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

Intevac (NASDAQ:IVAC)

Q2 2013 Earnings Call

July 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 and Chairman of the Board

Wendell T. Blonigan - Chief Executive Officer and President

Analysts

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

Richard Kugele - Needham & Company, LLC, Research Division

John D. Abouchar - GRT Capital Partners, LLC

Operator

Good day, ladies and gentlemen, and thank you for standing by, and welcome to the Intevac's Second Quarter 2013 Financial Results Conference Call. [Operator Instructions] Please note that this conference call is being recorded today, July 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 second quarter of 2013, which ended on June 29. In addition to outlining the company's financial results, we will provide guidance for the third quarter of 2013 and our current outlook for the full year.

On today's call are Norm Pond, Chairman; and Jeff Andreson, Chief Financial Officer. Jeff will start with a review of the second quarter results, and then Norm will introduce our new President and Chief Executive Officer and then 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 July 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 second quarter.

Jeff?

Jeffrey Andreson

Thanks, Claire. Consolidated second quarter revenues totaled $17 million, above our revised guidance of $16 million to $16.5 million as a result of a late quarter equipment upgrade shipment. Equipment revenue totaled $9.2 million and included 1 Solar Implant system as announced late in the quarter. Photonics sales of $7.8 million included $3.7 million of contract research and development revenue.

Equipment gross margin of 14.8%, which declined from the first quarter and was below our guidance due to a $500,000 reserve related to a return of the Solar Implant evaluation system shipped in 2002. As we discussed on our last call, this customer made a decision to exit the Solar business earlier this year.

In our Photonics business, gross margins increased from the first quarter to 31.7%, primarily as a result of improved yields on our low-light sensor.

Q2 operating expense of $10.8 million declined 12% from the first quarter, reflecting the savings from our cost-reduction actions and were below the low-end of our guidance range due to further cost reductions made during the quarter.

Our operating loss includes about $200,000 in employee-related restructuring costs. Our Q2 net loss was $6.4 million or $0.27 per share. On a non-GAAP basis, our net loss was $0.26 per share, which excludes the impact of the severance costs associated with the restructuring.

Our backlog was $78 million at quarter end, more than doubling from Q1. Equipment backlog of $29 million included 3 200 Lean systems and no Solar systems. Backlog in our Photonics business was $48 million.

We ended the quarter with cash and investments of $88.3 million, equivalent to approximately $3.70 per share based on 23.8 million shares at quarter end. Cash and investments decreased by $5.3 million, primarily due to operating loss.

Capital expenditures were $534,000 and depreciation and amortization was $1.1 million for the quarter.

I'll now turn the call over to Norm to provide an update on our businesses.

Norm?

Norman H. Pond

Thanks, everyone, for joining us today. Two weeks ago, Wendell Blonigan joined us as Intevac's President and CEO. We're very pleased to have him here. He's sitting in on this call and he will be handling the Q3 call in October.

Overall, we're pleased with the accomplishments in Q2, and particularly encouraged by the strong order growth leading to a 3-year high in backlog. However, the equipment markets that we serve, hard disk drives and solar, continue to have production capacity that is well in excess of current market requirements. That was changed in order for the demand for our equipment to significantly increase. The situation improved in Q2, more is needed.

In the hard disk drive area, we received orders for 3 systems during the quarter, an indication that the industry is still investing in manufacturing and structure. Jeff will discuss the timing of the shipment of these tools.

As I have talked about previously, the transition from a primarily PC-based storage market to a centralized or cloud-based storage market is taking place. In Q1 of this year, PC units declined about 11% year-over-year, yet HDD units shipped were flat and gigabytes shipped were up about 35%. This demonstrates the continued underlying growth and total data storage demand, as well as the effect of the shift to centralized storage.

