Intevac Inc (IVAC) 2012 Q2 法說會逐字稿

Good day and welcome to Intevac Second Quarter 2012 Financial Results conference call. Please note that this conference call is being recorded today, July 31, 2012.

At this time, I would like to turn the call over to Claire McAdams, Intevac's Investor Relations Counsel. Please go ahead.

(Technical difficulty) in addition to outlining the Company's financial results, we will provide guidance for the third quarter and full-year 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'd 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 and Exchange Commission, including our annual report on Form 10-K and quarterly reports on Form 10-Q.

The contents of this July 31 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 second quarter results included revenues of $31.8 million and a net loss per share of $0.06, both at the upper end of our guidance.

Today I will update you on our progress in our equipment business. Drew will discuss the photonics business, followed by Jeff, who will discuss our financial results and outlook.

In the second quarter our equipment business demonstrated strong execution with operating results exceeding expectations due to the combination of near-record gross margin performance and prudent control of operating expenses. We achieved very significant milestones for our equipment business diversification into the solar market. We shipped our first two ion implant systems for the doping of silicon solar cells. We also received sign-off on our first silicon texture etch system.

Turning to the hard drive market, the outlook for drive shipments for the remainder of the year has softened from the industry's and our initial expectations earlier this year due primarily to the macroeconomic headwinds. We have seen the estimates for the fourth quarter be significantly reduced from a range of 185 million to 210 million drives as we entered the year to about 170 million drives currently.

We continue to believe that media capacity starts to become constrained above a quarterly TAM of 180 million drives. Whereas we previously expected this to occur in the second half of this year or potentially the first quarter of 2013, given the current outlook, our customers are understandably being cautious on the timing of capacity additions and have pushed out the ordering of capacity systems we had previously expected this year.

Growth in digital data storage over the last five years has demonstrated that it is somewhat insulated from the impact of challenging economic conditions and continued to grow about 50% each year. We don't see any reason for data generation growth to slow down.

The long-term outlook continues to be positive for our hard drive equipment business. Since 2007, disks have grown at a compounded annual rate of almost 7% with hard drives growing just slightly less. The combination of digital data growth combined with the slowing growth of aerial density as forecasted by industry analysts at double the annual unit volume of disks for hard drives by 2016 as compared to 2012. This equates to a compound annual growth rates of 18% for disk, which is more than double the forecast growth rate for hard drives.

Today there is the equivalent of approximately 300 of our 200 Lean magnetic media manufacturing production systems in use today by the industry. On an industry-wide basis, this number will have to nearly double by 2016 to support this expected level of growth in disks and represents a very significant opportunity for us in the future. Even if these estimates turn out to be too optimistic and the industry only achieves the historic rate of growth for disks we have seen since 2007, then we are still looking at a significant opportunity of over 100 machines given the lack of new capacity added in 2012 and the additional impact of the legacy systems expected to be retired by that point.

We will continue to work hard to support our hard drive customers' needs through a combination of providing the most cost-effective technology solutions and execution to commitment and strive to earn their trust and win the bulk of available systems business in the future.

Now I would like to review the solar market and the progress we are making on our new product penetrations with leading customers in the industry.

In reading the headline news, you might think that the solar industry is shrinking, but actually it's growing in both unit volume and gigawatts installed. This is in spite of the global economic headwinds and reduced government subsidies in Europe.

The growth has been driven principally by the continued decline in the cost of solar modules. Installed solar prices per kilowatt hour now -- per kilowatt hour are now below retail electricity prices in many of the advanced economies and in some cases are near the cost of wholesale electricity in countries that don't have access to conventional, low-cost, carbon-based or hydroelectricity generation. In countries with higher amounts of sunshine, solar is actually cheaper than available wholesale electricity. Novel solar cell manufacturers are benefitting. Those companies with high-efficiency models with competitive pricing albeit at very low margins are running at full utilization. Companies who lag in terms of module efficiency are struggling in some cases have exited the business. The companies that have exited or are now exiting are not limited to Europe and the US. There's a significant number of smaller Chinese companies who have quietly disappeared as well.

