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Executives

Jerry Cutini - Chairman, President and Chief Executive Officer

Pat O’Connor - Executive Vice President and Chief Financial Officer

Laura Guerrant - Investor Relations of Counsel

Analysts

Edwin Mok - Needham & Company

Steve Bauman - The Weiser Capital

Aviza Technology, Inc. (AVZA) F4Q08 Earnings Call November 20, 2008 4:30 PM ET

Operator

Good day ladies and gentlemen and welcome to Aviza Technology’s conference call. My name is Mitch and I will be your operator today. At this time, all participants are in a listen-only mode. Following the presentation, the conference will be open for questions. (Operator Instructions) As a reminder, this conference is being recorded for replay purposes. I would now like to turn our presentation over to Laura Guerrant, IR Counsel for Aviza Technology. Go ahead ma’am.

Laura Guerrant

Thank you Mitch and good afternoon everyone. Thank you for joining us today to discuss Aviza Technology’s financial results for the fourth quarter of fiscal 2008, which ended September 26. In addition to outlining the company’s financial results for the quarter, we will also provide guidance for the first quarter of fiscal 2009. On today’s call are Jerry Cutini, Aviza’s President and CEO and Pat O’Connor, Executive Vice President and Chief Financial Officer.

Before turning the call over to Jerry, I’d like to remind everyone that the information provided today, including some of the responses to your questions will include forward-looking statements. These forward-looking statements are based on management’s current expectations and beliefs that involve numerous risks and uncertainties that could cause actual results to differ materially. You should not rely upon these forward-looking statements as predictions of future events as we cannot assure you that the events or circumstances reflected in these statements will be achieved or will occur.

These forward-looking statements include, but are not limited to the statements made by Mr. Cutini or Mr. O’Connor. All statements containing the words believe, expects, forecasts, may, will, should, seek, intends, plans, anticipates or the negative of these words or phrases and/or variations or comparable terminology.

Many factors could cause actual results to differ materially from those projected in these forward-looking statements. Some of these factors and other important factors are detailed in various SEC filings that Aviza has made in particular the most recent Form 10-K, copies of which are available from the company without charge. Please review these filings and do not place undue reliance on the forward-looking statements, as we assume no obligation to update such statements.

A replay of today’s call will be available on the company’s website at www.aviza.com under Calendar of Events in the Investor Relations section approximately two hours after the conclusion of the call. Details for the telephone replay could be found in today’s press release and keep at the closure of today’s call. Additional information can be found on the company’s website.

Please note that during the remainder of the prepared remarks and in our answers to your questions, all references to quarters and years will be for fiscal quarters and fiscal years unless we specifically refer to the calendar quarter or calendar year. As a reminder, Aviza’s fiscal year ends on the last Friday in September.

All references to earnings per share are to basic EPS unless otherwise specified, shipments include all systems and parts shipped during the quarter and the related services for which Aviza holds the contract for current and future revenue.

Also, please note that during this call we will be discussing GAAP and non-GAAP financial measures. A table that outlines the reconciliation between GAAP and non-GAAP financial measures is included in the earnings release, which has been filed with the SEC and posted on the Aviza website.

With that, I will turn the call over to Jerry Cutini. Jerry.

Jerry Cutini

Thank you, Laura. Good afternoon everyone and thank you for joining us today. I would like to begin with some commentary in our industry and the current business environment and then I’ll follow with the few highlights and accomplishments that took place during the year and the quarter.

It’s clear that the current global economic downturn ranks is one of the most challenging that our industry has ever faced. During the year we saw continued over supply of DRAM’s which intern severely effected capital spending by our customers worldwide. The unfolding global financial crisis has exacerbated these problems resulting in falling ASPs among most device types and clearly showing in consumer demand for end products. I believe we are now in a period of demand driven recession, the length of which no one is able to forecast right now.

