Intevac Inc. Q4 2009 Earnings Call Transcript

Feb. 2.10 | About: Intevac, Inc. (IVAC)

Intevac Inc. (NASDAQ:IVAC)

Q4 2009 Earnings Call Transcript

February 2, 2010 4:30 pm ET

Executives

Claire McAdams – IR and Strategic Initiatives

Kevin Fairbairn – President and CEO

Joe Pietras – VP and General Manager, Intevac Photonics

Jeff Andreson – EVP, Finance & Administration, CFO, Treasurer and Secretary

Analysts

Bill Ong – Merriman

Rich Kugele – Needham & Company

Kevin Hunt – Hapoalim Securities

Aaron Rakers – Stifel Nicolaus

J.D. Abouchar – GRT Capital Partners

Operator

Good day everyone and welcome to the Intevac fourth quarter and full-year 2009 financial results conference call. Please note that this conference call is being recorded today, February 2, 2010.

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 and full year 2009, which ended December 31.

In addition to outlining the company’s financial results for the quarter, we will provide guidance for the first quarter and an overview of our current expectations for 2010.

On today’s call are Kevin Fairbairn, President and Chief Executive Officer, Jeff Andreson, Chief Financial Officer and Joe Pietras, Vice President and General Manager of Intevac Photonics.

Before turning the call over to Kevin, I’d like to remind everyone that information provided in today’s conference call contains forward-looking statements. During the course of this conference call we will comment upon future events and make 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 report on Form 10-Q. The contents of this February 2 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.

I’ll now turn the conference call over to Kevin Fairbairn. Kevin?

Kevin Fairbairn

Thank you. Good afternoon and thank you for joining us today. Our results for the fourth quarter met our guidance on revenue and exceeded guidance on gross margin and earnings per share.

Revenues totaled $34.2 million, which included three 200 Lean Systems. Net income was $2 million or $0.09 per share and included equity-based compensation expense equivalent to $0.02 per share.

For the full-year, revenues totaled $78 million and our net loss was 10.1 million or $0.46 per share and included equity-based compensation expense equivalent to $0.14 per share.

As we discussed our results for the fourth quarter and outlook for 2010 we are in a dramatically different position that we were at this time last year. 2009 started out as one of the most challenging environment for the hard drive industry it has seen in its history, yet demand for hard drives rapidly recovered exceeding all estimates for the year.

As we look back on 2009, we are pleased with the positive progress we achieved in a number of areas. Thus, we took early and rapid steps to resize our cost structure ahead of the industry’s downturn.

We significantly cut expenses and minimized losses and cash burns, while creating incremental revenue opportunities and maintaining a steadfast focus on bringing new products to markets that will drive future growth.

Importantly, we continue to establish our company as the equipment technology leader in the hard drive media market while also expanding our sales markets in the photonics and sale of photovoltaic markets.

We shipped the industry’s first high productivity tools to Patterned Media development as well as an R&D System featuring our latest deposition technology for advanced planner media.

We launched our LEAN SOLAR tool in mid-2009 and began working with multiple customers for high efficiency, low-cost solar fixed solutions. We began initial production ramps for two significant photonics programs and won several key contract awards for our digital night vision products as well as continue to expand and grow our Raman instrumentation business.

In the fourth quarter, we once again demonstrated our operational capabilities as we continued our discipline in managing cost and expenses. This led to our return to profitability on revenues, that is $4.2 million, which was within guidance but included just three 200 Lean Systems. The recognition of revenue expected on the full system was delayed to current quarter as Jeff will discuss in his remarks.

As we look forward to 2010, we see new MS drivers from growing growth in our hard drive business. The market demand for hard drives is robust. Strong growth is expected in 2010 estimated in the neighborhood of 15%. There is continued strong demand from the consumer sector driven by attractively priced PCs and increased demand from emerging economies. There is also increasing demand in the commercial sector driven by enterprise, storage and a corporate PC fresh cycle driven by Windows 7. This growth in hard drive shipments cannot happen without more media manufacturing capacity coming online.

Media manufacturing capacity in the second half of 2009 was severely constrained. Our customers struggled to keep up the demand and effectively had not buffer stock.

In recent conference calls, we heard capacity utilization rates above 95%, which are problematic levels for our customers. The pressures on capacity in 2009 were closed by a combination of factors. There was very limited investment for new systems. There were a significant number of legacy tools taken offline either permanently or cannibalized to rebuild systems with more process chambers. The industry will have to add capacity in 2010, firstly they will need systems to bring capacity utilization rate more sustainable yet still quite at high levels. There will be ongoing retirements of legacy systems that cannot support competitive magnetic media technologies and lastly, they need more systems for growth forecast for hard drive shipments.

