Intevac Inc (IVAC) 2014 Q1 法說會逐字稿

Good day, and welcome to Intevac's first quarter 2014 financial results conference call.

(Operator instructions)

Please note that this conference call is being recorded today, April 28, 2014.

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 2014, which ended on March 29. In addition to outlining the Company's financial results, we will provide guidance for the second quarter and full year 2014. On today's call are Wendell Blonigan, President and Chief Executive Officer; and Jeff Andreson, Chief Financial Officer.-

Wendell will start with an update on our businesses, and then Jeff will review the first quarter results and then provide our guidance and outlook before turning the call over to Q&A. Before turning the call over to Wendell, 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 preparation of our Form 10-Q, as well as comments about 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 April 28 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.

Additionally, we will not be taking any questions related to the proxy contest initiated on April 10, as the intent of this call is to provide our stockholders with an update on our businesses and the results of the first quarter and our outlook for the year.

I will now turn the call over to Wendell. Wendell?

Thanks, Claire.

Before I begin, I'd like to take this opportunity to thank the employees of Intevac for their hard work and dedication, not only in executing the quarter, but in doing so while embracing the changes we are driving through the organization. On the call today, I'll discuss the actions we are taking to navigate through the current business environment, provide you with an update on each of our business segments, and explain the changes I've made in our Equipment growth strategy.

Our outlook for 2014 remains relatively unchanged from our expectations entering the year. Jeff will discuss the details of our outlook a bit later. We continue to be focused on reducing cash burn and positioning the Company for profitability as we enter 2015. During the first quarter, we implemented additional cost reductions, including a reduction in force in our Equipment group, that will result in approximately $2 million in annual savings, much of which we will see this year.

In addition to making these cost reductions, we have implemented initiatives, some of which are multi-year in nature, across the organization aimed at consolidating our organizational structure and facility footprint. We are also working on increasing the variability of our cost structure in all of our business segments. Now I'll turn to a more detailed update of each of our businesses and the markets we serve, beginning with our Equipment business.

I'll start with our hard drive equipment business. In 2014, we continue to expect to ship a few systems this year and our service and spares business holding flat versus last year.

A modest decline is expected in our upgrade business. Over the past several years, we have had significant amount of revenue generated from high efficiency sputtering source upgrades. The upgrade of the installed base is nearly complete and the focus now is on upgrades that will increase yields or reduce defects on the media.

We have multiple programs underway with our customers which, if successful, can result in approximately $100 million of upgrade sales over the next three years. The qualification process for these types of upgrades can take six to nine months, so this is the reason for the softness we are seeing this year.

We recently completed an update of our media growth projections through 2017 with the latest and best information available. Our model incorporates a number of key variables including estimates for exabyte growth, aerial density improvement, and product mix.

Our previous projections, published six months ago, resulted in range of Intevac system shipments required for media capacity additions of between 25 and 100 tools over the next four years. Our range of expectations for data growth and exabytes shipped on hard drives is largely unchanged. Aerial density improvement, however, has been far slower to materialize than earlier thought and, in fact, has been lower than 10% per year. This is good for our business.

On the flip side, product mix has shifted more towards 3-1/2-inch disks with continued softness in the PC market, and reduced expectations, in particular, for mobile PCs utilizing 2-1/2-inch disks. With more of this storage expected to be shipped on higher capacity 3-1/2-inch disks, the latest estimates in our model now generate a range of 20 to 80 of our tools needed for media capacity additions through 2017.

We see this as a narrowing of our prior estimate, but it is still a strong forecast for our hard drive equipment business. We continue to keep a close watch on all of the key variables that drive our hard drive equipment business. Expectations have continued to improve for capital investments in the build out of the cloud infrastructure and PC conditions appear to be stabilizing. We will drive our strategy to maintain technology leadership, pursue opportunities to gain share, and focus on the significant upgrade opportunity within our installed base, which I said earlier, could generate around $100 million of revenue for us through 2016.

