Intevac, Inc. (NASDAQ:IVAC) Q3 2023 Earnings Call Transcript

Intevac, Inc. (NASDAQ:IVAC) Q3 2023 Earnings Call Transcript November 1, 2023

Intevac, Inc. beats earnings expectations. Reported EPS is $-0.06, expectations were $-0.14.

Operator: Good day and welcome to Intevac’s Third 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, November 1, 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, operator, and good afternoon, everyone. Thank you for joining us today to discuss Intevac’s financial results for the third quarter of 2023, which ended on September 30. In addition to discussing the company’s recent results, we will discuss our outlook looking forward. Joining me on today’s call are Nigel Hunton President and Chief Executive Officer and Kevin Soulsby, Chief Financial Officer. Nigel will begin with an overview of our business and outlook. Then Kevin will review our financial results before turning over the call 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-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 November 1 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. Intevac posted strong results for the quarter. And I’m very pleased to have this opportunity today to update you on Intevac’s ongoing developments for 2023 and our outlook for the year ahead. As evident in our Q3 financial results, we achieved significant upside to our previous forecast for our HDD business. The revenue ramp we achieved in Q3 demonstrates our operational agility and our ability to execute to meet customer time lines for technology upgrades. Even more importantly, Intevac has emerged as the enabling technology partner for the HDD media industry. Our results in 2023 to-date demonstrate that we are a direct beneficiary of the expanded scope of HDD media technology upgrade initiatives, currently underway.

In Q3, in particular, we delivered over $5 million of revenue upside in response to both pull-ins as well as increased orders received within the quarter. As a result today, we are reporting our largest revenue quarter in nearly three years. Following the restructuring, I met with our new Leaner team in Singapore and I was particularly pleased in the way they delivered the upside in Q3 with 100% on-time delivery for a more focused organization. It’s upside for Q3 revenues culminated in breakeven earnings on a non-GAAP basis, which excludes the $2 million restructuring charges incurred during the quarter. Our balance of cash and investments declined from Q2 levels as a result of the timing of accounts receivable collections. Since quarter-end, we’ve collected over $13 million of receivables and we remain on track to end 2023 within the $75 million to $80 million guidance range, consistent with our outlook provided earlier this year.

Our revenue outlook for the year has likewise improved by about 14% from our earlier expectation in August of a $44 million revenue year to now our current expectations that we will achieve around $50 million of revenue for 2023. This will equate to year-over-year revenue growth of approximately 40% in our hard drive business, during one of the most challenging periods in the HDD industry’s history. This growth is indicative of our critical role as a key technology enabler for process technology and more importantly, set up the foundation for sustained base of technology upgrade revenues, as we look to the years ahead. Turning to the TRIO, and I’m pleased to say that we are in the qualification process for the initial system with our JDA partner Corning.

It was one of the world’s leading innovators in glass and glass ceramic materials. I’m very proud of the entire Intevac team or the way they have collaborated together, produces key milestone and support Intevac’s expansion into a new growth market. We began qualification during Q3 at our Santa Clara headquarters and are progressing through the final steps. The tool has been fully integrated and is producing process samples. As I mentioned, we are now in the final stages of qualification, which includes endurance runs to ensure consistency and runtime. These are starting this quarter and we are still on track to complete the qualification by year end. Once we achieve qualification, the next step will be to receive an initial order as per the JDA.

We continue to expect our first real revenues and cash to occur in the first half of 2024. Over the last few earnings calls, we’ve discussed what sets the TRIO apart from other manufacturing options. In our joint development process to date it is increasingly clear that Corning’s enthusiasm for the TRIO is primarily driven by the platform superior productivity and flexibility. Today on our IR website, we have added a live-action video of our TRIO running in Santa Clara, as it prepares to enter endurance, enabling you to view the modular and compact design for this world-class coating machine. This video can be found on our IR homepage along with an updated investor presentation for the company’s today’s earnings call. Slides that accompanies today’s conference call, also now include an overview of the longer-term revenue potential for TRIO, which offers a significant market opportunity for Intevac.

