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

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

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

Richard Kugele - Needham & Company, LLC, Research Division

Intevac (IVAC) Q1 2013 Earnings Call April 29, 2013 4:30 PM ET

Operator

Good day, and welcome to Intevac's First Quarter 2013 Financial Results Conference Call. [Operator Instructions] Please note that this conference call is being recorded today, April 29, 2013. At this time, I'd 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 first quarter of 2013, which ended on March 30. In addition to outlining the company's financial results, we will provide guidance for the second 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 first 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-Q, as well as comments regarding future events and projections about the future financial performance of Intevac. These forward-looking statements are based upon our current expectations, and actual results could differ materially as a result of various risks and uncertainties relating to these comments and other risk factors discussed in documents filed by us with the Securities and Exchange Commission, including our annual report on Form 10-K and quarterly reports on Form 10-Q.

The contents of this April 29 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 first quarter. Jeff?

Jeffrey Andreson

Thanks, Claire. First off, I'd like to recap the cost-reduction plan we executed on February 1. The plan will result in annual reduction of $12 million to $14 million in total expenditures. The cost of implementing the plan was approximately $500,000 and was principally severance costs. The plan also includes the decision to divest our Raman Instrumentation product line to focus on the larger military markets for our digital night vision products. The asset sale was completed in late March.

Consolidated first quarter revenues totaled $13 million, within our guidance of $12.5 million to $15 million. Equipment revenue totaled $5.4 million and consisted of service and upgrade revenues. Photonics sales of $7.6 million included $4.1 million of contract research and development. The high end of guidance had included one LEAN SOLAR system shipment, which did not occur as the customer made the decision in March to exit the solar business.

Equipment gross margin of 22.4% declined as expected from the fourth quarter. This decrease in gross margin was a result of the lower level of upgrade revenues and lower factory utilization, partially offset by the savings from our cost-reduction activities. Photonics gross margin of 30.4% decreased from the fourth quarter, driven primarily by lower yields on one of our low-light sensor products and a mix of lower margin technology development contracts completed during the quarter. Q1 operating expense of $12.3 million was slightly below our guidance of $12.5 million to $13 million and included approximately $300,000 in severance payments. The decrease was driven primarily by our cost-reduction actions. We expect to realize the full quarter savings of the headcount reductions in Q2.

The operating loss includes an approximate $200,000 loss associated with the sale of the Raman Instrumentation product line and its associated assets. The structure of the sale includes a revenue earn out of up to an additional $1 million over the next several years, which will be recognized as earned in the future. Our Q1 net loss was $8.3 million or $0.35 per share. On a non-GAAP basis, our net loss was $7.6 million or $0.32 per share, which excludes the impact of the sale of the Raman Instrumentation product line and the severance costs associated with our cost-reduction plan. Our backlog was $35.2 million at quarter end and included 1 Solar system. Since the end of the quarter, we received an order for 2 200 Lean systems.

We ended the quarter with cash and investments of $93.6 million, equivalent to approximately $3.94 per share based on 23.8 million shares at quarter end. Cash and investments increased by $1.5 million, principally due to the conversion of working capital and the proceeds from the Raman divestiture.

Capital expenditures were $300,000, and depreciation and amortization was $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. On our last call, I talked about the transition currently underway in the hard drive industry and that demand is shifting from PC-based storage to cloud-based storage. Over the past 2 years, the expected continued growth in hard drives did not occur, and in fact, the total available market declined from around 170 million drives in Q3 of 2011 to 135-million shift in Q1 of this year. Various explanations have been offered, including the effect of the Thailand flood and the impact of solid-state storage. Then it was postulated that the underlying cause of the decline was that fewer hard drives were being purchased for PCs, and more were being purchased for cloud-type data storage, large data sets.

The typical hard drive that goes into a PC has far more capacity than the user needs, but the hard drive that goes into a data center is typically sized to fit the storage capacity then needed. And it is this transition that has caused the discontinuity in the total storage required by the market. Thus, a reduction in drive shipments has occurred even in the face of increasing amounts of data being stored.

The industry results over the most recent quarters lend support to this view. In Q1, PC units shipped fell 12% from the fourth quarter of 2012. Yet hard drive shipments were essentially flat. We believe in that quarter that the average number of disk per drive will show an increase. One major drive company reported 35% year-over-year increase in gigabytes per drive. We also believe this validates that in the ongoing race between total data stored and aerial density improvements, total data storage is winning. What this means is that as time goes on, more and more disks will be required to meet the market needs. Some estimate that nearly 6,000 exabytes of storage will be shipped per year by 2020, more than 10x the current level. With aerial density growing at around 20% per year, this means around twice as many disks will be required by then.