We estimate our customers will have to add over 20 production systems with additional upside dependent on how many legacy tools are retired. At this point, we have a backlog of sixteen production systems with eight announced today. Some systems are of fewer capacity adds and some are replacements for legacy tools. Additionally, R&D systems will be incremental and we currently have two systems in backlog.

In spite of the positive indicators for the hard drive shipments, caution has remained a norm for our customers consistent with our comments through 2009. Our customers are determined to limit their capacity additions to what will be just enough to support drive demand this year and bring this new capacity online just in time. Customers need to have new capacity online to support traditional Christmas season as well as the first quarter Chinese New Year season. This means that we expect to ship the majority of systems in Q2 and Q3 making for a very lumpy year in terms of equipment revenues.

Our recent order activity has been primarily driven by our hard drive customers. We’re also seeing further growth opportunities in our emerging equipment of photonics business.

Luke Marusiak rejoined the company in January and will be the EVP and General Manager for our Emerging Equipment business. We are pleased to have Luke back on the team and look forward him driving these new opportunities. In the solar voltaic industry, we introduced in 2009, a high productivity solution for six Lean server and are working with multiple customers to address the industry’s need for high efficiency modules at a lower cost per watt than what is currently available in the market.

We are working towards shipping our first solar system within the next couple of quarters and hope to recognize revenue on at least one system in 2010. There is some risk here as we are still optimizing the process hardware and some of our customers are still raising capital.

We’ve continued to fine-tune our Lean semiconductor product with our alliance partner, TES as they are actively demonstrating the systems to those large customers in the South Korean market.

I’ll now turn the call over to Joe Pietras to talk about another great quarter for our Photonics business. Joe?

Joe Pietras

Thank you, Kevin. Intevac Photonics revenues were 7.3 million in fourth quarter growing 6% quarter-over-quarter and 61% year-over-year. We matched the record levels of orders achieved in Q3 and exited the fourth quarter with a record level of backlog. This growth has been driven primarily by our military digital night vision business, our military Long Range Target Identification or LIVAR camera business and our handheld Raman Instruments business.

In our military digital night vision business, we began initial production deliveries of our digital camera module to Sagem, our NATO customer during 2010, we expect to receive higher volume production orders and will continue to ramp our production capacity to meet Sagem’s growing needs.

In the domestic military night vision market, we are very pleased to announce the award of a new key contract we received during the fourth quarter. This contract is for the evaluation of our digital night vision camera as a replacement for analog night vision sensors within an existing U.S. military avionics application.

We were awarded this contract in head-to-head competition and if our camera is deployed this application can represent approximately $25 million in revenue over the next six years. This contract is a prime example of the growing interest we are experiencing for our digital night vision products and of our business strategy to obtain entry onto major military platforms.

In our LIVAR camera business, we continue to deliver production quantities during the fourth quarter against a multi-million dollar order for an airborne application.

We also received initial funding for a multi-million dollar follow-on production order, which will extend our backlog for this application well into 2010.

In addition, we received an order for our LIVAR camera for a second airborne application, which we expect to lead to an initial production order during the latter part of 2010. The opportunity represented by these two applications is estimated at over $45 million over the next 10 years.

In our Raman instruments business, where our focus is on handheld portable instruments for materials identification, the order pipeline continues to grow within our target markets.

In particular, in the chemical, biological and explosives threat detection market. We were awarded two contract awards over a major competitor for the development of handheld Raman instruments that incorporate our core infrared sensors to enable the detection of critical threat materials.

To sum up, in our military business, we continue to make significant progress in winning orders and new contract awards that demonstrate penetration of our digital night vision products and LIVAR cameras or our major military platforms that have significant potential.

In our commercial business, we continue to see growth in our handheld Raman instrument target markets. In all, we expect our photonics business to grow approximately 30% in 2010.

I will now turn it over to Jeff to discuss our financial results for the fourth quarter and our outlook for the first quarter and full year 2010. Jeff?

Jeff Andreson

Thank you, Joe. Consolidated fourth quarter revenues totaled $34.2 million within our guidance of 34 to 36 million. Equipment revenue totaled 26.9 million included three 200 Lean Systems recognized in the quarter. The remaining system included in our guidance was scheduled for acceptance late in Q4 and has been delayed until Q1 of this year but the shortfall in system revenue being mostly offset by increased revenue from technology upgrades.

