Seeking Alpha
We cover over 5K calls/quarter
Profile| Send Message| ()  

Executives

Kevin Fairbairn - President & Chief Executive Officer

Jeff Andreson - Chief Financial Officer

Joe Pietras - Vice President & General Manager of Intevac Photonics

Analysts

Rich Kugele - Needham & Company

Unidentified Analyst - CRT Capital LLC

Intevac Inc. (IVAC) F1Q09 Earnings Call Transcript April 27, 2009 4:30 PM ET

Operator

Welcome to Intevac’s 2009 first quarter results conference call. All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question-and-answer session. (Operator Instructions) Thank you. Please note that this conference call is being recorded today, April 27, 2009.

Kevin Fairbairn, Intevac’s President and Chief Executive Officer is hosting the call today. I would now like to turn the conference over to Mr. Fairbairn. Please go ahead sir.

Kevin Fairbairn

Good afternoon and thank you for joining us today. With me are Jeff Andreson, our Chief Financial Officer and Joe Pietras, our General Manager of Intevac Photonics. After Jeff reads the Safe Harbor statement, I will provide an update on our business activities. Joe will discuss our Photonics business and then Jeff will discuss our first quarter results and provide our outlook for the second quarter. I will then summarize before opening up the call for questions. Jeff.

Jeff Andreson

During the course of this conference call, we will comment upon future events and make projections about the future financial performance of Intevac, including statements related to projected cash flow, orders, revenue, gross margin, operating expense, other income, taxes, earnings per share and stock-based compensation expense.

We will discuss projected demand for hard drives, our 200 Lean Systems and upgrades, the impact of upgrading legacy tools, the transition to patterned media recoding, the status of our Lean Etch semiconductor manufacturing product and our alliance with TES. We will discuss our plans for the Photonics business, projected applications and the status of our products and programs.

These forward-looking statements are based upon our current expectations and actual results could differ materially as a result of various risks and uncertainties related to these comments and other risk factors discussed in documents filed by us with the Securities and Exchange Commission, including our annual report on Form 10-K and quarterly reports on Form 10-Q.

The contents of this April 27th call include time sensitive, forward-looking statements that represent our projections as of the date of the call. We undertake no obligation to update the forward-looking statements made during this conference call. Any redistribution of this call without our express written consent is strictly prohibited. Kevin.

Kevin Fairbairn

Thank you. Our results for the first quarter include revenues exceeding guidance and operating expenses coming in lower than guidance. As expected, it was a difficult quarter for our equipment business. However, we are pleased to report strong momentum building in our Photonics business. Our revenues totaled $12.3 million. While we did not ship any 200 Lean Systems during the quarter, our hard disk customers did take degree of technology upgrades.

Our net loss was $5.8 million or $0.26 per share and included equity-based compensation expense equivalent to $0.05 per share. Our net loss per share came in better than the high end of our guidance. We have just experienced a nearly complete freeze in the capital equipment environment triggered by the rapid deterioration in the global economy resulting in a minimal to no visibility in our equipment business in the short term.

With that being said, industry conditions are beginning to stabilize and we are encouraged by some positive signs. Ordering activity is emerging from the deep freeze evidenced by today's announcement for purchase order from a new 200 Lean customer. Hard drive customers are now actively engaged without the new equipment purchasing negotiations. The discussions we are having with our customers are focused on technology buys and not capacity additions and our latest purchase order is no exception. This system which incorporates both Etch and deposition process modules is a major milestone for Intevac as it represents our first patterned media 200 Lean System order.

We expect other customers will also begin placing orders during the second quarter. We are hearing positive signals from some of the leading drive manufacturers but demand has not dropped as deeply as expected. We are encouraged by reports of continued growth in 2 ½ inch media from mobile applications and the ongoing mix shift for 2 ½ inch from 3 ½ inch. As this mix shift continues, we think the industry may see tightness in manufacturing capacity for mobile applications in spite of the current levels of overall media capacity. The rapid mix shift away from desktop towards mobile computer in the short term leads to a new utilization of legacy tools and in the longer term will drive their retirement as they are incapable of producing competitive 2 ½ inch media on gross mobile applications.

As I mentioned last quarter, our customers cannot afford to fall behind on technology and the next major technology change rapidly approaching is the shift to patterned media. The last major technology shift in patterned media drove our business to record levels in 2006. We believe our opportunity in patterned media could exceed even those record levels as patterned media requires disc pass through two separate 200 Lean process tools effectively doubling the serve market for our systems.

We had been working closely with our customers and are very pleased with our progress in developing the industry's first high productivity solution for patterned media which is based on the industry leading 200 Lean platform. The adoption of patterned media is dependent on the achievement of technology as well as cost targets. Today, we feel confident that our systems are uniquely capable of meeting both with these requirements. We expect to ship our first 200 Lean Systems for patterned media midyear.

