Intevac Inc (IVAC) 2011 Q3 法說會逐字稿

Good day, and welcome to Intevac's third quarter 2011 financial results conference call. Currently all participants are in a listen-only mode. Later, we will conduct a question-and-answer session and instructions for questions will be given at that time.

(Operator Instructions)

Please note, this conference call is being recorded today, October 31, 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 third quarter of 2011, which ended on October 1. In addition to outlining the Company's financial results we will provide guidance for the fourth 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 October 31 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 will now turn the conference call over to Kevin Fairbairn. Kevin?

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

Our third quarter revenues were $19.3 million ahead of our guidance, with a net loss per share of $0.27, at the high end of guidance. 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 for the third quarter, and guidance for the fourth quarter and full year.

In Q3, the hard drive industry shipped an all-time record high 177 million drives, with PC shipments also ahead of prior estimates. This performance was in spite of concerns about the worldwide economy and slowing PC sales growth. Demand estimates for Q4 hard drive shipments were expected to be up from the Q3 record numbers, and to be as high as 180 million drives. The tragic floods in Thailand, with the resulting major supply chain disruptions, will result in lower hard drive shipments in the fourth quarter and into the first half of 2012. This complicates forecasting Intevac's 2012 business.

As one of our hard drive industry analysts mentioned recently we are in chartered territory. While nearly half of the world hard drives are manufactured in Thailand, such is not the case with hard drive media. Media is produced primarily in Singapore, Malaysia, China, and Taiwan, which means the production is not directly impacted by these supply-chain disruptions. The unavailability of components and the suspension of manufacturing at some hard drive assembly plants may lead to market share shifts, and possibly result in media constraints at some customers. The pending industry consolidation will also impact when and how many systems are required in 2012.

If the consolidations get the appropriate at government approvals by year-end, we continue expect that our customers would address their product line rationalizations through early 2012. We remain confident that our medium manufacturing system, the 200 Lean, is the best solution to address the critical technology and cost needs of the hard drive industry. While incremental capacity additions for new medium manufacturing systems have been limited this year, the same cannot be said for technology upgrades. This year, we estimate that we will ship several hundred deposition source upgrades to the installed base. These sources enable our customers to reduce the cost associated with the expensive precious metals that are used in magnetic media, such as platinum and ruthenium. These new sources also allow our customers to improve their system up times, as they increase the time between source target changes.

Now, I will discuss our positive progress of diversifying our equipment business. We remain extremely busy developing and bringing to market 3 new products to address the crystal needs of the solar cell manufacturing industry. The solar market is currently going through a difficult time, with supply currently outstripping demand, resulting in significant price erosion of solar modules. In the long term, this is good news. The industry must attain good parity pricing in order to compete and prosper without government's assistance. In the short-term, we would expect to see consolidation in the industry.

To succeed, the surviving companies will have to lower their costs and improve the capability of their products. In the solar industry, the key metric is cost per watt, with cell conversion efficiency being the biggest lever. Simply increasing volumes will not be enough to compete effectively. Companies will have to invest in technology to increase their solar cell conversion efficiencies. Our business and product strategy is to address this critical metric and provide assistance that can be retrofitted into existing factories and increase solar cell conversion efficiencies.

We have developed a versatile modular platform called Lean Solar, which supports our 3 product line applications -- physical base of disposition, etch, and ion implant. This path, while [meets allows us] to learning from our high product density of very cost effective 200 Lean disk processing system, the platform also shares a lot of common OEM items such as vacuum pumps and [pacifiers] with our magnetic media system to enable cost economies of scale. We shipped our first Lean solar system earlier this year for deposition application, where we deposit three different films on either side of a silicon cell; and expect complete qualification in the fourth quarter. We are excited to announce that our first Lean Solar Etch system recently shipped to a large, top 10 Asian solar cell manufacturer, where it will be used to texture the surface of solar cells to enhance the amount of light captured, thus improving conversion efficiency.

The third product line, ion implant, enables higher conversion efficiencies and eliminates some process steps to further lower costs. We made good progress on our development implant system, and expect to ship our first system early next year. In 2012, we expect to complete customer qualifications on all our new products and start to see repeat orders. We continue to expect that retrofitting our systems into existing manufacturing lines will be a significant part of our business in the next few years.

I will now turn the call over to Joe Pietras to provide an update on our Photonics business. Joe?

Thank you, Kevin.

Intevac Photonics revenues for the third quarter were $6.9 million. Product revenues totaled $5.4 million, and comprised 78% of Photonic revenues, and grew 58% from the third quarter of 2010. As we look at the remainder of the year, we expect the fourth quarter to be essentially flat with the third quarter.

As we look at next year, we expect to see a return to growth driven primarily by the recovery of our contract R&D business, as the US military continues to develop night vision solutions based on our digital low-light sensor technology. In our military night vision business, we again delivered a record number of camera modules during the quarter to our NATO customer. Our NATO product shipments represent the largest digital night vision deployment in the world, with over 2,500 units to be deployed by the end of 2011. We have now ramped our manufacturing capacity to a level required to sustain the deployment of the camera modules through 2014. In our US military night vision business, we continue to move forward with our major program to develop and qualify our digital night vision camera for deployment on the Apache helicopter for the US Army.

