Intevac Inc (IVAC) 2015 Q1 法說會逐字稿

Good day, and welcome to Intevac's first-quarter 2015 financial results conference call.

(Operator Instructions)

Please note that this conference call is being recorded today, May 4, 2015.

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 FY15, which ended on April 4. In addition to outlining the Company's financial results, we will provide guidance for the second quarter of 2015 and discuss our outlook for the year.

Joining me on today's call are Wendell Blonigan, President and Chief Executive Officer; and Jim Moniz, Chief Financial Officer. Wendell will start with an update on our businesses and then Jim will review first-quarter results and provide guidance for Q2, before turning the call over to Q&A.

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 on 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 May 4 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 over the call to Wendell.

Thanks, Claire, and good afternoon.

On the call today, I will review the progress we have made in our strategic initiatives during the first quarter, provide some commentary on the current environment for our business units, and share our view on the opportunities and challenges ahead.

Today, we reported financial results at the high end of our guidance, with revenue of $19.9 million and a net loss of $0.12 per share. Included in equipment revenues were one 200 Lean and our first VERTEX PVD pilot cover panel coating system. We had not included the VERTEX system in the Q1 guidance, and are pleased to have [that, the signed off] criteria within the quarter.

We saw some upside for our non-systems hard drive business, as our customers made some strategic purchases, which increased demand for upgrades in Q1. The variance in our Q1 revenue guidance range for the first quarter represented the uncertainty and signing time-off of the MATRIX PVD system and backlog. This tool revenues on customer sign-off, and is subject to our customer's factory status and priorities, which are not in our control. This sign-off did not complete in the first quarter, however we expect to revenue the tool within the next quarter or two. We will continue to range this tool in our guidance until it signs off.

In total, the higher level of hard drive upgrade business and revenue recognized on our cover panel coding tool led to sales near the high end of guidance, while the revenue for MATRIX PVD moves later into the year. Most importantly, we continue to make steady progress with our thin-film equipment growth strategy.

Turning now to the current environment for our thin-film equipment business. In the hard drive industry, PC and hard drive units reported year-to-date have been disappointing and short of expectations, which in turn affected media units and overall Exabyte shipments. In spite of the industry's lackluster results in Q1, recent earnings calls across the storage supply chain continue to provide positive commentary about the forecasted demand in near-line enterprise and cloud storage and stated optimism for the second half of 2015. The storage requirements for the cloud is expected to drive at least 35% annual growth in Exabyte demand in that segment.

Additionally, the average number of discs in each of the near-line drives is forecasted to increase significantly, from 3.8 in 2014 to 6.3 by 2019. Accelerating demand for high-capacity multi disk storage will help enable the HDD industry to absorb its excess media manufacturing capacity and then drive demand for our production tools.

The long-term view of Exabyte demand remains consistent with what has been forecasted over the last few quarters, and our outlook for capacity systems needs through 2018 timeframe has not changed. In 2014, we reported that our customers had tightly constrained their capital budgets even for tool upgrades. Last quarter, we discussed that there could be some opportunity for improvement in our upgrade business in the second half of 2015. We actually saw some of that upside in the calendar first quarter, and that business has the potential to further improve, dependent on our customers' budget for their 2016 fiscal year. In the meantime, we feel confident in our technology leadership position and our ability to gain incremental market share at the next technology inflection points.

Our strategy to drive the revenue growth in Thin-film equipment is to leverage our core capabilities and technology to new Thin-film deposition applications in the vacuum coating industry. Last week we introduced our MATRIX and VERTEX platforms, as well as our Thin-film solutions at the Society of Vacuum Coaters technical conference here in Santa Clara. We were well represented, with presentations and poster sessions, and a well attended booth, showcasing our products and technology. This was an important event in the evolution of our equipment business outside the hard drive media space.

In my recap of the first quarter results, I highlighted that we continue to make progress in the key initiatives for growing our Thin-film equipment business. These three initiatives are our protective coating for display cover panels, and PVD metallization, and implant for doping for solar cell manufacturing.

In display cover panel, our first pilot VERTEX PVD tool that was installed in the third quarter of 2014 met its sign-off specifications and was accepted in Q1. The tool is currently running low rate production at a tier one customer in Asia. As I have discussed previously, this is a new feature for display cover panel manufacturing and market demand for the protective function of our carbon film specifically from the end user needs to be developed. We continue to drive this initiative with our initial customer, defining panel performance specifications with the end users, and optimizing our film's properties to establish the protective coatings value proposition. Driving this effort is a key objective for us this year.