You may recall the early in the year we announced the shift in our business strategy to focus on our single wafer products, which have a significantly better financial profile for our company. As the new paradigm of more than more becomes more clear, it is evident that shrinks alone will not be enough for IC makers to stay competitive and gain market share. For this reason Aviza began to shift its emphasis to these growing markets which include MEMS, 3-5 and 3D IC devices for which we specifically introduced the Celsior fxP mid year.

The majority of our business has now shifted to these markets and we believe we have made substantial in roads into those end markets, all of which have positioned us to improve the balance of our business opportunities. These are all goals we set out to achieve and we are pleased to report that we have made clear progress toward this end. Moving forward we will continue to work closely with these customers who face the challenge of navigating the market towards more value-added devices.

During the most recent quarter we received orders from an A4 and ALD system from a logic device maker in Japan for 32 nanometer logic devices. We received orders for our high performance Gallium Arsenide devices from our foundry in Taiwan and a leading MEMS device maker in Europe as well as a leading optical electronics maker for high brightness LEDs and we also continue to penetrate our Deep Silicon Etch products, all further evidence of the successful product shift.

Two weeks ago we announced the introduction of StratIon fxP, the world’s first 300 millimeter ready Ion Beam Deposition system. The StratIon will be used to develop next generation magnetic tunnel junction based devices for applications including magnetic memory MRAM, hard disk drives and RF components. Aviza’s Ion Beam Deposition system delivers key advantages over traditional magnetrons cluttering approaches.

The first system was shipped to LETI in Grenoble, France, one of Europe’s foremost applied research centers in electronics and Spintronics. We are very pleased to be in partnership with such a distinguished research center and believe that combining both companies technology expertise under this collaboration will help accelerate the adoption of MRAM and Spintronics technologies.

Both Aviza and LETI will be well positioned to support IC markers in the MRAM and Spintronics arenas as they are focus shifts from research and development towards volume production.

This wraps up my opening comments. Here to provide you with more insight into results for the quarter and to provide guidance for December is Pat O’Connor. Patrick.

Pat O’Connor

Thank you, Jerry. Good afternoon everyone, thank you for joining us. Before I review the quarter results, I want to point out that in our press release today you will find two supplemental non-GAAP financial measures. We believe these measures will provide additional information with respect to our business activities and we refer you to the release for the reconciliation of GAAP to non-GAAP financials.

Now, I’d like to review the September quarter results followed by December quarter guidance. We are pleased with our results for the September quarter particularly in light of the challenging economic environment. Shipments of $35.5 million increased over June quarter shipments of $34.9 million. Net sales of $35.5 million were within the guidance and improved over June quarter net sales of $33.5 million.

Our improved financial results reflect new penetration into growth markets with our single wafer products and the success of our restructuring programs initiated during the March quarter. On a geographical basis, the percentage breakdown of net sales was Asia-Pacific 46%, Europe 41% and North America 13%. Gross margin of 36.5% improved from June quarter gross margin of 32.9%.

We have continued to lower our operating expenses. Total operating expenses of $15.8 million included a onetime restructuring charge of $1.8 million, primarily related to an impairment of a previously licensed technology. This compares to the June quarter total operating expenses of $16.3 million.

R&D spending of $6.6 million compares with $7.3 million for the June quarter and SG&A spending was $7.4 million, which compares with $9 million for the June quarter. Loss from operation was $2.9 million, which compares with the June quarter loss from operations of $5.3 million.

Adjusted net income for the quarter was $941,000, which was inline with our updated guidance. On an adjusted basis, we recorded $0.04 earnings per share. This compared with adjusted net loss for the June quarter of $3.6 million or $0.16 per share.

Non-cash charges include a depreciation expense of $1.2 million, amortization expense of $109,000, stock-based compensation expense of $438,000, net interest expense of $500,000, net other income of $19,000 and income tax benefits of $244,000. In addition, we recorded a one-time restructuring charge of $2.1 million in the quarter.

