Intevac Inc (IVAC) 2014 Q2 法說會逐字稿

Good day and welcome to Intevac's Second-Quarter 2014 Financial Results conference call.

(Operator Instructions)

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

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

Please go ahead.

Thank you.

Good afternoon, everyone. Thank you for joining us today to discuss Intevac's financial results for the second quarter of 2014, which ended on June 28. In addition to outlining the Company's financial results, we will provide guidance for the third quarter and full-year 2014.

Joining me 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 second-quarter results and provide our guidance for Q3 and outlook for the remainder of the year 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 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 28 call include time-sensitive, forward-looking statements that represent our projections as of today. We undertake no obligation to update such forward-looking statements made during this conference call.

I'll now turn the call over to Wendell.

Thanks, Claire.

To begin with, I'd like to take this opportunity to thank all of our employees for their hard work and dedication in executing the quarter. In particular, I'd like to acknowledge the outstanding results in ramping volume production of the Apache Camera, as well as the design and build of two new thin film deposition systems that are being deployed into adjacent applications in the vacuum-coating industry.

On the call today, I will be providing an update on both of our businesses, including our progress in our thin film equipment growth strategy. I'll start today's update with our Photonics business, which achieved record performance for both revenue and operating profit last quarter. Our Photonics business outlook continues to be strong and is on track to grow approximately 30%, or to $40 million this year. In the second quarter, revenue increased 37.5% from Q1, to $11 million, with a 23% operating margin.

Today, the primary revenue growth driver, as we have discussed on prior calls, is our Apache Camera program for the US Army. Our team has done a great job executing the transition of this program from pilot to full-rate production levels. We believe that our performance in Apache program will help facilitate success in other digital night vision programs, as it will clearly demonstrate the capability and maturity of our core technology, as well as validate our capability as a systems provider.

In addition to our Apache program, we continue to ship our LIVAR cameras to our partner, Northrop Grumman, as well as our digital night vision camera modules to our NATO partner. Our LIVAR cameras have now surpassed over 1.6 million flight hours and over 300,000 hours of ranging in the targeting operations.

We've also shipped over 7,000 camera models for digital night vision rifle sights. Earlier this month at the Farnborough Airshow in the UK, our partner, BAE Systems, unveiled their new Striker II helmet-mounted display, which brings digital night vision imagery inside of the pilot's helmet visor. This eliminates the need for night vision goggles for day to night transitions. This new helmet-mounted display incorporates and is enabled by our propriety ISIE11 digital night vision sub-system.

Our digitally-fused goggle programs are progressing, and we continue to move through the technology development process. We are pleased to now be engaged in live evaluations of performance, and are receiving important feedback on our initial prototypes. Today, our Photonics business is an established contributor to corporate performance. And we expect continued strong performance as we look to 2015.

Moving to our thin film equipment business. In our core business for thin film deposition of hard disk drive magnetic media, we continue to operate in one of the most challenging periods in our industry's history. The secular changes underway continue to negatively impact our business over the near-term.

But the long-term outlook for growth in data and, most importantly, exabyte shipping on spinning drives remains positive. Although exabyte growth year to date has lagged some of the more aggressive estimates entering the year, our customers and industry analysts are forecasting better-than-expected hard disk drive unit growth in the second half of this year. And industry analysts are forecasting year-over-year media growth for 2014, 2015 and, in fact, each year through their extended forecast.

In the interim, we remain focused on the development and qualification of upgrades for our installed base of over 200 systems. The qualification process for these upgrades can take six to nine months. And we expect to complete several significant qualifications in the second half of this year that can drive growth in upgrades next year.

In FY14, we expect to revenue two to three hard drive deposition systems, with our service and spares business flat versus last year and a decline in our upgrade business. As we look towards 2015, depending on media unit growth rates, it is possible we will see a return to capacity orders late in the year. These orders, combined with executing on our upgrade business pipeline, would support an improved environment for our hard drive equipment business next year.

Now for an update on our equipment growth strategy. As I explained on our last call, the focus of our equipment growth strategy is to drive revenue by leveraging our core capabilities into adjacent vacuum-coating applications.

Our core capabilities lie in high throughput, small-substrate in-film deposition, particularly sputtered metals and dielectric deposition. To date, we have achieved initial traction in two applications aligned with our strategy: metal deposition for high-efficiency solar cell manufacturing -- particularly advanced cell architectures -- and diamond-like carbon for the protective coating of mobile device cover glass.

In July, we formally announced our Intevac MATRIX platform. The MATRIX is enabled by a novel carrier-based transport system that can accommodate various sizes and types of substrates. The system can be configured with multiple thin film deposition technologies for in-line sequential processing.

