Intevac, Inc.

Thank you, and good afternoon, everyone. Thank you for joining us today to discuss Intevac's financial results for the first quarter of 2012, which ended on March 31.

In addition to outlining the company's financial results, we will provide guidance for the second quarter and talk about our current outlook for 2012.

On today's call are Kevin Fairbairn, President and Chief Executive Officer; Jeff Andreson, Chief Financial Officer; and Drew Brugal, Executive Vice President and General Manager of Intevac Photonics.

Before turning the call over to Kevin, 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 30 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'll now turn the call over to Kevin Fairbairn. Kevin?

Good afternoon, and thank you for joining us today. Our first quarter revenues were $17.3 million, within our guidance, and a net loss per share of $0.14, ahead of guidance.

Today, I will update you on our progress in our Equipment business, Drew will discuss the Photonics business, followed by Jeff, who will discuss our financial results and outlook.

The dynamics of our served equipment market continued to evolve. In the hard drive industry, our customers are still working through their remaining supply constraint challenges and merger integration planning.

In the solar industry, we are starting to see a shakeout among noncompetitive and undercapitalized solar companies driven by the record low module pricing.

In spite of these challenges, we are very pleased with the progress we made in the first quarter towards each of our strategic growth objectives, and we continue to project revenue growth in each of our business segments for 2012.

the receipt of the first two 200 Lean orders for the hard drive industry; the announcement of the drive industry's milestone storage density of 1 terabit per square inch, which was accomplished on our 200 Lean System; a competitive selection in solar, that resulted in an agreement to ship our first LEAN SOLAR implant system, after a successful qualification, we expect will lead to a large follow-on order; the final acceptance from a leading Asian cell manufacturer of our first Lean energy Nano Texture Etch system for solar, which will revenue in the second quarter; and finally, the award of a $10 million follow-on contract in our Photonics business for a U.S. Army program incorporating our night-vision camera on all Apache helicopters.

Now we'll provide more detail regarding our outlook for our hard drive and several Equipment businesses. The progress made towards the recovery of the hard drive supply chain this year has been phenomenal, a testament to the incredible resilience and unwavering determination of our customers.

First quarter hard drive shipments and second quarter guidance have exceeded the expectations going into the year. Both industry analysts and our customers now project second quarter drive shipments to exceed 160 million drives with projections of record level shipments of at least 185 million drives, with some forecasting up to 200 million drives in the December quarter.

For this level is dependent on the level of recovery in channel inventories and the retail markets.

Hard drive companies have reported they have to ship fewer multiple disk drives due to component shortages. The unmet exabyte demand shortfall, which based on our customers' comments is substantial and growing, has been and will continue to be of significance in 2012 and is not expected to be fully rectified until sometime in 2013.

Therefore, we expect to see the average number of disk drive begin to recover to a higher level in the second half of 2012. This is important, as 200 Lean System orders for capacity are driven by the growth in these shipments, not merely drives.

Given these projections, what does this mean for capacity orders? As we have said in the past, we believe media capacity starts to become constrained by the quarterly total available market of 180 million drives at historical typical disk-per-drive ratios.

Our customers are in the process of completing their capacity planning process for the calendar year and are starting to look at the first half of 2013.

We expect that the planning has been complicated, not just by the timing of component recovery, but by the operating conditions imposed on Western Digital by China's Ministry of Commerce relating to the acquisition of Hitachi Global Storage Systems.

So as it relates to our order visibility, based on expected hard drive shipments as well as recent quoting activity, as we said last quarter, we continue to have reasonably good visibility for at least 10 system orders this year. We booked the first 2 orders against this 10 in March.

While last quarter we predicted these orders will come in by midyear, we think our customers are primarily focused on planning capacity needs for the December and March quarters, and therefore, these orders could continue to come in through the late summer. Jeff will provide more detail around our outlook in a few moments.

Our final achievement of note in the hard drive industry was related to technology. In the first quarter, Seagate announced the milestone achievement of 1 terabit per square inch aereal density, utilizing their HAMR technology on our 200 Lean, demonstrating the technology capability of our system.

Now I'd like to review the solar market and the progress we are making on our new equipment products. As we have all read, the pricing of solar modules has declined more rapidly than predicted, with the cost-per-watt recently reaching a low of $0.87.

This had a both positive effect as well as a negative effect on the industry. On the negative side, the straining in the cash generation of the cell manufacturers are limiting investments this year.

On the positive side, solar power generation is now competitive with many traditional forms of electricity generation today. In the current situation of oversupply, it also puts pressure on companies to invest in technology to increase their solar conversion efficiencies, to improve their product competitiveness, and at the same time, lower their manufacturing cost per watt.