As for our Lean Etch, our progress with our alliance partner in Korea has been continuing on schedule. Test is now working with the Korean semiconductor manufacturers demonstrating state-of-the-art Etch technology. We are targeting customer qualification in 2009. As this product is largely complete, we have been able to reduce our expenditures on the Lean Etch program by $0.75 in the peak without hindering our ability to achieve success in the semiconductor industry. We have leveraged our world class Etch technology capability to rapidly develop high productivity patterned media solutions for our hard drive customers.

I am pleased to report that our Photonics business show very strong revenue growth in the first quarter with record product sales. Our unique digital low-light sensors and cameras continue to proliferate into multiple programs. Our night vision products are gaining traction with a number of production programs underway. We are seeing success with our strategy to increase commercial sales. Joe will provide more details in the momentum in our Photonics business in a few moments.

This will be a back end loaded year for our equipment business and the second quarter will be as challenging as the first. As a result in the first quarter, we completed the second phase of our global cost reduction plan. We are intensely focused on managing cash while preserving our ability to introduce new products and continue the rapid growth in our Photonics business. In the first quarter, we realized the full benefits of our November 2008 cost reductions and in the second quarter, we will realize the benefits of our continued cost reductions implemented so far this year.

I will now turn the call over to Joe. Joe.

Joe Pietras

Thank you, Kevin. Intevac Photonics revenues were $6.2 million in Q1, a 37% increase over the fourth quarter. We achieved record product sales of $2.6 million which represented 42% of revenues and we are well on our path to achieve our 2009 goal of product sales contributing 50% of our revenues.

Contract R&D or program revenues increased 25% in the quarter as several new programs were launched. This include the development of a next generation low light digital sensor, a new round of instrument operating in a new infrared and an initiative to deploy our digital night vision camera module in a large volume existing airborne platform.

As I discussed on our Q4 call, we are now delivering higher performance night vision modules to Sagem, our NATO customer. This program is expected to ramp up to production qualities in the second half of 2009 and is anticipated to contribute over $20 million in revenues over the next five years. We also continued shipping low rate quantities of our digital night vision camera module in support of our first US military production order for an avionics application. We expect follow on orders in 2009 with this business opportunity estimated at over 25 million in the next seven years.

We completed the development of our new 2 megapixel digital night vision sensor and delivered cameras using the sensor to multiple branches of the US military for evaluation and a number of ground and avionics' applications. We also received initial funding for a next generation four megapixel digital low light sensor for Panoramic Night Vision viewing applications

In the area of military digital night vision systems products, we are pursuing two major products for us. With our partner, DRS Technologies, we are working with the US Army to develop a Digital Enhanced Night Vision Goggle, or DENVG which electronically combines night vision images using our digital sensor with thermal images from a DRS sensor. DENVG is the US Army's major program for deploying a full digital goggle for situational soldier awareness and is expected to answer initial large volume production valued at a $150 million over three years beginning in 2012. In April we delivered prototypes of our latest design for field evaluation. US Army is evaluating prototypes from two other competitors, one of which also incorporates our own digital night vision sensor.

Our second major thrust in night vision systems products is our Night Port, a compact digital monocular that provides full night vision viewing and recording capabilities. Night Port has the potential to be a direct replacement for a legacy night vision goggles, the market for which is an excess of $400 million annually. Recently, we completed an initial prototype of our Night Port and demonstrated into many key military customers where it was well received for applications and ground and avionics night vision.

During Q1, we received our first Night Port based contract award where the Night Port product platform will be incorporated into a fully digital binocular for ground soldier use. This product opportunity is expected to enter production in 2011 valued at $10 million over four years. We are pleased to report that we received our first full scale production order for our LIVAR camera to be used on an airborne application. We delivered low level production quantities for this application as well as small quantities of units for several other customer applications in the quarter. We continue to estimate our LIVAR business opportunity to be $100 million over the next 10 years.

In our commercial business, we are seeing increased momentum in our handheld Raman instrument business, especially in key market areas with volume based end user or OEM customers. We received our first OEM production order for our handheld Raman instrument for an explosive detection application with anticipated quantities of 150 units in 2009. We are in discussions with several other potential customers for volume based production applications. We are on a path to double our Raman instrument business this year.

In all, we are pleased with our progress in the first quarter and are on track towards meeting our objective of $30 million in revenue from Photonics in 2009. I will now turn it over to Jeff to discuss our financial results for the first quarter and our outlook for the second quarter of 2009.

Jeff Andreson

Thank you, Joe. Consolidated first quarter revenues totaled $12.3 million. The equipment revenues for the quarter totaled $6.1 million with no 200 Lean Systems shipped in the quarter. Photonics sales were $6.2 million and that consists of $3.6 million of contract, research and development and a record level of $2.6 million in product shipments. Q1 consolidated gross margins of 35% was above our beginning of quarter guidance as we aggressively implemented a series of actions to reduce our manufacturing cost.