Our value proposition to the solar cell manufacturers is simple. We provide equipment that can help improve their cell conversion efficiencies, which increase the market demand of their products and lowers their cost per watt. We are primarily focused on two process technology solutions to do this -- ion implant for silicon doping and texture-etch to increase light capture. The biggest opportunity we currently see is in ion implant, which has the potential to replace today's diffusion furnaces for the silicon doping steps. The doping of silicon by ion implants is recognized as one of the most promising technologies that can enable higher cell conversion efficiencies. Companies have already demonstrated higher efficiencies using ion implantation systems are based on those used in the semiconductor industry.

Fortunately for Intevac, these semiconductor-type systems do not meet the throughput or cost requirements of solar cell manufacturers. They are more expensive than our product and the existing diffusion furnaces used today in addition to being too complex for the solar industry. Our Lean Solar ion implant system has been designed to meet the cost requirements of the industry while providing all of the technology advantages and expandability of ion implant doping. We are pleased to report that we have now shipped our first two ion implant systems to two large, well-capitalized customers.

Our short-term focus is to ensure the successful qualification of our systems and capture additional customers so that we can get qualified for production system orders and deliveries in 2013.

The second-largest opportunity we see in solar is in texture etch. In April we completed the final acceptance of our first (inaudible) texture etch system at a very large Asian customer. In this process application, we are modifying the surface of the silicon cell to absorb more light than the legacy wet etch processes by replacing it with a vacuum-based plasma etch. We are on track with our goals to penetrate this market and to position the Company for repeat orders beginning as early as the fourth quarter and certainly into 2013. We continue to believe that the solar market represents a very large opportunity for us.

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

Drew?

Thank you, Kevin.

The photonics business continues to lay the groundwork for future growth having booked a record $19 million in orders during the second quarter. These orders came in several areas. As we announced earlier in the quarter, we received a $10 million order for the US Army's Apache helicopter program for the manufacturing transition phase and the initial lot of low-rate production cameras. The US Army intends to fit the entire Apache fleet with our camera, making the total program revenue potential in excess of $50 million over the next five to seven years.

In our long-range airborne identification systems or LIVAR, we have received orders for $5 million to support the ongoing production of the current version of our camera currently fielded on the Northrop Grumman LITENING system, as well as for the development of a new version of the camera to facilitate expansion onto new platforms such as unmanned aerial vehicles.

As we stated on the last call, we continue to receive funding to advance the state-of-the-art of our most advanced 4-megapixel sensor and to improve the sensitivity of our 2-megapixel sensor as part of our multiyear contract for improvements in performance and manufacturability.

We have received $2 million in funding during the second quarter and anticipate an additional $3 million of funding in the second half of 2012.

Lastly, we had a successful live demonstration of our night vision camera, the same camera used on your Apache helicopter program with the US Army and continue to make good progress in completing the development of our digitally-fused goggles that we are developing for use in both avionic and ground applications.

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

Jeff?

Thank you, Drew.

Consolidated second quarter revenues totaled $31.8 million, at the high end of our guidance of $29 million to $32 million. Equipment revenue totaled $25.1 million and includes two 200 Leans and our first NanoTexture etch solar system recognized in the quarter. Photonics sales of $6.7 million consisted of $3.6 million in product shipments and $3.2 million of research and development contracts.

Q2 consolidated gross margin of 44.8% was above our guidance. Equipment gross margin of 47.1% was higher than the first quarter due primarily to a higher margin upgrades and spares and improved factory utilization. Photonics gross margin of 36.3% improved over the first quarter as we continued to lower the cost of our low light camera products.

Q1 operating expenses were $14.9 million versus our guidance of $15.3 million to $15.6 million and declined dearly 7% from the first quarter as we continued to prudently manager our expenses. Our Q2 net loss $1.5 million or $0.06 per share, at the upper end of our guidance. The net loss included $0.05 per share impact related to a year-to-date adjustment for our tax rate and also included $944,000 of stock-based compensation expense equivalent of $0.03 per share.

