Intevac Inc (IVAC) 2013 Q2 法說會逐字稿

Good day, ladies and gentlemen. Thank you for standing by. Welcome to the Intevac second-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 be given at that time.

(Operator Instructions)

Please note that this conference call is being recorded today July 29, 2013. At this time I 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 second quarter of 2013 which ended on June 29. In addition to outlining the Company's financial results, we will provide guidance for the third quarter of 2013 and our current outlook for the full-year. On today's call are Norm Pond, Chairman, and Jeff Andreson, Chief Financial Officer. Jeff will start with a review of the second-quarter results and then Norm will introduce our new President and Chief Executive Officer and then 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-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 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 second quarter. Jeff?

Thanks, Claire. Consolidated second-quarter revenues totaled $17 million, above of our revised guidance of $16 million to $16.5 million, the result of a late quarter equipment update shipment. Equipment revenue totaled $9.2 million and included one solar implant system as announced late in the quarter. Photonic sales of $7.8 million included $3.7 million of contract research and development revenue. Equipment gross margin of 14.8%, which declined from the first quarter and was below our guidance due to a $500,000 reserve related to a return of a solar implant evaluation system shipped in 2002. As we discussed on our last call, this customer made a decision to exit the solar business earlier this year. In our Photonics business, gross margins increased from the first quarter to 31.7%, primarily as a result of improved yields on our low light sensor.

Q2 operating expense of $10.8 million declined 12% from the first quarter reflecting the savings from our cost reduction actions and were below the low end of our guidance range due to further cost reductions made during the quarter. Our operating loss includes about $200,000 in employee related restructuring costs. Our Q2 net loss was $6.4 million, or $0.27 per share. On a non-GAAP basis our net loss was $0.26 per share which excludes the impact of the severance costs associated with the restructuring. Our backlog was $78 million at quarter end, more than doubling from Q1. Equipment backlog of $29 million included three 200 Lean systems and those solar systems. Backlog in our Photonics business was $48 million.

We ended the quarter with cash and investments of $88.3 million, equivalent to approximately $3.70 per share based on 23.8 million shares at quarter end. Cash and investments decreased by $5.3 million, primarily due to operating loss. Capital expenditures were $534,000 and depreciation and amortization was $1.1 million for the quarter. I will now turn the call over to Norm to provide an update on our businesses. Norm?

Thanks, everyone for joining us today. Two weeks ago Wendell Blonigan joined us as Intevac's President and CEO. We are very pleased to have him here, he is sitting in on this call and he will be handling the Q3 call in October.

Overall, we are pleased with the accomplishments in Q2 and particularly encouraged by the strong order growth leading to a three year high in backlog. However, the equipment markets that we serve, hard disk drives and solar, continue to have production capacities well in excess of current market requirements. That must change in order for the demand for our equipment to significantly increase. The situation improved in Q2, more is needed. In the hard disk drive area, we received orders for three systems during the quarter, an indication that the industry is still investing in manufacturing its structure. Jeff will discuss the timing of the shipment of these tools. As I have talked about previously, the transition from the primarily PC-based storage market to a centralized or cloud-based storage market is taking place. In Q1 of this year PC units declined about 11% year-over-year, yet HDD units shipped were flat and gigabytes shipped were up about 35%. This demonstrates the continued underlying growth in total data storage demand, as well as the effect of the shift to centralized storage.

While there is general agreement among industry forecasters that data storage requirements will continue to grow significantly, the rate and timing of the forecasts vary. A recent forecast predicts that exabytes shipped will grow from around 400 last year to 500 this year and over 700 next year. And this increase of around 40% compounded annual growth is in the face of HDD units forecasted as being relatively flat. So it is bytes and not PC units that is driving the forecast for disk and equipment. In the meantime, we will continue our focus on developing new upgrades and expanding our service and spears business for the install base of over 200 systems while continuing to support the road map -- our new road map for our customers.

Moving to solar. During the quarter we achieved a major milestone in our implant business with the qualification of our first production solar implant tool. This was a competitive win with an Asian solar cell manufacturer. We expect this customer to add incremental cell production capacity. The timing is uncertain, but we expect additional systems through 2014. The qualification process that we completed was quite rigorous. Our system is designed to process around 20 million cells per year, indicative of the significant volumes that the solar industry deals with. The qualification process included implanting over 800 wafers. These wafers were completed into cells and met the efficiency gains we had committed to. We will continue to work with this customer to further optimize the performance of this tool.