Photonics sales of 7.3 consisted of 4.6 million of contract research and development and 2.7 million in product shipments. Q4 consolidated gross margin of 44.6% exceeded the high end of our guidance of 41.5.

The equipment gross margins improved from 48% to 49% sequentially due to higher sales volume partially offset by a higher mix of system revenues and exceeded our guidance as a result of the increased shipments of technology upgrades in the quarter.

As anticipated, photonics gross margins decreased to 29%, reflecting the initial higher cost as we begin to ramp to high-volume production for our NATO customer.

Q4 operating expenses declined to 11.2 million and we’re below our guidance of 12.5 million, driven primarily through our actions to tightly manage expenses in light of the revenue risk within the quarter.

We recognized a tax expense for the quarter of $2.6 million. Our Q4 net income was $2 million or $0.09 per share compared to our guidance of break-even to $0.03 per share.

Net income included $546,000 of pre-tax stock-based compensation expense equivalent to $0.02 per share.

Our backlog was 73.8 million at quarter end, an increase of 21.6 million compared to 52.2 million at the end of Q3 and included a total of ten 200 Lean Systems. As of today’s call, our backlog includes eighteen 200 Lean Systems.

Now, I will discuss the balance sheet. We ended the quarter with cash and investments of $89.8 million or approximately $4 per share, which included a valuation allowance of $3.7 million associated with our auction rate securities investments. Excluding the impact of this adjustment, cash and investments decreased by $8.5 million from Q3 as a result of an increase in working capitals for our revenue growth.

Our investment portfolio at the end of the year included 66 million in student loan-backed auction rate securities. In Q4, $450,000 of these securities were called apart.

We continue to have liquidity access to these assets through our existing line of credit and do not anticipate borrowing as we have adequate cash to support the increased business levels expected in 2010.

In the fourth quarter, capital expenditures totaled 606,000 and depreciation and amortization totaled 1.5 million.

I will now provide guidance for the first quarter and the company’s current expectations for 2010. I’d like to remind you that historically our revenues from quarter-to-quarter can be very lumpy as our customers typically and to install new systems in the second and third calendar quarter of the year to support the peak levels of shipments in calendar quarter three and four. We are projecting consolidated Q1 revenues in the range of 26 to 33 million, which includes a range of one to two 200 Lean Systems.

We expect first quarter gross margins in the range of 41% to 42.5%, a decrease in gross margin percentage from the fourth quarter as a result of a lower mix of technology upgrades expected in the equipment business. Photonics margins will remain relatively flat to the fourth quarter as we continue to ramp volume and lower the cost of our high-volume night vision models to Sagem through the first two quarters of 2010.

Operating expenses are expected to be in the range of 13 to 13.5 million, the increase from Q4 is related to reinstatement of variable compensation programs and the normal seasonality of employee taxes in the first half of the year. Additionally, our fourth quarter results included short-term actions to reduce expenses, which will not reoccur in the first quarter.

Other income and expense will be approximately $200,000 excluding any impact associated with any changes in the credit ratings of our auction rate securities or foreign exchange.

For Q1, we are projecting net income in the range of a loss of $0.08 to a profit of $0.03 per share, which includes an estimated 600,000 of pre-tax stock-based compensation expense equivalent to $0.02 per share.

I will now provide the company’s current expectations for the full-year 2010. At the levels forecasted by our customers and given the amount of legacy capacity that was taken offline during 2009 and expected retirements in 2010, we estimate that 20 to 25 200 Lean Systems will be required to provide enough capacity to support unit growth, maintain sustainable utilization levels and include a limited number of R&D tools. Additional legacy tool retirements could potentially increase this number.

We expect revenues from service and upgrades to be approximately $25 million. Intevac’s Photonics to be approximately $35 million and our new equipment products to generate up to 5 million in revenue for 2010.

In total, we are projecting consolidated revenues to be in the range of 155 to 185 million for the year. As we look at the rest of the P&L, we expect gross margin to be in the range of 41 to 42% and full-year operating expenses to be in the range of 53 to $55 million. Our tax rate will range from 15% to 20%. This completes the formal part of our presentation. Operator, we are ready for questions.

Question-and-Answer Section

Operator

Thank you. (Operator instructions) And we’ll take our first question from Bill Ong with Merriman.

Bill Ong – Merriman

Yes. Congratulations on recent multi-tool orders. My question is on the solar business, given the recent subsidy cuts you’re seeing from Germany and Italian governments have that been factored into your forecast to ship one tool in this year. Have you seen any slowing down of business activities as a result of subsidy changes?

