Intevac Inc (IVAC) 2011 Q2 法說會逐字稿

Good day and welcome to Intevac's 2nd quarter 2011 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 be given at that time. Please note that this conference call is being recorded today, August 1st, 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 second quarter of 2011 which ended on July 2nd. In addition to outlining the company's financial results, we will provide guidance for the third quarter and full year. 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 August 1st 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. I will now turn the conference call over to Kevin Fairbairn. Kevin?

Thank you. Good afternoon, and thank you for joining us today. Our second quarter revenues were $27.6 million, with a net loss per share of $0.11, both ahead of our guidance. We recognized revenue on 3, 200 Lean systems in the second quarter. Today I will provide an overview of the hard drive business and update you on the progress we are making in our equipment diversification strategy. Joe will provide an update on our photonics business, and Jeff will discuss our financial results and guidance for the third quarter and full year.

The situation in the hard drive industry continues to be difficult for us in the short term, driven by two main factors. Firstly, the pending consolidations have put the dampers on capital spending by the industry until the consolidations are complete. And secondly, the year-over-year forecasted growth in hard drive shipments has been reduced. Next, factors for the reduced growth relate to economic conditions in the US and Europe, tablets impacting netbook sales, and supply constraints due to the Japan natural disaster. Positive factors have included the emerging market's growing appetite for PCs and growth in traditional enterprise and cloud-related nontraditional enterprise segments. That said, we see a more positive side to 2012.

The industry shipped around 165 million drives in Q2, which is better than typical seasonality and close to the record for quarterly shipments. This bodes well for the remainder of 2011, and expectations for yet another record year of hard drive shipments. We would expect media manufacturing capacity to become constrained if the industry ships north of 100 million drives in Q4, which is a reasonable possibility based upon current market forecasts. The growth in digital storage continues to grow at a rate of over 40% as measured in bytes. Given the slowing of [aerial] density growth, which was recently quoted at 25% year-over-year, we would expect to see more hard drives ship and/or an increase in discs per drive. Either scenario would require incremental new media manufacturing capacity in 2012. Assuming all the industry consolidations are complete by year end, we would expect that our customers would start their product line rationalizations in 2012, and although this will take some time, we expect they will look to unify their products based upon two factors -- the most advanced media technology and the media which is manufactured at the lowest cost. We believe that our media manufacturing system for 200 Lean is extremely competitive on both of these factors, which we hope will lead to improved market share in the future. We also will be in the best position to satisfy the consolidated industry's needs to react quickly to market demand-, given that we have the shortest lead times in the industry.

Another issue affecting our customers is the price inflation for rare-earth and precious metals. We have addressed this problem by developing improved efficiency deposition sources that reduce the amount of rare-earth and precious metals used to create magnetic media. We expect to ship a significant number of these sources in 2011, which will help our upgrade revenues, and we expect to sell more of these cost-saving sources in 2012. We continue to remain optimistic about the growth prospect for our hard-drive business after this current period of uncertainty. Turning to our diversification strategy, where our focus is on developing solutions for the solar cell manufacturing market. Before I talk about our progress, I want to give you our views on the dynamics of the market. We believe the solar mark will continue to expand, with growth accelerating once it becomes competitive in traditional carbon-based electricity generation. We expect that the market will be characterized by periods of over capacity relative to demand, resulting in the ongoing consolidation of smaller solar companies, much like we witnessed in the hard drive and semiconductor markets. In fact, with the pricing environment expected over the next year or so, a significant number of silicon-based cell companies may exit the market or be consolidated into larger, well-capitalized manufacturers. The lower pricing will spur demand until demand catches up with capacity, and another cycle will start. In an over-capacity environment as we are today, some of the traditional equipment suppliers to the silicon cell market will be impact, as capacity orders are reduced. This will greatly hamper their ability to develop new products.

So given the nature of this market, what is our strategy? We are focused on providing manufacturing systems that will provide unique technology solutions to enable silicon solar cell manufacturers to lower their costs, as measured in cost-per-watt, through the production of higher-conversion-efficiency cells. Cost-per-watt is the critical metric. Increasing the conversion efficiency has great leverage, as it lowers the module fixed cost. For example, a module that increases its conversion efficiency from 16% to 17% will result in an approximately 6% reduction in cost-per-watt, assuming absolute costs remain constant. This is a very significant reduction, given the slim margins in this industry. Additionally, higher efficiency solar module can command a pricing premium, as it would lower the other costs associated with installing solar panels. In the silicon solar cell market, we are focused on working with companies who either have the large scale needed to lower their cost, or unique technologies that give them a cost advantage. We are targeting the photovoltaic or solar cell market with our lean solar platform, with the vacuum processes needed to support increased cell conversion efficiencies for both crystalline silicon and thin film 6. To date we have shipped 2 deposition systems.