Turning to the balance sheet, DSOs were 81 days and inventory returns were 2.4 times. As of September 26, the outstanding share count was approximately $21.9 million shares. This wraps up my comments on the results for the quarter.

Let’s turn to our guidance for the December quarter, which is predicated up on the continued share in our product mix. We expect the first quarter net sales will be in the range of $25 million to $32 million and adjusted net income will be in a range of break-even to a loss of $4 million. In addition, we expect stock-based compensation expense to be in the range of $400,000 to $450,000.

With that I will turn the call back to Jerry. Jerry

Jerry Cutini

Thanks, Pat. Some financial results for the quarter in particular proven and net sales in gross margin reflect our ongoing aggressive focus on our served markets, where our products offer a distinct technical advantage evidenced by our continued market wins. We believe our product focus and continued efforts to reduce cost will enable us to continue on a path towards an improved financial profile for the company. Having said the above, we are clearly in a period of extremely challenging forecasting, visibility is quite low and I believe will remain so until early 2009.

We’ll now open the call for questions.

Question-and-Answer Session

Operator

(Operator Instructions) Your first question comes from Edwin Mok - Needham & Company.

Edwin Mok - Needham & Company

So just a few housekeeping question first; what was the cash flow from operation for the past quarter as well as your CapEx?

Pat O’Connor

Okay, Edwin. We generated a bit of cash during the quarter of about $1 million and the CapEx for the quarter was $1.6 million.

Edwin Mok – Needham & Company

So, if I kind of look forward, right; how much do you think you guys need to spend for the coming year in terms of CapEx?

Pat O’Connor

Maybe $2 million to $3 million

Edwin Mok – Needham & Company

Minimum, just maintenance CapEx?

Pat O’Connor

Right yes, it would be adding a module or a system to our lab for expansion on demo capability which I always hope it will happen.

Edwin Mok – Needham & Company

Did you guys have to write down any intangibles for this past quarter?

Pat O’Connor

Yes, we did; we wrote down the technology license that we purchased last year. That was about $1.6 million.

Edwin Mok – Needham & Company

And then just two more housekeeping questions; in terms of your outlook for this fiscal first quarter, how should I look at the tax ratio? I stop to expect some tax benefit there? Also do you guys expect to see any restructuring costs for the coming quarter?

Pat O’Connor

Well, from a tax standpoint, I think we’ll be at minimum taxes and that relates to some of our foreign subs that are profitable by contract. So, I would believe that maybe the tax expense will be $100,000 to $200,000 on a quarterly basis.

Edwin Mok – Needham & Company

And then restructuring charge?

Pat O’Connor

Well, we try to manage the business accordingly and it depends on what business conditions are. At this point I’m not anticipating any.

Edwin Mok – Needham & Company

And a question maybe for Jerry; it look like these new products that you guys are looking for, the single wafer product’s actually grown quite a bit this past year, in fact at least my module shows 40% growth this year on that piece of your business. I’m just curious, how do we visualize that’s going into 2009 given such strong growth? Do we expect it to become more inline with the semi-cap sector or do you expect that sectors would eventually outperform; if you can give some color on that will be helpful.

Jerry Cutini

Actually I know exactly what’s you’re asking and I would say in the current environment, we’re clearly going to be impacted and I’ll give you a very specific example. We’re doing a lot of men’s devices, which are used obviously in cars. I think for the next couple of quarters that’s going to be a very challenging environment, but overall in the long-term I believe that those submarkets that we are in will outgrow the rest from the growth rate standpoint of the broader semiconductor equipment market.

So, I think we’re in the right segments, because we can win technically and those markets do you show the ability to grow, but I think like everything else we’re in such as a macroeconomic decline right now that it’s impacting everything. So, I think in the short-term, we’re going to have bumps in the road like everybody else, but I think over the long-term, I think this will be the first to come out and I think we’re going to see pretty decent growth in those markets that we serve.

