Claire McAdams - IR Counsel Wendell Blonigan - President & CEO Jim Moniz - CFO.

Rich Kugele - Needham & Company Mark Miller - Noble Financial Capital Markets Nehal Chokshi - Maxim Group JD Abouchar - Graham Partners.

Welcome to Intevac's Fourth Quarter and Full Year 2014 Financial Results Conference Call. [Operator Instructions]. At this time, I would like to turn the call over to Claire McAdams, Intevac's Investor Relations Counsel. Please go ahead..

Thank you and good afternoon, everyone. Thank you for joining us today to discuss Intevac's financial results for the fourth quarter and fiscal year 2014, which ended on January 1. In addition to outlining the company's financial results, we will provide an outlook for the year and guidance for the first quarter of 2015.

Joining me on today's call are Wendell Blonigan, President and Chief Executive Officer and Jim Moniz, Chief Financial Officer. Wendell will start with an update on our businesses and then Jim will review fourth quarter results and provide guidance for Q1 before turning the call over to Q&A.

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-K, 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 February 4th 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 Wendell..

Thanks Claire. Good afternoon everyone. To start I would like to welcome Jim Monzi to his first conference with Intevac. Jim and I worked together in the past and he brings a wealth of experiences as a public company CFO in both the capital equipment and military industries. I'm very pleased to have Jim on-board.

On the call today, I will start with a recap of our progress and the execution of our 2014 strategic initiatives followed by some comments about the current business environment and our view on the opportunities and challenges ahead in 2015.

In the first quarter of 2014, I delivered to the Board of Directors a three year strategic plan which included the resetting of the company's capital deployment and growth strategies.

In the Spring of 2014, I met with our major stockholders and communicated our plan and have since been communicating our progress to our investment community at conferences in our quarterly calls.

In communicating this strategic plan we talked about our financial objectives to cut expenses and limit the declining cash for the full year 2014 to less than $5 million. We also discussed the return of capital to stockholders via our share buyback program.

We explained our phase gate and milestone approach to investing in new products and markets and the initial traction we would look to achieve with leading Tier 1 customers in our equipment growth strategy.

And finally we spoke about our opportunity to execute the largest revenue volume increase in our photonics business history as I went on the Apache program transitioned into full rate production. I'm pleased to report that we met or exceeded each of these objectives for 2014.

In Photonics we exceeded expectations for revenue growth and profits with excellent execution in the ramp of the Apache camera production delivering good yields and above target margins.

We cut non-GAAP operating expenses by 14% versus 2013 and outperformed our cash management targets by limiting our net declining cash to less than $3 million net of share repurchases.

We bought over $8 million of our stock back in 2014 or a total of $10 million since the plans inception and our thin film equipment growth strategy in 2014 we achieved Tier 1 customer engagement for each of the three programs that passed through our milestone and gates shipped initial tools for two of the three programs.

Now moving on to our thin film equipment business for hard drive media. In the hard drive industry we continue to see improving fundamentals for media unit growth which is the primary driver of our HDD equipment business. In 2014, the negative trends experienced over the previous three years in both PCs and hard drive units reversed.

PC demand stabilized, hard drive units were up for the year and exabyte growth started to pick up in the second half.

In 2015, both PC's and hard drive units are forecasted to be up year-over-year and in recent earning call across the hard drive supply chain we have heard consistently positive commentary about the forecasted growth in enterprise and cloud storage demand beginning to materialize.

Accelerating demand for high capacity, multi-disk storage will help enable the HDD industry to absorb it's excess manufacturing capacity and it's expected to be a key driver of media growth going forward. This environment is consistent with what we saw at our last conference call and our outlook is unchanged.

Current estimates are that exabyte shipments were up 15% to 17% in 2014 with growth rates picking up in 201. Given strong demand from the cloud growth is forecasted again in 2016 and then accelerating into 2017 and 2018.

