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Executives

Laura Guerrant – IR, Guerrant Associates

Jerry Cutini – Chairman, President and CEO

Pat O'Connor – EVP and CFO

Analysts

Edwin Mok – Needham & Company

Aviza Technology, Inc. (AVZA) F3Q08 (Qtr End 06/27/08) Earnings Call Transcript August 6, 2008 4:30 PM ET

Operator

Good day, ladies and gentlemen, and welcome to Aviza Technology's financial results conference call for the third quarter fiscal 2008. My name is Michael. I'll be your operator today. At this time, all participants are in a listen-only mode. Following the presentation, the conference will open for questions. (Operator instructions) As a reminder, this conference is being recorded for replay purposes. I would now like to turn our presentation over to Ms. Laura Guerrant, Aviza Technology's Investor Relations Counsel. Please go ahead.

Laura Guerrant

Thank you and good afternoon everyone. Thank you for joining us today to discuss Aviza Technology's financial results for the third quarter of fiscal 2008, which ended June 27, 2008. In addition to outlining the company’s financial results for the quarter, we will also provide guidance for the fourth quarter of fiscal 2008.

On today's call are Jerry Cutini, Aviza's President and Chief Executive Officer and Pat O'Connor, Executive Vice President and Chief Financial Officer.

Before turning the call over to Jerry, I would like to remind everyone that the information provided today, including some of the responses to your questions will include forward-looking statements. These forward-looking statements are based on management's current expectations and beliefs that involve numerous risks and uncertainties that could cause actual results to differ materially. You should not rely upon these forward-looking statements as predictions of future events as we cannot assure you that the events or circumstances reflected in these statements will be achieved or will occur.

These forward-looking statements include, but are not limited to the statements made by Jerry or Pat. All statements containing the words believe, expects, forecasts, may, will, should, seek, intends, plans, anticipates, or the negative of these words or phrases, and/or variations or comparable terminology. Many factors could cause actual results to differ materially from those projected in these forward-looking statements. Some of these factors and other important factors are detailed in various SEC filings that Aviza has made in particular the most recent Form 10K, copies of which are available from the company without charge. Please review these filings and do not place undue reliance on the forward-looking statements, as we assume no obligation to update such statements.

A replay of today's call will be available on the company's Web site at www.aviza.com under Calendar of Events in the Investor Relations section approximately two hours after the conclusion of the call. A telephone replay will also be available two hours after the conclusion of the call and will be available through August 8. The replay is available at 303-590-3000 or 800-405-2236. Confirmation code is 11117890#. Additional information can be found on the company's Web site.

Please note that during the remainder of the prepared remarks and in our answers to your questions, all references to quarters and years will be for fiscal quarters and fiscal years unless we specifically refer to the calendar quarter or calendar year. As a reminder, the company's fiscal year ends on the last Friday in September.

All references to earnings per share are to basic EPS unless otherwise specified, and shipments include all systems and parts shipped during the quarter and the related services for which Aviza holds the contract for current and future revenue. Also, please note that during this call we will be discussing GAAP and non-GAAP financial measures. A table that outlines the reconciliation between GAAP and non-GAAP financial measures is included in the earnings release, which has been filed with the SEC and posted on the Aviza Web site.

And with that, I'll turn the call over to Jerry Cutini. Jerry?

Jerry Cutini

Thank you, Laura. Good afternoon, everyone, and thank you for joining us today. As everyone is aware, as a result of the supply imbalance in the DRAM market, in April we announced a significant restructuring plan so that we could move the company towards a much better financial model.

I'm pleased with the direction the company has taken since April, and we have implemented a number of new initiatives worldwide, and we have accomplished our restructuring as planned. Our proved results reflect the rapid shift that our team executed to focus on the growth market segments with our single-wafer products, which we believe will provide a better long-term financial profile for the company.

Over 90% of our system bookings for the June quarter were for single-wafer products, demonstrating the success of our strategy. The shift in our product mix on a shipment basis has allowed us to substantially decrease our overall dependency on the memory market, which continues to reflect challenging industry-wide conditions, driven by a major imbalance in the supply chain. This situation has continued longer than most had predicted, and I expect it will continue into 2009.

Our improved financial results also reflect our market penetrations into growth areas such as MEMS 3-5 and 3D-IC chips, which enable smaller form factor devices for consumer products. These devices will ultimately provide increase functionality and improved electrical performance. We see IDMs DRAM companies, foundries, and packaging houses all developing TSV solutions based around Deep Silicon Etching and CVD and PVD approaches.

To direct this rapidly evolving market, this quarter we introduced a newest member of our single-wafer product family, the Versalis system, which is specifically designed for R&D opportunities for the 3D-IC market and can later easily be transitioned to production-based manufacturing.

To date, Aviza is the only company to have introduced a system with three process technologies Etch, PVD, and CVD installed on a single mainframe. This provides great value to our customers by lowering their CapEx and reducing the installation cost compared to three individual systems and working with three different suppliers. We believe the Versalis will reduce the development cycle time for this complex process because of the interdependencies the three processes have on the final device performance. As already mentioned, MEMS and 3-5 devices are two very fast growing market segments within which Aviza is very active.

