Intevac Inc (IVAC) 2012 Q4 法說會逐字稿

Good day and welcome to Intevac's fourth quarter 2012 financial results conference call. At this time all participants are in a listen-only mode. Later we will conduct a question and answer session and instructions will follow at that time. (Operator Instructions). Please note that this conference call is being recorded today, January 29, 2013. 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 you Intevac's financial results for the fourth quarter of 2012 which ended on December 31. In addition to outlining the Company's financial results, we will provide guidance for the first quarter of 2013, and our current outlook for the full year. On today's call are Norm Pond, Chairman and Chief Executive Officer, and Jeff Andreson, Chief Financial Officer. Jeff will start with a review of the fourth quarter results, and then Norm will provide an update on our businesses. Jeff will then provide guidance before turning the call over to Q&A.

Before turning the call over to Jeff, 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-K, 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 January 29 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 Jeff to discuss our financial results for the fourth quarter. Jeff.

Thanks, Claire. Consolidated fourth quarter revenues totaled $17.5 million, versus our guidance of $17 million to $20 million. The high end of the guidance had included one Lean solar system, which was not recognized in the quarter. Equipment revenue totalled $9.4 million consistingof service and upgrade revenues. Photonic sales of $8.1 million, included $4.9 million of contract research and development.

Equipment gross margin of 46% improved from the third quarter due to the higher level of upgrades and lower factory overhead expense. Photonics gross margin of 37.4% increased from the third quarter, driven primarily by better overhead absorption. Overall Q4 consolidated gross margin of 42% exceeded the high end of our guidance, due to better factory utilization coupled with the favorable mix of the equipment revenues.

Total Q4 operating expenses were $31.2 million, which included an $18.4 million noncash goodwill and intangibles impairment charge explained in our 8-K filings on December 21, 2012 and January 24th of this year. Excluding this impairment charge operating expenses declined to $12.8 million below the low end of our guidance, and 7% lower than Q3.

Our Q4 net loss was $42.7 million, or $1.82 about per share. On a non-GAAP basis our net loss was $3.6 million, or $0.15 per share, which excludes the impact of the $23.4 million valuation allowance established on the Company's US federal deferred tax assets, and the goodwill impairment charge of $18.4 million. Our backlog was $35.2 million at year end, and did not include any 200 Leans or Lean solar systems.

We ended the year with cash and investments of $92.2 million, equivalent to approximately $3.93 per share. Our year end cash and investment balance was lower than we expected due principally to a payment in one of our large photonics programs being pushed into the first quarter of 2013. Our free cash flow was a net use of cash for the quarter of $6.4 million, and included incremental working capital investment for our new solar products. It also included capital expenditures of $1.2 million, and depreciation and amortization of $1.1 million for the quarter.

I will now turn the call over to norm to provide an update on our equipment and photonics businesses. Norm.

Thanks everyone for joining us today. I am about two months into the CEO role, which I previously held as Founder of Intevac. Today I will give you my perspective on each of our businesses, and Jeff will then provide our guidance for the first quarter of 2013. 2012 was a challenging year for us due to the weak macro economic environment and the industry transition underway from PC-based storage to centralized or cloud-based storage. This significantly affected our core business hard drives sputtering equipment. We are the leader in that area, and about 60% of all media is made on our machines. Data storage is expected to grow this year, and the number of disks per drive is expected to increase. However, since the industry is still operating below capacity, we expect low demand for our hard drive equipment again in 2013. We view this market as mature but cyclical with significant fluctuations year to year.

We have achieved great success in this business with revenues averaging over $100 million per year, and operating profit around 20% over the past ten years. The business has been profitable even in the recent downcycles. We have the largest market share, the most customers, the best technology. We expect to enjoy continued success and are working to increase our market share.