Should this exabyte growth materialize as forecasted and assuming current aerial density improvement rates, capacity would begin to become constraint in 2016 and there are number of tools needed to support this growth remain substantial and in the range we have discussed previously.

Until our customers need to invest in more capacity they have tightly constrained their capital budgets even for tool upgrades. There may be some opportunity for improvement in our upgrade business in the second half of 2015 depending on the budgets of our customers new fiscal year.

In the mean time we feel confident in our technology leadership position and our ability to gain incremental market shares at the next technology inflection point.

While we look forward to recovery in our HDD equipment business, we’re focused on driving revenue growth by leveraging our core capabilities and technology into new thin film deposition applications in the vacuum coding industry.

As I mentioned in our 2014 highlights we achieved meaningful traction with leading Tier 1 customers in three primary programs and see the potential for significant revenue with positive return on investments for each. We have shipped two new products into the field and we’re currently under-qualification.

Given the fact that these programs are new products to new customers, they revenue on final customer acceptance. This presents challenges in forecasting revenue timing as they are a function of our customers, technology and factory progress. We typically received the majority of our payments at shipment however.

Our first success in 2014 was the shipment of our first MATRIX PVD system deployed for solar cell metallization for next generation high efficiency devices. I'm happy to report that our tool is running well in it's final acceptance cycle barring any unforeseen delays on our customers end we expect this tool revenue in the first quarter of 2015.

In our guidance for Q1 we have conservatively arranged this revenue event as it is subject to our customers schedule which is not in our control.

Our objective for 2015 is to continue to work with our customer, supporting their activity to validate their device and production line performance, provided our customer is successful, their plan is to build out significant capacity with our tools.

This would be a sizeable project and would allow us to recover the total investment in the MATRIX platform. We continue to be engaged with additional customers and estimate the SAM for equipment in this space to be over $100 million over the next five year.

Additionally the MATRIX system is designed to be leverageable into additional thin film applications. In the mobile display cover panel application, our first pilot VERTEX PVD tool was installed in Q3 is running well and depositing transparent carbon protective coatings in low volume production.

The high end of our revenue guidance in Q4 have included final customer acceptance of this system which is not occurred yet. As I’ve discussed previously this is a new technology and a new feature for cover panel manufacturing and market demand for the protective function of our carbon film specifically from the end customer needs to be developed.

This activity needs to work through the value chain and has many variables including cost, performance specifications and end market premium validation. We continue to drive this initiative as our customer works to define their products protective specifications for a given price point.

Driving this effort and establishing our films value proposition in the end market is a key objective for us in 2015. Given that we have leveraged our thin film carbon coating technology from our HDD product line we can recover our invested capital for this opportunity by achieving success with our first customer.

This is a brand new end market application which if adopted could be a large growth driver and we continue to be engaged with multiple customers for this application.

As I indicated last quarter if one half of the projected incremental market growth in cell phone and tablet cover panels would adopt this coating, over the next five years the TAM for deposition tools could exceed $300 million.

The last highlight in 2014 I would like cover with regards to our thin film equipment growth strategy is our entering into a JDP for solar implant development. This program entails working with our customers to implement our technical solutions into their next generation solar cell manufacturing flow.

This joint technology development approach allows us to offset our investments as we retire technical program risk. If successful we estimate the SAM for this niche application to be around 50 million over the next several years with a complete payback of our ongoing investment in this initiative in the first planned factory that built.

2014 was a year when we successfully introduced our newest systems into the field in support of our equipment growth strategy, planting the seed so to speak. 2015 will be the year that we grow these opportunities to a point they can bear fruit in 2016 and beyond.

Our opportunity to help offset the cyclical environment of the hard drive media equipment lies in the continued execution of our growth strategy and our customers success in driving the adoption of their technologies that utilize our equipment.

Successful achievement of our objectives in 2015 in these adjacent businesses will well-position our overall thin film equipment business going forward. Turning now to photonics business delivered a record year well outpacing our expectations and became the largest contributor to the company's revenue in 2014.