We feel the company is demonstrating strong success as these end markets grow and as we increase our share in these served markets. The research firm Yole Development expects the MEMS market to reach $2.5 billion by 2012 for cell phones alone. MEMS is a key enabler for innovation in the cell phone industry.

Other growing and emerging applications for MEMS include the automotive and aircraft industries, medical and biotechnology fields, as well as consumer products like game consoles and digital camcorders.

In the 3-5 market, demand for our advanced communications devices continues to fuel demand for compound semiconductors. The increasing level of data, voice, and multimedia transition – transmission for wireless communications has resulted in the higher need for higher operating frequencies, more bandwidth which these devices help provide for cell phones, PCS products, text messengers, GPS navigation, and satellite communications.

We are also beginning to see traction in the High Brightness LED market for our systems. I expect to report additional information on this market in the coming quarters. Lastly, and probably most importantly, although we do not report bookings, we are very pleased to report that we had a very strong booking quarter in June and expect September to be similar, further evidence that our strategic shift is succeeding.

That wraps up my entry comments. Here to provide you with more insight into the results for the quarter and to provide guidance for the September quarter is Pat.

Pat O'Connor

Thank you, Jerry. Good afternoon, everyone. Thank you for joining us. Before I review the quarterly results, I want to point out that in our press release today you will find two supplemental non-GAAP financial measures. We believe these measures will provide additional information with respect to our business activities, and we refer you to the release for a reconciliation of GAAP to non-GAAP financials. Now I would like to review the June quarter results, followed by September quarter guidance.

June quarter shipments of $34.9 million increased by $6.6 million or 23% over March quarter shipments. Net sales for the quarter of $33.5 million were in line with the range of our guidance and increased 11% over the March quarter net sales. Our improved financial results reflect a shift in product mix and new market penetrations into growth markets with our single-wafer products. As Jerry noted, over 90% of our system bookings for the June quarter were in single-wafer products.

On a geographic basis, percentage breakdown of net sales was

Asia-Pacific 55%, Europe 25% and North America 20%.

Gross margin was 32.9%, which compares to the March quarter gross margin, excluding restructuring charges of 30.3%.

Total operating expenses were $16.3 million. This compares to the March quarter total operating expenses, excluding restructuring and one time charges, of $17.5 million. R&D spending of $7.3 million compares with $8 million for the March quarter and SG&A spending of $9 million, which compares with the $9.5 million for the March quarter. As you can see, our restructuring efforts have resulted in lower operating expenses for the quarter.

June quarter loss from operations was $5.3 million, which compares with the March quarter loss from operations, excluding restructuring charges of $8.4 million. Adjusted net loss for the June quarter was $3.6 million or $0.16 per share. This compares with an adjusted net loss for the March quarter of $6.3 million or $0.29 per share. Noncash charges included deprecation expense of $1.2 million, amortization expense of $109,000, stock-based compensation expense of $456,000, net interest expense of $465,000, net other income of $15,000 and income tax benefit of $128,000.

Turning to the balance sheet, DSOs were 75 days and inventory turns were 2 times. As of June 27, the outstanding share count was approximately 21.9 million shares. This wraps up my comments on the results for the quarter.

Let's turn to guidance for September June quarter, which reflects an anticipated improvement over our results for the June quarter, and is predicated on a continued ship in our product mix. We expect that the June – September quarter net sales will be in the range of $35 million to $40 million with an adjusted net loss in the range of approximately $3 million to an adjusted net income of $100,000. In addition, we expect stock-based compensation expense to be in the range of $450,000 to $480,000.

With that, I will turn the call back over to Jerry.

Jerry Cutini

Thank you, Pat. We feel confident that the new direction Aviza has taken has put the company on a path towards improved financial performance. We believe that this quarter's accomplishments and trends indicate that we have chosen a course that is manifesting itself in a positive manner. Our team will continue to concentrate on further deploying our growth initiatives and to put our strategy into action such that we can continue in a direction beneficial to our company and our shareholders. We will now open the call for questions.

Question-and-Answer Session

Operator

Thank you. Ladies and gentlemen, at this time we will begin the question-and-answer session. (Operator instructions) Your first question is from the line of Edwin Mok with Needham & Company. Please go ahead with your question.

Edwin Mok – Needham & Company

Great. Thanks for taking my question, and good job, guys. So, for the guidance – let me start with the guidance, basically just a few housekeeping. What do you expect the tax rate or the tax amount to be in the coming quarter?

Pat O'Connor

It will be in the $200,000 to $300,000 range.

Edwin Mok – Needham & Company

Okay, great. And then, your guidance seems to suggest that either you have a substantial gross margin improvement or better OpEx in the coming quarter. How should I visualize it? Is it more because of mixed and even better gross margin or are you guys looking to get more savings on OpEx side?