It is capable of double-sided deposition without breaking the vacuum, and can deposit in either a horizontal or vertical substrate orientation. This platform has been engineered to produce the highest quality films at the lowest cost of ownership for an array of applications in vacuum coating.

We are making good progress towards the shipment and qualification of these two new PVD tools and expect to ship both systems within the next few weeks. Each of these systems are going through extensive factory acceptance testing by both ourselves and our customers, with very positive results so far. This level of testing will help ensure a smooth and efficient start-up at our customers' sites, with final acceptance for each anticipated in the fourth quarter. Both of these new applications are expected to have follow-on opportunities over the next 12 months.

In the applications for solar implant, we continue to scale our investment levels that align with the opportunities we see. We are continuing our engagements with multiple solar cell manufacturers on technology development, and drive our investment decisions through our phase gate process. As I said on our last call, the solar industry's interest in our implant is primarily for the next generation of high-efficiency device structures. Capacity rollouts will be timed with our customers' technology roadmap progress, as well as overall supply and demand dynamics.

In summary, we continue to manage the Company dynamically and are focused on continuous improvement in our performance in the diverse markets we serve, given the market conditions we are experiencing. In our Photonics business, we continue to extend our industry-leading digital night vision sensors and camera technologies to capture the program opportunity pipelines in front of us, while managing the business for both growth and profitability.

In our Thin Film Equipment business, our near-term efforts on products for the hard drive industry will be on the development and qualification of upgrades for the installed base, while ensuring that we are well-positioned when the industry resumes capital tool additions. In our equipment growth strategy, we will leverage the new Intevac MATRIX platform and our core technologies into new thin film applications, starting with the successful start-up in qualifications of our first two systems discussed earlier in the second half of this year.

Finally, we continue to face a challenging business environment in our core HDD equipment business, which we cannot control. We are making marked progress in diversifying our business opportunities.

All of the efforts we have discussed today are focused on driving revenue growth and positioning the Company for a return to profitability in 2015. 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 second quarter, guidance for the third quarter, and our outlook for the year.

Thanks, Wendell.

Second-quarter revenues totaled $14.7 million, which was above our guidance, due to incremental equipment upgrades and spares. Equipment revenue totaled $3.8 million and did not include any (technical difficulty).

Photonic sales of $11 million included $2.7 million of contract research and development revenues. Photonics product sales were $8.3 million, nearly doubling from Q1, and set a new record for our Photonics business. Consolidated gross margin was 35.4%.

Equipment gross margin was 8.3%, down from both the first quarter of this year and the second quarter of last year, due to lower equipment upgrades and the impact on factory absorption at this lower level of revenue. In our Photonics business, gross margin was 44.7%, significantly up from both the first quarter and second quarter of last year, and above expectations for this business (technical difficulty) sales volume.

The high gross margin in Q2 was due to the higher mix of product shipments versus lower margin contract development. They released the favorable warranty reserves and better yields than expected in our sensor-based products.

Q2 operating expense was $10.5 million, up from the first quarter and higher than our guidance, due entirely to the costs associated with the proxy contest, which in Q2 were $800,000. Excluding this cost, we were at the midpoint of our guidance for the quarter.

Our Q2 net loss on a GAAP basis was $5 million or $0.21 per share. Our Q2 net loss on a non-GAAP basis was $4.9 million, or $0.20 a share, as compared to our guidance of a loss of $0.21 to $0.24 per share.

Our backlog was $46.3 million at quarter-end. Equipment backlog of $8.6 million included two new PVD systems -- which we are shipping shortly -- but did not include the new 200 Lean order announced today. Backlog in our Photonics business with $37.8 million.

We ended the quarter with cash and investments of $76.3 million (sic, press release, "$75.3 million"), equivalent to $3.19 per share based on 23.9 million shares at quarter-end and roughly flat to the first quarter. During the second quarter, we bought back 58,000 shares totaling $400,000. We continue to purchase opportunistically in the market, and in July have purchased an additional 320,000 shares for $2.3 million, bringing the total repurchases on this program to date to 756,000 shares or $5.5 million. Capital expenditures were $839,000, and depreciation and amortization was $1.1 million for the quarter.

I'll now provide our guidance for the third quarter, and our outlook for the year. We are projecting consolidated Q3 revenues of $13.6 million to $14.7 million, flat to Q2 at the high end of the range. Our Photonics revenue is expected to remain relatively flat to the second quarter, with some growth at the top of the guidance range. We do not expect to revenue our new Thin Film Equipment systems shipping in Q3.