Our backlog was $43.3 million at quarter-end and did not include any 200 Leans or Lean solar system. In addition to the reported backlog, the Company has two evaluation systems that we recognized as orders and revenues once accepted by the customer.

We ended the quarter with cash and investments of $103.5 million, equivalent to approximately $4.45 per share. Our free cash flow was a net use of cash for the quarter of $5.4 million and included capital expenditures of $815,000 and depreciation and amortization of $1.1 million for the quarter.

I will now provide our guidance for the third quarter and for the remainder of 2012. We are projecting consolidated Q3 revenues of $15 million to $16 million, which includes no hard drive or solar systems recognized. We expect third quarter gross margin to be in the range of 33% to 34%. Operating expenses are expected to be in the range of $14.5 million to $15 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 Q3, we are projecting a net loss in the range of $0.27 to $0.28 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. Given the softening in the forecasted hard drive systems for the fourth quarter that Kevin discussed, we do not expect to ship any additional 200 Leans this year as the unit volumes are not expected to reach the level needed to drive incremental capacity needs as we exit 2012. We expect revenue from our hard drive equipment business to be $51 million to $52 million including service upgrades -- service and upgrades, and photonics revenues to be $30 million to $31 million for the year. Revenues from our new products will be in the range of $6.5 million to $9 million, representing three to four tools recognized as revenue this year. In addition to these tools, we expect to have two to three additional systems delivered pending final qualification.

Given these revenue ranges, we would expect total revenues in the range of $88 million to $92 million, gross margin to be 39% to 40%, and operating expenses to be in the range of $59 million to $60 million. Other income and expense is expected to be $3 million, which includes the $2.2 million gain from the sale of our mainframe technology in Q1. Our expected tax rate is expected to be 30%. We are projecting full-year -- our full-year net loss to be between $0.62 and $0.66 per share.

Operator, we are now ready for questions.

(Operator Instructions). And our first question is from Rich Kugele of Needham & Company. Please go ahead.

A couple of questions -- first, so the orders that were tentatively expected in the second half of 2012, were they pushed to a specific time frame in '13 or are they just indefinitely pushed out?

This is Kevin here, look there's been no, you know, the orders get pushed until they're placed and not orders as you know, so I wouldn't say that they're indefinitely postponed. It's just that there's no need for capacity this year.

Okay. And then in terms of you talked about 300 tools, right, being just worldwide deployed. Was that the right figure?

That's correct.

For the industry, Rich.

Yes. Can you break that down between systems that could be replaced at some point versus 200 Leans?

Probably, yes, roughly just over 10% is legacy tools that could be potentially retired as they run out of steam.

Okay. And of those 200 Leans that are out there, are they all capable of making current disks? Do any of them need to be expanded? Is that what's going on with your spares and upgrades?

All of the tools can support all of the technology out there. Most of our upgrade business is because we've come up with more efficient sources so we can enable customers to reduce the amount of target material that is wasted and therefore significantly lower their manufacturing costs. That's why we always get good upgrade business.

Okay. And then just two last ones from me, one is the obviously one of the major acquisitions in the space has taken place now. Is there any greater clarity on who's -- well, will you expect to continue to get orders once demand were there from all of you're your legacy (technical difficulty) --

-- if we had orders, we would be announcing them, but we won't actually tell you which customer, you know, which -- by which customer name. As we've said in the past, we feel that with the large number tools that we have at Hitachi, which obviously WD acquired, that's a great reference point for us in terms of technology and cost of ownership. And we were hopeful that that, you know, puts us in good stead when they consider new systems in the old WD.

Okay. And then my last one is for Jeff -- just on the cash burn perspective, what type of cash level do you expect to exit the year at and what -- how much cash do you need to run the business or what's your target cash level just all else being equal to run the business in the current environment?

