Intevac - Q1 2022
May 9, 2022
Transcript
Speaker 0
Good day, and welcome to Intevac's First Quarter 2022 Financial Results Conference Call. A brief question and answer session will follow the formal presentation. As a reminder, this conference is being recorded. Please note that this conference is being recorded today, May 9, 2022. At this time, I'd like to turn the call over to Claire McAdams, Investor Relations for Intevac.
Please Go ahead.
Speaker 1
Thank you, Devin, and good afternoon, everyone. Thank you for joining us today to discuss Intevac's financial results for the Q1 of 2020 to which ended on April 2. 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 Jim Moniz, Chief Financial Officer. Nigel will begin with his prepared remarks and then Jim will review our financial results before turning the call over to Q and 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 remain 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 ks and quarterly reports on Form 10 Q. The contents of this May 9th 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 Nigel.
Speaker 2
Thanks, Claire, and good afternoon. Thank you for joining us today and hearing more about the new Intevac. It's now been just over 100 days since I started with Intevac. And that has been a very exciting and productive period of time for both me and the company. We have eliminated a layer of top management, Consolidated our development efforts and stopped programs that wouldn't deliver a positive return.
I've started to develop the new management team. I've traveled to Singapore and I've met with our employees, major customers and suppliers. So a busy and very active start to the year. We've also announced record bookings in our core And identified how to focus our growth initiatives to expand our business beyond the HDD market areas. I will get into all of these in a moment, but first let me quickly recap on our financial results for the quarter, which came in as expected.
We had some upside in HDD upgrade business, resulting in total revenues of $4,400,000 Our non GAAP results excluded $2,700,000 of restructuring related costs, including severance and disposals of fixed assets. And the resulting non GAAP loss was $0.20 per share, so better than forecast. The primary highlights of the quarter center on orders and backlog, both of which achieved new 12 year record highs. New orders in the quarter totaled $67,000,000 which enabled us to grow backlog to over $87,000,000 as of quarter end. The $87,000,000 of backlog includes nearly $60,000,000 of 200 Lean Systems.
1200 Lean will ship in Q4 this year and the systems ordered at the end of Q1 will ship over multiple quarters beginning in mid-twenty 23. The remaining $27,000,000 of backlog at the end of Q1 consists of ACD upgrades, spurs and field service. And given this month's significant new order, we also expect to report a sequential increase in backlog for the end of Q2. In February, we announced a multiyear refurbishment and upgrade agreement with a major data storage company being deployed on the 200 Lean platform rather than on the incumbent equipment suppliers platform. Valued at over $20,000,000 orders released in this program will be added to backlog on a system by system basis over the 2022 to 2024 time At the end of Q1, less than $5,000,000 of the $20,000,000 agreement was in battle.
Since November of last year, we have now announced 4 orders and agreements that firmly establish our 200 Lean system As a platform of choice for the entire industry's media capacity expansion plans being put into place for the next few years. To recap, November's announcement marked the very beginning of new 200 lean capacity orders. February's announcements highlights a major agreement with a leading data storage company to add capacity. The $54,000,000 order received at the end of Q1 Was the largest 200 Lean System order received since early 2010. And finally, our most recent press release Includes an additional $11,000,000 of 200 Lean System orders.
As I mentioned on the last call, I'm happy to confirm we expect HDD revenue in 2022 will be similar to last year at around $35,000,000 Importantly, we already have the backlog in place in support of a $65,000,000 to $70,000,000 year in 2023, giving us confidence for the future. The key in 2023 We'll be achieving profitability and positive cash flow generation at this revenue level, which brings me back to our priorities. 1st, assessing our growth potential in each of our end markets, which entails strengthening relationships with each of our key customers, both existing and prospective. I'm pleased to say that during my visit to Singapore, I met with our employees, suppliers and customers ensuring that in my 1st 90 days, as promised, I met with all key existing and prospective customers in the USA and Singapore. A great start to positioning InterVac as a customer driven organization and more importantly, understanding the potential future business opportunities.
Next, I've worked internally on streamlining the cost structure and to align resources with our revenue growth prospects. In the Q1 of 2022, We made significant progress in support of our new business model with a focus on our core HDD Media business and a vastly more targeted approach any equipment growth opportunities outside of our core HDD market. As I mentioned earlier, We're also investing in the new management team to leverage the strengths of each person supported by a focused leadership development program that can propel the company forward. We will still maintain an emphasis on cost control and managing our cash while selectively adding capabilities that support future growth. And 3rd, positioning the company for a return to profitability as soon as possible while preserving the strength of the balance sheet.
With prudent control of working capital in the quarter, we were able to limit the decline in our cash balance to solely transaction Related to the sale of the Photonics business, which were about $4,000,000 We ended with a total of $117,000,000 of total cash and investments, a great achievement by the management team. We effectively eliminated an entire layer of executive management as we significantly simplified our operating structure. We now have a strong foundation for growth and profitability in our core HDD Media business. We redeployed investment into our supply chain and made targeted R and D investments in support of our additional growth initiatives, enabling us to move forward with a customer focused structure in support of our most significant prospects for revenue growth and profitability. Our sole activities outside of our core HDD Media business today are focused on very specific applications, Well, we believe Intevac offers a compelling and differentiated solution at the right price point to disrupt the market in pursuit of what could become large revenue opportunities.