We have developed the deposition modules for metals and transparent conductive oxides, and are now developing etch and ion implant process modules to expand our product offerings. Our development programs continue to progress as planned, with the goal of completing these modules by the end of 2011 or early 2012. We are working closely with leading solar cell manufacturers to ensure our products meet the industry's needs. In 2011 we are focused on completing the product development initial product qualifications, with 2012 expected to be the year of ramping revenues once these products complete qualification. We estimate that the available [serve] market will be $1 billion in 2013, increasing to $3 billion in 2015. We expect that retrofitting our systems to existing manufacturing lines will be a significant part of our business, and we are not counting solely on new green-field sites. I will now turn the call over to Joe Pietras to provide further updates on our photonics business.

Thank you, Kevin. Intevac photonics revenues for the second quarter were $7.8 million, increasing 7% from the prior quarter. We achieved another record for product revenues, which totaled $5.9 million and comprised 76% of photonics revenues, illustrating the traction we are achieving in migrating the business from primarily contract R&D based to a product-driven business. As we look at the remainder of the year, we expect the second half of the year to be essentially flat with the first half, due to an additional quarter's impact of funding delays in military programs associated with the delay in the US defense budget this year. In our digital night vision business, we again delivered a record number of camera modules during the quarter to our NATO customer. As we continue to ramp production and to improve our sensor yields to meet our customers' needs in deploying their system to additional troops. During 2011, we expect to deliver in excess of 2,000 camera modules, which represents a doubling of the quantities delivered in 2010. Within the US military market, we continue to receive strong support of our leading digital sensor technology. As we announced last week, we received a $9.6 million contract award from the US Navy. This is a multi-year award through 2016 that will fund ongoing performance improvements of our 4 mega-pixel digital sensor for various Navy aircraft platforms. The first funding release against this program totaled approximately $2 million. We also continue to make good progress in the development and qualification phases of the program to provide a digital night vision camera for the Apache helicopter, which is being funded by the US Army.

During the quarter, we achieved a key performance milestone, which has enabled us to remain on track to receive follow-on funding in the fourth quarter for the manufacturing start-up phase of the program. As the program moves towards initial production in late 2013, this program represents an opportunity of approximately $40 million over the next five years. During the quarter, we also successfully completed a key milestone of our development program for a night-port-based binocular system that we are conducting for a leading defense contractor in the fixed-wing avionic market. This system will provide night vision and thermal imaging capability by digitally fusing our night vision sensors with a thermal sensor within our compact night port binocular design. This will represent our first system product for a fixed-wing avionics application.

In the second quarter, we again shipped a record number of our LIVAR cameras to a major defense contractor for an avionic long-range target identification application, which our customer is deploying across several avionic platforms. We have received approximately $14 million in orders over the last 2.5 years against our estimated LIVAR opportunity of $40 million over 10 years. I will now turn the call over to Jeff to discuss our financial results and outlook. Jeff?

Thank you, Joe. Consolidated second quarter revenues totaled $27.6 million, exceeding our guidance of $21 million to $26.5 million. Equipment revenue totaled $19.8 million, and included 3, 200 Lean systems. Photonics sales of $7.8 million consisted of $5.9 million of product shipments, and $1.9 million of contract research and development. Q2 consolidated gross margins of 36.7% were slightly below our guidance, and flat to Q1. Equipment gross margin of 38.3% was lower than the first quarter, due primarily to the higher mix of system shipments. Photonics gross margins of 32.7% improved from the first quarter, reflecting the higher mix of product shipments and improved manufacturing costs of our digital night vision camera module. Q2 operating expenses were $14.8 million, lower than our guidance and driven primarily by lower new product development expenses as compared to the prior quarter. Our Q2 net loss was $2.6 million, or $0.11 per share. The net loss included $1.1 million in stock-based compensation expense, equivalent to $0.03 per share. Backlog was $36.9 million at quarter end, and includes 2 Lean solar systems and no 200 Leans. I will now discuss the balance sheet.

We ended the quarter with cash and investments of $123.3 million, or approximately $5.40 per share. The decline from the first quarter was due primarily to the loss from operations. Capital expenditures totalled $1.5 million, and depreciation and amortization totaled $1.4 million for the quarter.