So overall, the industry metrics witnessed over the last quarter have validated each of these trends, the increased demand for high-capacity drives, slowing aerial density, increasing disk per drive and a decoupling of the PC unit demand from disk unit demand, and have not changed our outlook for the year or our optimism for media capacity needs beginning in 2014.

Moving on to Solar. During the quarter, we received a -- we achieved a major milestone on our implant business but also experienced a setback. And as we said in the last conference call, we received the first production order for a Solar implant system. It shipped in February, is currently in qualification, and we plan to complete this qualification this quarter. This order was a direct result of demonstrating the efficiency gains we had committed to our customer. We expect additional system orders from this customer, as they deploy additional capacity both this year and next.

In March, the second customer that was evaluating our implant system decided to exit the solar business. While this is a setback, attrition like this must happen, and the excess capacity situation existing today must be reduced for the solar industry to become viable again.

The efficiency gains we have achieved have proven that we have a compelling argument for replacing existing diffusion building equipment with ion implanters. The payback for our implant system is just over a year. Today, there are approximately 16 gigawatts of monocrystalline capacity using the diffusion process today. Retrofitting this capacity would require about 200 systems. So the opportunity is very large. The challenge is our customers' access to capital.

Now turning to Photonics. During the quarter, we had a very successful flight test for our Apache camera and the Joint Strike Fighter camera. These tests demonstrate that our digital solutions operate at or better than the performance level of existing analog solutions. We expect to complete the negotiations of the first large production order for the Apache helicopter program this quarter, which, as we have said, will drive our expected step-function growth in 2014.

A lot's been said regarding the impact of sequestration on the military budget. Today, we have not experienced any significant negative impact, but we remain cautious and monitor it closely. Our Apache night vision program has not been impacted.

Now to summarize, we are seeing the transition of the hard drive industry from a PC unit-based business to a cloud byte-based storage business. We expect 2014 to be the year when disk capacity becomes tight, driving the need for new systems. Our Solar implant has shown that it's ready for production, but significant orders are dependent on improving conditions in the industry. 2014 should be a significant growth year for Photonics, as we begin to deliver the Apache camera.

I'll now turn the call back to Jeff to discuss our guidance for the second quarter and provide our outlook for 2013.

Jeffrey Andreson

Thanks, Norm. We are projecting consolidated Q2 revenues of $14 million to $16.5 million, consisting of service and upgrades in our hard drive business plus 1 Solar system at the high end of the range. We expect second quarter gross margin to be in the range of 26% to 27% or flat to down slightly from the first quarter. Operating expenses are expected to be in the range of $11.8 million to $12.3 million. Other income and expense will be approximately $100,000. This excludes any impact associated with foreign exchange. For Q2, we are projecting a net loss in the range of $0.31 to $0.33 per share.

Turning to the full year 2013. We currently expect total revenue for the year to be 5% to 10% lower than 2012, principally driven by a lower level of Equipment upgrades that are not expected to be completely offset by the incremental revenue for our new Solar products. We expect 2 to 3 hard drive systems for the year. Two of which we have in backlog today. All of which will ship in the second half. We continue to expect limited growth in our Photonics business this year with incremental revenues in the core imaging business, offsetting the revenue reduction associated with the sale of the Raman Instruments. We continue to expect Photonics to be profitable for the year, with 2014 being an inflection point for significant revenue growth, as we begin shipments for the Apache program. We expect our operating expenses to be in the range of $44 million to $45 million, down about 25% from last year. We expect to significantly reduce our non-GAAP operating loss, as well as reduce our cash burn by approximately half as compared to 2012.

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

Question-and-Answer Session

Operator

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

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

2013, did I miss the margins? Or are you giving margin guidance for the entire year? It won't be around this quarter's margins?

Jeffrey Andreson

I have and it'll be better than this quarter's margin, but I didn't include that in there.

