Intevac Inc (IVAC) 2013 Q1 法說會逐字稿

Good day, and welcome to Intevac's first-quarter 2013 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, April 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 Intevac's financial results for the first quarter of 2013 which ended on March 30. In addition to outlining the Company's financial results, we will provide guidance for the second 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 first-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'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 Exchange Commission, including our annual report on Form 10-K and quarterly reports on Form 10-Q. The contents of this April 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 first quarter. Jeff?

Thanks, Claire. First off, I'd like to recap the cost reduction plan we executed on February 1. The plan will result in an annual reductions of $12 million to $14 million in total expenditures. The cost of implementing the plan was approximately $500,000 and was principally severance costs. The plan also includes the decision to divest our Raman Instrumentation product line to focus on the larger military markets for our digital NIght Vision products. The asset sale was completed in late March.

Consolidated first-quarter revenues totaled $13 million, within our guidance of $12.5 million to $15 million. Equipment revenue totaled $5.4 million and consisted of service and upgrade revenues. Photonic sales of $7.6 million included $4.1 million of contract research and development. The high end of guidance had included one LEAN SOLAR system shipment which did not occur as the customer made the decision in March to exit the solar business.

Equipment gross margin of 22.4% declined as expected from the fourth quarter. This decrease in gross margin was the result of the lower level of upgrade revenues and lower factory utilization, partially offset by the savings from our cost reduction activities. Photonics gross margin of 30.4% decreased from the fourth quarter, driven primarily by lower yields on one of our low-light sensor products and a mix of lower margin technology development contracts completed during the quarter.

Q1 operating expense of $12.3 million was slightly below our guidance of $12.5 million to $13 million and included approximately $300,000 in severance payments. The decrease was driven primarily by our cost reduction actions. We expect to realize the full quarter savings of the headcount reductions in Q2. The operating loss includes an approximate $200,000 loss associated with the sale of the Raman Instrumentation product line and its associated assets. The structure of the sale includes a revenue earn out of up to an additional $1 million over the next several years which will be recognized as earned in the future.

Our Q1 net loss was $8.3 million, or $0.35 per share. On a non-GAAP basis, our net loss was $7.6 million, or $0.32 per share, which excludes the impact of the sale of the Raman Instrumentation product line and the severance costs associated with our cost reduction plan. Our backlog was $35.2 million at quarter end and included one Solar system. Since the end of the quarter, we received an order for two 200 Lean systems.

We ended the quarter with cash and investments of $93.6 million, equivalent to approximately $3.94 per share based on 23.8 million shares at quarter and. Cash and investments increased by $1.5 million, principally due to the conversion of working capital and the proceeds from the Raman divestiture. Capital expenditures were $300,000 and depreciation and amortization was $1 million for the quarter.

I'll now turn the call over to Norm to provide an update on our Equipment and Photonics businesses. Norm?

Thanks, everyone, for joining us today. On our last call, I talked about the transition currently underway in the hard drive industry in that demand is shifting from PC-based storage to cloud-based storage. Over the past two years, the expected continued growth in hard drives did not occur, and in fact, the total available market declined from around 170 million drives in Q3 of 2011 to the 135 million shipped in Q1 of this year.

Various explanations have been offered, including the effect of the Thailand flood and the impact of solid state storage. Then it was postulated that the underlying cause of the decline was that fewer hard drives were being purchased for PCs and more were being purchased for cloud-type data storage, large data centers. The typical hard drive that goes into a PC has far more capacity than the user needs. But the hard drive that goes into a data center is typically sized to fit the storage capacity then needed, and it is this transition that has caused the discontinuity in the total storage required by the market.

Thus, a reduction in drive shipments has occurred even in the face of increasing amounts of data being stored. The industry results over the most recent quarters lends support to this view. In Q1, PC units shipped fell 12% from the fourth quarter of 2012 yet hard drive shipments were essentially flat. We believe in that quarter that the average number of disks per drive will show an increase. One major drive Company reported 35% year-over-year increase in gigabytes per drive.