We continue to expect to see consolidation in the market as companies who cannot afford to stay in the game either exit the market or get acquired. We believe that eventually the industry will be dominated by a limited number of large, well-capitalized companies with strong brand names capable of financially supporting the typical 20-year guarantees that come with solar modules.

It is on these companies that we are focusing both our development and sales efforts.

In spite of the financial difficulties, the solar cell markets, on a unit basis, continues to grow. The current forecast for 2012 solar module installations is 30 gigawatts, which has increased approximately 3 gigawatts from the forecast entering the year.

This is an elastic market with pricing reductions leading to incremental demand even in an environment where government subsidies are being reduced.

The forecast for solar capital spending is forecasted to be about $4.5 billion in 2012 versus over $14 billion in 2011 with a recovery to about $7 billion expected in 2013 as the industry digests the incremental capacity added in 2011.

The crystalline silicon cell capital spending represents about 30% of the total solar capital spending. We expect a significant amount of this investment to be related to technology investments and not just incremental capacity.

It has been our strategy to focus on the retrofit opportunity of existing capacity as well as new capacity additions.

Our major focus is ion implant. The dosing of silicon by ion implant is recognized as one of the most promising technologies that can enable higher cell conversion efficiencies.

Companies have already shown higher efficiencies using ion implantation system that are [ph] based on those used in the semiconductor industry. Unfortunately, these semiconductor equipment systems are too slow, too expensive and too complex for the solar industry.

Our LEAN SOLAR ion implant system addresses these shortfalls by providing all the technology advantages of ion implant doping.

We continue to make very good progress on our new products. As I said previously, we have now completed the final acceptance for our first Nano TextureEtch System, which will revenue in the second quarter.

And notably, after a competitive selection process, we finalized an evaluation agreement with a large solar cell manufacturer to ship our first ion implant system this quarter and expect to finalize another evaluation agreement this quarter with shipment expected for the summer. Both of these implant opportunities are key milestones for the company and can lead to significant shipments beginning in 2013.

So as you can see, we are beginning to penetrate this market and position the company for repeat orders beginning as early as the fourth quarter and certainly into 2013.

I'll now turn the call over to Drew to provide an update on our Photonics business. Drew?

Thank you, Kevin. As joining the company in early January, my excitement about our Photonics business has only increased as we have a strong portfolio of low-light cameras and sensor technologies that are well-positioned in virtually all major digital night-vision programs.

We are clearly seeing the transition from analog to digital technology for night pilotage and target identification, in addition to being the first manufacturer to deliver a digital night-vision product with over 3,000 units deployed through our NATO customer. Today, the analog night vision market is approximately $600 million annually with the avionics segment of this market representing approximately $60 million.

The U.S. Army is also continuing to demonstrate its support of our technology as we continue to expand our manufacturing technologies and production capabilities through both government funding and company investment.

In the first quarter, Intevac Photonics revenues were $6.6 million, up 7% from the fourth quarter of 2011. As we look at the remainder of the year, we expect to see growth each quarter and in the year-over-year comparison, driven primarily by the recovery of our contract research and development business, as the U.S.

Military continues to develop night vision solutions based on our digital low-light sensor technology. We are confident that our products possess a competitive advantage in sensitivity and power consumption for these digital applications.

Our customer base shares this confidence as demonstrated by the recent award of the first of several production contracts for the U.S. Army's Apache helicopter program.

And separately, we have completed the negotiations for a multiyear contract to a prime integrator for long-range airborne identification systems, or LIVAR. Both of these programs are estimated to be in excess of $50 million over the course of the development and deployment phases.

We anticipate this positive trend to continue and grow as we deliver these products over the next several years.

We also expect to deliver our first set of digitally fused infrared and night-vision goggles for use in avionic application this quarter. This program is in the development phase and can lead to a very significant award in the future as we are partnered with a leading defense contractor in the fixed wing avionics market.

We continue to achieve funding to advance the state-of-the-art of our most advanced 4-megapixel sensor and to improve the sensitivity of our sensors. The continued development of our sensor technology demonstrates the commitment through our technology that will eventually enable the large-scale deployment to the U.S.

Military Ground Forces.

I'll now turn the call over to Jeff to discuss our financial results and outlook. Jeff?

Thank you, Drew. Consolidated first quarter revenues totaled $17.3 million, within our guidance of $16 million to $18 million.

Equipment revenue totaled $10.7 million with no systems recognized in the quarter. Photonics sales of $6.6 million consisted of $4 million in product shipments and $2.6 million of contract research and development.

Q1 consolidated gross margin of 39.4% was above our guidance. Segment gross margin of 45.1% was higher than the fourth quarter and our guidance, due primarily to a higher mix of upgrades and spares and the delay of revenue recognition on the lower-margin solar tool into the second quarter.