While we continue to believe that our opportunities in the solar market are very large, we expect the market conditions to remain difficult until the industry absorbs the install capacity and improves cash flow. Our strategy is to balance a level of investment with the timing of the need for incremental capacity and we must be capable of supporting both the current and future cell technologies such as PERC, PERT and Back Contact. We have a rekindled interest recently in our PVD solar equipment related to the activity with these new cell technologies. As you may recall, the first two solar systems that we shipped were PVD systems.

Now, turning to Photonics. During the quarter we announced a $27 million contract award to deploy over 500 digital night vision cameras on the US Army's Apache helicopter fleet. This contract is directly with the US Army and Intevac is the prime contractor for this program. While the unique technology incorporated in the camera is Intevac's electron bombarded active pixel sensor, or EBAPS, the camera system also includes sophisticated optics, electronics and image processing software.

This award has significance beyond the size of the contract as it elevates Intevac to prime contractor status and establishes us as a supplier of digital night vision systems, as well as a supplier of our proprietary digital night vision senses. We believe this will expand our access to the market for that type of equipment. The Photonics backlog now exceeds $48 million, with this award representing two years of deliveries beginning mid next year. Prior to these shipments, the first production units will begin shipping in the fourth quarter of this year as a part of the $11 million we received previously. This award is a significant milestone, being the largest order for our Photonics business and also we expect will be a significant catalyst to winning future programs.

To summarize, we are encouraged with the uptick in orders for both equipment and Photonics, as well as the positive drivers for revenue growth in 2014. In the near-term, however, we expect demand for our equipment products to be constrained and we will continue to limit expenses accordingly. I will now turn the call back to Jeff to discuss guidance for the third quarter and full-year.

Thanks, Norm. We are projecting consolidated Q3 revenues of $18.5 million to $19.5 million, including one 200 Lean hard drive system. We expect third quarter gross margin to be in the range of 32.5% to 33.5%, up from the second quarter. Operating expenses are expected to be in the range of $10.5 million to $11 million. Other income and expense will be approximately $100,000. This excludes any impact associated with foreign exchange impact. For Q3, we are projecting a net loss in the range of $0.16 to $0.20 per share.

Turning to the full-year, we currently expect total revenue for the year to be in the range of $71 million to $77 million. On the last call we said we expected revenue to be down about 5% to 10% from 2012. This decrease from these levels is principally driven by lower equipment upgrades and one less solar system versus our view a quarter ago. We expect to revenue two to three 200 Lean hard drive systems for the year, all of which we have on backlog today and scheduled to ship in the second half. There is always a risk to our customers rescheduling deliveries when they are scheduled late in the year, so the low end of our full-year outlook includes only two 200 Lean systems. We expect our Photonics business this year to be in the range of $30 million to $31 million and to be profitable for the year.

We expect our gross margin to be in the range of 29.5% to 31% and our non-GAAP operating expenses to be in the range of $43 million to $44 million, down about 25% from last year. Our non-GAAP loss per share is expected to be in the range of $0.76 to $0.87. We expect cash and investments to be down around $12 million to $13 million for the year from the year-end 2012, on track with our target of reducing the cash burn by 50% as compared to 2012. This completes the formal part of our presentation. Operator, we are ready for questions.

(Operator Instructions)

Mark Miller, Noble Financial.

Jeff and Norm, hi. I was just wondering if you could maybe just expand a little on the solar opportunity. I had a recent meeting with the chairman of one of your competitors and I know AMtec has put 5,000 solar diffusion furnaces in the field. Now, you won't be replacing them but if you extrapolate from their share that is well over 12,000 units that are required. He was excited about what he thought would be a ramp in that business in the second half of next year. I don't know if your visibility is that good. The only thing I was wondering if you could discuss the competitive situation and the competitive advantages you might have in the field.

Okay, Mark. This is Norm. We certainly hope this outlook for next year turns out to be true. I think we read the same literature that everybody else does and it is clear today that the capacity of supply and demand is out of balance. I think it is moving to correct itself. I don't know if it will be next year or the following year. In terms of the competitive situation in implant, which is what we primarily talked about, we have two competitors, the one you mentioned and a much larger one. We have respect for both of them. We are doing our best to try to come up with the best machine at the lowest cost.

Just to get back, again, these tools are going to be more -- the reason people are investing in implanters is basically because they need the extra efficiency to go over 20%. It is more, like I said, that is the way I viewed it and I was just wondering what your thoughts are. This is not so much capacity but rather than capacity, the current capacity coming from next-generation cells and the question would be, when did these next-generation higher efficiency cells start to ramp?