With nearly a 50% decrease in revenues, the equipment gross margins decreased from 41% to 30% sequentially due to lower factory absorption, offset by the savings from our cost reduction plan. Photonics gross margins improved to 39% from 19% in the fourth quarter due to higher factory absorption and lower warrantee expenses.

Q1 operating expenses declined to $13.7 million or $300,000 below our guidance as we continue to realize the impact of our global cost reduction plan which I will update when I provide our Q2 guidance. Overall, operating expenses for the first quarter represented a 30% decrease compared to our peak levels in the first quarter of 2007 and a 14% decrease since Q3 2008 to quarter prior to the implementation of the global cost reduction plan. We recognized a tax benefit in the quarter of $3.3 million.

Q1 net loss totaled $5.8 million or $0.26 per share compared to our guidance of a loss of $0.30 to $0.35 per share. The net loss included $1.4 million of pre tax stock-based compensation expense equivalent to $0.05 per share. Our backlog was $17 million at quarter end down from $20 million at the end of the fourth quarter and included one 200 Lean Systems. As of this call, backlog includes two 200 Lean Systems.

Now, I will discuss the balance sheet. Cash and investments are $101 million or approximately $4.60 per share and include a valuation allowance of $7 million associated with our auction rate security investments. Cash and investments, excluding the impact of the valuation allowance adjustments decreased $5 million from Q4 and included the final $2 million payment related to our 2007 acquisition of DeltaNu. We continue to closely mange our cash flow in light of the current business environment.

Our investment portfolio at the end of Q1 included $67 million in student loan backed auction rate securities. The increase of $1 million versus the Q4 balance is a result of a reduction in the valuation allowance for these securities and is driven by an improvement in the long term interest rate spreads. In April, we had $3.3 million of our auction rate securities called at par. We continue to have liquidity access to these assets through our existing line of credit with Citibank. We currently do not anticipate borrowing as we have adequate cash to support our business.

Our balance sheet is debt free and has a cash position that we believe can sustain and prolong downturn if that should occur. In early April, the FASB approved changes to financial accounting standards 115 and 157. The change will require companies to expense credit related losses through the P&L on securities held. We are assessing the impact of this change as it relates to our investments and have not included any impact in our guidance. In the first quarter, capital expenditures totaled $780,000 and depreciation and amortization totaled $1.3 million.

I will now provide the guidance for the second quarter of 2009 and discuss the impact of our global cost reduction plan. In the fourth quarter of 2008, we implemented our global cost reduction plan and resized the Company to breakeven at approximately $120 million in revenue and a $115 million in revenue on a cash basis. In Q1, we implemented additional cost reductions that increased our annualized cost savings from the $10 million to $12 million range to over $15 million annually. These additional cost reductions will further lower our cash breakeven to approximately $100 million to $105 million. Our objective continues to be the size of the Company at a revenue level that allows Intevac to continue to invest in key development programs which will drive our future revenue growth.

We are projecting consolidated Q2 revenues to remain in the range of $9 million to $12 million which does not include any 200 Lean Systems. We expect second quarter gross margins to be 33% to 37% depending on product mix. Our operating expenses are expected to decline to approximately $13 million for the quarter reflecting the latest improvements to our cost structure. The cost reductions implemented to date are expected to result in further reductions to our operating expenses in the second half of the year. We will continue to aggressively manage expenses while ensuring completion of key programs and support our fiscal year 2009 and beyond technology based sales.

Other income will be approximately $400,000. For Q2, we are projecting a loss in the range of $0.19 to $0.26 per share which includes an estimated $1.4 million of free tax stock based compensation expense equivalent to $0.05 per share as well as an anticipated net tax benefit.

Kevin will now summarize our business. Kevin.

Kevin Fairbairn

In summary, the underlying drivers of demand for increased storage are intact. As the economy recovers, we expect hard drive growth will resume and meet the new systems orders. Our hard drive customers are today in active talks for about some technology buys as evidenced by our recent new order. The rapid mix shift away from desktop and towards mobile computing will help to drive the retirement of legacy systems over the next couple of years. Patterned media is now within site and offers us a significant future business opportunity. Business momentum is strong in our Photonics business driven by multiple military programs moving into production, further program awards that will lead to production down the road and increasing traction and product sales into commercial markets.

We have aggressively trimmed our cost structure which in the short term will help us manage our cash and when the equipment business recovers will drive great levels of operational efficiency and profitability. This completes the formal part of our presentation. Operator, we are ready for questions.

Question-and-Answer Session

Operator

(Operator's instruction) Your first question comes from the line of Rich Kugele - Needham & Company.