We believe these are centered on our unique capability to provide cost effective, Optically clear ballistic coatings. Our new tool approach that addresses these specific market needs is the Trio, which is a brand new concept And importantly, a very cost effective machine based on recent feedback from our prospective customers. The trio also leverages our 200 lean expertise in producing advanced films at high productivity on a small substrate platform. We are pursuing strategic partnerships from several companies that I have approached since I began as CEO. In order to validate this growth opportunity for Intevac, and we look forward to providing you with updates on our progress each quarter.
This customer focused approach is enabling the company to move forward with a clear vision and we have stopped the initiatives that no longer fit with our revamp strategy. We believe the combination of Intevac's ballistic coating and the Trio technology provides scratch resistant Protection and enhanced durability for multiple applications due to its superior hardness, strength, Service adhesion and thin film properties when compared to existing technologies and with improved optical transmission. Before turning the call to Jim, I'll provide a few more comments around what we see in our core HDD media market. The headlines are rife with debate over signs of near term pockets of softening demand, the trajectory of mass capacity derived growth for data centers, The impact of supply chain challenges and much more. These are bound to result in increased volatility and speculation around the particular dynamics of the HDD market.
There are a few trends in the industry, however, which drive Intevac's 2020 and is expected to remain a growth industry for the foreseeable future. 2nd, Media unit growth is being driven by nearline demand for mass capacity drives, which contain as many as 8 to 10 disks each. This growth in data center storage needs, which is estimated at upward of 35% annually, cannot be fully served by the solid state drive market. And in fact, expectations for exabytes shipped on SSDs over the next 5 years are still a small fraction of those being Shipped on hard drives. The 7 to 1 cost advantage of HDDs in terms of price per bit has not narrowed and is not expected Media capacity and the leading drive manufacturers are working with Intevac to add capacity solely on the 200 Lean platform.
So while near term fluctuations, supply chain challenges and volatility of the hard drive market are certainly making headlines, The growth foundation for our core media business is firmly established and the visibility and backlog we have today provide the confidence for future revenues And in combination with our restructuring program, plus orders secured for volume shipments, we're on track for a return to profitability by mid-twenty 23. Lastly, I look forward to continue working with our customers, our suppliers, our stockholders, our board and management team and the entire organization as we build a new InterVac. That completes my prepared remarks. And with that, I will now turn the call over to Jim.
Speaker 3
Thank you, Nigel. Turning to the Q1 results. Consolidated 1st quarter revenues totaled $4,400,000 Above our guidance of $4,000,000 and consisted of HDD upgrades, spares and service. Q1 gross margin was 16.3%, below our guidance of 25% due to inventory reserves of 700 and cover panel inventory where we will no longer focus our efforts. Without these reserves, gross margin would have been 32% Above guidance.
Q1 R and D and SG and A expenses were $8,400,000 which included $1,500,000 charge to dispose of certain lab equipment as well as $1,200,000 in severance, which was largely offset by stock grant forfeitures in the quarter. Net of these adjustments, operating expenses would have been just below our guidance of $7,000,000 The Q1 net loss was $7,900,000 or $0.32 per share. The non GAAP net loss was $5,000,000 or $0.20 per share and excludes the impact of restructuring charges and discontinued operations from the Photonics division. Our backlog was $87,000,000 at quarter end, reflecting the $67,000,000 of New orders booked in the quarter. Post quarter close, we announced an additional $11,000,000 of systems orders, which builds backlog for the current quarter.
We ended the quarter with cash and investments, including restricted cash of $117,000,000 equivalent to $4.71 per share Based on 24,900,000 shares at quarter end, the net decrease in cash from year end 2021 was limited to The transaction costs related to the sale of the Photonics business as cash flow used by operations was $4,100,000 during the quarter. Q1 capital expenditures were $618,000 And depreciation and amortization were $445,000 for the quarter. Now moving to Q2 2022 guidance. We are projecting consolidated revenues to be in the range of $8,000,000 to $8,500,000 reflecting a higher level of HDD upgrades, spares and field service revenue than we reported in Q1. For the first half of twenty twenty two, this represents about a 20% increase in the HDD business versus what we reported in the first of 2021.
Given the higher Q2 revenues and favorable mix of upgrades, We expect 2nd quarter gross margins to be around 45%. Q2 operating expenses are expected to be around 6.7 to $7,000,000 We expect interest income of around $20,000 and GAAP tax expense of around $500,000 in quarter. Most of the tax expense will be non cash. We are projecting a net loss in the range of to $0.15 per share based on 25,000,000 shares outstanding. For the full year, as Nigel mentioned, We continue to expect hard drive revenues will be similar to last year at around $35,000,000 This includes 1200 Lean System and therefore a slightly lower mix of upgrades.