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

Okay. One thing that we agree with, it's the capacity, as you heard from Western Digital, I think, Seagate's even saying their capacity has increased more than Western Digital's. And that, with the growing number of drives going to the cloud, it makes it hard. It's hard because we know that the TAM's going to be about 135 million units again this quarter, and installed capacity, drive production capacity is around 190 million. But it should be lower for the -- in terms of the capacity adds for your tools because of those 2 factors I just mentioned before. I know Hutchinson's telling us for every 1/10 increase in heads per drive, it increases suspension assemblies roughly 3%. Is there any guidance you can give us to get a better feeling? Because, like I said, all we have to go by is roughly what we -- what the TAM is for this quarter and what we know the capacity is. And we're assuming that the capacity for equipment additions in terms of number of drives produced will be less then, because of the factors I previously mentioned.

Norman H. Pond

Well, we try to follow this by looking first at the TAM, which is the historical number everybody's looked at. But then the next thing we do is quickly look at the disks per drive, and we also, of course, look at the number of gigabytes shipped. And from all that, the way we read the tea leaves is that things are headed in the right direction and more disks are going to be required next year.

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

So would I be too off by ballpark that the -- with these factors we just discussed that we'd up around 150 million drives with a higher capacity where you start adding capacity for your tools? Would that be in the ballpark, 150 million, 160 million?

Norman H. Pond

Well, if you look at it today, we think that the disk per drive, end of this year, is going to be like 1.85 billion. So at 140 million drives per quarter, you get 560 million per year or about 1,050,000,000 disks. And in our estimates, we think the industry capacity is 1.1 billion, maybe 1.2 billion, somewhere in that ballpark, so it doesn't take a lot of growth in disks to reach the capacity limit.

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

Okay. Finally, are you -- is it possible to break out how much cash you got for the sale of the Raman division? You said it improved your cash flow by $1.5 million, but that was in conjunction with another factor.

Jeffrey Andreson

Yes, it was about 1/3 of that.

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

About $0.5 million, okay.

Jeffrey Andreson

Yes.

Operator

Our next question comes from the line of Rich Kugele with Needham & Company.

Richard Kugele - Needham & Company, LLC, Research Division

A few questions. So in terms of the March quarter, how much savings did you actually get from the restructuring?

Jeffrey Andreson

It wasn't a whole lot. It was just a little bit, a few hundred thousand, mainly because severance was offset by some of the timing of the reduction.

Richard Kugele - Needham & Company, LLC, Research Division

And as we model the full year impact, is there a rough breakdown between R&D and SG&A?

Jeffrey Andreson

Yes, actually, Rich, I might have to get back to you on that, but I'm going to -- probably, R&D is going to be the fair brunt of it certainly. It's probably 2/3 of it.

Richard Kugele - Needham & Company, LLC, Research Division

Okay. That's helpful. And then I was interested in your comments about the spares and upgrades being less. What are the customers doing with their equipment that is enabling them to not need spare parts or upgrading some of these tools? Some of which are quite old, right?

Jeffrey Andreson

Yes. Well, I would say we don't expect our spares and service business to be down. Matter of fact, we're growing that a bit on some incremental, I'll call it routine maintenance. Although, that's at a bit of a lower margin. It's really in the upgrades. Last year, we did a very, very significant, almost site-wide upgrade at one customer, and we just haven't been able to replace it. We had some in our initial visibility that just doesn't seem to materialize yet this year. So those are the driver, but it's not the service and spare parts. Those are kind of holding up.

Richard Kugele - Needham & Company, LLC, Research Division

Okay. And then is it fair to say that the 2 orders that you have gotten for Leans, that those are for replacements rather than capacity?

Jeffrey Andreson

We don't know. I mean, they obviously can do production and R&D, and the customers haven't really shared all their plans with us on those.

Richard Kugele - Needham & Company, LLC, Research Division

Okay. Then, just lastly, obviously, you did see within the quarter an opportunity to divest one piece of your product lines. Are there any other areas that you -- did you -- would you expect further strategic reviews to take place?

Jeffrey Andreson

No.

Richard Kugele - Needham & Company, LLC, Research Division

Okay. So right now the go-forward strategy is to just reduce the cash burn as much as possible, get to 2014 and see if there's a rebound in at least the broader demand.

Jeffrey Andreson

Correct.

Operator

[Operator Instructions] There are no further questions at this time. I'll now turn the call back over to Norman Pond.

Norman H. Pond

Okay. We want to thank you for joining us today. We look forward to updating you on our -- the next call on our second quarter results. Goodbye, and 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!

Source: Intevac Management Discusses Q1 2013 Results - Earnings Call Transcript
This Transcript
All Transcripts