During Q3 we successfully completed a critical field demonstration of our camera, which resulted in the US Army concluding that we should be given authorization to proceed to a manufacturing startup phase. We expect to be awarded the manufacturing startup phase of the program by the end of this year, and this will lead to the start of camera deliveries in the latter part of 2013. This program represents an opportunity of approximately $40 million over the next 5 years. During the quarter we also successfully completed a critical design review of our night quartz-based binoculars, which we are developing for a leading defense contractor in the fixed-wing avionics market. This binocular, which represents our first system product for avionics applications, will provide night vision and thermal imaging by electronically fusing our market-leading digital night vision sensors with a thermal sensor within our compact night quartz goggle design. We expect to deliver the first prototype unit in early 2012.

In our LIVAR camera business, we recently announced receipt of a $6.7 million production order from Northrop Grumman for deployment of our camera in airborne, long-range target identification. We have begun deliveries against this order, which we expect to fill by mid-2012. To date, we have delivered $15 million in orders from Northrop Grumman for deployment on multiple aircraft platforms. As LIVAR continues to be deployed on these aircraft, we expect to continue to receive additional production orders for our LIVAR camera for this airborne application.

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

Thanks, Joe.

Consolidated third-quarter revenues totaled $19.3 million, exceeding our guidance of $16 million to $18 million. Revenues came in above guidance, primarily due to a higher than expected level of technology upgrades. Equipment revenue totaled $12.4 million and did not include any 200 Lean systems. Photonic sales of $6.9 million consisted of $5.4 million in product shipments and $1.5 million of contract research and development.

Q3 consolidated gross margin of 38.9% was above our guidance. Equipment gross margin of 44.9% was higher than the second quarter, due primarily to a higher mix of upgrades and spares shipments. Photonics gross margins of 28.3% was lower than the second quarter, driven by an increased mix of lower margin products and firm fixed price development contracts in the quarter.

Q3 operating expenses were $15.6 million, slightly higher than our guidance, and driven primarily by an increase in new product development expenses. Our Q3 net loss was $6.1 million, or $0.27 per share. The net loss included $1 million of stock-based compensation expense, equivalent to $0.03 per share. Our backlog was $26.2 million at quarter end, and includes one Lean solar system and no 200 Leans.

Turning to the balance sheet, we ended the quarter with cash and investments of $122 million, or approximately $5.30 per share, which was a decline of $1.2 million compared to the second quarter. Our book value, net of intangibles, was $172.4 million, or about $7.50 per share, at quarter end. Capital expenditures totaled $676,000 and depreciation and amortization totaled $1.3 million for the quarter.

I will now provide our guidance for the fourth quarter of 2011 and the remainder of the fiscal year. We are projecting consolidated Q4 revenues of $16 million to $20 million, which does not include any 200 Leans, and does include one solar system at the high-end. We expect fourth quarter gross margins to be in the range of 32.5% to 33.5%, down from the third quarter due to lower initial margins on our [solo] tool and lower factory utilization. Operating expenses are expected to be in the range of $15.2 to $15.5 million, flat to slightly down from the third quarter. These operating expenses do not include any adjustments to the fair value estimates for our goodwill and 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 for foreign exchange. For Q4, 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 will recognize revenue on 3 200 Lean HDD systems, and expect to revenue 1 or 2 Lean solar systems for the year. We expect revenue from our hard drive equipment service and upgrades to be in the range of $34 million to $35 million, which is lower than our last guidance as we have had some unexpected upgrades pushed to 2012. Photonics revenues will be approximately $29 million for the year, as further delays in receiving the funding vehicles for the development contracts recently approved have pushed several program start dates into the later portion of the fourth quarter. We expect revenues from our new products in the range of $3 million to $6 million. In addition to this system revenue, there are 1 or 2 additional systems that may ship but not be recognized as revenue, given our revenue recognition policy for new products.

Given these revenue ranges we would expect revenue in the range of $80 million to $84 million, gross margin to be 36% to 36.5%, and full-year operating expenses to be in the range of $61.5 million to $61.8 million. Other income and expense is expected to be a $600,000 and our tax rate is expected to be approximately 28%. We are projecting our full-year net loss to be between $0.96 per share and $0.99 per share. We expect our cash burn to be in the range of $17 million to $20 million this year, primarily reflecting the operating loss.

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

Yes, sir.

(Operator Instructions)

Our first questioner in queue is Rich Kugele with Needham & Co. Please go ahead, your line is now open.

Thank you. Good afternoon. Can you hear me all right?

Yes.

Just briefly, you have got 3 media customers today. Are any talking about needing tools potentially in 2012, and they just haven't gotten to the point where they are comfortable actually ordering? You must have some long-term discussions, especially for those who might be picking up share in the near-term.

Rich, this is Kevin here.

All of our customers are busy reacting to the recent events in Thailand. And, I think they need to get past that before we have any serious discussions with them.