Mark, I think we have mentioned in the past that we are looking at the market segment you talked about, namely new cells with new technology. We also are looking at the possibility of retrofitting some existing lines that use diffusion. That has not materialized to the degree that we had envisioned and we are now putting a greater emphasis on the new technology which is next year and beyond.

These are end type cells?

Yes.

Final question for me, cash flow from operations.

Our cash flow from operations this quarter was down about $5 million, so was cash burn. Primarily the operating loss.

Thank you.

Okay.

(Operator Instructions)

Richard Kugele, Needham and Company.

Hi, good afternoon and welcome Wendell. Just a couple of questions for me. First, in terms of the $48 million of backlog on the Photonics side, can you just talk about the timeframe that you're defining that backlog?

Yes, anything we put in backlog we deem as shippable. So the Apache, for instance, starts in mid '14 and goes for two years beyond that. It is probably split about even between the two years, maybe a little less in the first year. So you can take that off of shippable. The other stuff extends -- most of that extends within a year. That is the longest one in that backlog.

Okay. Should we assume that the margins for that backlog in aggregate are more in the 30s than in the 20s?

Yes, I think, certainly with volume we will see some increase in margin. As we've said, we think we will be kind of between this low 30s and mid 30s, depending on the volume of products versus programs. At least for the next 18 months or so.

Okay. Then in the quarter you just reported, just to go back on the equipment margin again, if we were to back out that $0.5 million hit from that solar system in 2012, your margins would have still been down sequentially in the equipment business. Is that just due to the lower upgrades?

It is two factors. The lower upgrades, this is a lower level of upgrade we've seen historically, as well, about 5 margin points is the reserve. We are building a more service business each quarter so that comes with lower margins as well. We saw some of that in this quarter. Kind of apples to apples margins, the biggest hits versus prior years is a little bit worse factory absorption and just the lower margins on the [soap versus] solar tool plus the reserve.

Now, my last question is about the reserve again. So, if -- what are the conditions for reversing that reserve?

I think I booked an estimate that we don't think we will need to reverse. If we thought we were going to reverse it, we probably wouldn't have booked it. I think we will fund it, utilize it and it's a tool that has been in production so we probably won't get similar ASP with brand tool. And it needs some upgrades.

So you are going to take it back in house, fix it up and then sell it again.

Right.

Okay. I got you. Thank you very much.

You bet.

JD Abouchar, GRT Capital.

Okay guys, on the hard drive side, going back a year or so ago, Intel made the argument that while storage on the PC was going away it was going into the cloud, or it had to be mirrored five times, so really it would be an increase in storage and clearly they were dead wrong. The efficiency of storing in the cloud far exceeds the unused capacity on PCs. But at some point we sort of get to an equilibrium and then we start to see demand pick up again. What are your thoughts on that because clearly it has hurt you and they were wrong, and we just sort of have to work through this shift from PC-based to cloud -based storage? If you could just kind of elaborate on that it would be helpful.

Well I think your view of history is the same as ours. We think the industry is working through the discontinuity and I think, again, the slope of the curve, once we get to discontinuity, is going to be the same. I think it is very difficult to know how far along we are. I think we are closer to the end than the beginning. When it pops through, I don't know.

On the installed market, they sort of -- unfortunately you built products that were too good and they have lasted a lot longer than we thought their useful life would be. Is there an inflection where they just finally, ultimately the 250B's wear out and we have to replace them?

I can tell you what our customers have said and that is that they think this is the last important capacity point that they will be able to use those machines and we hope they are correct.

Okay. Finally, Norm, you made a comment on the solar PVD that I just didn't fully grasp what you were saying. Could you elaborate on that?

What was the point?

You said it was shown but you were seeing some interest, I thought that is what you said.

Yes, yes. The first two tools that we shipped to the solar industry were [splare] machines, PVD machines. That has been quiet. Recently, we have had expressions of interest in that technology from customers that are looking at using sputtering in future new cell technologies.

Okay, would that have to be more R&D investment on Intevac's part or is that something you could sort of get NRE for?

The exact requirements aren't clear yet. So we can't assess the amount of change required. We expect there will be some but we don't think it will be significant.

Got you. Thank you, guys.

Thanks.

(Operator Instructions)

Presenters, I am showing no additional questions at this time. I would like to turn the call back over to Norman Pond for any additional or closing remarks.

Okay. We would like to thank you for joining us today. I have enjoyed speaking with you on the last three conference calls. And at the same time, I am pleased to be handing the reins to Wendell for our next call on our third-quarter results. Good afternoon.

Thank you, presenters, and thank you, ladies and gentlemen. This does conclude today's teleconference. You may now disconnect.