We also believe this validates that in the ongoing race between total data stored and aerial density improvements total data storage is winning. What this means is that as time goes on, more and more disks will be required to meet the market needs. Some estimate that nearly 6,000 exabytes of storage will be shipped per year by 2020, more than 10 times the current level. With aerial density growing at around 20% per year, this means around twice as many disks will be required by then. So overall, the industry metrics witnessed over last quarter have validated each of these trends, increased demand for high-capacity drives, slowing aerial density, increasing disks per drive and a decoupling of the PC unit demand from disk unit demand, and have not changed our outlook for the year or our optimism for [media] capacity needs beginning in 2014.

Moving on to solar. During the quarter, we achieved a major milestone on our Implant business but also experienced a setback. As we said in the last conference call, we received the first production order for a Solar Implant system. It shipped in February, is currently in qualification and we plan to complete this qualification this quarter. This order was a direct result of demonstrating the efficiency gains we had committed to our customer.

We expect additional system orders from this customer as they deploy additional capacity both this year and next. In March, the second customer that was evaluating our Implant system decided to exit the solar business. While this is a setback, attrition like this must happen and the excess capacity situation existing today must be reduced for the solar industry to become viable again. The efficiency gains we have achieved have proven that we have a compelling argument for replacing existing diffusion doping equipment with ion implanters. The payback our Implant system is just over a year. Today there are approximately 16 gigawatts of monocrystalline capacity using the diffusion process today. Retrofitting this capacity would require about 200 systems. So the opportunity is very large, the challenge is our customers' access to capital.

Now turning to Photonics. During the quarter, we had a very successful flight test for our Apache camera and the joint strike fighter camera. These tests demonstrate that our digital solutions operate at or better than the performance level of existing analog solutions. We expect to complete the negotiations of the first large production order for the Apache helicopter program this quarter which, as we have said, will drive our expected step function growth in 2014.

A lot has been said regarding the impact of sequestration on the military budget. To date we have not experienced any significant negative impact but we remain cautious and monitor it closely. Our Apache Night Vision program has not been impacted. Now to summarize, we are seeing the transition of the hard drive industry from a PC unit base business to a cloud byte-based storage business.

We expect 2014 to be the year when disk capacity becomes tight driving the need for new systems. Our solar implanter has shown that it is ready for production, but significant orders are dependent upon improving conditions in the industry. 2014 should be a significant growth year for Photonics as we begin to deliver the Apache camera.

I'll now turn the call back to Jeff to discuss our guidance for the second quarter and provide our outlook for 2013.

Thanks, Norm. We are projecting consolidated Q2 revenues of $14 million to $16.5 million, consisting of service and upgrades in our hard drive business, plus one Solar system at the high end of the range. We expect second-quarter gross margin to be in the range of 26% to 27% or flat to down slightly from the first quarter. Operating expenses are expected to be in the range of $11.8 million to $12.3 million. Other income and expense will be approximately $100,000. This excludes any impact associated with foreign exchange.

For Q2, we are projecting a net loss in the range of $0.31 to $0.33 per share. Turning to the full year 2013. We currently expect total revenue for the year to be 5% to 10% lower than 2012, principally driven by a lower level of Equipment upgrades that are not expected to be completely offset by the incremental revenue for our new Solar products.

We expect two to three hard drive systems for the year, two of which we have in backlog today, all of which will ship in the second half. We continue to expect limited growth in our Photonics business this year with incremental revenues in the core imaging business offsetting the revenue reduction associated with the sale of the Raman instruments. We continue to expect Photonics to be profitable for the year with 2014 being an inflection point for significant revenue growth as we begin shipments for the Apache program. We expect our operating expenses to be in the range of $44 million to $45 million, down about 25% from last year. We expect to significantly reduce our non-GAAP operating loss, as well as reduce our cash burn by approximately half as compared to 2012.

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

(Operator Instructions)

Our first question comes from the line of Mark Miller with Noble Financial. Your line is open.

Good afternoon, Norm and Jeff.

Hey.