In the near term, we are maintaining our outlook of a relatively flat year at the high end of our guidance for our hard drive business in 2014 with capacity orders commencing in 2015. These orders, combined with executing on our upgrade business pipeline, indicate an improving environment for our hard drive equipment business next year.

I'll now turn to Photonics. Our Photonics business outlook continues to be strong and is on track to grow by at least 25% this year. In the first quarter, revenue was $8 million with an 11% operating margin. The revenue growth over the next several quarters will be driven primarily by our Apache program. It is always challenging to ramp a new product, but our team has done a great job so far managing the challenges of the transition from a contract R&D operation to a volume systems provider. And they are on track to meet our customer delivery requirements.

Now I'd like to talk about our program opportunity for this business. Today we have visibility for programs that total approximately $350 million spanning the next seven years. We're in various stages of engagement with most of these programs. Some are well underway, such as the Apache program, and others are in the early development stage.

Intevac's differentiated digital night vision sensor is single source for nearly all of these programs. As we look at this pipeline, we are designed in with our sensor assembly for the joint strike fighter pilot helmet, our digitally fused goggle program is progressing for the special forces. We expect these programs to drive the next wave of growth beyond the Apache program. These two programs, in addition to Apache, represent over half the opportunity pipeline.

Our Photonics business, in contrast to prior years, is a significant contributor to corporate performance and provides important diversification for the Company in light of the cyclicality of the Equipment business. It is approaching an inflection to achieve model profitability that we believe can generate significant stockholder value when the business captures its opportunity pipeline and becomes sizeable enough to execute on its strategic alternatives.

Now I'll move to our Equipment growth strategy. We continue our efforts to grow the Equipment business and capitalize on differentiated technologies we have developed for the HDD media manufacturing market. We have redefined our growth strategy in Equipment to become an application-based strategy rather than a market-focused strategy.

We have consolidated our hard disk drive and solar business groups to a more efficient thin film equipment group led by Executive Vice President Jay Cook Cho. Our core capabilities lie in high-throughput small substrate thin film deposition, particularly sputtered metal and dielectric deposition. We are focusing our Equipment growth efforts into the vacuum deposition market where we can leverage our core technical capability.

Our new product offerings utilize a substrate independent platform that can address multiple vacuum coating applications in a wide array of markets. We will execute this strategy within the cost structure we have in place today. Our first success with this new strategy was the PVD system order for advanced crystal and solar cell manufacturing we received in the fourth quarter of last year, displacing our customer's incumbent supplier.

Further validating our new strategy, last we're week we announced our first development tool sale into the mobility marketplace. We reengineered our diamond-like carbon thin film technology that was developed for the hard disk drive media market into a scratch resistant protective transparent coating for cell phone cover glass. Both of these wins have follow-on opportunities expected in the next 12 months.

We have established both a business development organization and a product development process to manage the growth initiatives in all of our businesses. Now in place is a rigorous phase-gate process that funds programs as development milestones are met and the risk is retired from the program. Specifically, our process focuses on the retirement of market, technology, adoption, and competitive risks.

We believe that our new strategy, coupled with an improved organizational configuration in business processes, significantly increases our potential for success in our growth initiatives. With regard to our current products focused on the solar market, we have scaled our investment in solar implant to a level that aligns with the opportunities we see for this technology.

We continue to have active engagement with Tier 1 customers, and this product is now under management of the business development organization and has milestones and gates set for its continued funding. Our processes are in place and we continue to work to proliferate this new product for the next generation of high-efficiency device structures. Our product targeted for etching of multi-crystal and solar cells was unable to meet our milestone and gates in the first quarter of the year, and we have discontinued that product.

In closing, I would like to summarize our key strategies. In the hard drive media manufacturing equipment business, we are focussed on remaining the technology market share leader through continuous improvement and enhancement of our HDD media manufacturing tool, with particular focus in the near term on developing and qualifying our upgrade road map.