Edwin Mok – Needham & Company

That’s fair, but if I look at the overall semi-cap oil, [inaudible] you’re talking around 30% next year or something in that range, but obviously it would have been that certain sector might outperform the others. Given that the markets look like typically smaller, any risk that they might actually be underperforming in the coming quarter or few quarters?

Pat O’Connor

We’ve spend a lot time over the last few weeks, talking to the sales guys and some of our customers and I think I’m pretty comfortable saying they’re not going to perform worse that the broader semiconductor equipment market. I do think the equipment market goes down 20%, 25% next year, but I don’t believe that these sectors are going to drop like that.

They are going to comedown a little bit, but I don’t think they don’t appear today based on the forecast and activity of demos. They don’t appear to be falling of a cliff and it’s not like the de-ramp sector, which is gone to near zero, so I’m not nervous. I mean look at the forecast we’re giving next quarter, right or the December quarter. We’re not falling off a cliff like you’ve seen some of the other equipment companies.

Edwin Mok – Needham & Company

That was the kind of color I’m looking for. Two other questions relate to your, I guess more of the financial model; first is, looks like in terms of maybe kind of a non-GAAP base, breakeven point is actually closer of $35 million right now, it’s even lower than what you were saying before. Is that a fair way to look at your model going forward or is that some cost reduction but it’s not shown up in the September quarter yet?

Pat O’Connor

Edwin, we continue to look at our business model and continue to appropriately size the activity. I think it’s fair to say that this quarter, our breakeven is trending down to below $30 million and we will continue to monitor that and keep working on that.

Edwin Mok – Needham & Company

But in terms of kind of cost saving going forward, is there anything that you have done this quarter that might not reflect into in the financial mode at this point?

Pat O’Connor

A small amount of our September restructuring charge did relate to separation pay for employees that we did reduce during the September quarter. Our headcount is now down below 500 employees and again as contracts and as our business shift, we continue to optimize activity with the headcount.

Edwin Mok - Needham & Company

Okay and then one more question, more related to liquidity and where your stock price is trading at right now. Have you guys looked into almost like a worst case scenario going forward? If we assume that revenue remain at this almost at the low end of the guidance range you have provided, how much cash you guys expect to put in the coming year and with that costs, any liquidity issue for you guys?

Pat O’Connor

Well our goal obviously is not to burn in cash. In the near-term our goal is to continue as we did this last quarter and that is either generates a small amount of cash or I’ll stay flat. That’s our belief and we work hard on the expenses. We are looking at all expenses and as an example, we are restricting travel. We do a lot more use of the internet than I will mention some people will use, so that would be an advertisement, but we do; so we’re doing those types of things. We are asking our employees to take vacation or time-off without pay around the world during these tough times and we’ll continue those cost measures.

Edwin Mok - Needham & Company

I see, but no tough color in terms of potential cash burn for the coming quarter or for the coming year?

Pat O’Connor

I don’t think there will be much either way.

Operator

(Operator Instructions) Your final question comes from [Steve Bauman] – The Weiser Capital.

Steve Bauman - The Weiser Capital

Can you just talk a little bit about how you formulated the guidance for Q4 in what is obviously in an extraordinary environment?

Jerry Cutini

Yes, it is an extraordinary environment. What we generally do Steve is we are looking at, there is a backlog component. I mean we sit here six week into the quarter, so we know what we’ve shipped and we have customer requirements on delivery dates and we think we’ve got a pretty good handle on that.

Being as lumpy as it is right now, we could get order that just comes to late for us to get it to the process and we wouldn’t be able to ship it in the quarter. I think we have a good beat on the business and I think we know where it’s all coming from. So, it’s a lot of customer discussion and a lot of customer activity.

So, we take a pretty long hard look at this; I mean I have forecasting calls every week. So, we understand where the business is, we know what the customers requirements are for system deliveries and where we are from a delivery stand point. So, it’s a lot of blocking and tackling, I’ll admit, but we work pretty hard at it and we’ve got a pretty good team of people. It’s not just me, it’s a whole bunch of other folks out there.