We expect third-quarter gross margin to be 31% to 33%, which is lower than the second quarter, as we expect Photonics gross margin to normalize in the high-30% range. Operating expenses are expected to be $9.7 million to $10 million. For Q3, we are projecting a net loss in the range of $0.20 to $0.23 per share.

I'll now discuss the outlook for the full year 2014. The outlook for the full year is largely unchanged since our last conference call. We expect revenues in the range of $73 million to $80 million, with total Equipment revenues flat at the high end of our outlook, and Photonics revenues up approximately 30% from 2013 levels. We lowered our high end of the revenue range, due to a shift in the shipment timing for an expected follow-on covered glass PVD system to later in the year or early 2015.

Gross margin is expected to be 34.5%, with total operating expenses of approximately $39 million for the full year. While the resulting operating loss is expected to be in the range of $11 million to $13.5 million on a GAAP basis, the cash burn for the full year at the high end of the revenue range is expected to be approximately $6 million. Which includes approximately $1 million in costs related to the proxy contest initiated and completed in the first half, but excludes any cash used in the Company's repurchase of stock.

The net loss for the year is expected to be between $0.45 and $0.54 per share.

This completes the formal part of our presentation.

Operator, we are ready for questions.

Thank you.

(Operator Instructions)

Brett Piira, B. Riley.

Thanks for taking my question. Congrats on the photonics margins there. Just wondering if that changes anything. I know there's one-time items there, but longer term, do you have any update on what you can run the operating margins for the photonics business?

Yes. It's Jeff. We've said that we could have excursions that get above our targeted ranges for this, which is mid- to high-30s. Operating profits probably between 12 and 15 at these revenue levels will be about as good as it gets. But anyway, some of the one-time stuff pushed us up this quarter.

Okay, great. And then, did I catch that right -- you expect to ship the Lean 200 system this year? Is that correct, the one that you just announced the order for?

Correct, yes.

Okay, and then, before talked about to get to where we need for capacity of 150 million unit-type TAM average quarterly, and averaging two disks per. It's easy for us to see the TAM. But can you just give us an update of where you see the industry right now as relating to that?

Yes, Brett, this is Wendell. I think when we looked and modeled everything at the beginning of the year, our customers, industry forecasts, for exabyte growth, we modeled to that. I think as we look through the first half of the year, certainly that growth rate has not been there.

There is a forecast for the second half to be much better demand on the hard drive units. We have to wait and see how the tie ratios are positioned there. But we see that we are going to need to see some continued growth like we're seeing in the second half in order to get some of the low ends of those models coming into the year.

Brett, it's just -- it's Jeff. The media numbers won't be available for probably a month or so, to see the disk per drive.

Okay, great. And then finally from me, with your move into adjacent markets with this mobile coder and the shipment, when will we know the success of that? How long of qualifications will there be, or just any timing from that?

Well, in the prepared remarks, we are expecting that to qualify in revenue in the fourth quarter. So I think we'll have -- as we move towards the end of the year, we're going to see how that new application of film is working, as well as what our customers' customer base is -- how that's developing, so we'll have a better visibility there.

Okay. So at that time, we should know more on their end if there would be repeat orders or anything like that, right?

Yes.

All right, thank you.

Rich Kugele, Needham.

Thank you. Couple questions. The mix this quarter in the photonics side -- you're not guiding for the same type of margin here this quarter. Was it that unique? You mentioned that you could have visits up to that level again, but what again made it so favorable on the margin side, and why wouldn't that repeat?

One of the big items was the warranty for the camera sensors that we have in the field, the performance of the field is just improving, so we've released some of that. And so that's a fair bit of the amount that got released (technical difficulty) the 40% level. Some of it was the fact that we built higher volumes overlapping two [lots] the first quarter, so it will normalize down a little bit going into the next quarter.

Okay. So the margin that have been 40 can really be attributed to the warranty reversal?

Primarily, yes.

Okay. And then in terms of this 200 Lean, do you get the sense that this is for production, or is this R&D? Is this something that's going to be deployed here domestically for R&D or --?

Our customers really don't tell us exactly what their purposes are. We're just happy to get the order.

Okay. And at the time, was there any indication that there would be additional orders? Is that where your comments about potentially next year seeing some others is coming from?

I think we talked a little bit more in the near term. We have some visibility to one additional tool this year, albeit we're working to see what that configuration will look like. And that's really where our near-term visibility is at.

Okay. And then, obviously the guidance implies a pretty material snapback in the December quarter. Just so that there's no confusion, the drivers for that revenue -- you've got the Lean system, which you can recognize immediately, the two DVDs, correct? And you're expecting, what, some pretty decent spares and upgrades business?

Yes, exactly. We expect a bounceback in our upgrade business. And photonics is going to be running at this level, with maybe a little upside at some of the high-end of the guidance, but not up dramatically from the level it was in Q2.