While there is general agreement among industry forecasters that data storage requirements will continue to grow significantly, the rate and timing of the forecasts vary. A recent forecast predicts that exabytes shipped will grow from around 400 last year to 500 this year, and over 700 next year. And this increase of around 40% compounded annual growth is in the face of HDD units forecasted as being relatively flat. So it's bytes and not PC units that's driving the forecast for disk and equipment.

In the meantime, we will continue our focus on developing new upgrades and expanding our service and spares business for the installed base of over 200 systems, while continuing to support the roadmap -- the R&D roadmap for our customers.

Moving to Solar. During the quarter, we achieved a major milestone in our implant business, with the qualification of our first production Solar Implant tool. This was a competitive win with an Asian solar cell manufacturer. We expect this customer to add incremental cell production capacity. The timing is uncertain, but we expect additional systems through 2014.

The qualification process that we completed was quite rigorous. Our system is designed to process around 20 million cells per year, indicative of the significant volumes that the solar industry deals with. The qualification process included implanting over 800 wafers. These wafers were completed into cells and met the efficiency gains we had committed to. We will continue to work with this customer to further optimize the performance of this tool.

While we continue to believe that our opportunities in the solar market are very large, we expect the market conditions to remain difficult until the industry absorbs the installed capacity and improves cash flow.

Our strategy is to balance the level of investment and with the timing of the need for incremental capacity and we must be capable of supporting both the current and future cell technologies, such as PERC, PERT and back contact.

We have a rekindled inner [ph] recently in our PVD solar equipment related to the activity with these new cell technologies. As you may recall, the first 2 Solar systems that we shipped were PVD systems.

Now turning to Photonics. During the quarter, we announced a $27 million contract award to deploy over 500 digital night vision cameras on the U.S. Army's Apache helicopter fleet. This contract is directly with the U.S. Army and Intevac is the prime contractor for this program.

While the unique technology incorporated in the camera is Intevac's Electron Bombarded Active Pixel Sensor, or EBAPS, the camera system also includes sophisticated optics, electronics and image-processing software. This award has a significance beyond the size of the contract as it elevates Intevac to prime contractor status and establish us as a supplier of digital night vision systems, as well as our -- a supplier of our proprietary digital night vision sensors. We believe this will expand our access to the market for that type of equipment.

The Photonics backlog now exceeds $48 million, with this award representing 2 years of deliveries beginning mid next year. Prior to these shipments, the first production units will begin shipping in the fourth quarter of this year as a part of the $11 million we received previously. This award is a significant milestone being the largest order for our Photonics business, and also, we expect will be a significant catalyst to weighing future programs.

To summarize, we're encouraged with the uptick in orders for both Equipment and Photonics, as well as the positive drivers for revenue growth in 2014. In the near term however, we expect demand for our Equipment products to be constrained and we will continue to limit expenses accordingly.

I'll now turn the call back to Jeff to discuss guidance for the third quarter and full year.

Jeffrey Andreson

Thanks, Norm. We're projecting consolidated Q3 revenues of $18.5 million to $19.5 million, including 1 200 Lean hard drive system. We expect third quarter gross margin to be in the range of 32.5% to 33.5%, up from the second quarter. Operating expenses are expected to be in the range of $10.5 million to $11 million. Other income and expense will be approximately $100,000. This excludes any impact associated with foreign exchange impact.

For Q3, we are projecting a net loss in the range of $0.16 to $0.20 per share.

Turning to the full year, we currently expect total revenue for the year to be in the range of $71 million to $77 million. On the last call, we said we expected revenue to be down about 5% to 10% from 2012. This decrease from these levels is principally driven by lower equipment upgrades and 1 less solar system versus our view a quarter ago. We expect to revenue 2 to 3 200 Lean hard drive systems for the year, all of which we have in backlog today and scheduled to shift on the second half. There is always a risk to our customers rescheduling deliveries when they are scheduled late in the year, so the low-end of our full year outlook includes only 2 200 Lean systems.