I'll now provide our guidance for the third quarter of 2011, and the remainder of the fiscal year. We are projecting consolidated Q3 revenue of $16 million to $18 million, which does not include any 200 Leans, and does include revenue from 1 solar system that will be recognized in installments in quarter and over the next several years, per our agreement with this customer. We expect third quarter gross margins to be in the range of 34% to 36% -- lower than the second quarter, primarily due to lower factory utilization. Operating expenses are expected to be in the range of $15.2 million to $15.5 million, increasing from the second quarter due primarily to the timing of our new equipment product R&D programs and trade shows. 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 associated with changes to the valuation of our investments or foreign exchange. For Q3, we are projecting a net loss in the range of $0.27 to $0.30 per share.

Turning to our guidance for the full year 2011, we do not expect to ship any additional capacity systems to hard drive customers this year, as we have moved inside our standard lead times for our customers to bring additional capacity on line in the fourth quarter. For the full year, we expect to ship 3, 200 Lean systems; we expect revenue from our hard drive equipment service and upgrades to be in the range of $37 million to $38 million; and photonics revenue to remain roughly flat with the first half, or approximately $30 million for the year, as the delays in approving in approving the US defense budget has impacted several key programs by an additional quarter. At this point we see revenues from new product in the range of $5 million to $7 million. Given these revenue ranges, we expect revenue in the range of $88 million to $90 million, gross margin to be 36% to 36.5%, and full-year operating expenses to be in the range of $59.5 million to $60 million. Other income and expense is expected to be approximately $600,000, and our expected tax rate is to be approximately 30%. We are projecting our full-year net loss to be between $0.80 and $0.84 per share.

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

Thank you. (Operator Instructions) Kevin Hunt, Auriga.

Thank you. Had a couple questions. First, I wanted to clarify. Kevin, you mentioned 100 million or something as the capacity, I think I thought you heard say, where you'd be out of capacity, which seems, obviously, very low. You might want to -- maybe you could clarify that, first off. And then secondly, wanted to know about the add-on upgrade equipment revenue. Can you tell us what that was, ballpark in the quarter, and does that move up substantially, based on the comments you made about the other products to address the rare earth? So, meaning it would be above that $37-ish million for the year that you're talking about for this year?

Okay, Kevin. Thank you for giving me the opportunity to clarify. I did misspeak. It should be north of 180 million hard drives in Q4, is where we see capacity topping out. As for the comment on the upgrades, I'll let Jeff provide the feedback there.

So, Kevin, this quarter, with three systems, you can back into the number. It's going to be somewhere in the $8 million range for this quarter, and we see that increasing in the back half of the year, obviously, to get to the $37 million to $38 million.

Okay. And I think I might have missed it in terms of why the gross margin on the drive business was down for this current quarter. You addressed why the future quarters would be lower, but any further color you can give there?

Well, a big part of our revenue this quarter was systems, and systems carry a lower gross margin than we see on our upgrade business.

Okay, well, there was -- it seemed like they were lower even than I was thinking, historically, on those systems, but -- is that accurate, or is it --?

Well, it's also affected -- and we saw it in the first quarter a bit, but even more so with the factory utilization being down a little bit. Some of those builds started last quarter, and finished somewhere in the first two months of this quarter.

Okay, thanks. I'll let someone else ask a question.

Bill Ong, Ticonderoga Securities

Good afternoon everyone. So, last week Vico announced the divestiture of its six thermoprocess equipment business. It cited a weak thin-film solar market, versus the mainstream polysilicon business, just causing a lot of more pricing pressure. So, I'd like to just get Intevac's view of the six business going forward, in light of the decision that Vico just made.

Hi, Bill. This is Kevin here. We've never set out to supply to the general six market. So we worked with one particular customer and as far as we understand, they're continuing with their six programs. And I think that the Vico situation -- they were trying to sell to a much wider section of the market.

Could you clarify that? Because they were still focusing on six deposition -- more on the thermal side while you're focusing on the [silicon] side. Weren't you both addressing the same market, but just doing -- using different technologies?

Well, our tool was focused on small substrates, which our customers always deemed as a much easier way to get to consistent, higher-efficiency conversion efficiencies, whereas, I believe, Vico was doing [rol-to-rol], which is always more challenging in terms of getting it ready for production and getting high efficiency.

Okay, I appreciate that color. My then second question is, you mentioned the solar [sub available] market potentially reaching $1 billion by 2013. Could you talk about what the sub available market is for this year and also next year?

Significantly less than that, because if you take something like ion implants, that is just beginning to get qualified and put into use. So by 2013, we're expecting that to be much more significant, and that section of the market we're expecting to be about $280 million in 2013, and a number much less than that next year. One part of the market that probably isn't changing a lot is CBD, where the numbers are around $500 million to $800 million. And then, some of the other applications, like dry etching to increase the -- improve the reflectivity, again, that's a market that really doesn't exist today and people are just beginning to qualify. And there's another market we think could be $165 million in 2013, and growing to $680 million in 2015. Does that help?

