Intevac, Inc. (NASDAQ:IVAC) Q1 2023 Earnings Call Transcript May 6, 2023

Operator: Good day. And welcome to Intevac’s first quarter 2023 financial results conference call. At this time, all participants are in a listen-only mode. A brief question-and-answer session will follow the formal presentation. [Operator Instructions] Please note that this conference call is being recorded today, May 3, 2023. At this time, I would like to turn the call over to Claire McAdams, Investor Relations for Intevac. Please go ahead.

Claire McAdams: Thank you, Irene, and good afternoon, everyone. Thank you for joining us today to discuss Intevac’s financial results for the first quarter of 2023, which ended on April 1st. In addition to discussing the company’s recent results, we will provide financial guidance for the second quarter of 2023 and our outlook looking forward. Joining me on today’s call are Nigel Hunton, President and Chief Executive Officer; and Jim Moniz, Chief Financial Officer. Nigel will start with a review of each of our businesses and our current outlook, then Jim will review first quarter results and discuss our financial outlook before turning the call over to Q&A. I’d like to remind everyone that today’s conference call contains certain looking — 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 May 3rd 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 Nigel.

Nigel Hunton: Thanks, Claire, and good afternoon, everyone. I am pleased to have this opportunity today to update you on our year-to-date activities, progress on the TRIO platform and discuss the business environment in our primary served markets. First though, I will run through the Q1 results. In our hard drive business, we achieved revenues at the upper end of our expectations, due to the increased urgency and customer demand to drive aggressively towards their technology advancement objectives, resulting in an acceleration of upgrades deployed during the first quarter. With gross margin and operating expenses consistent with our forecast going into the quarter, the resultant net loss of $0.16 per share was also at the upper end of our expectations.

Now I will share my perspective today on the business environment affecting all electronics markets, starting with the hard drive market. As we are all very aware, the hard drive industry entered a period of softening demand around mid-to-late 2022 and around that time, we significantly moderated our growth expectations for 2023. Since that time, we have also discussed the reprioritization of customer demand, which effectively delayed plans for capacity additions in favor of a rapid deployment of technology upgrades. Our guidance for HDD revenues in 2023 has been consistent at around $40 million, roughly split between the first half and second half. Given the widespread weakening of customer demand across the electronics industry, the overall business environment has become increasingly challenging, especially related to forecasted growth rates for mass capacity drive demand.

These recent industry announcements indicating further weakening of the HDD market are now putting a portion of the 2023 forecast at risk of pushing out. The fact that we have been able to largely maintain our 2023 HDD revenue forecast over the last three quarters in spite of the continued deterioration in market conditions is testament to our critical role as a technology provider and enabler for our hard drive customers and our forecast for 2023 is primarily driven by technology upgrades that enable the migration to HAMR drives. There is no doubt that capacity additions have been pushed out and that the industry is utilizing significantly less than the currently installed media capacity. Even though our customers have altered their outlook regarding the timing of capacity investments, they remain excited about the long-term opportunities presented by the secular growth of data and the relevance of mass capacity storage as new data centric applications emerge and more workloads migrate to the cloud.

Our view on the latest industry feedback, however, is that the slowdown in the growth rate of data center investments will continue for some time. I will continue to meet with our leading customers each quarter in order to ensure we are sharing the latest data and outlook on each earnings call. In response to the current industry conditions, we are prudently managing costs and expenses as we weather through this drought in system shipments and we are closely watching inventory dynamics to determine the timing and magnitude of any changes to our longer term forecast. Finally, in what is now highly regarded as a game-changing development for Intevac, in late 2022, we delivered on our commitment to develop a meaningful partnership relating to a new product category.

Intevac’s development of the TRIO platform, a new product that supports consumer electronics and other applications has the potential to provide a runway of compelling and sustainable long-term growth opportunities and revenue for Intevac far into the future. It is by far and away the most important development achieved by the company since the launch of the 200 Lean products 20 years ago. The recently announced development agreement was a key milestone in our growth strategy, as it has the potential to broaden our product line and increase the total addressable market we can reach. These have been an extremely busy and productive first three months of 2023. On the last call, I highlighted that the process of transferring the technology from a test bed to a production tool and then into qualification would take a couple of quarters.