Rich, I think given the guidance we've given you and we're probably looking $15 million to $20 million in cash burn for this year. How much cash you need to run the business maybe is -- varies by people you ask. But I think you could assume that we have somewhat more cash to run the business than we need, but we also have some of this cash committed to the acquisition we did for Solar Implant, so some of it's earmarked and some of it's offshore as well.

Okay. All right. Thank you very much.

You bet.

Thank you. [Operator Instructions). Our next question is from Bill Ong of B. Riley. Please go ahead.

Yes, hi, good afternoon, everyone. With 21 weeks left in the year, lead times are out 17 weeks. Is there the flexibility to ship the disk drive tools at under 17 weeks? And how fast can you ship the tool if it wasn't urgent?

If it was really urgent plus usually if the customer would be working with us while they're getting all of their paperwork in place, we could probably pull it down to maybe 14 weeks and in a real stretch maybe 12 weeks.

Okay, that's helpful. Now when a hard disk drive maker upgrades the Lean 200 tools, how long does that extend the life of the machine before the tool really reaches its useful life and you have to acquire a whole new machine?

We don't see any end-of-life issues for the 200 Lean. It was designed to be an incredibly flexible machine and customers have really liked that feature and it's really proven itself. So these sources are interchangeable and it's very easy to come and bring new source technologies, just like a few years ago, we brought to market in a very short period of time patterned media etch systems, so with the same architecture, we certainly swapped deposition sources for different types of etching sources, so a very flexible tool.

Bill, it's Jeff. And we think the 250B is nearing its last generation of around a terabyte for 3.5 inch.

So the 250B you're referring to is -- that's part of the 10% of that 300 installed base?

Right.

Yes, yes. And, in fact, some of the legacy 250Bs have been retired by some other customers who chose not to try to extend their technology life to media.

Okay, understood. So I guess that also means that once all of the 250Bs are out of the installed base, then going forward, it's pure capacity additions that's going to drive hardware revenue because anything that's installed would just be simply replacing -- simply be upgrades.

Correct. But for some of the technologies may have to add process stations, so you may find our 200 Leans, which have five modules today and each module holds four process stations, we may find that we have to upgrade some of our systems to six modules to support the new heat-assisted magnetic recording. So that's a fairly significant upgrade.

Okay, that's helpful. Then my last question is in the last quarter solar revenue guidance was to be $10 million to $20 million at the low end of the range, so it seems to even a little bit lower than that, so maybe just some insight on the fine-tuning of your revenue guidance in solar.

Yes, I --

Bill, it's Jeff. A lot of it's been driven by it's taken a little bit longer to get some of the capital approved, even those are varied valuations, it still goes through that process. And we're still working on some qualifications even post-acceptance on the texture etch. But it's a slight slip out of the bottom. We said on the last call the biggest piece of that was we expected that one of our early customers that took a PVD to our deposition tool to expand and then put all of those expansion on hold and that was the biggest piece from the $20 million down to kind of the near $10 million.

Great. Thank you so much, gentlemen.

Thank you. Our next question is from JD Abouchar of GRT Capital. Please go ahead.

Hi guys. I just want to clarify, Jeff, your earlier comment, you said total loss for -- cash burn for the year would be in the $15 million to $20 million. That includes Q1 and the -- this current quarter?

Yes, that is -- that's going from year to year, so from fourth quarter to fourth quarter.

I'm assuming in the inventory are the two solar machines that have not -- that just shipped?

Exactly.

Okay. And then just give me one more clarification, at the very end of your guidance you were talking about some machines that may ship, but wouldn't be recognized in revenue. Can you sort of repeat what you were saying there?

Yes, we've said that we're trying to get additional qualifications out into the market and we would expect another two to three tools in finished goods.

Great. Okay, thank you.

Thank you. And there are no further questions at this time. I would now like to turn it over to Kevin Fairbairn. Please go ahead.

I would like to thank everyone for joining us today and we look forward to updating you in our next call on our third quarter results. Goodbye.

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