Hello, 2013, did I miss the margins or are you giving margin guidance for the entire year? Will it be around this quarter's margins?

I haven't. It will be better than this quarter's margin but I did not include that in there.

Okay. One thing that we agree with that the capacity, as you heard, on Western Digital, also, I think, Seagate is even saying their capacity has increased more than Western Digital's. And that with the growing number of drives going to the cloud, it makes it hard, it is hard because we know that the TAM is going to be about 135 million units again this quarter and installed capacity, drive production capacity, is around 190 million, but it should be lower for the -- in terms of the capacity adds for your tools because of those two factors I just mentioned before.

I know Hutchinson is telling us for every 0.1 increase in heads per drive it increases suspension assemblies roughly 3%. Is there any guidance you can give us to get a better feeling, because like I said, all we have to go by is roughly what we -- what the TAM is for this quarter and what we know the capacity is, and we are assuming that the capacity for equipment additions terms of number of drives produced will be less because of the factors I previously mentioned?

We try to follow this by looking first at the TAM, which is the historical number everybody has looked at. But then the next thing we do is quickly look at the disks per drive and we also, of course, look at the number of gigabytes shipped, and from all that, the way we read the tea leaves is that things are headed in the right direction and more disks are going to be required next year.

So would I be too off if I ballparked it that with these factors we just discussed that we would be up around 150 million drives with the higher capacity where you start adding capacity for your tools? Would that be in the ballpark, 150 million to 160 million?

If you look at it today, we think that the disks per drive into this year is going to be 1.85, so at 140 million drives per quarter you get 560 million per year or about 1.05 billion disks. And in our estimates we think the industry capacity is 1.1 billion, maybe 1.2 billion, somewhere in that ballpark. So it doesn't take a lot of growth in disks to reach the capacity limit.

Okay. Finally, is it possible to break out how much cash you got for the sale of the Raman division? You said it improved your cash flow by $1.5 million but that was in conjunction with another factor.

Yes, it was about a third of that.

About $0.5 million, okay. All right, thank you. I will jump back in the queue.

Not enough.

Our next question comes from the line of Rich Kugele with Needham & Company. Your line is open.

Thank you, good afternoon. A few questions. In terms of the March quarter, how much savings did you actually get from the restructuring?

It wasn't a whole lot. It was just a little bit, a few hundred thousand, mainly because the severance was offset by some of the timing of the reduction.

And as we model the full-year impact, is there a rough breakdown between R&D and SG&A?

Yes, actually, Rich, I might have to get back to you on that but I'm going to -- probably R&D is going to be the fair brunt of it, certainly. It's probably two-thirds of it.

Okay. That's helpful. And then, I was interested in your comments about the spares and upgrades being less. What are the customers doing with their equipment that is enabling them to not need spare parts or upgrading some of these tools, some of which are quite old, right?

Yes, I would say we don't expect our spares and service business to be down. As a matter of fact, we're growing that a bit on some incremental, I will call it routine maintenance, although that is at a bit of a lower margin. It's really in the upgrades, and last year we did a very, very significant -- almost site-wide upgrade at one customer and we just haven't been able to replace it. And we had some in our initial visibility that just doesn't seem to materialize yet this year. Those are the drivers, but it is not the service and spare parts, those are holding up.

Okay, and then, is it fair to say that the two orders that you have gotten for LEANs that those are for replacements rather than capacity?

We don't know. They obviously can do production in R&D and the customers have not really shared all their plans with us on those.

Okay, and then just lastly, obviously, you did see within the quarter an opportunity to divest one piece of your product lines, are there any other areas that you would expect further strategic reviews to take place?

No.

Okay, so right now to go-forward strategy is to just reduce the cash burn as much as possible, get to 2014, and see if there's a rebound in at least platter demand?

Correct.

Okay. All right, thanks a lot, guys.

Thanks, Rich.

(Operator Instructions)

There are no further questions at this time. I'll now turn the call back over to Norman Pond.

Okay, we want to thank you for joining us today. We look forward to updating you on the next call, on our second quarter results. Good-bye, and have a good afternoon.

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