We initially set out to grow photonics 25% last year and delivered 32% growth year-on-year and above model operating profitability of 22%. This performance reflects our well-executed production and delivery ramp on the Apache program which is now a full run-rate production volumes.

Military programs have a very structured roll out starting out with development efforts, prototypes, user feedback learning cycles, limited initial production and then finally ramp to full rate production.

When a program moves into full rate production there is a significant ramping event of the business revenue as occurred in 2014 followed by normalization of a new base of revenue.

We see the current environment for our photonics business as normalizing off our record performance in 2014 while we continue to drive our funded development activities which are in various stages in the product development sequence.

Our ISIE 11 camera assemblies that are designed into the F35 Joint Strike Fighter have moved into limited initial production. This program runs in-sync with the aircraft program roll-out and full production will ramp as the plane production levels increase over a decade.

The five year SAM for this project is approximately $20 million with the program scaling in volume at the end of that period and the program continuing many years from there. Our funded development program for digitally fused googles has completed, prototypes have been delivered and we have received important feedback from the user community.

Limited available budget from the government in 2015 has caused a pause in the external funding of this program, however we are funding efforts internally until external funding resumes. And leveraging our designs into adjacent funded google programs for fixed wing aircraft pilotage.

In total we continue to be recognized as a critical sole source provider of digital night vision technology with an opportunity pipeline of $350 million over the life of the programs which we’re currently engaged.

The outstanding result and profitability of this new business will also normalize overtime to the 15% range as we contracts are awarded off matured cost information as required by all government suppliers. In summary, strengthening fundamentals in the hard drive industry are long term positive for our media business.

We’re encouraged to see several negative trends reversed last year, however only time will reveal the slope of the media growth curves. 2015 will be another challenging year for our thin film equipment for hard disk drive media as industry over capacity has yet to be observed by demand.

We’re closely monitoring the performance of the industry versus the forecast refreshing our outlook and managing the business accordingly. In adjacent equipment markets we achieved meaningful progress in 2014 and are on plan with our strategy to penetrate new thin film applications.

We see the potential for these new applications to help offset the cyclical environment for HDD media equipment and provide growth vectors for our equipment business. Entering new markets with new technology and product is a challenging proposition. It takes time and it's not for the faint of heart.

We’re pleased with our progress to-date and are driving our strategy with determination in our current cost structure.

In our Photonics business, while revenues will normalize of exceptional growth we delivered in 2014, we will continue to leverage our success on the Apache program into additional military applications extending our sole source position in digital night vision technology to drive the next phase of volume production revenue growth.

We continue to manage the company dynamically and are focused on continuous improvement in our performance in the diverse markets we serve. Our commitment to discipline capital allocation provides a path for a positive return on investments for all our activities.

We continue to be committed to reducing operating losses as we enter 2015 and closely managing our cash. As we look out at 2015 there are many variables that will have significant influence on our performance.

That being said we see the year on a revenue basis to be similar to 2014 levels with potential upside depending on adoption speed of our initiatives in equipment growth, HDD manufactures fiscal '16 budgets and government funding allocation decisions.

All of the efforts we have discussed today are focusing on driving revenue growth, positioning the company for return to profitability and deploying capital in the best long term interest of our shareholders. I will now turn the call over to Jim to discuss our fourth quarter results and provide guidance for the first quarter..

Thank you, Wendell. I'm very happy to be on board supporting you and the Intevac team. Consolidated fourth quarter revenues totaled 19.1 million at the low end of our guidance range given that the VERTEX PVD cover panel tool is not signed up for the quarter as Wendell discussed. Equipment revenue totaled $9.1 million and included one 200 Lean system.

Photonics revenue of $10 million included $7.7 million of product revenues and $2.3 million of contract, research and development revenues. Q4 consolidated gross margin was $2.6 million or 13.6%.