I therefore am very pleased to have confirmed that, at the end of Q1, we successfully completed the build of our first TRIO system, which is a significant and key milestone. The TRIO system is currently running samples and testing multiple configurations and chemistries to optimize the tool. Our partner continues to express their excitement about the TRIO technology and development program and our next milestones are to move the tool to qualification at the end of this quarter and complete qualification ahead of market demand returning in 2024. Because of this progress with TRIO, we will continue prioritizing resources towards these new opportunities. As a result, during the quarter, we also made further investments in the TRIO development program, which we are able to make given our strong balance sheet and these underscore our confidence in the platform’s future success.

One key investment was to capitalize the TRIO tool for wider development activities and ensure we retain a capability for in-house coating for all our potential customers. A key driver of this decision was positive feedback from meetings held in the USA, Japan, South Korea, Vietnam and Singapore during the quarter. However, in the electronics ecosystem, we have seen forecasts being significantly reduced, levels of consumer weakness that are just beginning to be understood and development time lines elongating. Many OEMs have signaled that the industry’s sharpest slowdown in more than a decade is lasting longer than expected. As such, we are responding to the evolving market conditions and customer qualification timelines and are still forecasting that initial TRIO orders will be placed around year-end 2023 with first revenues now in 2024.

As we sit today, we have an incredibly strong team that can execute and deliver world-class products to the forefront of the markets we are operating in and pursuing and with great partners. Our objective on this call today is to ensure that our investors, analysts, employees, suppliers, customers and all stakeholders recognize the important achievements over the last 15 months and our confidence and commitment in our strategy to deliver strong growth and financial performance for years to come. Underscoring our confidence and commitment to delivering this strong performance are the unique attributes of the TRIO and before turning over the call to Jim today, I will highlight some key features about technology and platform we are developing with our strategic partner.

TRIO technology leverages the 200 Leans flexible and modular design that enable coating of glass disks. TRIO was able to coat glass faster than any other manufacturing processes, resulting in higher throughput. TRIO was also more flexible than other manufacturing designs and it does have capability for all form factors, including 2D and 3D shapes. And TRIO’s unique operating concept enables a compact footprint. We continue to believe that over time, the TRIO platform will be developed for multiple applications and make a significant contribution to our growth plans. Despite the uncertain operating environment, our significant technology expertise, deep customer relationships and strong fundamentals provide a solid foundation for us to execute on our business strategy.

This includes expanding our served markets, diversifying our customer base, expanding market research, establishing a leaner and more diverse team of operational leaders and continuing to deliver differentiated technology and manufacturing solutions to our partners and customers. In summary, we have launched into 2023 with continued progress following the transformative 2022 for Intevac. We are very excited about the future and our new partnership and development agreement for the TRIO platform. I will take this moment to emphasize just how committed we are as a company to increasing stockholder value and protecting the strength of the balance sheet. We made a decision to utilize our strong cash balance to make strategic investments in our future and these investments will absolutely convert back to cash as we revenue multiple tool deployments in the coming years.

As we grow the business and transform Intevac into a consistently growing and profitable cash generating company with a leading position in each of its key markets. Our goal is to emerge in these challenging market conditions as a stronger, more agile company with a return to profitable growth and leveraging our technology leadership. That completes my prepared remarks. And with that, I will now turn the call over to Jim.

Jim Moniz: Thank you, Nigel. First quarter revenues totaled $11.5 million and consisted of HDD upgrades, spares and service. Revenues were at the high end of our guidance range of $10.5 million to $11.5 million due to the acceleration in pull-in of technology upgrades in the first quarter. Q1 gross margin was 40.9%, roughly at the midpoint of our guidance of 40% to 42%. Q1 R&D and SG&A expenses were $9.2 million, just below the midpoint of our guidance of $9 million to $9.5 million. The Q1 net loss was $3.9 million or $0.15 per diluted share. The non-GAAP net loss was $4.2 million or $0.16 per diluted share, which is equal to our net loss from continuing operations and excludes the impact of discontinued operations from the Photonics division.

Our backlog was $120.7 million at quarter end, reflecting the $10.5 million of new orders booked in the quarter. We ended the quarter with cash and investments, including restricted cash, of $85 million, equivalent to $3.27 per share based on 25.9 million shares at quarter-end. This equated to a net use of cash of $28 million in the first quarter. The most significant change in the composition of our working capital during the quarter was the roughly $14 million increase in inventory. As we discussed on our last earnings call, we have been making targeted strategic investments in TRIO-related inventory in support of the growth ahead. These investments, which began in earnest in Q4 and which drove the majority of the increase in inventory during Q1, support the build of multiple TRIO systems over the next several quarters.