Kevin Fairbairn

Hi, Bill. This is Kevin here. First of all, before we embarked on solar, we wanted to make sure that our solution wasn’t actually dependent on government subsidies. So I don’t think this change affects that. And, no, we haven’t seen any impact on our customers in terms of their willingness to move forward.

Bill Ong – Merriman

Any sense of what number of tools you can anticipate to ship in 2011. Just given the type of momentum and interest level you’re seeing right now?

Kevin Fairbairn

If our customers are successful then it could be a reasonable number of tools. I think it’s too early to kind of – it will be speculation at this point.

Bill Ong – Merriman

Okay. Thank you so much.

Operator

(Operator instructions) We’ll move to Rich Kugele with Needham & Company.

Rich Kugele – Needham & Company

Thank you, good afternoon. So can you just update us on what you see today given the legacy retirements in 2009, what the install base is of 250Bs?

Jeff Andreson

How specific. We know that some 250Bs have been taken offline. We don’t really want to talk specifically about customers. But I would say it’s probably in the neighborhood of five to 10 for sure.

Rich Kugele – Needham & Company

Five to 10 in 2009. Okay. I’m just meant – I’m sorry, the entire install base?

Kevin Fairbairn

Rich, this is Kevin here. This 250B install base sometimes is a challenge to predict, especially with some of our Asian customers because in some cases they cannibalize the tools to try and make tools, which have more process chambers. Those tools haven’t necessarily got into production albeit successful. But in other cases, we believe some of our legacy tools are being cannibalized to spare parts to keep other legacy tools going. So it’s been difficult for us to get a handle on some of those tools in terms of the peripheral numbers.

Rich Kugele – Needham & Company

Okay. And the dispatch of eight orders that you got today, does this now mean that all of your three customers have ordered or is – some of this are repeat from the first batch?

Kevin Fairbairn

Rich, we don’t comment on our customers specifically, so we can’t say. We did say that it was from two manufacturers or so.

Rich Kugele – Needham & Company

Okay. And then, just a question on the quarter. The spares and upgrades – that run rate that you posted here in the December quarter, is that something that you expect to pop around? Or should we just spread it up evenly among the quarters to get to your guidance?

Jeff Andreson

I think what we said is kind of our service and spares portion of those numbers through the year is around 10 to 12 million pretty consistently and so that would be kind of relatively that I would say, the upgrade business can be lumpy and at this point – you can kind of back into the first quarter guidance, but I wouldn’t say you could say, it’s just linear at this point. It’s not just the visibility same we have to predict in those comments.

Rich Kugele – Needham & Company

Okay. And then, just lastly what are your lead times now in equipment if you would get an order today when – how quickly could it go up?

Kevin Fairbairn

As early as 17 weeks but in some cases, we’re having to add a few more weeks to that depending on work force and our schedules so that we haven’t added people and get materials online in time. I guess it range 17 to 19 weeks.

Rich Kugele – Needham & Company

Okay. Great. Thank you very much.

Operator

(Operator instructions) And we will take Kevin Hunt with Hapoalim Securities.

Kevin Hunt – Hapoalim Securities

Thanks, guys. I just had a quick question for you. If you kind of take the yield that you got today and in terms of an order that you guys got earlier in the tools, it looks like that’s pushing up from backlog earlier in the year I guess that would kind of – with two to 7 incremental machines in the guidance that you just said there, Joe. Any chance of – would that be more of 230 replacements? R&D machines or capacity additions that you’d think those incremental or where is it coming from?

Joe Pietras

Yeah. I think capacity driven primarily.

Kevin Hunt – Hapoalim Securities

Okay. And then what – the other question – in terms of the two – it seems like it’s coupled that’s been – sort of pushed out if it not, late in the quarter, it seems like you have a one-end backlog for LIVAR, any reason why that’s not been recognized or –?

Joe Pietras

Yeah. Well, it hasn’t shipped. I mean this is a customer placed an order with us. I think at the end of June or maybe early July and just we’d like to take their shipments in the first quarter. So, yeah, we had added in backlog.

Kevin Hunt – Hapoalim Securities

Okay. And then, the last question is in terms of follow-up on Richard’s question a little bit. And that the fourth quarter seasonality gets much better spare part revenue. And was that – was there something in there that made that sort of spike up so much or –?

Joe Pietras

I would say that what we’ve been seeing in the last two quarters is just additional technology upgrade to support the – our capacity drives out there in the 2.5 instrument. And so that’s been kind of robust for us, the last two quarters for sure.