In the last two years, major changes occurred that significantly impacted the business. Floods in Thailand, consolidation, portable devices, tablets, and the movement of some data to the cloud. Those changes have worked out well for the hard drive manufacturers but not yet for equipment suppliers like Intevac. This is due in part to the fact that in 2010 the industry added enough media capacity for about 170 million hard drives per quarter. That rate has not yet materialized. We believe the key factor in the decline of the hard drive units has been growth of storage in the cloud because in the cloud drives are utilized more efficiently thus requiring a smaller number of drives for a given amount of storage.

As the industry works through this discontinuity we believe that demand for disks will again exceed capacity. This is based on a consensus that data creation will continue to grow at a rapid pace as much as 50% byte growth year per year, which is well above the predicted growth rate and aerial density of around 20% per year. This transition is causing the key driver for disks to switch from the number of PCs sold, to the number of bytes to be stored. Further, we believe that this increased demand will require more disks, thus more equipment and disks with higher capacity, thus new technology, and we believe we are well-positioned to satisfy both needs.

Moving to Solar. In 2009 Intevac began a project to design solar cell manufacturing equipment and that continues. Our large investment run rate of around $25 million per year for the past two years has obscured the strong operating profitability and cash flow of the hard drive equipment business. We invested in solar because we have the skills and technology required to compete in this large market, and because we believe it is a growth business that will complement our cyclical hard drive business.

In 2012 we introduced two innovative systems. Our Etch system increases cell efficiency by reflecting photons from the back surface. And our ion implant system provides greater control of the dopant that forms the PN junction of the solar cell, further increasing cell efficiency. I am pleased to report that a large Asian cell manufacturer recently purchased a production implant system after successful completion of the first phase of our evaluation agreement. We have demonstrated increases in cell efficiency, and we believe that ion implant will enable further increases in efficiency.

The industry currently has excess capacity and purchases of production equipment are extremely low. However, solar cell demand is increasing, and the weaker participants are leaving the business. We are working closely with our customers to demonstrate production readiness, predictable uptime, and high reliability in order to be prepared when additional equipment will be required.

Turning to Photonics. Our strength is providing highly-sensitive digital imagers for military applications, that make it possible to see better at low light levels than with any other technology. For most of our programs we are the sole source supplier. We have substantial IP, our products enable some new military applications, and in other cases improved performance of existing systems, by replacing analog-type equipment with digital equipment. This business is at a $30 million run rate, and has become profitable. We view it as a growth business, not because the military budget will increase, but because we expect to be designed into more existing platforms and win new applications. We see a path to $100 million annual revenues within the next five years, without capturing the main US Army head-mounted night vision goggle market.

So summarize, in 2013 we expect profits and positive cash flow from both the hard disk drive equipment business and Photonics, and we will continue to invest in solar, albeit at a lower rate of both OpEx and working capital. I will now turn the call back to Jeff to discuss guidance for the first quarter, and our outlook for 2013.

Thanks, Norm. We are projecting consolidated Q1 revenues of $12.5 million to $15 million consistent of service and upgrades in our hard drive business, Photonics, plus one solar system at the high end of the range. This tool was delayed from Q1 due to our customer extending their internal qualification program. We expect first quarter gross margin to be in the range of 26% to 27%. This decrease in gross margin is the result of lower level factory utilization, and the impact of the lower margin expected on our first solar implant system. Operating expenses are expected to be in the range of $12.5 million to $13 million, and the same level as the fourth quarter which included the impact of an extended holiday shutdown.

Other income and expense will be approximately $100,000. This excludes any impact associated the with changes to the valuation of our intangibles or any other assets or foreign exchange. For Q1 we are projecting a net loss in the range of $0.33 to $0.35 per share.

Turning to the full year 2013 as Norm referenced earlier, we expect the hard drive equipment business to be roughly flat this year. With expectation for media growth beginning to drive capacity needs in 2014. Our solar equipment business is starting to show signs of growth beginning with the initial qualification of our implant tool, but it is too early to provide revenue guidance for the full year. We expect limited growth in our Photonics business, and while significant revenue growth will not occur before 2014,we expect this business to be profitable in 2013. Importantly, at these revenue and investment levels we expect our total operating loss and cash burn for 2013 to decline by about half as compared to 2012 levels. We will continue to monitor the business conditions, and we will adjust our plans to achieve this goal.