In our recently completed analysis, evaluating each of the potential end-market opportunities for the TRIO, we see a roughly $1 billion revenue opportunity for tools, assuming a durable anti-reflective coatings and similar applications become well penetrated through the high end of each end market. Of course, while our initial focus is on consumer electronics applications, our efforts to ramp up requirements for the automotive market will accelerate in 2024. We look forward to updating you on our market expansion strategies on subsequent earnings calls. In summary, to date in 2023, we’re on track to accomplish the objectives of the TRIO joint development program and we continue to expect to receive initial orders before year end. As we look to 2024, we believe we will revenue two to three TRIO systems and we will be building several additional tools and leveraging our investment in inventory ahead of increased order requirement component by year end 2024.

These expectations for initial TRIO revenues and expanded customer opportunities for 2024 are incremental to our solid-base business in the hard drive industry. There is no question that the expected revenue profile of our HDD media business over the next few years has changed significantly over the past year. Our customers must have not only deemphasized and delayed their capacity expansion plans but and in fact cancelled some orders originally slated for capacity enhancements. The steadfast focus this time is on our technological advancements and this is an excellent thing for Intevac, because we are proving to be a key enabler in advancing our customers’ IT Technology roadmaps. As I mentioned our outlook for 2023 HDD revenues has improved and so that’s for now around $50 million for the year.

Importantly, as we look to 2024 and beyond, technology-based upgrade revenues for us are sustainable for the foreseeable future. We have a steady pipeline of work to do with our customers to upgrade and optimize their existing Install Base. We believe that by year end 2023, approximately 10% of the world media Install Base one 200 Lean will be capable of producing HAMR media. Furthermore, we believe that all technology upgrade initiatives either underway or in planning stages by each leading HDD manufacturer are on Intevac’s 200 Lean platform. Its multi-year visibility provides us with a solid foundation of HDD business which we estimate to be sustainable for the years to come in a range of approximately $40 million annually in upgrade sales and field service.

Given this our expectation for interim revenues in 2024 is approximately $40 million in HDD sales as well as two to three TRIO systems. All together we continue to focus revenues in the low-to-mid $50 million range next year to a modest growth year compared to 2023. As a reminder our 2023 sales included one 200 Lean System as well as Refurbished System which we don’t expect to repeat in 2024. The key message of our outlook for 2024 is that after the resizing of our cost structure completed in Q3, at this revenue level we expect our P&L to be at least cash flow neutral for the full year. We have reduced our quarterly OpEx run rate to the low $7 million level and we expect the non-cash portion of our cost structure will entirely offset any GAAP operating losses incurred as we look next year.

I’ll summarize with a few additional key takeaways from today’s call. First, our TRIO qualification process is nearing its final stages and we are on track for the first orders before year end. Second, our HDD Media Business outlook has improved for 2023 and as in the early stages of the industry’s multi-year initiative to progress the industry’s technology roadmap. Third, we have a global team of employees that are energized and excited for the future. And finally, we have a strong balance sheet to support what we expect will be several years of growth ahead. Before handing the call over to Kevin, I would like to add that we currently have two processes ongoing and outstanding. One is the strategic process announced in June which we will comment on the appropriate time.

The other is the search for new CFO, which is progressing, but remains outstanding at this time and the meantime our financial design and the very capable hands of our long-term control and current interim CFO, Kevin Soulsby. Now, over to you Kevin.

Kevin Soulsby: Thank you, Nigel. Turning to the third-quarter results. Revenues totaled $17.9 million, well above our guidance of $12 million to $13 million and consisted of HDD upgrades, spares and service. We achieved more than $5 million of revenue upside, primarily due to our operational agility and our ability to respond to the increase in technology upgrade order activity within the quarter. Q3 gross margin was aligned with our expectations at 39.1%. Total operating expenses were $8.4 million, slightly below our guidance of $8.5 million. And as expected, we recorded nearly $2 million of charges associated with our restructuring plan announced last quarter. As a result, our GAAP operating loss was $1.4 million and non-GAAP operating income was a positive $0.5 million.

We recorded a GAAP loss of $0.06 per share and achieved breakeven results for non-GAAP EPS. Turning to the balance sheet, we ended the quarter with cash and investments including restricted cash of just over $66 million equivalent to $2.51 per share based on 26.4 million shares at quarter end. During the quarter, total cash declined just shy of $8 million solely due to the roughly $8 million increase in accounts receivable in the quarter as a result of delayed payments from our largest customer. We have already added $13 million of cash through the collection of receivables quarter to date and continue to expect to end the year with total cash in the $75 million to $80 million range. Cash flow used by operations was $7.5 million during the quarter.