Kevin Hunt – Hapoalim Securities

Okay. All right. Thanks guys.

Operator

We’ll move next to Aaron Rakers with Stifel Nicolaus.

Aaron Rakers – Stifel Nicolaus

Yeah. Thanks guys for taking the question. The industry – there is been some recent third-party research out there suggesting that the industry would get into a situation where they over build capacity possibly in the back half of the year. Can you help us understand the 20 to 25 number that you guys have thrown out there? What your assumption is in terms of the industry capacity as we look into the second half of calendar 2010 either be it from a – I guess, mainly from a shipment level basis for hard drives?

Kevin Fairbairn

We obviously look to this very carefully. We’ve certainly seen no sentiment from the customer base because they are looking to have excess capacity and as we develop often such numbers that’s how we came up with our number – came up with our estimates on systems to assuming there was a small reduction in – or small improvements in utilization rates to make it more sustainable and that the capacity tools we needed to support what our customers are seeing in terms of estimates that demand 2010. And based on our current interest from our customers, we see nothing that supports any third-party report of the industry is trying to over build.

Aaron Rakers – Stifel Nicolaus

Right. And then also there’s been some things around – it looks like aerial density is actually – for the industry going to slow here as perpendicular or magnetic recording kind of hit some maturity phases. What are you guys seeing right now in terms of – I guess for you guys, media or platters per drive and what that trend looks like over the coming year or maybe the next couple years?

Kevin Fairbairn

We typically rely on other people for their projections. When we do our analysis, we assume 1.65. Now in terms of media technology our customers, engineers always proved to be very genius and come up with new ways of extending aerial density. There was a question earlier about our upgrade business, obviously, that was supporting some of that technology development status of the current mode.

As we look forward to 2010, we see most of our business remain in the ramp – putting back some additional capacity into the industry as that’s – as we move forward we would expect that there will be more technology upgrades, not sure if we will head in 2010 or 2011 or you will see retrofits to the existing systems to improve the media technology in terms, it would be incremental business for us.

Aaron Rakers – Stifel Nicolaus

Right. And so you’re referring to that being bit Patterned Media, I would assume, which –?

Kevin Fairbairn

No. I’m referring to some of the advances that are being proposed for planner media.

Aaron Rakers – Stifel Nicolaus

Okay. And when do you see bit Patterned Media, I think in the past you’ve talked about that being more 2012, is that still far?

Kevin Fairbairn

Yeah. We really haven’t changed our assumptions there. We’ve always said – we hope the earliest would be like 2011 for the low volume and this would be a very difficult ramp for the industry. Yeah, this is a new technology as and so, we never saw any things really meaningful. So it will be on 2012.

Aaron Rakers – Stifel Nicolaus

Great. Thank you, guys.

Operator

(Operator instructions) We have a question from J.D. Abouchar with GRT Capital.

J.D. Abouchar – GRT Capital Partners

Hey, guys. Just have a question on the tax rate, it was really high in the quarter and you guided to 15 to 20% next year and we have a big tax asset on the balance sheet. If you could just walk me through the whole tax math?

Jeff Andreson

Sure, J.D. It’s Jeff. Last year, the effective rate was about 37% and it was a net tax benefit and so this year with profitability, we see it been in a range of 15 to 20 and you might say, why is that rates are different. It’s just really a mix between our profitability in the U.S. versus our foreign subsidiaries, which are tax build to lower rate.

J.D. Abouchar – GRT Capital Partners

Okay.

Jeff Andreson

And we had higher losses in the U.S. and essentially limited profitability in our foreign subs in 2009. Next year, we should be above profitable external and a little bit profitable in the U.S. and our tax asset, we review all the time. So we were comfortable with our evaluation of that.

J.D. Abouchar – GRT Capital Partners

Okay. So we can use 15 to 20 for the next year or two?

Jeff Andreson

Yeah.

J.D. Abouchar – GRT Capital Partners

Okay. Great. And then just a backup, why should we be using or how much does the ASP vary on the Leans on sort of this – the new generation that we’re shipping now versus over the older ones. So what’s an average ASP for backlog?

Jeff Andreson

As we’ve said, between 4.5 and five.

J.D. Abouchar – GRT Capital Partners

Okay. Great. Thank you, guys.

Operator

That does conclude our question-and-answer session. At this time, I will turn the call back over to our speakers for any final or additional remarks.

Kevin Fairbairn

Well, I’d like to thank you for joining us today and we look forward to updating you in our next call on our Q1 results. Bye.

Operator

And that concludes today’s conference call everyone. Thank you all for your participation.

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