Because we leveraged our Thin-film coating technology from HDD products, we can recover our invested capital for the cover panel opportunity by achieving success with our first customer. This is a new end market application, which, if adopted, could be a large growth driver. And we continue to engage with multiple customers. As I indicated previously, if half the projected incremental market growth in cell phone and tablet cover panels would adopt this coating, over the next five years, the TAM for deposition tools could exceed $300 million.

For PVD metallization for advanced solar cells, our first MATRIX PVD system is currently running 24 by 7 production with a leading tier one customer. As a first of a kind tool, running a new solar cell design in a pilot line, we continue to work together with our customizer -- customer, optimizing the performance and design of our tool to support the ramp of output, yield, and device efficiency.

Our objective for this year is to complete the sign-off and continue to support our customer's activity to validate their device and production line performance. Provided our customer is successful, their plan is to build out significant capacity with our tools. This would be a sizable project and would allow us to recover the total investment in the MATRIX platform. In the last quarter, we also made good progress in the qualification of our MATRIX PVD tool and film stacks with an additional tier one solar customer. We estimate our SAM for equipment in this application to be over $100 million over the next five years.

In implant doping of advanced solar cells, the joint development program with our tier one customer to implement our technical solutions into their next generation solar cell manufacturing flow successfully passed its second milestone, which was the key technical feasibility gate. We have now moved into the next phase of the program, which is the productization of the technology and integration on to our MATRIX platform. If successful, we estimate the SAM for this application at this customer to be around $50 million over the next several years, with a complete payback of our ongoing investment in this initiative in the first planned factory build.

As a final comment on our Thin-film equipment growth initiatives, we believe that, already in 2015, we have demonstrated excellent progress towards growing these opportunities to a point where they could bear fruit in 2016 and beyond. Our opportunity to offset the cyclical environment of hard drive media equipment lays in the continued execution of our growth strategy and our customer's success in driving the adoption of their technologies that utilize our equipment. Successful achievement of our objectives in 2015 in these adjacent businesses will well-position our overall Thin-film equipment business, going forward.

Turning now to photonics. After a record year in 2014, as expected, our photonics revenues moderated in the first quarter. Sales were $9.3 million, off of peak levels, but well ahead of the same period last year, with operating profitability moving toward the model, coming in at 16%.

As we move into the second quarter, there are several dynamics that will impact our photonics business in the near-term. First, as we look at the mix of revenue between products and funded R&D, in the first quarter of 2015, product revenues represented a record 81% of photonics revenue.

Gross margin came in better than expected due to excellent manufacturing execution on the remainder of the second lot of Apache helicopter night vision cameras, which were all delivered in Q1. We are now delivering the third lot for Apache, and the contractual pricing with the government steps down and the margin profile move toward the model.

Given the fact that revenue mix in photonics continues to be more production versus funded R&D, and we are in full volume production with the Apache camera program, we have modified our rate structures to most accurately reflect our production costs. These cost structures will be used to price our products on our upcoming contracts. Jim will give you some detail on this during his prepared remarks.

We are currently in negotiation for the next lots of Apache and Joint Strike Fighter, which coincides with our rate changes. The sequestration of the military budget is having an effect on our funded R&D revenue stream for 2015. Last call I discussed a pause in government funding in our digitally fused goggles, which we are currently funding internally from the profits of the business.

Last quarter, we saw a few government-funded programs forecasted for 2015 delayed to 2016 because lack of budget and or reallocation of existing funds. While our production products remain unaffected, we see continued headwinds in available government funding for new military development projects and are keeping a close watch on activities in Washington related to the 2016 budget.

Now, as we look out to the future of our night vision technology and align with the military's long-range plans to replace analog night vision with digital, we have made the decision to begin development of our next generation sensor. Our current sensor has been successfully deployed in high-value airborne applications. The next evolution of our proprietary technology is driving performance and price points for ground soldier deployment utilizing the most advanced silicon technology available.

Initially we will be investing some of the profits from photonics business to fund the concept and feasibility efforts for our next generation sensor, and deploying capital through our internal gate and milestone process. As with the production-proven ICE-11 sensor, we will be looking to offset our development and CapEx costs with significant funding from the government, and we are in active discussions for this support today. This is a long-range program, and we must begin now to meet the military's roadmap for deploying digital night vision to ground forces, which will be the largest opportunity for our technology.