Q3 capital expenditures were $600,000 and depreciation and amortization were $400,000 for the quarter. Now moving to guidance for the fourth quarter. We are projecting revenues in the range of $9.5 million to $11 million, which at the midpoint equates to full year revenues of $50 million. We expect fourth-quarter gross margin to be between 39% and 41%. Q4 operating expenses are expected to be around $7.25 million, which reflects the new lower quarterly run rate that you should expect for the coming year. We expect interest income of about $600,000 and GAAP tax expense of about $500,000 in the quarter. Most of the tax expense will be non-cash. We are projecting a net loss for Q4 in the range of $0.10 to $0.13 per share based on 26.4 million shares outstanding.

As we look ahead to fiscal 2024, we expect this lower OpEx run rate will enable our P&L results to be cash flow neutral for the full year given our revenue expectations in the low to mid $50 million range. Gross margin gross margins of approximately 38% to 40% and net the non-cash portion of our cost structure will total $7 million to $8 million for the full year. Therefore, our 2023 cost restructuring program completed in Q3 is enabling Intevac to eliminate any further use of our cash balance to fund our operations in fiscal 2024. This completes the formal part of our presentation. Operator, we are ready for questions.

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Q&A Session

Operator: Thank you. We will now be conducting a question-and-answer session. [Operator Instructions] The first question we have is from Peter Wright of Intro Act. Please go ahead.

Peter Wright: Great. Congratulations on a wonderful quarter and thank you for taking my question. Nigel, like I have two questions for you. The first one is looking at the HAMR upgrade cycle I missed one number that you referred to is what — what number was upgraded in 2023? If you can help me put this in context of the installed base. What I’m trying to understand is how many systems need to go through upgrade and what portion of kind of the available install base does that represent to have kind of steady-state service spares and upgrade revenue in 2024?

Nigel Hunton: Okay, Peter, thank you for that question. Yes, if you look at the HAMR upgrades, so I think we’ve shared with people that around over the short history of the 200 lien has been over 182 systems shipped. We believe they’re up and running around today in the sort of 140 plus levels up towards 150 as some of those upgrades are completed. And we’ve said around 10% of those will be ready by the end of the year. So it’s pretty simple. That’s around 15 units will be upgraded to be HAMR ready.

Peter Wright: Wonderful. And so and of the assumption how do you see that trending in 2024? Is the opportunity set bigger or smaller if you can have that? And then I’ve got I’ve got a follow-up as well.

Nigel Hunton: Yeah I think what we are looking at and we’ve said we’re going to run the similar level of upgrades over the next three to four years. That really though depends heavily on the success of the HAMR products into the market. And I think if you’ve seen some of the public announcements HAMR is starting to get some great traction. People are now putting out forecasts for 2024. And therefore I think for me the positive move of HAMR finally coming to fruition and starting to actually be seen and being evaluated and getting some successful revenue for our customer has been key to us seeing some of that additional revenue this year. But as we’ve said we see a similar level of revenues for the HAMR upgrades next year and for the subsequent year.

Peter Wright: And is there any — is there any capacity constraints on your side if that was to get pulled into next year last part of the HAMR and then I’ll ask one other one other follow-up question and I’ll come back to you is in the TRIO Billion dollar TAM that you have on Slide 11 of your deck, your joint development agreement does that represent the first three pieces? So does that cover smartphone wearables and tablet? And then it does not include automotive. Is that a good way to think about that? And then is it too early to say who your partners are going to be on that? Do you think it’s going to be an exclusive? Or do you think there could be several people that you’re working with on the auto side?

Nigel Hunton: Yeah. I mean just — if we take the HAMR serviceable available market of $1 billion first I’ll say that question first. It’s committed and that’s why we put that slide in following. So I think one of your request. I hope you appreciate the level of detail we’ve gone to and share in the size of the available market. We think it is very significant. The agreement and partnership with Corning is focusing on the consumer devices. So consumer devices other smartphones wearables tablets and laptops. And we see that partnership being key getting momentum and success into that sector. The office display is outside of that partnership. And we are — it’s early days we’re talking to people, but it’s early days. And I think 2024 we’ll see some progress around the auto sector.