Intevac Inc (IVAC) 2012 Q1 法說會逐字稿

Good day. Welcome to Intevac's first quarter 2012 financial results conference call. Please note that this conference is being recorded today April 30, 2012. At this time, I would like to turn the call over to Claire McAdams, Intevac's Investor Relations counsel.

Thank you, and good afternoon, everyone. Thank you for joining us today to discuss the Intevac's financial results for the first quarter of 2012, which ended on March 31. In addition to outlining the Company's financial results, we will provide guidance for the second quarter and talk about our current outlook for 2012. On today's call are Kevin Fairbairn, President and Chief Executive Officer; Jeff Andreson, Chief Financial Officer; and Drew Brugal, Executive Vice President and General Manager of Intevac Photonics.

Before turning the call over to Kevin, I would like to remind everyone that today's conference call contains certain forward-looking statements including, but not limited to, statements regarding financial results for the Company's most recently completed fiscal quarter, which remains subject to adjustment in connection with the preparation of our Form 10-Q as well as comments regarding future events and 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 Exchange Commission, including our annual report on Form 10-K and quarterly reports on Form 10-Q. The contents of this April 30 call include time sensitive forward-looking statements that represent our projections as of today. We undertake no obligation to update the forward-looking statements made during this conference call.

I will now turn the call over to Kevin Fairbairn. Kevin?

Good afternoon, and thank you for joining us today. Our first quarter revenues were $17.3 million, within our guidance, and a net loss per share of $0.14, ahead of guidance. Today, I will update you on our progress on our equipment business, Drew will discuss the Photonics business followed by Jeff, who will discuss our financial results and outlook.

The dynamics of our served equipment market continue to evolve. In the hard drive industry, our customers are still working through their remaining supply constraint challenges and merger integration planning. In the solar industry, we are starting to see a shakeout among noncompetitive and under-capitalized solar companies, driven by the record low module pricing.

In spite of these challenges, we are very pleased with the progress we made in the first quarter towards each of our strategic growth objectives, and we continue to project revenue growth in each of our business segments for 2012. While we will discuss each of these businesses in more detail, some of the first quarter highlights are -- the receipt of the first two 200 Lean orders for the hard drive industry; the announcement of the drive industry's milestone storage density of one terabit per square inch, which was accomplished on our 200 Lean system; a competitive selection in solar that resulted in an agreement to ship our first LEAN SOLAR implant system that, after successful qualification, we expect will lead to a large follow-on order; the final acceptance from a leading Asian cell manufacturer of our first Lean energy NanoTexture etch system for solar, which will revenue in the second quarter and finally, the award of a $10 million follow-on contract in our Photonics business for a US Army program incorporating our night vision camera on all Apache helicopters.

Now, I will provide more detail regarding our outlook for our hard drive and solar equipment businesses. The progress made towards the recovery of the hard drive supply chain this year has been phenomenal testament to the incredible resilience and unwavering determination of our customers. First quarter hard drive shipments and second quarter guidance have exceeded the expectations going into the year. Both industry analysts and our customers now project second quarter drive shipments to exceed 160 million drives, with projections of record-level shipments of the least 185 million drives, with some forecasting up to 200 million drives in December quarter. This level is dependent on the level of recovery in channel inventories and the retail markets.

Hard drive companies have reported they have to ship fewer multiple disk drives due to component shortages. The unmet exabyte demand shortfall, which, based on our customers' comments is substantial and growing, has been and will continue to be a significant in 2012 and is not expected to be fully rectified until sometime in 2013. Therefore, we expect to see the average number of disks per drive begin to recover to a higher level in the second half of 2012. This is important as 200 Lean system orders for capacity are driven by the growth in disk shipments, not merely drives.

Given these projections, what does this mean for capacity orders? As we said in the past, we believe media capacity stock to become constrained above a quarterly total available market of 180 million drives at historical typical disk per drive ratios. Our customers are in the process of completing their capacity planning process for the calendar year and are starting to look to the first half of 2013. We expect that the planning has been complicated, not just by the timing of component recovery, but by the operating conditions imposed on Western Digital by China's Ministry of Commerce relating to the acquisition of Hitachi Global Storage systems.