But on the operating expense side, no material changes? And as we enter next year, should we assume this type of level continues at the operating line?

I think as of today, we are kind of saying that will be around $39 million. Obviously there's some one-time stuff in there related to the proxy contest. But it's kind of this $9.5 million, $10 million range that we can see for at least next year or so, barring any other shifts in the business.

Okay, great. Thank you very much.

Thanks, Rich.

(Operator Instructions)

Mark Miller, Noble Financial Capital.

Good afternoon.

Hi, Mark.

I just was wondering, we recently had one of your solar competitors on the road, and their CFO was saying that one thing that was hanging over them was this tariff issue. And I think we got some resolution Friday; it's still hanging out there. But they thought that was depressing capital investment thinking, and I'm just wondering what your thoughts are.

But they were also telling us they thought this next year for capital investment in the solar industry would be a good one. And was trying to get your thoughts on that situation.

Yes, Mark, I was actually reading the DOC documents this morning; I got my copies. I would say -- and again, I haven't read -- I only have the summary here in front of me. But it appears that at least this preliminary ruling from the DOC is closing what would appear to be a loophole from the Taiwanese manufacturers. I don't think the final decision is until sometime in January, right?

That's my understanding.

But I would say in general, with solar customers that we've talked to, specifically in Asia, that there's an overhang from this. Because nobody knows exactly how it all plays out. I think we got a little more resolution on Friday here with the direction they're going, although I think I heard the WTO ruled against it last week or something. So it's a variable in play.

I think overall, it's not good for the overall business. That being said, end-demand for solar cells is still strong. I think we're looking at the high-40s in gigawatts of demand exiting this year, which puts us right on to or right up against the installed capacity.

It's really going to be -- regionally, how does that shake out? And does the pricing have any impact on the end market? Certainly there are other solar manufacturers in the universe who see this as quite positive.

From what I'm understanding, it's pushing some firms. I think there's been recent announcements about building plants in the US. Would that be a plus for you guys?

I think anything in the US, regionally, gives us an advantage of being local. It really depends on what technology they want to propagate, what efficiency points they're at. And as they are further up that technology road map, that's where our products are focused on. So any activity in the high-efficiency, new device structure areas are positive for the products we have positioned in that market.

Anything new on the implanter quals, how they're going and how many slates are you at?

Well, we've talked about the one tool that's out there that continues to run in production. We're in the technical development with several different manufacturers. We can't talk about who they are and what exactly we're working on with them. But as we move forward, we're continuing to fund this activity. And that's one of the key milestone points as we review the technology, is the customer engagement and the progress in the technology development.

When you say technical development, do you mean that you have a tool that's being evaluated at site, or are you providing samples?

In general, we work by not necessarily providing samples, but inserting our technology steps into their process flows. So the substrates would start on their site, come to us, we would do our processing, and then they would return back for a cell processing.

Okay, so you're doing it more locally. One area that you've mentioned here, you've got a metallization tool out there for photovoltaics. Another area, I'm just wondering if it's an opportunity, it's a little different piece, CVD, but it's for silicon nitride ARs. Have you thought about that area as an opportunity? Or you want to just stick to your knitting with metallization type coatings?

Well, I think when you look at that space -- and I don't know if you recall that my previous company, I did that particular type of equipment, which was PECVD nitride. But that space has got a lot of activity in it with a lot of players. And I think if you're going to be in that space, you really need to have something really differentiated. Because there's a lot of incumbent players that have been in that space for a very long time, specifically Europeans.

I agree, because what I'm hearing is that people trying to enter that space are seeing -- either having to sell the tools at very low margins to get their foot in the door. And that would get me to my last question. Are you under similar pressure for your diamond-like carbon tool and your PVD tool for metallization? Are you having to discount these tools to get them in door, or that's not as competitive as the PECVD market?

Well, I think that the DLC is a pretty unique market, although there are lots of companies that make a diamond-like carbon product. We think that we have something that's unique and valuable, and we're continuing to nurture that program and bring it to the forefront of our growth initiatives as we develop this market with our partner-customer. So to answer your question is, it's not like a very crowded equipment space that's been commoditized at this point.

That also goes for the metallization opportunity.

There's a lot of metallization, but again, when we look at how we see ourselves being differentiated, we see certain segments where our patented technology provides us a significant advantage.

Thank you.

Okay. Thanks, Mark.

Thank you. There are no further questions in the queue at this time. I'll turn the call back over for closing remarks.

Okay, thank you. Well, we want to thank all of you for joining us today, and we look forward to updating you in our next call on our third-quarter results. Until then, so long.

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