Okay. And then, in terms of the spares and upgrades. You did say that some have been pushed into 2012. Were reasons given for that, or is that maybe because they want to actually buy new equipment at some point? Or do you think it is actually just the timing of their purchasing?

I think -- this is Kevin here. It was really timing on their purchasing. These were some upgrades related to a series of upgrades, and they needed to get them all aligned with their product ramp.

Okay. And then, lastly, on the solar side, I know you didn't provide 2012 guidance. But, given the -- call it $3 million to $6 million -- revenue for this year, where do you think would be a baseline level to start the thinking for 2012? Would you think that it would be a second half event of equal magnitude? Do you think it could be higher? Anything directionally?

Rich, it's Jeff.

Yes, I think revenue will be -- the biggest part of it will be second half, because we've got to go through the qualification phase of these early tools. I would suspect that if we qualify successfully we will see more than just 1 of these. And the $3 million to $6 million is, too, at the high-end. So, we don't really want to put any guidance out there but we would see that it would be more than $6 million, certainly, if we are successful with the qualification. There should be more than one tool for each application.

When you expect to be able to announce that you were qualified at these placed?

We will keep you apprised as appropriate. But, yes, we will -- if we get qualifications and significant orders we will announce those, like we do for the hard drive business.

Okay. That's helpful. Thanks guys. Take care.

Thank you, sir. Our next questioner in queue is Mark Miller with Noble Financial. Your is line is now open; you may proceed.

On the upgrades, you said they were primarily for cathode upgrades, the Lean tools, is that correct?

That is correct.

I was wondering -- I wanted to go back, what you said about the Apache camera. You said that is a potential $40 million-type contract. You expect the award late 2013, and ships were -- the second half of 2013 or earlier?

Hi, this is Joe.

We will start that program with a manufacturing transition phase, which will go through 2012 into the latter part of 2013. And then, actual manufacturing, delivering of low-volume numbers will start at latter part of '13 into '14, and then ramp up from there over the next five years.

Okay. Jeff, did you say what the cash from operations were this quarter?

I didn't say what the cash from operations was, particularly, but I will get that to you, Mark.

Thank you. Okay, thank you.

Thank you, sir. Our next questioner in queue is Kevin Hunt with Auriga. Your line is now open; please go ahead.

Thanks. I had a couple of clarifications. On the add-on, on the spare parts revenue, you said there was push-outs into next year, but did you have pull-ins this quarter too? Because it seems like it was pretty strong this quarter.

Hi, Kevin, it is Jeff. Yes, it was strong this quarter. It was a little stronger than we thought. I wouldn't say it was -- the amount over our guidance was basically incremental upgrades. As we got an order, as soon as we can ship, they will take them. But it was a stronger, certainly, than the last quarter. Last quarter we had our system shipments in it.

Okay; and question on the solar backlogs. You said you had 1 system in backlog, but it sounds like you're saying there's 2. And, 1, I think you already shipped awhile ago, they've been waiting to recognize. Is that the one in backlog? And than, you said you're going to install a second 1. Can you give us more detail on that? And, what is exactly in backlog versus not.

The 1 that we shipped in second quarter is still in backlog at the end of Q3. That is the one we said we expect to finish qualification on the fourth quarter. And, as Kevin said, we just shipped a second tool, which also booked right after the end of the quarter. And, it is a small single module R&D tool for Etch application.

So, you'd only be at 2 if you're doing the backlog as of today? Is that right?

Correct.

Okay. All right, thank you.

Thank you, sir.

(Operator Instructions)

Our next questioner in queue is Ben Pane with Caris & Company. Your line is now open, please go ahead.

Thanks for taking my question. In terms of the solar application, if you look beyond 2012 which one of these -- deposition, PVD, et cetera -- which ones have the fastest growth rate, do you think?

Hi, Ben, its Kevin here. We think ion implant is number one. We believe that market size will eventually be double that of either deposition or the Etch market.

Okay, and when I think about the profitability of the solar segment, do you guys break out the breakeven level separately for that?

No, we don't at this point. A lot of the resources are common to both our hard drive business as well as our solar business.

Okay. And, the final question is, in your upgrade business, how would you think about what the opportunity is in terms of beyond the second half of 2012? Is that dependent on what -- how the whole industry recovers?

Are you talking hard drives or solar?

The hard drive.

There are 2 elements to that. One, we are expecting that the industry will recover by the second half. And, assuming that we see the ongoing growth in drives that we have experienced over the last 5 years, we would hope that the industry would need more capacity systems. In terms of upgrades, there we're typically talking about source upgrades, and we've shipped a lot this year. We hope to ship more next year. But, I'm not sure if we will ship the same level in 2012.

Thank you, very much.

Thank you, sir. And, at this time I'm showing no further questions. I would now like to turn the program back over to Kevin Fairbairn. Please go ahead.

Thank you for joining us today and we certainly look forward to updating you in our next call on the fourth quarter and the 2012 results. Goodbye.

Thank you Sir. This concludes today's teleconference.