As it relates to our order visibility, based on expected hard drive shipments as well as recent quoting activity, as we said last quarter we continue to have reasonably good visibility for at least 10 system orders this year. We booked the first two orders against the 10 in March. While last quarter we predicted these orders would come in by mid-year, we think our customers are primarily focused on planning capacity needs for the December and March quarters; and therefore, these orders could continue to come in through late summer. Jeff will provide more detail around our outlook in a few moments.

Our final achievement of note in the hard drive industry was related to technology. In the first quarter, Seagate announced the milestone achievement of one terabit per square inch aero density utilizing their HAMR technology on our 200 Lean, demonstrating the technology capability of our system.

Now, I would like to review the solar market and the progress we are making on our new equipment products. As we have all read, the pricing of solar modules has declined more rapidly than predicted, with the cost per watt recently reaching a low of $0.87. This has had both a positive effect as well as a negative effect on the industry. On the negative side, it is straining the cash generation of the cell manufacturers and limiting investments this year. On the positive side, solar power generation is now competitive with many traditional forms of electricity generation today.

In the current situation of oversupply, it also puts pressure on companies to invest in technology to increase their cell conversion efficiencies, to improve their product competitiveness and, at the same time, lower their manufacturing cost per watt. We continue to expect to see consolidation in the market as companies who cannot afford to stay in the game either exit the market or get acquired. We believe that eventually the industry will be dominated by a limited number of large, well-capitalized companies, with strong brand names, capable of financially supporting the typical 20 year guarantees that come with solar modules. It is on these companies that we are focusing both our development and sales efforts.

In spite of financial difficulties, the solar cell market on a unit basis continues to grow. The current forecast for 2012 solar module installations is 30 gigawatts, which is an increase of approximately 3 gigawatts from the forecast entering the year. This is an elastic market, with pricing reductions leading to incremental demand even in an environment where government subsidies are being reduced. The forecast for solar capital spending is forecasted to be about $4.5 billion in 2012, versus over $14 billion in 2011, with a recovery to about $7 billion expected in 2013, as the industry digests the incremental capacity added in 2011.

The crystalline silicon cell capital spending represents about [30%] of the total solar capital spending. We expect significant amounts of this investment to be related to technology investments and not just incremental capacity. It has been our strategy to focus on the retrofit opportunity of existing capacity as well as new capacity additions.

Our major focus is ion implant. The doping of silicon by ion implant is recognized as one of the most of promising technologies that can enable higher cell conversion efficiencies. Companies have already shown high efficiencies using ion implantation systems are based on those in the semiconductor industry. Unfortunately, these semiconductor equipment systems are too slow, too expensive, and too complex for the solar industry. Our Lean solar ion implant system addresses these shortfalls by providing all the technology advantages of ion implant doping.

We continue to make very good progress on our new products. As I said previously, we have now completed the final acceptance of our first NanoTexture etch system, which will revenue in the second quarter. Notably, after a competitive selection process, we finalized an evaluation agreement with a large solar cell manufacturer to ship our first ion implant system this quarter and expect to finalize another evaluation agreement this quarter, with shipment expected for the summer. Both of these implant opportunities are key milestones for the company and can lead to significant shipments beginning in 2013. As you can see, we are beginning to penetrate this market and position the Company for repeat orders beginning as early as the fourth quarter and certainly into 2013.

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

Thank you, Kevin.

Since joining the Company in early January, my excitement about our Photonics business has only increased, as we have a strong portfolio of low-light cameras and sensor technologies that are well-positioned in virtually all major digital night vision programs. We are clearly seeing the transition from analog to digital technology for night pilotage and target identification, in addition to being the first manufacturer to deliver a digital night vision product with over 3,000 units deployed through our NATO customer. Today, the analog night vision market is approximately $600 million annually, with the avionics segment of this market representing approximately $60 million. The US Army is also continuing to demonstrate its support of our technology as we continue to expand our manufacturing technologies and production capabilities through both government funding and company investment.

