Intevac Management Discusses Q4 2012 Results - Earnings Call Transcript

Jan.29.13 | About: Intevac, Inc. (IVAC)

Intevac (NASDAQ:IVAC)

Q4 2012 Earnings Call

January 29, 2013 4:30 pm ET

Executives

Claire McAdams

Jeffrey Andreson - Chief Financial Officer, Principal Accounting Officer, Executive Vice President of Finance & Administration, Secretary and Treasurer

Norman H. Pond - Founder, Chairman of the Board and Chief Executive Officer

Analysts

Richard Kugele - Needham & Company, LLC, Research Division

Mark S. Miller - Noble Financial Group, Inc., Research Division

John D. Abouchar - GRT Capital Partners, LLC

Operator

Good day, and welcome to Intevac's Fourth Quarter 2012 Financial Results Conference Call. [Operator Instructions] Please note that this conference call is being recorded today, January 29, 2013. At this time, I would like to turn the call over to Claire McAdams, Intevac's Investor Relations counsel. Please go ahead.

Claire McAdams

Thank you and good afternoon, everyone. Thank you for joining us today to discuss Intevac's financial results for the fourth quarter of 2012, which ended on December 31. In addition to outlining the company's financial results, we will provide guidance for the fourth -- first quarter of 2013 and our current outlook for the full year. On today's call, are Norm Pond, Chairman and Chief Executive Officer; and Jeff Andreson, Chief Financial Officer. Jeff will start with a review of the fourth quarter results and then Norm will provide an update on our businesses. Jeff will then provide guidance before turning the call over to Q&A.

Before turning the call over to Jeff, I'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-K, 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. Contents of this January 29th call, include time-sensitive forward-looking statements that represent our projections as of today. We undertake no obligation to update the forward-looking statements made during this conference call. I will now turn the call over to Jeff to discuss our financial results for the fourth quarter. Jeff?

Jeffrey Andreson

Thanks, Claire. Consolidated fourth quarter revenues totaled $17.5 million versus our guidance of $17 million to $20 million. The high end of the guidance had included 1 LEAN SOLAR system, which was not recognized in the quarter. Equipment revenue totaled $9.4 million consisting of service and upgrade revenues. Photonics sales of $8.1 million included $4.9 million of contracts, research and development. Equipment gross margin of 46% improved from the third quarter due to the higher level of upgrades and lower factory overhead expense. Photonics gross margin of 37.4% increased from the third quarter, driven primarily by better overhead absorption. Overall, Q4 consolidated gross margin of 42% exceeded the high end of our guidance due to better factory utilization coupled with the favorable mix of Equipment revenues.

Total Q4 operating expenses were $31.2 million, which included an $18.4 million noncash goodwill and intangibles impairment charge explained in our 8-K filings on December 21, 2012, and January 24 of this year. Excluding this impairment charge, operating expenses declined to $12.8 million below the low end of our guidance and 7% lower than Q3. Our Q4 net loss was $42.7 million or $1.82 per share. On a non-GAAP basis, our net loss was $3.6 million or $0.15 per share, which excludes the impact of the $23.4 million valuation allowance established on the company's U.S. federal deferred tax assets and the goodwill impairment charge of $18.4 million.

Our backlog was $35.2 million at year end and did not include any 200 Leans or LEAN SOLAR systems. We ended the year with cash and investments of $92.2 million equivalent to approximately $3.93 per share. Our year end cash and investment balance was lower than we expected due principally to a payment for one of our large Photonics programs being pushed into the first quarter of 2013. Our free cash flow was a net use of cash for the quarter of $6.4 million and included incremental working capital investment for our new solar products. It also included capital expenditures of $1.2 million and depreciation and amortization of $1.1 million for the quarter. I'll now turn the call over to Norm to provide an update on our Equipment and Photonics businesses. Norm?