This included a $3.1 million inventory reserve equivalent to 16 percentage points of margin related to certain solar implant inventory purchased in 2011 and 2012 for multiple programs which did not materialize and which have pushed beyond our 12 month forecast. Without this reserve we were within our gross margin guidance for the quarter.

Photonics gross margin was 44.4% about the same as last quarter and significantly up for the fourth quarter of last year and also above our long term model for this business.

The high gross margin in Q4 was due to continued high yield on our sensor based product and a continued favorable mix of product revenue versus lower margin, contract, research and development revenue.

Equipment gross margin was negative 20.1% down from both the third quarter of this year and the fourth quarter of last year and was impacted 34 percentage points of equipment gross margin on the inventory reserve described earlier. Q4 R&D and SG&A expenses were $8.2 million just below the low end of our guidance range.

This amount is lower than our run-rate and includes the benefit of $0.9 million customer funded development. Our Q4 net loss on a GAAP basis was $14.4 million or $0.62 per share. We recorded in this quarter a valuation allowance of $9.6 million on our foreign deferred tax assets.

Without this valuation allowance and the previously mentioned inventory reserve we came within the net loss guidance provided at the last conference call. Our Q4 net loss on a non-GAAP basis excludes the valuation allowance on foreign deferred tax assets and the acquisition accounting related credit and was $5 million or $0.22 per share.

Our backlog was $48.4 million at quarter end. Equipment backlog of $17.7 million included one 200 Lean system, one Intevac MATRIX PVD system, one pilot VERTEX system as well as one energy solar implant tool. Backlog in our photonics business was $30.7 million.

We ended the quarter with cash and investments including restricted cash of $70.4 million equivalent to approximately $3.02 per share based on 23.2 million shares at quarter end.

During the fourth quarter we bought back a 122,000 shares for $0.8 million at an average price of $6.73 per share bringing total share repurchases for 2014 to $8.3 million and to $10 million total since inception, out of a total plan of upto $30 million.

Net of the $8.3 million in repurchase is completed during calendar 2014, the net declining cash and investments was $2.7 million better than our $5 million goal when we entered this year. Q4 capital expenditures were $1.4 million and depreciation and amortization was $1.2 million for the quarter.

Turning to guidance for the first quarter of 2015, we are projecting consolidated Q1 revenues to be between $16.5 million and 21 million including one 200 Lean system and one MATRIX PVD system at the high end. We expect to get customer acceptance for the MATRIX PVD system in the quarter but we have taken it out of our low end guidance.

We expect first quarter gross margin to be between 30% and 31%. Operating expenses are expected to be between $9 million and $9.7 million which is within the normalized operating expense for our current cost structure. Because now we have a full valuation allowance on our deferred tax assets, we expect no tax benefit and minimal tax expense.

For Q1 we’re projecting a net loss in the range of $0.12 to $0.19 per share based on an estimate of 23.7 million shares. Now turning to the full year outlook, we expect revenue in 2015 to be similar to 2014 levels.

There is potential upside which will be dependent on the adoption speed of our equipment growth initiatives, HDD manufacturers fiscal 2016 budgets and government funding allocations. At this revenue level we would expect gross margins in the range of 34% to 36% with operating expenses of between $36 million to $38 million for the year.

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

[Operator Instructions]. And our first question comes from the line of Rich Kugele with Needham & Company Your line is now open. Please proceed with your question. .

Couple of questions, I guess first just about the MATRIX PVD, being the first one, was there anything unusual with the way it was installed or any complications that led to the delay in sign off or was that just customers timing?.

It really has to do with the customer timing, we’re very happy with the way the tool is operating.

I think one thing to keep in mind and I mentioned in my prepared remarks, these are new tools, new technology, new applications and we’re looking at production lines that need to come up and the timing of that can be variable depending on the rest of this equipment set.