In the first quarter, Intevac Photonics revenues were $6.6 million, up 7% from the fourth quarter of 2011. As we look at the remainder of the year, we expect to see growth each quarter and the year-over-year comparison, driven primarily by the recovery of our contract research and development business, as the US Military continues to develop night vision solutions based on our digital low-light sensor technology. We are confident that our products possess a competitive advantage in sensitivity and power consumption for these digital applications.

Our customer base shares this confidence as demonstrated by the recent award of the first of several production contracts for the US Army's Apache helicopter program; and separately, we have completed the negotiations for a multi-year contract to a prime integrator for long-range airborne identification systems, or LIVAR. Both of these programs are estimated to be in excess of $50 million over the course of the development and deployment phases. We anticipate this positive trend to continue and grow as we deliver these products over the next several years. We also expect to deliver our first set of digitally fused infrared and night vision goggles for use in an avionic application this quarter. This program is in the development phase and can lead to a very significant award in the future, as we are partnered with a leading defense contractor in the fixed-wing avionics market.

We continue to achieve funding to advance the state-of-the-art of our most advanced four-megapixel sensor and to improve the sensitivity of our sensors. The continued development of our sensor technology demonstrates the commitment to our technology that will eventually enable the large-scale deployment to the US Military ground forces.

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

Thank you, Drew.

Consolidated first quarter revenues totaled $17.3 million, within our guidance of $16 million to $18 million. Equipment revenue totaled $10.7 million with no systems recognized in the quarter. Photonics sales of $6.6 million consisted of $4 million in product shipments and $2.6 million of contract research and development. Q1 consolidated gross margin of 39.4% was above our guidance. Equipment gross margin of 45.1% was higher than the fourth quarter and our guidance, due primarily to a higher mix of upgrades and spares, and the delay of revenue recognition on the lower margin solar tool into the second quarter. Photonics gross margin of 30.1% was flat with the fourth quarter.

Q1 operating expenses were $16 million, versus our guidance of $15.5 million to $15.7 million, with the increase driven by costs associated with the acceleration of some of our new product development. The operating loss includes a $2.2 million gain associated with the sale of the continuum mainframe technology to Brooks. Our Q1 net loss was $3.2 million, or $0.14 per share, exceeding the upper-end of our guidance. The net loss included $1.1 million of stock-based compensation expense equivalent of $0.03 per share. Our backlog was $40.9 million at quarter-end and included to two 200 Leans and one LEAN SOLAR system. We ended the quarter with cash and investments of $111.7 million, equivalent to approximately $4.80 per share. Our free cash flow for the quarter was a negative $6.7 million and included capital expenditures of $852,000 and amortization and depreciation of $1.2 million for the quarter.

I will now provide our guidance for the second quarter, and the Company's current outlook and primary assumptions for the remainder of 2012. We are projecting consolidated Q2 revenues of $29 million to $32 million, which includes two 200 Lean and one SOLAR system. We expect second quarter gross margin to be in the range of 40% to 42.5%. Operating expenses are expected to be in the range of $15.3 million to $15.6 million. Other income and expense will be approximately $200,000 and excludes any impact associated with changes to the valuation of our investments or foreign exchange. For Q2, we are projecting a net loss in the range of $0.05 to $0.09 per share, which includes an estimated $1 million of pretax stock-based compensation expense equivalent to $0.03 per share.

I will now turn to providing current outlook for the remainder of 2012. As Kevin discussed, we continue to have reasonably good visibility today for at least 10 hard drive system orders this year. We continue to expect to see these orders in the mid-year timeframe, or possibly a bit later, as our customers complete their capacity plans for the December and March quarters. Due to this timing, we also continue to expect the year to be back-end loaded for revenue. We continue to see upside for four to six additional system orders this year, with those tools primarily addressing calendar year 2013 needs. Given the uncertainties regarding the timing and magnitude of the system orders for the hard drive industry, we will not be providing full-year guidance on this call. As a reminder, we do announce all of our 200 Lean orders. That being said, our expectation for upgrades and service revenue to the hard drive industry have improved and is now expected to be in the range of $37 million to $39 million.