In Photonics, we will grow this business by leveraging our industry-leading digital night vision sensor and camera technologies to capture the program opportunity pipeline we discussed earlier. We will drive opportunities to grow our Equipment business by leveraging our core capabilities in high-throughput thin film deposition into adjacent vacuum coating applications in which we already have had success, first in the manufacturing of high-efficiency solar cells, and recently in protective coating of cover glass for mobile devices.

We will prudently allocate funding for our growth initiatives based on the expected return in investment in retirement of product and market risk. We will implement our strategic agenda while continuing to maintain a strong financial foundation and return capital to our stockholders. I look forward to updating you on our progress next quarter, and will now turn the call over to Jeff to discuss our financial results for the first quarter, guidance for the second quarter, and our outlook for the year. Jeff?

Thanks, Wendell.

First quarter revenues totaled $17 million which was above our guidance. Equipment revenue totaled $9 million and included one 200 Lean system. Photonics sales of $8 million included $3.7 million of contract research and development revenues.

Total consolidated gross margin was 28.3%. Equipment gross margin was 22.2%, flat to the first quarter of last year, and down from the fourth quarter due to a lower level of equipment upgrades and the impact on our factory absorption at the lower revenue level. In our Photonics business, gross margins were 35.2%, down slightly from the fourth quarter of 2013, but up significantly from the first quarter of last year due to higher contract margins.

Q1 operating expense was $9.5 million, down from the fourth quarter and our guidance, as we implemented additional cost reductions in the quarter. Our Q1 net loss on a GAAP basis was $4.5 million, or $0.19 per share. Our Q1 net loss on a non-GAAP basis was $4.3 million, or $0.18 per share, as compared to our guidance of a loss of $0.23 to $0.25 per share.

Our backlog was $51.9 million at quarter end. Equipment backlog of $8.5 million includes two PVD systems, one for solar and one for protective coating of cover glass.

Backlog in our Photonics business was $43.4 million. We ended the quarter with cash and investments of $75 million, equivalent to $3.14 per share, based on 23.9 million shares at quarter end. Cash and investments decreased by $6.4 million, principally due to the operating loss, capital expenditures and stock repurchases. During the quarter, we bought back 138,000 shares of stock for $1.1 million.

Capital expenditures were $1.4 million, and depreciation and amortization was $1.2 million for the quarter. Now I will provide our guidance for the second quarter and our outlook for the year. We are projecting consolidated Q2 revenues of $12.5 million to $13.5 million. The decrease in revenue from the first quarter is due both to no hard drive systems in the second quarter, as well as lower Equipment upgrade revenue.

Our Photonics revenue is expected to grow from $8 million in the first quarter to over $10 million in the second quarter. This growth is driven by our Apache Camera business. We expect second quarter gross margin to be 27% to 27.5%, which is slightly lower than the first quarter due to the lower level of upgrades in our Equipment business.

Operating expenses are expected to be $9.5 million to $10 million. For Q2, we are projecting a net loss in the range of $0.21 to $0.24 per share. I'll now discuss our outlook for the full year 2014. The outlook for the full year 2014 is largely unchanged since our last conference call. We expect revenues in the range of $73 million to $83 million, with total equipment revenues up 10% at the high end of our outlook, and Photonics revenues up approximately 25% to 30%, respectively, from 2013 levels.

Gross margin is expected to be 34% to 35%, with operating expenses of approximately $38 million to $39 million for the full year, while the resulting operating loss is expected to be in the range of $10 million to $13 million on a GAAP basis. The cash burn for the full year is expected to be approximately $5 million, excluding cash used in the Company's $30 million stock repurchase program. The net loss for the year is expected to be between $0.41 and $0.49 per share.

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

(Operator instructions) David Rold of Needham & Company.

Hi, there, David Rold in for Rich Kugele. Thank you for taking the question. I just wanted to asked a question on the win announced this week on the touch screen equipment opportunity. Any idea of market size, who the incumbent was you displaced, who potential other competitors might be, ASPs in that business versus others, and what the extent of the modifications necessary to repurpose that equipment? Thank you.