Pat O'Connor

Well, I think the gross margin has improved over the last quarter, if not over the last several quarters. We do believe that we will see additional savings in the OpEx this next quarter.

Edwin Mok – Needham & Company

Great. And then, maybe for looking out a little bit more, given that you guys are at adjusted breakeven point or getting closer to adjusted breakeven. What about actual breakeven for the company? When do you guys – what revenue level you guys expect you will reach breakeven point?

Pat O'Connor

Well, Edwin, we continue to bring that breakeven down. We think that we are probably in the mid-40s, in that range.

Edwin Mok – Needham & Company

Great. That was helpful. Okay, so moving on to the products, just a few questions. First thing is on the 3D-IC. I was wondering how many demo tools have you guys shipped and how many tools have you actually recognized revenue so far for the 3D-IC application?

Jerry Cutini

Hi, Edwin, this is Jerry. It's a tough one. We have, I would say three different systems out in the field addressing specifically through silicon via for the packaging applications. And I think that's going to increase probably each quarter over the next couple of quarters. We already have one Versalis in the field that has multiple technologies on it, and we think that's going to continue next quarter. So, I think by the end of the calendar year, we might have one or two more demos out in the field. But the ones that are out there have been paid for.

Edwin Mok – Needham & Company

I see. So, those that are out there, you have already recognized revenue, right? I should not visualize that as incremental, right?

Jerry Cutini

In some cases, yes, in one case, not yet.

Edwin Mok – Needham & Company

I see. My understanding for the 3D-IC at this point in time there is still more development activity. Do you visualize that as a good opportunity at least for 2009 or do you actually think that some of these will actually get into production point by 2009?

Jerry Cutini

I think you have to break it down a little bit further. I think if you look at one part of it, which is CMOS Image Sensors, I think that's in production. I think that's going to be in production in 2009. I think that's one specific product family. I think if you look more broadly, I would say there's going to be a lot of R&D activity next year and minimal mass production opportunity. But I think the R&D is very busy. We are very active with a lot of different customers. So, I think for us, it's going to be more R&D and a little bit of production.

Edwin Mok – Needham & Company

Great. And then, talk a little bit about the MEMS market looks quite strong for you guys. Is it possible for you to break down in terms of opportunity, do you think you are more dependant on the MEMS or do you think you have more opportunity in the 3-5 or the Power IC market?

Jerry Cutini

I think currently, I think all of these product markets or segments are in different phases. Power is the slowest right now. MEMS is probably, I would say 3-5 is the strongest and MEMS is second. And that's going to probably stay that way for the next quarter, I would say. Then I think it's going to change. I think it could change after that.

Edwin Mok – Needham & Company

Great. When you say it could change, you mean –

Jerry Cutini

I think MEMS could come up, and we see a whole lot of activity in the LED area, as well.

Edwin Mok – Needham & Company

I see. That leads to my next question, on the LED side, what actually are you guys selling toward the LED application right now?

Jerry Cutini

We are exactly selling Etch and CVD into that area.

Edwin Mok – Needham & Company

I see, great.

Jerry Cutini

Not MOCVD, just regular CVD.

Edwin Mok – Needham & Company

Right. So, this is not MOCVD, but regular CVD application for the LED, right?

Jerry Cutini

Correct.

Edwin Mok – Needham & Company

And where are you guys out for that application? Are you in qual or you actually got into some production for that?

Jerry Cutini

I think we are in qual right now, that’s the way I would characterize it.

Edwin Mok – Needham & Company

Great. That was helpful to frame the opportunity there. And one last thing, you mentioned that 90% of your tools are single wafers, so I imagine the rest of the 10% is your thermal tube. Is it fair to say that going into the next few quarters, even though you have discontinued that product, you might still a few tools in the coming quarters?

Jerry Cutini

I think that's a good way to look at it. We will sell them. We've had discussions with customers that have them and need some additional capacity or another application. So, we will sell them but we're not actively out trying to find new customers for that product. But we are very busy supporting the installed base, we spent a lot of time furthering some of the applications work. And like I said, as people need additional capacity here or there, we will be selling systems into that.

Edwin Mok – Needham & Company

Great. That was helpful. That's all I have. Thanks.

Jerry Cutini

Thanks, Ed.

Pat O'Connor

Thanks, Edwin.

Operator

Thank you. (Operator instructions) And there are no further questions. Mr. Cutini, please continue with any closing comments.

Jerry Cutini

Okay. Thank you, everyone. We appreciate your time. As a final reminder, Aviza will be participating in a Security Research Associates conference in San Francisco on August 18th. You can look to our Web site for a press release on that activity pretty soon. This wraps up the quarter's call. We appreciate your time and interest in Aviza.

Operator

All right. Thank you, ladies and gentlemen. This does conclude Aviza Technology's financial results conference call for the third quarter of fiscal 2008. You may now disconnect. Thank you very much for using AHT Conferencing. Have a very pleasant rest of your day.

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