We expect our Photonics business this year to be in the range of $30 million to $31 million and to be profitable for the year. We expect our gross margin to be in the range of 29.5% to 31%, and our non-GAAP operating expenses to be in the range of $43 million to $44 million, down about 25% from last year.

Our non-GAAP loss per share is expected to be in the range of $0.76 to $0.87.

We expect cash and investments to be down around $12 million to $13 million for the year -- from the year end 2012, on track with our target of reducing the cash burn by 15% as compared to 2012.

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

Question-and-Answer Session

Operator

[Operator Instructions] And our first question will come from the line of Mark Miller with Noble Financial.

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

Jeff and Norm, I was just wondering if you could maybe just expand a little on the solar opportunity. I had a recent meeting with the Chairman of one of your competitors, and I know Amtech has put 5,000 solar diffusion furnaces in the field. Now you won't be replacing them, but if you extrapolate from their share, that's well over 12,000 units that are required. He was excited what he thought would be a ramp in that business in the second half of next year. I don't know if your visibility's that good. But the other thing I'm just wondering, if you could discuss the competitive situation and the competitive advantages you might have in that field.

Norman H. Pond

Okay, Mark. This is Norm. We certainly hope his outlook for next year turns out to be true. I think we read the same literature that everybody else does. And it's clear today that the capacity of supply-demand is out of balance. I think it's moving to correct itself. I don't know if it will be next year or the following year. In terms of the competitive situation in implant, which is what we primarily talked about, we have 2 competitors, the one you mentioned and a much larger one. We have respect for both of them. We're doing our best to try and come up with the best machine at the lowest cost.

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

Just to get back, again, these tools are going to be more -- the reason people are investing in implanters is basically because they need the extra efficiency to go over 20%. So it's more, like I said, that's the way I viewed it and I'm just wondering what your thoughts are. This is not so much capacity but rather than capacity -- current but capacity coming from next-generation cells, and the question would be when do these next-generation, higher-efficiency cells start to ramp?

Norman H. Pond

Yes. Well, Mark, I think we've mentioned in the past that we are looking at this market segment you talked about, namely new cells with new technology. But we also were looking at the possibility of retrofitting some existing lines that use diffusion. That has not materialized to the degree that we envisioned, and we're now putting a greater emphasis on the new technology, which is next year and beyond.

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

These are N-type cells?

Norman H. Pond

Yes.

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

And then final question for me, cash flow from operations.

Jeffrey Andreson

Our cash flow from operations this quarter was down about $5 million, so it's cash burn. It's primarily the operating loss.

Operator

[Operator Instructions] Our next question will come from Richard Kugele with Needham & Company.

Richard Kugele - Needham & Company, LLC, Research Division

Welcome, Wendell. Just a couple of questions for me. First, in terms of the $48 million of backlog on the Photonics side, can you just talk about the timeframe that you're defining that backlog?

Jeffrey Andreson

Yes. We put -- anything that we put in backlog, we deem as shippable. So the Apache, for instance, starts in mid-'14 and goes for 2 years beyond that. And it's probably split about even between the 2 years, maybe a little less than the first year. So you can take that off as shippable. But the other stuff extends -- most of that extends within a year. That's the longest one in that backlog.

Richard Kugele - Needham & Company, LLC, Research Division

Okay. And should we assume that the margins baked -- for that backlog in aggregate are more in the 30s than in the 20s?

Jeffrey Andreson

Yes. I think that they'll -- certainly, with volume, we'll see some increase in margin. But as we've said, we think we'll be kind of between this both 30s and mid-30s, depending on the volume of products versus programs, at least for the next 18 months or so.

Richard Kugele - Needham & Company, LLC, Research Division

Okay. And then in the quarter you just reported, just to go back onto the Equipment margin again. If we were to back out that $0.5 million hit from that solar system in 2012, your margins would've still been down sequentially in the Equipment business. Is that just due to the lower upgrades?