We're extremely pleased with our execution of the Apache program, with on-time in-spec deliveries and our ability to come up the yield curves faster than forecast. This $75 million program has been a touchstone for our photonics business and an ongoing success. The F-35 Joint Strike Fighter cameras are in limited production and ramping with the overall aircraft rollout. Over the next five years, we see this as a $20 million opportunity with over $120 million worth of business over the Joint Strike Fighter build-out.

We are continuing with our digitally fused goggles activity, incorporating the key feedback we received during last year's user evaluations into the design. Additionally, our externally funded program for night vision goggles for avionics remains on track for prototype delivery at the end of the year. There's no change in our differentiated positioning, and we continue to be recognized as a critical sole-source provider of digital night vision technology, with an opportunity pipeline of over $350 million over the life of the programs in which we are currently engaged.

So to sum up our business environment, only time will reveal the slope of HDD media growth that drives the 200 Lean systems business. 2015 will be another challenging year, as industry overcapacity has yet to be absorbed by demand. We saw some upside in our non-systems HDD business in Q1, which leads us to have a slightly improved outlook for upside throughout the year. We are closely monitoring the performance of the industry versus the forecasts and managing the business accordingly.

In adjacent Thin-film equipment markets, we achieved meaningful progress in the first quarter and are on plan with our strategy to penetrate new applications. We are encouraged by the first revenues recognized in the display cover panel protective coatings area, and are also pleased to have passed a key technical validation gate for solar implant.

In our photonics business, we continue to leverage our success on the apache program into additional military applications, and we are deploying capital to ensure our ability to support the military's roadmap for the ground application, the largest opportunity in digital night vision.

Last quarter, we provided outlook for similar revenues for the full year 2015 as compared to 2014. With the potential for upside in the second half, depending on our HDD customer's FY16 budgeting, as well as government funding levels.

As we are now into the second quarter of 2015, based on our customer's activity in Q1, we currently believe there is around 5% upside to our revenue outlook for the year. We continue to be committed to reducing operating losses as we move through 2015, and closely managing our cash.

All of the efforts we have discussed today are focused on driving revenue growth, positioning the Company for return to profitability, and deploying capital in the best long-term interest of our stockholders. In the first quarter, we completed $3 million of stock repurchases, and we will continue to be opportunistic.

With that, I will now turn the call over to Jim discuss our first-quarter results and provide guidance for the second quarter.

Thank you, Wendell.

Consolidated first quarter revenues totaled $19.9 million, above the midpoint of our guidance range. Equipment revenue totaled $10.6 million, including one 200 Lean system and the sign-off of the first VERTEX PVD pilot cover panel tool, as Wendell discussed. Photonics revenue of $9.3 million included $7.5 million of product revenues and $1.8 million of contract Research and Development revenues.

Q1 consolidated gross margin was $6.9 million or 34.8%. Photonics gross margin was 42.1%, slightly lower than last quarter, significantly up from the first quarter of last year, and also above our long-term model for this business. The high gross margin in Q1 was due to continued favorable mix of product revenue versus lower margin contract Research and Development revenue. As we have been communicating over the last several quarters, these margins will start to normalize to the longer-term profit model.

Equipment gross margin was 28.5%, up from both the fourth quarter and the first quarter of last year. The improvements in margins was primarily due to lower excess and obsolete inventory charges and higher factory absorption.

Q1 R&D and SG&A expenses was $9.9 million, just outside of our guidance range, driven by slightly higher engineering costs for our new Thin-film equipment initiative programs. Our Q1 net loss on a GAAP basis was $2.9 million, or $0.12 per share, at the favorable end of our guidance range. Q1 net loss on a non-GAAP basis excludes the acquisition accounting related charge and certain restructuring expenses, and was $2.8 million or $0.12 per share.

Our backlog was $39.2 million a quarter end. Equipment back-log of $16.2 million includes one MATRIX PVD system and one energy solar implant tool. Backlog in our photonics business was $23 million. We ended the quarter with cash and investments, including restricted cash, of $63.3 million, equivalent to approximately $2.75 per share based on 23.1 million shares at quarter end.

During the first quarter, we bought back 443,000 shares for $3 million, at an average price of $6.71 per share, bringing total share repurchases to $13 million total since inception, out of a total plan of up to $30 million. Since the end of Q1, we have purchased an additional 223,000 shares for $1.2 million at an average price of $5.48 per share. Q1 capital expenditures were $918,000, and depreciation and amortization was $1.2 million for the quarter.