Thanks, David, that's a whole bunch of questions. Of course, we announced this because it really aligns to the strategic direction we're going with the Company. As far as market size, obviously, the cell phone market is 1.5 billion units per year, something like that, so the opportunity out there could be very large.

I think where we're at, in our stage, we have been working with a particular Tier 1 customer on this application. We are in the product development stage of this program, and they do have a customer that's going to purchase cover glass with our films on it, and then we'll have to see how the market adoption goes forward with that. So it is early stage, a little too early to really decide what that equipment market looks like until we see some of the initial adoption.

But it is very positive with our strategy going forward and a validation of that to some degree. You asked a question on the --

The competitive landscape.

Yes, competitive landscape. This is an area where you'll see some of the European players are in this, [Vonnardan] is one that plays somewhat in this space. But most of the competitive tools out there are either doing very large sheets of glass, is equipment that did large sheets of glass that have been adapted and palletized.

So we think our solution is pretty novel, and we also have a pending patents on our carbon source, so we believe we have differentiated technology with our diamond-like carbon that we initially developed for the hard drive. I'm sure if this becomes a very popular coating that there will be other people that will take a close look at this, but we're encouraged with the progress.

Okay. And just the extent of the modifications necessary to repurpose it? Does it end up -- what does that do to margin, I guess, is the question?

Right now we are working on existing platforms with slightly modified sources. And, again, this is a development tool that we put out in the field. We'll address the production version of this particular tool.

We may keep that on a current platform if the market is not taking off as quickly as we would like, or if we get to very good adoption rates we may look to move that program on to a higher-output platform, that's our universal platform that I mentioned in the script.

Okay. All right. Great, thank you very much.

Thank you.

(Operator Instructions) And your next question comes from Mark Miller of Noble Financial.

I just wanted to clarify your response to the previous questions. This DLC tool, is that essentially the same type process technology you are using for the hard drives, or is this something new in terms of the deposition technology?

No, this is a source that was developed for the hard drive business that we've done work with the process to make it transparent. The DLC we put on hard drives is opaque. So that's where the development activity, and it was really more a process development with a little bit of modification to handle the different substrate rather than the hard disk.

Is there any thought of going to -- adding to that a chamber that deposits a hydrophobic coating to prevent finger prints or suppress fingerprints, or does anybody offer that in terms of your competitors?

At this point, those two processes are being done in two separate pieces of equipment. The anti-smudge is done in evaporation chamber, but it is certainly an interesting area that we will look at.

So it's something you're not offering now, but a possibility to expand your universe here?

That is correct. We're not offering that at this point, but we'll look at all of the opportunities that we think this can blossom from, this particular technology, in this industry.

I'm just wondering, you said you discontinued your solar etch program. What's going on in terms of the I&M planners, are you involved in any quals or evaluations currently?

Yes, we have several ongoing, I would say they're all major players. One may be a little more further out because it's a very, very advanced application, but we are actively doing demos. I think we just did over 2,000 cell runs for a big customer in Asia, and we're seeing that data start to come back this week and next week. So we still have interest in engagement, and that's what we're using to drive our spend levels in that area, as well as how we set our milestones and gates on how we continue to fund this program.

So if these quals go well for you it is possible we'll see some additional orders this year for the I&M planners?

I would say that there is a possibility, yes.

Just wondering, get back on just to finish up some of the cash flow items. Cash consumer operations, was that around $5 million, I'm assuming?

A little bit more.

Okay. And then CapEx this quarter?

It was $1.4 million.

And depreciation -- it's probably on your balance sheet. Depreciation and amortization?

Was $1.2 million.

Okay. All right. Thank you very much.

Thanks, Mark.

(Operator instructions ) There are no further questions. I'll now turn the call back over to Mr. Blonigan.

Thank you. We want to thank you for joining us today, and we look forward to updating you in our next call on our second quarter results. Until then, so long.

Ladies and gentlemen, this concludes today's teleconference. You may now disconnect.