Jeffrey Andreson

Yes. I mean, it's 2 factors. The lower upgrades. This is a lower level upgrades we've seen historically as well, about 5 margin points is the reserve. And then we're building more service business each quarter, so that comes with lower margins as well. And so, we saw some of that in this quarter. But kind of apples-for-apples margins, the biggest hits versus prior years is a little bit worse factory absorption, and then just the lower margins on the softer [ph] solar tool plus the reserve.

Richard Kugele - Needham & Company, LLC, Research Division

Now my last question is just about the reserve again. So if -- what are the conditions for reversing that reserve?

Jeffrey Andreson

I mean, I think I had booked an estimate that we don't think we'll need to reverse. If we thought we were going to reverse it, we probably wouldn't have booked it. So I think we'll want to utilize it. And it's a tool that's been in production, so we probably won't get a similar ASP to a brand-new tool, and it needs some upgrades.

Richard Kugele - Needham & Company, LLC, Research Division

So you're going to take it back in-house, fix it up and sell it again?

Jeffrey Andreson

Right.

Operator

Our next question comes from J.D. Abouchar with GRT Capital.

John D. Abouchar - GRT Capital Partners, LLC

On the hard drive side, going back a year or so ago, Intel made the argument that while storage on the PC was going away, it was going into the cloud where it had to be mirrored 5x. So really, it would be an increase in storage, and clearly, they were dead wrong that the efficiency of storing in the cloud far exceeds the unused capacity on PCs. But at some point, we sort of get to an equilibrium and then we start to see demand pick up again. What are your thoughts on that? Because clearly, it's hurt you and they were wrong and we just sort of have to work through this shift from PC-based to cloud-based storage. If you could just sort of elaborate on that, it'd be helpful.

Wendell T. Blonigan

Well, I think your view of history is the same as ours. We think the industry is working through the discontinuity, and I think, again, the slope of the curve, once we get to this continuity, is going to be the same. I think it's very difficult to know how far along we are. I think we're closer to the end than the beginning. But when it pops through, I don't know.

John D. Abouchar - GRT Capital Partners, LLC

And on the installed market, they've sort of -- unfortunately, you built products that were too good and they've lasted a lot longer than we all thought their useful life would be. Is there an inflection point where they just finally, ultimately, the 250bs wear out and we have to replace them?

Norman H. Pond

Well, I can tell you what our customers have said, and that is that they think this is the last important capacity point that they'll be able to use those machines, and we hope they're correct.

John D. Abouchar - GRT Capital Partners, LLC

Okay. And then finally, Norm, you made a comment on the solar PVD that I just didn't fully grasp what you were saying. Could you elaborate on that?

Norman H. Pond

What was the point?

John D. Abouchar - GRT Capital Partners, LLC

That you said it was shuttled but you were seeing some interest. I thought that's what you said?

Norman H. Pond

Yes, yes. The first 2 tools that we shipped to the solar industry were sputter machines, PVD machines. And that's been quiet. Recently, we've had expressions of interest in that technology from customers that are looking at using sputtering in future new cell technologies.

John D. Abouchar - GRT Capital Partners, LLC

Okay. But that would have -- would that have to be more R&D and investment on Intevac's part? Or is that something you could sort of get NRE [ph] for?

Norman H. Pond

Well, the exact requirements aren't clear yet, so we can't assess the amount of change required. We expect there'll be some, but we don't think it will be significant.

Operator

[Operator Instructions] Presenters, I am showing no additional questioners at this time. I'd like to turn the call back over to Norman Pond for any additional or closing remarks.

Norman H. Pond

Okay. We'd like to thank you for joining us today. I've enjoyed speaking with you on the last 3 conference calls. And at the same time, I'm pleased to be handing the reins to Wendell for our next call, on our third quarter results. Good afternoon.

Operator

Thank you, presenters, and thank you, ladies and gentlemen. This does conclude 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 Q2 2013 Results - Earnings Call Transcript
This Transcript
All Transcripts