Norman H. Pond

Thanks, everyone, for joining us today. I'm about 2 months into the CEO role, which I previously held as founder of Intevac. Today, I'll give you my perspective on each of our businesses and Jeff will then provide our guidance for the first quarter of 2013. 2012 was a challenging year for us due to the weak macroeconomic environment and the industry transitions that are underway from PC-based storage to centralized or cloud-based storage. This significantly affected our core business, hard drives, bettering equipment. We're the leader in that area and about 60% of all media is made on our machines.

Data storage is expected to grow this year and the number of disk per drives is expected to increase. However, since the industry is still operating below capacity, we expect low demand for our hard drive equipment again in 2013.

We believe this market is mature but cyclical with significant fluctuations year-to-year. We have achieved great success in this business with revenues averaging over $100 million per year and operating profit around 20% over the past 10 years. Business has been profitable even in the recent downcycles. We have the largest market share, the most customers, best technology. We expect to enjoy continued success and are working to increase our market share.

In the last 2 years, major changes occurred that significantly impacted the business. Floods in Thailand, consolidation, portable devices, tablets and the movement of some data to the cloud. Those changes have worked out well for the hard drive manufacturers but not yet for equipment suppliers like Intevac. This is due in part to the fact that in 2010, the industry added enough media capacity for about 170 million hard drives per quarter. That rate has not yet materialized. We believe the key factor in the decline of the hard drive units has been growth of storage in the cloud. Because in the cloud, drives are utilized more efficiently, thus requiring a smaller number of drives for a given amount of storage.

As the industry works through this discontinuity, we believe that demand for disk will again exceed capacity. This is based on a consensus that data creation will continue to grow at a rapid pace as much as 50% byte growth year per year, which is well above the predicted growth rate in areal density of around 20% per year. This transition is causing the key driver for disk to switch from the number of PCs sold to the number of bytes to be stored.

Further, we believe that this increased demand will require more disk, thus more equipment and disk with higher capacity, thus new technology. We believe we are well positioned to satisfy both needs.

Moving to solar. In 2009, Intevac began a project to design solar cell manufacturing equipment and that continues. Our large investment run rate of around $25 million per year for the past 2 years has obscured the strong operating profitability and cash flow of the hard drive equipment business. We invested in solar because we have the skills and technology required to compete in this large market and because we believe this is a growth business that will complement our cyclical hard drive business.

In 2012, we introduced 2 innovative systems. Our Etch system increases cell efficiency by reflecting photons from the back surface and our ion implant system provides greater control of the dope-vented [ph] forms, the P-N junction of the solar cell, further increasing cell efficiency. I'm pleased to report that a large Asian cell manufacturer recently purchased a production implant system after successful completion of the first phase of our evaluation agreement. We have demonstrated increases in cell efficiency and we believe that ion implant will enable further increases in efficiency. The industry currently has excess capacity and purchases of production equipment are extremely low. However, solar cell demand is increasing and the weaker participants are leaving the business. We are working closely with our customers to demonstrate production readiness, predictable uptime and high reliability in order to be prepared when additional equipment will be required.

Turning to Photonics. Our strength is providing highly sensitive digital imagers for military applications that make it possible to see better at low-light levels than with any other technology. For most of our programs, we're the sole source supplier. We have substantial IT. Our products enable some military applications, some new military applications. In other cases, improve performance of existing systems by replacing analog-type equipment with digital equipment. This business is at a $30 million run rate and has become profitable. We view this as a growth business, not because the military budget will increase, but because we expect to be designed into more existing platforms and to win new applications. We see a path to $100 million annual revenues within the next 5 years, without capturing the main U.S. Army head-mounted night-vision goggle market.

So to summarize, in 2013, we expect profits and positive cash flow from both the hard disk drive equipment business and Photonics and we will continue to invest in solar, albeit at a lower rate of both OpEx and working capital. So I'll now turn the call back to Jeff to discuss guidance for the first quarter and our outlook for 2013.