Steve Bauman - The Weiser Capital

Jerry, did you guys assume though that you are going to see a higher degree of push outs this quarter than you would in a normal quarter or even a normal down quarter?

Jerry Cutini

No, I wouldn’t characterize it that way, Steve. We give the guidance 25 to 32 this quarter. There are a few machines in there; paper work couldn’t come through, for whatever reason we didn’t get all the sign offs we though we’re going to get. I wouldn’t characterize them as push outs as much as getting the activity done and making sure all the T’s are cross and I’s are dotted.

As well in this quarter we do have one, two big sign offs that we need to achieve final acceptance on, one of which is our Ion Beam tool and our revenue in Japan. So, those are two big things that are delivered and in start-up mode and turn-on mode and so what we have to do is get acceptance on those because of the way Japanese revenue is recorded and the fact that the Ion Beam tool is new technology. So, those are two big chunks in the revenue this quarter.

Steve Bauman - The Weiser Capital

In the current quarter, in the December quarter?

Jerry Cutini

Yes, in the current quarter. They are already out there in the field and they are already sparked up and running wafers. We just got to get them signed off.

Steve Bauman - The Weiser Capital

Okay, and neither one of those has been signed off?

Jerry Cutini

That’s correct and Ion Beam tool because its truly new technology and I would interject; I think it’s one of the most fascinating machines out there right now and we produced I think a word class tool. It is new technology; we can’t take revenue on shipment, we have to get it in on acceptance, so that’s why that where sitting there.

Steve Bauman - The Weiser Capital

Pat, a question for you on sort of accounts receivable, obviously it ticked up a little bit this quarter. They are not significantly in days; is there an opportunity to have that be a source of cash here in the December quarter?

Pat O’Connor

Well, I think that our AR is picking up as we become of a similar to the other compatriots; it relates to the market, I mean the region you ship to. We ship to Taiwan, we’re typically on a letter of credit and we not only ship to these other markets, it’s now on open account, net 60. So, we work those very hard too, we talk on those every month, it’s not weekly. I don’t expect to see much change though in this environment.

Steve Bauman - The Weiser Capital

So, I would think that some of your customers are worried about preserving cash, at least to have any optics of preserving cash?

Pat O’Connor

Right, they do. Usually that first 90% will come within the typically net 60 days, if it’s a European; net 30, if it’s a U.S.; Asia again as usual NLC and then that last 10% is the harder one to collect. That’s where we struggle with them all the time.

Steve Bauman - The Weiser Capital

Okay and then finally Pat, if U.S. obviously have some covenants on some of your bank borrowings, is that adjusted net income number that you give? Is that the same as the number for covenant purposes?

Pat O’Connor

Yes, it is.

Steve Bauman - The Weiser Capital

Okay and you guys are formulating contingency plans to make sure that if the environment gets any worse you are able to stay in business?

Pat O’Connor

Well, our Vice President, Treasurer, John Joy, is speaking to the bank all the time. He has a very good relationship with them and I believe we have a good relationship along that line and we will continue to keep them advised of how business progresses and as Jerry mentioned, we sat down, John and I sat at the bank, I think a week or two ago and we talked about a couple of key sign offs we need this quarter. So, that are well aware where we’re at.

Operator

Thank you and we have no further audio questions at this time. I would like to turn the conference back over to Jerry Cutini for any closing statements.

Jerry Cutini

Okay, thank you everyone. We appreciate your time and look forward to speaking to you all again. Good bye.

Operator

Ladies and gentlemen, this concludes the Aviza Technology’s conference call. If you’d like to listen to our replay of today’s conference, please dial 800-405-2236 or 303-590-3000 with the passcode 11121289. ACT would like to thank you for your participation and you may now disconnect.

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Source: Aviza Technology Inc F4Q08 (Qtr End 9/26/08) Earnings Call Transcript
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