We continue to expect our Photonics business to grow by 10% to 15% over 2011. At this time, we are estimating revenues from new products to be at the low end of the $10 million to $20 million range we discussed previously. As we said, our new products revenue recognition is dependent on the timing of our customers qualifications. And, these initial systems require final acceptance or completion of the qualification prior to recognizing our revenue. The reduction from the prior outlook is due principally to the delay in capacity additions we expected at our first crystalline silicon customer.

Certainly the lower revenue outlook is not a reflection of any lack of new traction, as we expect to have up to four additional solar tools and qualification by the end of the year and continue to expect backlog to grow in the second half of the year. Given the current outlook, we expect gross margins for the year to be in the high 30%s, and operating expenses to be in the range of $60 million to $61 million for 2012. Other income and expense is expected to be approximately $3 million for the year, which includes the $2.2 million gain in Q1.

Now, we are ready for questions.

Thank you.

(Operator Instructions)

Bill Ong, B Riley & Co.

Good afternoon, everyone. Can you characterize the solar customers that are evaluating your solar tools, are they Q1 customers? How are their balance sheets and their financial ability to place multiple orders if these evaluation tools become more production worthy?

Hey Bill, it's Jeff. They are all Tier 1 customers right now. Balance sheets are relatively strong on the first ones that we are qualifying, and most of the customers that we are working with have relatively strong balance sheets. Obviously, right now most companies are seeing negative free cash flow coming out of 2011 where they invested a lot of money.

Okay, great. My last question is on the implant tool, are these tools targeted towards the conventional p-type furnace equivalents, and how does your implant tool compare to n-type furnace equivalent tools, which obviously have better yields than the conventional p-type?

Bill, this is Kevin here. Most of our customers are doing initial qualifications so they can use them on p-type silicon as of 2013 to move to n-type. On your other question, can you explain again what you are asking relative to (inaudible)?

Maybe just compare apples to apples yields. My understanding is n-type furnaces have a delta 1% yield improvement over p-type. So, I just want to see how the implant stacks up in terms of yields, and maybe in terms of yields per dollars, or whatever metric you feel comfortable with?

Okay. So, simply going from a p-type silicon to n-type will give you a 1% improvement just because of the superior properties of the n-type silicon. An advantage of ion implant is it reduces a number of process steps and makes it much easier to accomplish.

Great, thanks so much. Nice job, gentlemen.

Mark Miller, Noble Financial Capital.

Just wondering if you can give us some of your insights about what the current capacity is in the hard drive business? I'm thinking around 180 million drives a quarter. What is your feeling about that?

Yes, that's the number we have stated, Mark, that we feel that the current capacity is around 180 million. Now, some people are predicting for the year that it might go up to 185 to 200. And obviously, that is going to depend on several factors including the recovery in the number of disks per drive, the restoration of some of the channel of entries and then how quickly the retail market rebounds.

As you noted, and your customers noted, they have been shipping drives with fewer disks. Do you know, the last quarter or so, what was the average number of disks per drive?

No, Mark. We have not seen that data yet from TRENDFOCUS or from anybody else yet. All we have heard is the verbal comment from our customers.

Final question, there was some -- in fact, there was a lot of confusion at the Western Digital call, and they indicated that Hitachi subsidiary was dealing with some excess capacity. It was kind of my inference from some of the other things they said that was more because they had bought excess number of heads and that excess capacity was more in their head fab. Can you shed any light on that?

I don't believe the excess capacity was in media.

Okay, thank you.

Rich Kugele, Needham & Company.