Photonics gross margin of 30.1% was flat with the fourth quarter.

Q1 operating expenses were $16 million versus our guidance of $15.5 million to $15.7 million, with the increase driven by costs associated with the acceleration of some of our new product development. The operating loss includes a $2.2 million gain associated with the sale of the Continuum mainframe technology to Brooks.

Our Q1 net loss was $3.2 million or $0.14 per share, exceeding the upper end of our guidance. The net loss included $1.1 million of stock-based compensation expense equivalent to $0.03 per share.

Our backlog was $40.9 million at quarter end and included two 200 Leans and 1 LEAN SOLAR system.

We ended the quarter with cash and investments of $111.7 million, equivalent to approximately $4.80 per share. Our free cash flow for the quarter was a negative $6.7 million and included capital expenditures of $852,000 and amortization and depreciation of $1.2 million for the quarter.

I'll now provide our guidance for the second quarter and the company's current outlook primary assumptions for the remainder of 2012.

We are projecting consolidated Q2 revenues of $29 million to $32 million, which includes two 200 Lean and 1 solar system.

We expect second quarter gross margin to be in the range of 40% to 42.5%. Operating expenses are expected to be the range of $15.3 million to $15.6 million.

Other income and expense will be approximately $200,000 and excludes any impact associated with changes to the valuation of our investments or foreign exchange.

For Q2, we are projecting a net loss in the range of $0.05 to $0.09 per share, which includes an estimated $1 million of pretax stock-based compensation expense, equivalent to $0.03 per share.

I'll now turn to providing our current outlook for the remainder of 2012. As Kevin discussed, we continue to have reasonably good visibility today for at least 10 hard drive system orders this year.

We continue to expect to see these orders in the midyear time frame or possibly a bit later as our customers complete their capacity plans for the December and March quarters. Due to this timing, we also continue to expect the year to be back-end loaded for revenue.

We continue to see upside for 4 to 6 additional system orders this year, with those tools primarily addressing calendar year 2013 needs. Given the uncertainties regarding the timing and magnitude of the system orders for the hard drive industry, we will not be providing full year guidance on this call.

As a reminder, we do announce all of our 200 Lean orders.

That being said, our expectation for upgrades and service revenue to the hard drive industry has improved and is now expected to be in the range of $37 million to $39 million. We continue to expect our Photonics business to grow by 10% to 15% over 2011.

At this time, we are estimating revenues from new products to be at the low end of the $10 million to $20 million we discussed previously. As we said, our new products' revenue recognition is dependent on the timing of our customers' qualifications, and these initial systems require final acceptance or completion of the qualification prior to recognizing our revenue.

The reduction from the prior outlook is due principally to the delay in capacity additions we expected at our first crystalline silicon customer. Certainly, the lower revenue outlook is not a reflection of any lack of new traction as we expect to have up to 4 additional solar tools and qualification by the end of the year and continue to expect backlog to grow in the second half of the year.

Given the current outlook, we expect gross margins for the year to be in the high 30s and operating expenses to be in the range of $60 million to $61 million for 2012.

Other income and expense is expected to be approximately $3 million for the year, which includes the $2.2 million gain in Q1.

And we're ready for questions.

Can you characterize the solar customers that are evaluating your solar tools? Are they Tier 1 customers?

How are their balance sheets and their financial ability to place multiple orders, as these evaluation tools become more production worthy?

Bill, it's Jeff. They're all Tier 1 customers right now.

Balance sheets are relatively strong on the first ones that were qualifying, and most of the customers that we're working with have relatively strong balance sheets. Obviously right now, most companies are seeing negative free cash flow coming out of 2011 where they invested a lot of money.

Great. And then my last question is on the implant tool.

Are these tools targeted towards the conventional P-type furnace equivalents? And how does your implant tool compare to N-type furnace equipment tools, which obviously have better yields than the conventional P type?

Bill, this is Kevin here. So most of our customers are doing initial qualifications so they can use them on P-type silicon and in 2013 to move to N-type.

And your other question, could you explain it again what you were asking relative to furnaces?

Yes, maybe just compare on apples-to-apples yields. My understanding is N-type trends just have a delta 1% yield improvement over P-types so you obviously have the implants stacked up in terms of yields and maybe in terms of use-per-dollars or whatever metric you feel comfortable with?

Okay. So simply going from a P-type silicon to N-type will give you a 1% improvement just because of the superior properties of the N-type silicon.

The advantage of ion implant is it reduces the number of process steps and makes it much easier to accomplish.

Just wondering if you could give us some of your insights about what the current capacity is in the hard drive business? I'm thinking around 180 million drives a quarter.