So on that particular application we’re really looking to when the tool moves into, can run a marathon type operation to complete it's qualifications and because the line runs 2000 to 3000 substrates an hour that’s a pretty big undertaking, it requires to align itself to be up and running..

Would you anticipate having to ship a few systems before you get to recognizing on shipment?.

I would have to look and see what the internal precedence has been set here at the company in my past experience. Typically you ship 1 to 2 tools in so you can prove that you’ve -- I think it's perfunctory [ph] installation and then you would start taking revenue at shipment..

And then in the Photonics business, obviously tremendous growth on that side, would you anticipate in 2015 that division to remain profitable? And then strategically is there any revisiting of the ideas spitting it out?.

Yes your first question, yes, absolutely we expect that business to be profitable at these revenue levels and product mix.

On the second part of your question, we look strategically at least once a year at a 3 to 5 year outlook of where we see the different programs and what is the right strategic decision for the businesses including our Photonics business.

So that strategic alternative is always there and we look to see what we think that business is worth, you know how we can best support it's growth and make those decisions fundamentally on a yearly basis..

Okay, then my last one is just another strategic one. So, by my count you’re probably in 4 to 5 different spaces with your various tools and systems and technologies.

Do you think that you’ve got the right diversification and enough shots on goal to get the business profitable in the couple of years or do you think that you will continue to diversify your R&D to even expand that further?.

I think where we stand today, like you said we’re in the, not exactly to display space but the mobile display cover protection space. We have been in solar but we’re really focusing on specific platform and specific applications that really fit what we do best, core, like very high throughput, small piece part processing, sputtering etcetera.

So we think in the near term that we need to stay focused basically on what we are focused on but we also believe in our strategic evaluation and growth strategy that there are other applications out there that are emerging that we’re keeping a close eye on and trying to stay engaged at least the R&D and on that activity..

Our next question comes from the line of Mark Miller with Noble Financial Capital Markets. Your line is now open. Please proceed with your question..

By my calculation from what Western Digital have put up, it looks like capacity has grown by 35% over the last two years capacity shipped and yet I assume that areal density has grown at a rate of half that. So I'm just curious, it seems like to me you’re talking 2016 for capacity, I think that certainly makes sense.

But where do you think media utilization is currently in the [inaudible]?.

Our estimate right now and again if you look at it just strictly as an industry, we calculated 78% to 80% somewhere in that neighborhood and then when you look at it more granular, different customers that can vary quite a bit..

It just seems to be -- we have been hearing this 78% to 80% for a while, like I said we have seen substantial growth that’s why I'm kind of scratching my head here.

Hammer, do you think that comes in next year in a big way? We have been hearing every year, it's next year, it's next year, what's your feeling what's going on with Hammer?.

In general I think on that side of the technology, I think you probably start to see some products that would come out but my expectation and you have to talk to the drive guys on their plans but my expectation is that the technology would be myriad with certain product lines and would come out incrementally with different products.

So depending on how you define a big way, but we don’t expect that to make us serious dent in the overall areal density rate for some time..

The solar stocks have got hit over the oil situation, I really don’t think that makes a lot of sense. I'm just wondering what you’re hearing in terms of porting [ph] activity or discussions with your solar customers.

Is that peeled off or is that still fairly -- going fairly well?.

No I think what we’re seeing in general is a feeling that overcapacity is either being eaten up or is close to being eaten up at this point.

I think there are very strong differences between different customers that you’ve different technologies that they are selling as well as different customers in different regions that may or may not be impacted by tariff activity.

But I say overall the mood in the industry is improving and you’re seeing some incremental capacity in Asia and some pretty significant already announced capacity expansions from some of the big Tier 1 guys..

[Operator Instructions]. Your next question comes from the line of Nehal Chokshi with Maxim Group. Your line is now open. Please proceed with your question. .

So is that the third quarter in a row that you’re well above the long term operating margin model on Photonics? Keep on talking about that, it's going to come down but it hasn’t.