Good afternoon. Just a couple questions. First, when it comes to the HDD side of the business, the -- so, you are saying that some time over the next few months, you would have potentially orders for 10 but then there is another 4 to 6 that could potentially come through as replacement? So, it is 14 to 16 as a theoretical, total available market over the next year?

Yes. Hey Rich, it's Jeff. Yes, I would say that's a reasonable way to characterize it. The upside we see would address 2013 production needs. But, you are right if you look out a year, say 20 months, you are in that horizon we are talking about.

And, that 10 would still be 10 that would recognize for revenue in calendar 2012 though?

Well, if we could have said that we would have given guidance. I mean, it's still got to get the orders in so we can tell you guys when we think they will ship.

Are those orders broadly diverse, spread across your customer base, or concentrated in any particular accounts?

What we would tell you is, like we said on the last call, is that it is more than one customer that we are seeing in for visibility today.

Okay. In terms of the first quarter, you are saying that solar tool just pushed into the second quarter? And now, because of the timing of the Leans you have three tools all hitting in the same quarter, right?

Correct.

What happened to that solar tool that just caused a delay?

The qualification is never quite well-defined. It could take somewhere between three and six months. This one happened to take about four, and it just crawled over the end of the quarter. So, it was accepted mid-month this month.

Okay. And the other four tools, if I'm understanding this correctly, are the other four tools on the solar side that you are talking about potential for 2012, have they already shipped and we're just waiting for sign-off?

No. They have not shipped yet. As Kevin said, we just won this competitive selection, and that tool we expect to ship this quarter. Then, we expect another one to ship, or two, over the next quarters or so and those are the tools we would see. The four I specifically said we expect to ship in the year but probably later in the year, and they will be in qualification.

These beta tools, are they going out more configured than your production-level ones might be?

No, these tools are going out. The initial ones are configured more as R&D tools. But after the first two tools, the configurations will be exactly the same as production tools.

Can you give us a sense on what the rough ASP is for these?

In the range of $2 million to $3 million.

Okay. All right, great; thank you very much.

(Operator Instructions)

JD Abouchar, GRT Capital.

Hi guys, nice quarter. A question on the ion implant for solar. Can you talk about what sort of efficiency improvement your customers are seeing, and how that translate into pennies per watt cost reductions?

The efficiency improvements can range from 0.5% to over 2%, and it really depends on the number of ion implant steps, the design of the cell, and whether they are using p-type or n-type silicon. So, there are some variables there. In terms of cost savings, it can be anywhere up to $0.08 a cell, if you measure on a cents basis. But in a lot of cases, people want the higher efficiencies to have much more competitive product. In a market where there is oversupply, people will always go for the higher efficiency, price being the same.

You said there could be multiple ion implant steps. Would that be multiple tools per line, or just running through the machine a couple times?

We would expect multiple tools per line, so when people move to n-type wafers, they could have one machine doing phosphorus implants, and they could have a second machine doing boron implants.

Okay. And, just ballpark ASPs on the tools?

For an integrated tool, it could be $2.5 million to $3.5 million.

Great. And if I remember correctly, we were discussing on the last call a little bit the competitive dynamics back in the HDD business that it seemed like your market share had the opportunity to gain some more. Any update there?

Can you repeat the question again?

Yes. Back in the hard drive business, last quarter you were talking about maybe making more progress, vis-a-vis your competitors, on tool performance and the chance to pick up share. I just wonder if you had any update there?

Clearly the acquisition of Hitachi by Western Digital gives us some opportunity in that new combination because, probably, we have more of our tools in that combination than our competitor does. Plus our tool, 200 Lean, has demonstrated the best technology in the industry to date. So, that's what gives us encouragement that we could hopefully improve our market share situation.

Great, thank you.

There are no further questions at this time. I will turn the call back over to Kevin Fairbairn.

Thank you for joining us today, and we look forward to updating you at our next call on our second-quarter results. Goodbye.

Thank you. Ladies and gentlemen, this concludes the conference for today. You may all disconnect, and have a wonderful day.