Jeffrey Andreson

Thanks, Norm. We are projecting consolidated Q1 revenues of $12.5 million to $15 million, consisting of service and upgrades in our hard drive business, Photonics, plus one Solar system at the high-end of the range. This tool was delayed from Q1 due to our customer extending their internal qualification program. We expect first quarter gross margin to be in the range of 26% to 27%. This decrease in gross margin is a result of lower level factory utilization and the impact of the lower margin expected on our first Solar implant system. Operating expenses are expected to be in the range of $12.5 million to $13 million, and the same level as the fourth quarter, which included the impact of an extended holiday shutdown.

Other income and expense will be approximately $100,000. This excludes any impacts associated with changes to the valuation of our intangibles or any other assets or foreign exchange. In Q1, we are projecting a net loss in the range of $0.33 to $0.35 per share.

Turning to the full year 2013, as Norm referenced earlier, we expect the hard drive equipment business to be roughly flat this year, as expectation for media growth beginning to drive capacity needs in 2014. Our solar equipment business is starting to show signs of growth beginning with the initial qualification of our implant tool, but it's too early to provide revenue guidance for the full year. We expect limited growth in our Photonics business and while significant, revenue growth will not incur before 2014, we expect this business to be profitable in 2013.

Importantly at these revenue and investment levels, we expect our total operating loss and cash burn for 2013 to decline by about 1/2 as compared to 2012 levels. We will continue to monitor the business conditions and we will adjust our plans to achieve this goal. This completes the formal part of our presentation. Operator, we are ready for questions.

Question-and-Answer Session

Operator

[Operator Instructions] Our first question comes from the line of Rich Kugele with Needham & Company.

Richard Kugele - Needham & Company, LLC, Research Division

Norman, I wanted to make sure that I ask you a strategic question first rather than get right into the numbers. It's great to have you on the call. In bigger-picture terms, when you look at the solar market and you were obviously on the board when the decision was made to participate in this space. What did you think we would be at, at this point and what do you think is necessary to actually get that business as a standalone entity, or do you think that at some point over the next 12 or 18 months, you'd have to make a more hard decision of saying, "Okay. Let's go and sell this business." So if you could kind of talk about the initial decision that you made -- referenced there in '09, and then where we are now and what would be the trigger point to go and potentially, cut bait on that business.

Norman H. Pond

Well, thanks, Rich. As you're aware, conditions were very different in 2009 when we had made the decision to begin the project and we did not expect to see a major collapse of the business that has occurred, driven by just too much capacity. So the markets are quite different than we thought. However, our outlook continues to be that it's going to be a big business and if we can design and build the right machines and be cost-competitive, we think it's going to work out for us and we are not giving any consideration to selling it at this point.

Richard Kugele - Needham & Company, LLC, Research Division

Do you think that the $25 million that you referenced for investments are going to decline from here. Have you basically innovated as much as you need to and now it's just a minor attraction?

Jeffrey Andreson

Rich, it's Jeff. Yes, we expect it to decline. I mean, most of the decline will be in that particular area because we have gotten to a certain level of development and we're working mainly on reliability, CIP, things like that, as well as we invested some working capital to be ready for some of these valuations.

Richard Kugele - Needham & Company, LLC, Research Division

Okay. And then, Jeff, on the operating loss being roughly 1/2 in '13 versus '12, is it primarily OpEx that we should use to get there, if the overall -- it sounds like the overall revenue is basically going to be flat, I guess, on a run-rate basis, is that correct?

Jeffrey Andreson

Yes, I think a little of it can be in revenue. I mean, I wouldn't say it's 100% flat, but it's not going to be tremendous growth as we talked about but a little bit. And the rest of it, you could probably assume it's going to come through the OpEx because we'll modulate some of the margins through the gross margins, which year-over-year we expect to come down, too, just because of the lower margin, new tools we expect.

Richard Kugele - Needham & Company, LLC, Research Division

Okay. And then just lastly, what is the average platter count now in your estimation and where would you expect it to be in 2014?