To a lesser extent, a portion of the increase in inventory was in our hard drive business and reflects a number of long lead-time components that we had ordered over a year ago when our customers were on an aggressive delivery schedule and the supply chain was highly constrained. However, it’s important to note that this inventory was already funded by advanced customer deposits received late last year. On our last call, we shared our outlook that we expect inventory to continue to go up as we go through the year and that when you see a decline in cash, there will normally be a corresponding increase in inventory to support customer requirements. That being said, our cash declined more than we expected in Q1 and that is largely attributable to the $6 million increase in receivables year-to-date.

This increase is directly related to the current very challenging business environment in the hard drive industry and the extended payment terms we currently have in place with our largest customer. The cash portion of the P&L loss was about $2 million after adjusting $1.6 million of stock compensation and about $400,000 of depreciation and amortization. Total cash flow used by operations was $24 million during the quarter and the remaining use of cash in Q1 was from capital expenditures of $4 million, driven primarily from the TRIO tool being capitalized. We absolutely acknowledge and appreciate that the use of cash exceeded our expectations going into the quarter. We expect the increase in receivables will convert the cash within 2023 and the increase in inventory will take a bit longer to convert, but it absolutely will.

Further, the additional HDD inventory is more than funded by advanced customer deposits. When these HDD systems were orders were placed, we were on a very aggressive shipment schedules with a highly constrained supply environment, and as such, we made certain commitments to purchase critical components and delivery of these non-cancelable orders will continue throughout 2023. Now let me move to the current quarter Q2 2023 guidance. We are projecting revenue to be in the range of $8 million to $9 million. This would bring first half revenues to $19 million to $20 million, which is about 40% higher than the first half of 2022. We expect second quarter gross margin to be in the mid-30% due to the increased under-absorption and a somewhat less favorable mix of higher margin upgrades.

Q2 operating expenses are expected to be around $8.5 million. We expect interest income of about $400,000 and GAAP tax expense also of about $400,000 in the quarter. Most of the tax expense will be non-cash. We are projecting a net loss in the range of $0.21 per share to $0.23 per share based on 26 million shares outstanding. For the full year, as Nigel mentioned, for the last few quarters, we have been consistent with our expectation that hard drive revenues will be around $40 million this year. But with our visibility today, we believe as much as 10% of that forecast is at risk of pushing out to next year. This forecast continues to include one 200 Lean system and a similar level of upgrades to 2022, and at this time, our full year revenue forecast does not include revenue from TRIO.

Given this revenue profile and expected mix, we now anticipate gross margins for the year will be in the 35% to 38% range. We expect ongoing operating expenses will be below the $8.5 million forecasted for Q2, and as a result, full year OpEx is now expected to be approximately $34 million. We expect both interest income and taxes to be in the range of $1 million to $2 million in 2023. Finally, our current expectation is that our use of cash for the remainder of 2023 will be in the range of $5 million to $10 million, which is largely comply — comprised of planned material receipts in support of future growth. This completes the formal part of our presentation. Operator, we are ready for questions.

Q&A Session

Operator: Thank you. [Operator Instructions] The first question is from Hendi Susanto of Gabelli Fund. Please go ahead.

Operator: The next question is from Mark Miller of The Benchmark Company. Please go ahead.

Operator: The next question is from Peter Wright of PartnerCap Securities. Please go ahead.

Operator: There are no further questions at this time. I will now turn the call back over to Nigel Hunton for his closing remarks. Please go ahead, sir.

Nigel Hunton: Thank you. Firstly, I want to thank all of our employees, as well as their sort of counterparts with our industry partners for their hard work and dedication as we progress with our partnerships with the new TRIO platform, as well as the partnerships for the HDD’s industry transition to HAMR. I think it’s been an incredible performance from everyone. I also wish to thank our investors for their ongoing support. Clearly, we need this while these near-term macroeconomic challenges are adversely affecting demand in each of our markets. So I would like to thank the investors for their support in that remit. And also, I’d like to say that, if you want to reach out to Claire directly, if you want to follow up with us and we look forward to updating you on our Q2 call early in August. And with that, I will conclude today’s call. Thank you.

Operator: This does conclude today’s conference. Thank you for joining us. You may now disconnect your lines.