Rich Kugele - Needham & Company

I got a few questions. I guess first just on the equipment margins, usually when there is a lot of spares and upgrades as a percentage of the total for that side, the margins are higher. I understand that there was under utilization factor here but have you seen any degradation to the margins you get on those products? Was it just the under utilization?

Jeff Andreson

It is Jeff. The answer is yes, utilization was the biggest factor that drove the margins down. But included in the quarter, we also had some active deliveries that carry a little bit lower margin than other upgrade type of products.

Rich Kugele - Needham & Company

Do you expect to see the spares and upgrades business increase or remain at this type of level over the balance of the year?

Jeff Andreson

Spares, you would specifically…

Rich Kugele - Needham & Company

Well, or just the non-equipment, non-tool sales.

Jeff Andreson

Yes, we actually think that it will remain in similar levels. It might pop up and down a little bit but it should remain about that level.

Rich Kugele - Needham & Company

Okay. Kevin, as you start to rollout patterned media here, what have you seen from the Nova? I know that they had some type of solution, but is it also starting to see any traction and if you can talk about the competitive differences between the products?

Kevin Fairbairn

Okay, so very early on, we made the decision that we will not going to bring out R&D tools for R&D’s sake that we will going to focus on tools which could be moved eventually into production. The Nova approach was to take technology from their head business where productivity is measured in 10 or 20 wafers an hour and try and use that technology for media R&D. Once you can get results on the disc, it is nowhere close to being a solution for manufacturing. So we took a different approach. We believe we needed to have productivity similar to what we do on our media deposition and we developed an Etch technology which comparable with that to date, to our knowledge, Nova has not done that.

Rich Kugele - Needham & Company

And this is a new customer you wrote in there that it was new for 200 Lean. Is it new for 250 B as well? Is it an outright new customer?

Kevin Fairbairn

No, this customer already had some of our legacy tools.

Rich Kugele - Needham & Company

Okay and then I guess the industry is facing potentially some conflicting priorities here where, if we are right about the 2 ½ inch tightness later this year or early next year happening, then I guess with the same time as patterned media, is there a way of doing both this way or do you expect them to run on separate CapEx plans?

Kevin Fairbairn

The patterned media, you will need two systems. You have one system that puts all the magnetic layers down and then you will then go through the [32.43]. It will come back into a second system where you will both have etching of the resistant of the layers and then subsequent deposition to [plainarize_32.53] that surface. So, there will be two systems required.

Rich Kugele - Needham & Company

Have the customers indicated their concerns about industry tightness on media?

Kevin Fairbairn

We have not had that feedback. Their observation is coming from the fact that we see our legacy tools our underutilized and all the new tools are fully utilized.

Rich Kugele - Needham & Company

Okay and then I guess just lastly Jeff on the breakeven at this new cash level that you are taking about, what would be the in a straight line format, what will be the type of gross margin you would expect on a quarterly basis to get to that breakeven?

Jeff Andreson

On a straight line basis?

Rich Kugele - Needham & Company

Yes.

Jeff Andreson

Probably high 30s.

Operator

(Operator's instruction) Your next question comes from the line of JD [34.00] - CRT Capital LLC.

Unidentified Analyst - CRT Capital LLC

First question is on the patterned media system. What is the typical qualification cycle for that and would revenues be recognized this year? Is that something that could take a while?

Jeff Andreson

It is Jeff. Yes, it probably will take about a quarter we think right now. So, it could certainly it will revenue on 2009.

Unidentified Analyst - CRT Capital LLC

Okay and then the second question is on the semi Etch tools that had been out there and you talked about qualification this year, those are currently still carried in inventories, is that correct?

Jeff Andreson

That is correct.

Unidentified Analyst - CRT Capital LLC

And because they are sort of R&D/qualification tools, are we going to take ahead on gross margin on those?

Jeff Andreson

The initial, we have already said the very tool that comes out will be lower gross margin and our goal of being 45 to 50, so yes.

Unidentified Analyst - CRT Capital LLC

Okay and to your mind is there, once we get qualification, does that lead to orders or given the sort of disastrous semicon equipment market that you are going to continue play with them for a while until the economy gets better?

Kevin Fairbairn

We assumed all along that we will get no revenue from that system until 2010 and a lot of people are predicting that the recovery will start in 2010 so the goal has been to get qualified in 2009.

Unidentified Analyst - CRT Capital LLC

Okay, so really it is not going to, it will be late this year where we will have to make a determination where the state of capital equipment spending is.

Kevin Fairbairn

Correct.

Operator

(Operator's instruction) It appears that there are no questions at this time.

Kevin Fairbairn

Okay. Well, thank you for joining us today and we look forward to updating you in our next call on our Q2 results. Goodbye.

Operator

That concludes today’s conference call. You may all 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!

Source: Intevac Inc. F1Q09 Earnings Call Transcript
This Transcript
All Transcripts