Turning to guidance for the second quarter of 2015. We're projecting consolidated Q2 revenues to be between $18 million and $22 million. We continue to range the MATRIX PVD tool until we get customer sign-off, and as Wendell mentioned, we expect this tool to revenue in the next quarter or two. We expect second quarter gross margin to be between 30% and 32%, lower than what we achieved in Q1. Gross margins will trend lower as we see photonics margins trending closer to our long-term model for this business. Existing photonics programs have contractual step downs in unit prices, and we saw some of that in Q1 and we'll see more as the year progresses.

Additionally, as we are now in volume production with both the Apache and Joint Strike Fighter programs, starting in Q2 we have modified our cost structures and have moved the expenses related to our sensor manufacturing out of R&D and into cost of goods sold. This has two effects. It most accurately reflects our product cost that will be used to price our products on our upcoming contracts, and in the overall photonics P&L, the cost moved from below the line out of OpEx, to above into cost of sales as a wash. The current contracts in place based on the previous cost structure will be impacted on the gross margin line.

Operating expenses are expected to be between $8 million and $8.3 million, which is below the normalized operating expense for our current cost structure, and driven in Q2 by the benefit we expect from customer funded development in our equipment business, as well as some movement of costs in photonics from OpEx to cost of sales as a result of our modified cost structure. We expect no tax benefit and minimal tax expense.

For Q2, we are projecting an net loss in the range of $0.08 to $0.12 per share based on an estimate of 23 million shares. The outlook for the full year 2015 now has about 5% upside to the 2014 revenue level. The first half is already coming in a little better than expected. Continued upside in the second half will be dependent on the adoption speed of our equipment growth initiatives and HDD manufacturers' FY16 budgets.

At this revenue level, and with our new photonics margin structure, we would expect total gross margins for the year in the range of 32% to 34%, with operating expenses of between $36 million to $37 million for the year. Cash burn for the full year is expected to be approximately $5 million to $6 million, excluding any cash used for the Company stock repurchase program.

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

(Operator Instructions)

Nehal Chokshi, Maxim Group.

Thank you, and congratulations on getting a faster than expected sign-off on the cover glass tool. A few questions around that. Can you discuss what was the driver of that, first of all?

The driver for our sign-off is based on the performance of our tool, as well as the performance to specification of our film. So we've transferred that process from our site here into Asia, duplicated the testing methodologies and set ups, and proved that system met it specifications, so that drove the sign-off.

Okay, great. Can you discuss -- give us some color as far as run rates or utilization that you're seeing with this tool and give us a flavor as far as timing of potential follow-on orders?

Sure. So what's going on with that tool right now is that our customer has -- [a high-end phone] customer that they are selling very small quantities to right now. It's kind of on one flagship phone. Most of the activity on that tool right now is working on getting our next customers for that tool and developing the value proposition between us, our film performance, our customer, and their customer, and we've been spending a lot of time using different test methodologies for the film performance. As an example, nominal specifications are for taper testing or steel wool test that are derivatives from military spec testing for coatings on glass.

As we move into this process of defining the requirements in the cell phone space, particularly, one of the tests that we've been working on is we put the cover glass in a container that's full of rocks and sand and car keys and other objects, and that gets put in a washing machine and goes 40 minutes in the washing machine, and the goal there is to be able to survive that test multiple times. So we've been working on our -- as I said in the prepared material, is variations in different performance of our film in order to meet some of these additional tests, and that is what we are working on right now.

And I think as far as the engagement with that customer, they're engaged with multiple customers but they really want to get the most value they can out of that coating, and going through some of these severe testing is allowing them to have a different value proposition to their customer. They have multiple customers they are talking to, and we are also engaged with other customers for our equipment as well. So that's kind of the progress and the status there.

Just to be clear, this customer of yours that are going to other customers, do those other customers -- are already going through a qualification process, or they are simply trying to be proved, the market value of the solution?

I think we've got multiple requirements from multiple customers, but there is a common set that we're working on between a number of customers, and we're working to get that particular order done. And as far as tool timing, we've got to get the end customer engaged, but it could turn very quickly with one large order. But we just have to work the process and be diligent and patient with it.

Okay. I'll take one more question and get back in the queue. Just clerical question, can you give us a split between the equipment revenue and the upgrades and et cetera for the thin-film equipment business?

I don't know if we've given the split between tools and the actual upgrades of the equipment. I don't have that off the top of my head, but I don't think that something with given in the past. I do know --

Yes, we don't split those out, but the photonics versus the thin-film equipment business is in the --

Yes, [we'll certainly give you that in new material].

Okay. All right; thank you.

David Rold, Needham & Company.

Hi, there, thank you. First, they wanted to check in on where you guys see the HDD industry, TAM at the moment -- or sorry, capacity?