Jeffrey Andreson

Right now, the disk numbers aren't out but we thought going in, maybe it's 1.75, maybe slightly higher than that. I think by 2014, I think it's going to be close to 2. This is based on some work we've done with some of the forecasters in the industry. And exiting 2013, we think it's going to be kind of 1.85 or so, if the forecasters are right but obviously, you know all the macros are -- the slowing in areal density and the appetite for storage. So we don't think we're going to be far off of those numbers.

Operator

[Operator Instructions] Our next question comes from the line of Mike Miller with Noble Financial.

Mark S. Miller - Noble Financial Group, Inc., Research Division

I'll follow up on Richard's question. Just to follow up on Richard's question, Seagate, I believe reported yesterday that their average capacity per drive had increased by 59%. That was probably double the areal density improvements and as you noted, it's going to be 20%, maybe 25% on areal density. The projections you made, are they based on these tight figures or are they more conservative?

Norman H. Pond

For this year, I don't think it makes much difference because it's going to take a year of that to get back to industry capacity but we were thrilled to hear that 59% number. I think it translates, as I said, into a requirement for more disks that is going to occur within about a year.

Mark S. Miller - Noble Financial Group, Inc., Research Division

I'm just wondering, too, that we're moving away from laptop-type drives to enterprise drives, which should have more platters also and I don't know if that's factored in or what the extrapolation is in terms of near-line enterprise growth versus decline in laptop and I know Seagate was down 15% last quarter on laptop, but they were up 23% on near-line. So there are 2 positive trends here. I mean, the shift to near-line storage away from laptops and also the areal density. So it just seems like a conservative number to me and I'm just trying to probe about that, the 1.75 to 1 -- 1.85.

Norman H. Pond

We'd like to have that outcome, Mark.

Mark S. Miller - Noble Financial Group, Inc., Research Division

The other question I had is on the ion implant. It's my understanding that the industry, which have been using thermal diffusion ovens is moving away to ion implant as cells become more complex and cell's design changes. And I'm just wondering, what's your feeling for in terms of what percent of the cells are going to be made using thermal implant versus ion implant and how that progresses in time shifting towards ion implant?

Norman H. Pond

Mark, today, you can round it off to the -- maybe 100% are made by diffusion. There are few people using implant on machines with a fairly limited capacity but far and away, the dominant process is diffusion. And since there's plenty of capacity, there aren't any big production buys going on for either diffusion or ion implant. The people that we talk to, I think, have the opinion that implant is the process of the future and even if today, it doesn't offer some compelling advantage if they're going to buy machines, they would probably buy implant machines, expecting that as the processes evolve, that there's going to be more growth and efficiency possible with implant than the diffusion process. But again, it doesn't really matter until production is required and our goal is to be ready with the right machines at that point in time.

Mark S. Miller - Noble Financial Group, Inc., Research Division

Well, the reason I bring that up is at Amtech Systems, which has been a leader in thermal diffusion ovens, has made a very significant effort and they're on thin ice, too, in terms of not having much in the way of orders and they're really pushing ion implants and I'm just wondering if in the one tool that you placed, did you compete against them and what was -- or was this your market all to yourself, and just how do you compare. I think they're just in the beta-side type of valuation for their tools.

Norman H. Pond

Yes, I would say the status of the industry is such that everything is competitive, Mark. There aren't any easy orders out there. But in this case, we had placed a consignment unit some months ago. The machine worked well. The customer liked it and they had a slot they needed to fill and picked our machine, and so we're very pleased to how it turned out.

Mark S. Miller - Noble Financial Group, Inc., Research Division

Now the trade-off right now between ion implant, thermal diffusion, is it basically throughput? You have a more accurate process but throughput advantages to thermal diffusion at the moment, is that correct?

Norman H. Pond

No. The lines are set up to run more or less at a certain rate, around 2,400 per hour and we try to match our implant or throughput to fit that need. So the customer, if they're so inclined, can swap out diffusion furnace and put in an implant. They wouldn't do that unless they felt that there was some advantage such as efficiency or lower costs of consumables or something of that nature. But when they're going to add new capacity, we think that odds are, the choice will be overwhelmingly implant versus diffusion.