Yes, that helps, thank you so much.

Rich Kugele, Needham & Company.

Thanks. Good afternoon. A couple questions. First, Jeff, can you talk about cash burn, and based on the guidance, and whatever other inflows you might have? Would you expect your cash per share to exit here in 2011? And then, in that same vein, should we assume that the first half of '12 also is more cash drain, until the drive guys can go and get a handle on what they've bought, or do you think that the orders will end up happening in a more similar, seasonal fashion?

Okay, so, cash burn, based on what I've guided, I would say, will be in the range of $15 million to $17 million for the year, is what I'm expecting.

Okay.

If the orders happen, it's hard to tell. If the orders happen in Q4, obviously, cash burn'll probably continue into Q1, like you predicted. And then, if it's more seasonal, then, typically, our cash burn in the front is a little heavier than the back half of the year, obviously, when we spin all the working capital back into cash. Does that help?

Yep. And then, in terms of OpEx, is this the right run rate? The guidance here for Q3? Does it sufficiently hit your new product rollouts, or should we expect continued increases?

No, I think we expect to hit the numbers we guided for the year. Going in to next year, I think, we're going to be finishing some of the products. So it's hard to tell right now, but I don't see a step function up, other than the fact that variable comp may come back next year with a year where, guiding incremental systems and HCDN and the solar arena. But for right now, we're trying to add nothing beyond our incremental spend to get these new products out.

Okay. The last one for me is on the solar side. What would you say are important milestones that investors could track to see your progress there? Is it an order from a major producer, or is it a technology announcement? And over what time frame should we be looking for this milestone?

This is Kevin here, Rich, So, internally, we're looking at these shipments of these new products, ion implant and etched, and as we mentioned earlier, we're trying to accomplish that in the next two quarters. So those are two key events you should look for.

Okay, so the announcement and shipment of those two to a customer for revenue? Or availability to ship?

We would be looking to ship those for revenue, but the revenue recognition may take several quarters, because of --

Qualifications

-- they have to be qualified and signed off by the customers, and these are new applications.

Okay. All right. Thank you very much.

Mark Miller, Noble Financial Capital.

You're guiding us somewhat higher OpEx, for the next quarter at lower revenues. Is that because of the shipment of the solar tool? I'm just trying to understand that.

Well some of it has to do with just the timing of our R&D programs, and R&D material does time itself with the development of tools. Like the first ones we basically build and expense. And then we have some trade shows in the quarter. And then you will probably see that come down a little bit in the fourth quarter.

Compared to your Lean tools, the solar tools, do they deposit a large number of layers, or is that a relatively small number of layers compared to the Lean tools?

This is Kevin here. Usually they are only putting down one film, in some cases, maybe up to three films. But they never put down the large number of process steps that you might see in the hard drive industry.

Okay. Thank you very much.

(Operator Instructions) Mark Rogers, Gagnon Securities.

Thank you for taking my question. You mentioned that you saw some inflation or cost inflation from some of the precious metals and the rare earths. Are you starting to see that affect some of your customers' decisions, such as your solar cell customers, in how they're designing their cells? Are some of your customers talking about -- or asking you to figure out ways for them to circumvent things like using silver paste? How does that come into play on their end, and what are you seeing from that, from your viewpoint?

This is Kevin here. We haven't seen any kind of feedback out of the solar market, they're trying -- this is a big issue for them. The work we've done to date has been in the hard drive market, where we've been trying to help our customers lower the cost of manufacturing by providing more efficient deposition sources so they don't use as much of the expensive target material.

So you see that becoming an issue for the solar cell players?

Well, silver's a significant portion there, so I would expect that that will be a focus for the industry, but impacting Intevac so far, it hasn't been an issue.

Okay. And then also, as you see your solar cell equipment market develop -- and your offering develop -- do you think that it will be targeted toward pure play cell manufacturers, or is it really a tool that's most appropriate for someone with a vertically integrated structure?

We said earlier that we're focused on those large companies that are well capitalized, so that's becoming very much the vertically integrated companies. And so that's really our focus -- is on well-capitalized companies who we think will survive long-term. Or companies that have some unique technology that's going to give them a cost advantage. So I wouldn't say we're separating out pure play cell manufacturers from integrated manufacturers. Did I make myself clear?

Yes, thank you.

I'm not showing any further questions in the queue at this time. I'd like to turn the call back over to Kevin Fairbairn for closing comments.

Well, thank you for joining us today. We look forward to updating you in our next call on our third quarter results. Good-bye.

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