It really varies quarter two quarter, but if we look at what Q1 was, where Q2's forecasted, and the original coming-into-the-year forecast, for the back half of the year, we show that in the [mid-70's].

[Mid-170s]? Okay.

That was on average, yes.

Okay, thank you. Can you talk a little bit more -- can you put a dollar amount on the revenue that got pushed out in photonics? Any way to do that?

It's really -- what I talked about, as far as the military budget, was bookings that were to happen, there wasn't additional funds. I think we'll talk more about the total photonics story as we get to the end of the year, on what those numbers look like, but again, in our overall guidance, we're talking about 5% upside of what we had discussed on our last call.

Okay. And then I guess related to the last question on the cover glass, what realistically given all those customer qualifications going on, what's the earliest we could realistically expect kind of meaningful revenue from that category? Ballpark?

I think one way to look at it is leadtimes on that particular piece of equipment is about five months.

Okay.

So that would be the inside window.

Okay.

And I think my opinion is that we've got a much better value proposition than we did a quarter ago by going through these additional tests, and have a better story for the end customer, and we've got a better coating as well. So I think our odds get better as the film gets better and better.

Do you have a sense of how many competitors you're going up against for those wins? How many other people they're looking at?

We are only aware of one very small equipment provider in Asia, and it's our understanding that it didn't work, so we think at this point we're first to market.

Okay and your specific advantage versus that smaller competitor is what?

Film quality. Our ability to take that film and our knowledge and core capability out of hard drive for the carbon overcoat there got us into a good position very, very quickly.

Okay, great. Thank you.

Thanks, David.

Thank you.

(Operator Instructions)

Mark Jordan, Noble Financial.

Yes, good afternoon, gentlemen. A question relative to the photonics backlog, could you give a little color as to the breakdown of that funded R&D versus sensors? And you said you're delivering on lot 3, do you know when you would expect a release of lot 4?

Let's see. So, let me start with your last question. As I said in my material, we are in negotiations right now for the next lot on Apache, and lot 3 delivers out across two years, I think. So that's where the status of that is. Also in my prepared remarks, I think we said that about 80% in Q1 was programs versus funded R&D in photonics, and that's similar.

Okay. Thank you very much.

Thanks, Mark.

Craig Ellis, B. Riley.

Thanks for taking the question, guys. Can you go into more detail on what's driving the non-system strength and Thin-film business? And if you saw that in the first quarter, what's the potential for that to emerge more consistently as you go through the rest of the year?

Great. Well as I said, we saw some strategic purchases, and across the customer base we saw some business that was I believe -- they don't share exact details with us, but as part of some incremental arial density improvement on perpendicular media, we had orders that came in on reliability and particle control. Some of our catalog of upgrades that we have.

And it also could be a function of utilization rates. They had tools available to upgrade, they're not fully utilized in their factory, and we're optimistic about -- as we go through the year in this part of the business, but I think we really, after the numbers came out over the last couple of weeks and what Q2 was being forecasted at, just as far as hard drive units, we want to see those 2016 budgets and that stuff allocated before we get too optimistic on that.

That makes sense. And switching gears to the cash comments. Did I hear you correctly that the effect is to mitigate cash burn $5 million to $7 million excluding repurchase, so to the extent that you continue to be active in the repurchase program, there would be greater cash burn than that?

That is correct, and we said $5 million to $6 million.

Okay, thank you, guys.

Nehal Chokshi, Maxim Group.

Yes, I just wanted to go a little further into the photonics and what you're indicating as far as ongoing contract negotiations, and sequestration I think is what you talked about. But, the photonics backlog is down [QOQ] and year-over-year, I presume due to the ongoing negotiations. But can you just reiterate that you do have confidence level on a low end of the guidance (inaudible). I know you said 5% upside, but just reiterate that the low end is indeed $65 million?

I can confirm that's what we are seeing right now.

Okay. And that does imply then, that the photonics does pick back up from where we are?

We're not really going to guide out that way. We'll see what the results are in Q2. I think there's just a lot of different moving pieces, but when we look at risks and opportunities on both sides of the business, as we went through our financial forecasting, we see about 5% upside for the Company.

Okay, thanks.

Thanks.

Thank you, and there are no further questions at this time. I'll now turn the call back over to Mr. Blonigan for any closing remarks.

Okay, thank you. Before I sign off, I'd like to take this opportunity to thank our employees for their hard work and dedication as we navigate the current environment.

And also thank our customers for their continued partnerships and business. Thank you all for joining us today, and we look forward to updating you again during our Q2 call in August.

Until then, so long.

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