Mark S. Miller - Noble Financial Group, Inc., Research Division

So you see any possibility you -- or about Varian entering that field or they're happy where they're at right now in terms of implanters?

Norman H. Pond

Both. Varian Semiconductor was acquired by Applied, of course. And even before that, they were very active in the implant -- solar implant area and that continues.

Operator

[Operator Instructions] And we have a question from the line of J.D. Abouchar with GRT Capital.

John D. Abouchar - GRT Capital Partners, LLC

Just a simple follow-up question on the ion implant. And Applied Material, I know they've been added a while but they're more batch process versus continuous. So maybe a little more color about what you know about their process. Are they trying to go to -- away from batch so they can actually fit into the line and then the follow-up question on the win that you have so far, was that a competitive bake-off and are you in any competitive bake-offs right now?

Norman H. Pond

So this is Norm. It's our understanding that the Varian Applied machine is a scanning-type machine where they scan a few disks at a time rather than batch. And we don't have a lot of details on the design, but our impression is that it's a machine that was first designed for semiconductors and has been modified to fit this need. So your second question, was the order that we received competitive and I got to tell you, I don't know exactly what the customer's decision process was. I suspect that other offers were made but I don't know that.

John D. Abouchar - GRT Capital Partners, LLC

I guess then, more generically, have you been in any bake-offs or -- maybe simply, what's the competitive landscape because obviously, Varian now Applied has always been -- you're talking about 2 very, very big companies who have great reputations and have squashed a lot of innovative, smaller competitors. So generically, what's the competitive landscape like?

Norman H. Pond

We have great respect for them and I'm sure they'll have a great machine. We're working hard to have a better machine and avoid being squashed. It's a lot more important to us than it is to them.

Jeffrey Andreson

But J.D., it's Jeff. I mean just about everywhere we go, they're there, obviously, because the 2 people with tools in the installed base, to our knowledge, are Varian and us. I'm not quite sure where the Amtech guys are in getting tools out in the field.

Operator

[Operator Instructions] And there are no further questions at this time. I will now turn the call back over to Norman Pond.

Norman H. Pond

Okay, thanks for joining us today. We look forward to updating you again on our next call. Have a good afternoon.

Operator

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

Copyright policy: All transcripts on this site are the copyright of Seeking Alpha. However, we view them as an important resource for bloggers and journalists, and are excited to contribute to the democratization of financial information on the Internet. (Until now investors have had to pay thousands of dollars in subscription fees for transcripts.) So our reproduction policy is as follows: You may quote up to 400 words of any transcript on the condition that you attribute the transcript to Seeking Alpha and either link to the original transcript or to www.SeekingAlpha.com. All other use is prohibited.

THE INFORMATION CONTAINED HERE IS A TEXTUAL REPRESENTATION OF THE APPLICABLE COMPANY'S CONFERENCE CALL, CONFERENCE PRESENTATION OR OTHER AUDIO PRESENTATION, AND WHILE EFFORTS ARE MADE TO PROVIDE AN ACCURATE TRANSCRIPTION, THERE MAY BE MATERIAL ERRORS, OMISSIONS, OR INACCURACIES IN THE REPORTING OF THE SUBSTANCE OF THE AUDIO PRESENTATIONS. IN NO WAY DOES SEEKING ALPHA ASSUME ANY RESPONSIBILITY FOR ANY INVESTMENT OR OTHER DECISIONS MADE BASED UPON THE INFORMATION PROVIDED ON THIS WEB SITE OR IN ANY TRANSCRIPT. USERS ARE ADVISED TO REVIEW THE APPLICABLE COMPANY'S AUDIO PRESENTATION ITSELF AND THE APPLICABLE COMPANY'S SEC FILINGS BEFORE MAKING ANY INVESTMENT OR OTHER DECISIONS.

If you have any additional questions about our online transcripts, please contact us at: transcripts@seekingalpha.com. Thank you!