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

(Operator Instructions). Our first question comes from the line of Rich Kugele with Needham & Company. Your line is open.

Thank you. Good afternoon. Norman, I wanted to make sure that I ask you a strategic question first, rather than get right into the numbers. It is great to have you on the call. In bigger picture terms when you look at the solar market, and you obviously were on the Board when the decision was made to participate in this space. What did you think we would be at this point and what do you think is necessary to actually get that business as a standalone entity, or do you think that at some point over the next 12 or 18 months you would have to make a more hard decision of saying okay, let's go and sell this business? If you could kind of talk about initial decision that you referenced there in 2009, and then where we are now, and what would be the trigger point to go and potentially cut bait on that business?

Well, thanks, Rich. As you are aware, conditions were very different in 2009 when we made the decision to begin the project. And we did not expect to see the major collapse of the business that has occurred,driven by just too much capacity. So the market is quite different than we thought. However, our outlook continues to be that it is going to be a big business, and if we he can design and build the right machines to be cost competitive we think it is going to work out for us, and we are not giving any consideration to selling it at this point.

Do you think that the $25 million that you referenced for investments are going to decline from here? Have you basically innovated as much as you need to, and now it is just a matter of traction?

Rich, it is Jeff. Yes. We expect it to decline. Most of the decline will be in that particular area, because we have gotten to a certain level of development, and we are working mainly on reliability, CIP, things like that, as well as we invested some working capital to be ready for some of these evaluations.

Okay. And then actually Jeff on the operating loss being roughly half in 2013 versus 2012, is it primarily OpEx that we should use to get there if the overall, it sounds like the overall revenue is basically going to be flat,I guess on a run rate basis. Is that correct?

I think a little of it can be in revenue. I mean I wouldn't say it is 100% flat. But it is not going be tremendous growth as we talked about. But a little bit and the rest of it, you can probably assume is going to come through the OpEx, because we will modulate some of the margin through the gross margins which year-over-year we expect to come down too. Just because of the lower margin, new tools we expect.

Okay. And then just lastly, what is the average platter count now in your estimation, and where would you expect it to be in 2014?

Right now the disk numbers aren't out, but we thought going in maybe it was 1.75,maybe slightly higher than that. I think by 2014 I think it is going to be close to 2. This is based on some work we have done with some of the forecasters in the industry, and exiting 2013 we think it is going be kind of maybe 1.85 or so. If the forecasters are right. Obviously all of the macros, the slowing in aerial density, and the appetite for storage. We don't think we are going to be far off of those numbers.

Okay. That is helpful. Thank you very much.

Okay.

(Operator Instructions). Our next question comes from the line of Mark Miller with Noble Financial. Your line is open.

A follow-up on Rich's question. By the way, welcome Norm, and hi Jeff. Seagate I believe reported yesterday that their average capacity per drive had increased by 59%. That was probably double the aerial density improvements, and as you noted, it is going to be 20% to 25% on aerial density. Is projections you made, are they based on these type figures, or are they more conservative?

For this year I don't think it makes much difference because it will take a year of that to get back to industry capacity. But we were thrilled to hear that 59% number. I think it translates as I said into a requirement for more disks that is going to occur within about a year.

I was just wondering, too, that we are moving away from laptop type drives to enterprise drives, which should have more platters also, and I don't know if that is factored in or what the extrapolation is, in terms of near line enterprise growth versus decline in laptop. I know Seagate was down 15% on laptop but they were up 23% on near line. There are two positive trends there. The shift to near line storage away from laptops, and also the aerial density. Seems like a conservative number to me, and I am just trying to probe about the 1.75 to go on to 1.85.

We would like to have that out, Mark.