What is your feeling about that?

Yes, that's the number we've stated, Mark, that we feel that the current capacity is around 180 million. Now some people are predicting for the year that it might go up to 185 million to 200 million, and obviously that's going to depend on several factors, including the recovery [ph] in the number of disk per drive, the restoration of some of the panel inventories and then how quickly the retail market rebounds.

You noted and your customers noted that they've been shipping drives with fewer disk. Do you know, the last quarter or so, what's the average number of disk per drive?

No, Mark, we haven't seen that data yet from TRENDFOCUS or from anybody else yet. What we've heard is the verbal comment from our customers.

And final question. There was some -- in fact, there was a lot of confusion at the Western Digital call, and they indicated that a Hitachi subsidiary was dealing with some excess capacity.

It was kind of my inference from some of the other things they said that, that was more because they had bought excess number of heads and that excess capacity was more in their head fab. Can you shed any light on that?

I don't believe the excess capacity was in media.

Just a couple of questions, I guess, first, when it comes to HDD side of the business, the -- so you're saying that sometime over the next few months, you would have potentially orders for 10, but then there's another 4 to 6 that could potentially come through as replacement? So it's 14 to 16 as a theoretical total available market over the next year?

Yes, Rich, it's Jeff. Yes, I would say that's a reasonable way to characterize it.

The upside we see would address 2013 production needs. But you're right, if you look out a year, say, 20 months, you're in that horizon we're talking about.

And that 10 would still be 10 that would recognize for revenue in calendar '12, though?

If we could have said that, we would have given guidance. I mean it's still got to get the orders in, so we can tell you guys when we think those ship.

Are those orders broadly diverse, spread across your customer base or concentrated in any particular accounts?

What we would tell you is, like we said on the last call, that it is more than one customer that we're seeing for visibility today.

Okay, and in terms of the, I guess, the first quarter, you're saying that, that tool, that solar tool just pushed into the second quarter and now because of the timing of the Leans you have 3 tools all heading in the same quarter, right?

Correct.

What happened to that solar tool that just caused the delay?

The qualification is never quite well defined. I mean they could take somewhere between 3 and 6 months.

This one happened to take about 4 and it just crawled over to the end of the quarter, so it was accepted in midmonth this month.

Okay. And the other 4 tools, if I'm understanding this correctly, are the other 4 tools on the solar side that you're talking about potential for '12, have they already shipped and we're just waiting for sign-off?

No, they haven't shipped yet. As Kevin said, we've just won this competitive selection and that tool we expect ship this quarter and then we expect another one to ship, or ,2, over the next quarters or so and now those are the tools that we would see.

The 4 I specifically said we expect to ship in the year, but probably later in the year and they'll be in qualification.

These data tools, are they going out more configured that your production level ones might be?

No, these tools going out -- the initial ones are configured more as R&D tools. But after the first 2 tools, the configurations will be exactly the same as production tools.

Can you give us a sense on what the rough ASP is for these?

In the range of $2 million to $3 million.

Question on the ion implant for solar. Can you talk about what sort of efficiency improvement your customers are seeing and how that sort of translate into pennies per watt cost reductions?

The efficiency improvements can range from 0.5% to over 2% and it really depends of the number of ion implant steps, the design of the cell and whether they're using P-type or N-type silicon, so there's some variables there. In terms of cost savings, it can be anywhere up to $0.08 a cell, if you measure on a cents basis.

But in a lot of cases, people want the higher efficiencies to have much more competitive product. In a market where there's oversupply, people will always go for the higher efficiency, price being the same.

Right, so as you said there could be multiple ion implant steps. Would that be multiple tools per line or just running through the machine a couple of times?

We would expect multiple tools per line, so when people move to N-type wafers, they could have one machine doing phosphorus implants and they could have a second machine during boron implants.

Okay, just ballpark ASPs on the tools?

For an integrated tool, it could be $2.5 million to $3.5 million.

And then if I remember correctly, we were discussing on the last call a little bit competitive dynamics back in the HDD business that it seemed like your market share had the opportunity to gain some more. Any update there?

Can you repeat the question again?

Yes, back in the hard drive business, last quarter you were talking about maybe making more progress vis-à-vis your competitors on tool performance and the chance to pick up share. Just wondered if you had any update there.

Clearly, the acquisition of Hitachi by Western Digital gives us some opportunity in that new combination because we have more watt tools in that combination than our competitor does. Plus, our tool 200 Lean has demonstrated the best technology in the industry to date, so that's what give us encouragement that we could hopefully improve our market share situation.

Well, thank you for joining us today, and we look forward to updating you at our next call on our second quarter results. Bye.