Can you discuss why it hasn’t even in the context of Q-to-Q decline on the Photonics product?.

Yes, so I think probably the most significant contributor that add to that, number one our yields have been very good, which helps us a lot. But we are operating specifically on Apache, which is taking the bulk-- is delivering the bulk of the revenue into that group off of the first set of orders that we have received.

And as we stand today and you see some of the backlog coming down in Photonics, the reason that is, is because we are in negotiations for the next round of buys for Apache. So in the process of doing the due diligence on the next round of buys, you know our actual costs are reviewed and then the pricing is readjusted from there.

So that's why we expect that to happen. So there is kind of two vectors that are pushing that margin up..

Moving on to the -- and correct me if I'm wrong, for the mobile phone opportunity, it's a diamond-like carbon tool to create anti-scratch surfaces for smartphones, correct?.

Yeah, I would like to-- what we really position that product and that film is, is it is a component of a film stack that is integrated on a display cover glass that increases durability of the anti-smudge coating that our customers would put on and also giving a under layer of improved scratch protection..

Okay.

But it consists of diamond-like carbon, that's your process step, correct?.

You can call it diamond-like carbon. We call it a carbon overcoat. There is not a super clear definition of what hydrogen concentration you need to actually be called diamond-like carbon, but yes, that's fundamentally it and it's derived off the diamond-like carbon that we apply to the hard disk drives..

Okay. All right. So this tool, it's been shipped, it's not a recognized status. The product is actually coming off of it. You said you're happy with the way it's operating. My understanding is that your customer is already shipping it to its customer, who has already put it onto a market where actual consumers can actually utilize this product.

Is that correct?.

Very small quantities at this point and in one particular Asian region is where it's out at this point. Very small quantities..

Okay. Very small quantities.

What type of phones are these? Is it the highest premium phone that they are basically putting it out on, or is it a rung below that? Can you sort of detail that there?.

Our customer is not necessarily sharing all that information with us at this point, but my understanding is that it was targeted at very high end phones in that particular market. And that would drive very small volumes..

Okay.

And so what will be the incentive for the cell phone OEMs to create a distinct SKU for just the capability that you guys are bringing to the table, which you know I think is somewhat embedded in the assessment of the TAM opportunity that you're talking about?.

Yes, I think we're working through that process and that is a challenging process and we've got -- Intevac's involved, our customer is involved and then multiple customers of our customer involved in defining what the value proposition is at a given price point for the film.

I think that a recent promotion of sapphire as scratch protection generates -- has confirmed a market demand for it. It's really now an amount of how much scratch protection is good enough at a particular price.

And we're working through a very elaborate series of environmental testing with our customer to really quantify in a number of different scenarios, just what the advantage of having this coating is.

I would just add one other thing is that I also think that we all -- and we've confirmed this from the voice of the end customers, would like to see the smudge protection on our mobile devices last longer than they currently do..

Our next question comes from the line of JD Abouchar with Graham Partners. Your line is now open. Please proceed with your question..

Just a quick question on your rough guidance for 2015.

Any thoughts on what cash consumption will be for the year?.

We haven't put the numbers together. I think at this point, we're driving for similar levels as what we were able to deliver in 2014. However, when we get towards the back half, depending on -- you know there is a lot of moving pieces in the cash equation with inventory etcetera, we'll have to see how that plays out.

But we're certainly operating inside of our cost structure that we put in place in 2014..

Thank you. And there are no further questions at this time. I'll now turn the call back over to Mr. Blonigan for closing remarks..

Thank you. Before I sign off, I would like to take this opportunity to thank both our employees for their hard work and dedication in delivering to our objectives in 2014 and to our customers for their partnerships and business. For those on the call, thank you for joining us today and we look forward to updating you again during our Q1 call in May.

Until then, so long..

This concludes today's teleconference. You may now disconnect..