The other question I had is on the ion implant, it is my understanding that the industry which had been using thermal diffusion ovens is moving away to ion implant, as sales become more complex and sales design changes. I am just wondering what is your feeling for, in terms of what percent of cells are going to be made using thermal implant versus ion implant, and how that progresses in time shifting towards ion implant?

Mark, today you can round it off to maybe 100% are made by diffusion. There are a few people using implant on machines with fairly limited capacity. But far and away the dominant process is diffusion. And since there is plenty of capacity, there aren't any big production buys going on for either diffusion or ion implant.

The people we talk to I think have the opinion that implant is the process of the future, and even if today it doesn't offer some compelling advantage if they were going to buy machines they would probably buy implant machines, expecting that as the processes evolve, that there is going to be more growth and efficiency possible with implant than the diffusion process. Again, it doesn't really matter until production is required, and our goal is to be ready with the right machine at that point in time.

The reason I bring that up is that Amtek Systems which has been a leader in thermal diffusion ovens, has made a very significant effort, and they are on thin ice too, in terms of not having much in the way of orders, and they are really pushing ion implants. I am just wondering if in the one tool that you placed did you compete against them, or was this your market all to yourself, and just how you compare? I think they are just in the beta site-type evaluation for their tools.

I would say the status of the industry is such that everything is competitive, Mark. There aren't any easy orders out there. But in this case we had placed a consignment unit some months ago. The machine worked well. The customer liked it. And they had a slot they needed to fill and picked our machine. And so we are very pleased how it turned out.

Now the tradeoff right now between ion implant and oven diffusion, is it basically throughput? You have a more accurate process, but the throughput advantage is to thermal diffusion at the moment,is that correct?

No, the lines are set up to run more or less at a certain rate, around 2400 per hour, and we try to match our implant or throughput to fit that need, so the customer if they are so inclined can swap out diffusion furnace and put in an implanter. They wouldn't do that unless they felt that there was some advantage, such as efficiency or lower cost of consumables or something of that nature. But when they going to add new capacity, we think that odds are the choice will be overwhelmingly implant versus diffusion.

Do you see any possibility about Varian entering that field, or they are happy where they are at right now in terms of implanters?

Varian Semiconductor was acquired by Applied of course, and even before that they were very active in the solar implant area, and that continues.

Thank you.

You are welcome.

Thanks, Mark.

(Operator Instructions). And we have a question from the line of J.D. Abouchar with GRT Capital. Your line is open.

Hi, can you hear me okay?

Yes.

Okay. Sorry about that. Just a simple follow-up question on the ion implant and Applied Material, I know they have been at it a while, but they are more of a batch process versus continuous. Maybe a little more color about what you know about their process, are they trying to go away from batch so they can actually fit into the line. The follow-up question on the win that you have so far, was that a competitive bakeoff, and are you in any competitive bakeoffs right now?

So this is Norm. It is our understanding that the Varian Applied machine is a scanning type machine, where they scan a few disks at a time rather than batch. And we don't have a lot of details on the design, but our impression is that it is a machine that was first designed for semiconductors, and has been modified to fit this need. So your second question was the order that we received competitive, and I have got to tell you I don't know exactly what the customer's decision process was. I suspect that other offers were made, but I don't know that.

I guess then more generically have you been in any bakeoffs? Maybe simply what is the competitive landscape, because obviously Varian now Applied has always been, you are talking about two very, very big companies who have great reputations, and have squashed a lot of innovative smaller competitors. Generically what is the competitive landscape like?

We have great respect for them, and I am sure they will have a great machine. We are working hard to have a better machine, and avoid being squashed. It is a lot more important to us than it is to them.

J.D., it is Jeff. Just about everywhere we go they are there obviously. The two people with tools in the installed base to our knowledge are Varian and us. I am not quite sure where the Amtek guys are in getting tools out in the field.

Okay. Thank you.

Okay.

(Operator Instructions). And there are no further questions at this time. I will now turn the call back over to Norman Pond.

Okay. Thanks for joining us today. We look forward to updating you again in our next call. Have a good afternoon.

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