Given the timing of deliveries during the year, We expect over 60% of 2022 revenue will be recognized in the second half. At this revenue level and expected mix, We anticipate gross margins for the year will be in the high 30s. We expect ongoing cash based operating expenses will decrease compared to last Finally, we expect to end fiscal 2022 with a total balance of cash, Cash equivalents and investments of at least $115,000,000 That completes
Speaker 0
Our first question comes from the line of Mark Miller with The Benchmark Company. Please proceed with your question.
Speaker 4
Congratulations on your cash management and also your orders. That's good news. Just was wondering in terms of supply chain issues, how much of a headwind has it
Speaker 2
Yes. Just I mean the supply chain is as everyone knows is extended out And extend it out. And if I look for 2022, we placed Significant orders for inventory. We placed orders for the demand that was coming in. So from a confidence level for 2022, we've got a pretty high confidence level that the numbers we've committed to at $35,000,000 are achievable and we can manage that within the supply chain constraints around.
So I think the team are doing a very good job around that. And I guess as we mentioned on the call, the big challenge really is around 2023. I think we are confident around the level of the sort of 65 to 70. I think supply chain If the supply chain opens up and deliveries come in, there's potential upside on that. But I think being conservative at the moment based on the client chain dates we have, we're pretty confident around the 2023 number as well.
But it is challenging if you try and push for additional revenue and actually drive High volumes.
Speaker 4
In terms that you took a number of inventory reserve hits last quarter, Which impacted margins, are we done with this in the future quarters? Has the inventory been cleaned up?
Speaker 3
Yes, Mark. As far as we're concerned, we are done with this. We took a big Hit as you know in a lot of the fixed finished goods in Q4 and then we did a more thorough look at some of the Stock room inventory and took that last hit in Q1. We believe we're done with any major hits. Yes, we are.
Speaker 4
Okay. The 1200 Lean is You mentioned this, is that going to be in the Q3?
Speaker 3
No, that will be in the Q4, Trey. Okay. As originally scheduled.
Speaker 4
Thank you.
Speaker 3
Thank you, Mark.
Speaker 0
Thank you. Our next question comes from the line of Peter Wright with IntraAct. Please proceed with your question.
Speaker 5
Great. Thank you for taking my question. Congratulations, Nigel, Nigel on an amazing first 100 days. My first question is understanding the backlog. $87,000,000 does that mean there's about $13,000,000 of upgrades embedded in that if I'm backing out your $20,000,000 refurb in your $54,000,000 system?
Speaker 3
Yes, that's a good number, Peter.
Speaker 5
And so if I add the 11,000,000 you're just probably right around $100,000,000 backlog active ish Today, my question is on the precision of that, but if I look into the second half of this year, What is the opportunity to sell incremental business in 2023 and what would it come from? Would it come from the Same customers that are in backlog today or would it come from new customers?
Speaker 2
So I think as we sort of talked about it, so The sort of 65% to 70% range we've given is HDD business around existing customers. And that was a number we feel pretty confident that we can actually revenue in the year. I mean, if the supply chain opened up, there could be upside. But I think realistically, We have to assume the supply chain constraints are going to be around for the next, I think, 2 to 3 years being realistic. Some components We've gone extending out sort of 2 year lead time.
So we have to make sure that we have put in a number that we know we're confident that we actually revenue in the year.
Speaker 5
And if you were to look at those orders, do you think that they reflect kind of the best and full demand From those customers or for a period of time, are you starting to get visibility on the other side of kind of the bid 'twenty three
Speaker 2
Yes. I think the other thing I mentioned in my previous one, the upgrade orders which is $20,000,000 We've got less than $5,000,000 of that already taken as orders. So there'll be additional orders coming through for that as well. So we see that the order book, as you rightly say, is just under the $100,000,000 today. And we're confident There'll be some more upgrades and things coming through, but for new lean sort of systems, I don't expect any significant orders coming through this year
Speaker 5
And very last question is just the gross margin assumption. If you look at the 23 number with the system mix in there, Any thoughts on where margin would be and then is OpEx Kind of most of the heavy lifting is behind you at this point and kind of the 6, 7 to 7 ish a quarter is a doable number as sales ramp As an offset to the cost cuts as well.
Speaker 3
Yes. So the first question, I would expect margins next year to be Low 40s, 40 to 45 depending on the mix in any given quarter, but certainly in the low 40s. Your Observation about OpEx, I think is a good observation. Keep in mind that included in this year's our run rate is going to be around $7,000,000 We're not giving Guidance beyond that, we still think there could be some room second half of the year to look at that. And then can I just ask for clarification on your First question again, because I think you gave a number like $11,000,000 or $13,000,000 for upgrades in backlog?
Speaker 5
Correct. Is that and there's another system in there. I got it. So $13,000,000 how does that breakdown of upgrades versus Non-two hundred Lien Systems?
Speaker 3
Yes. So I think that number is low because I don't know the systems refurbishments that we talked about. Those are actually going to be an upgrade. And so if you look at the $87,000,000 in backlog at the end of Q1, There's probably closer to around $28,000,000 that's upgrades, fuel service and spares.
Speaker 5
How far out does that go?
Speaker 2
Is that a one?
Speaker 3
That goes out to covers this as Nigel said, it covers most of 2023, but we still have Somewhere around maybe $3,000,000 or $4,000,000 that we're booking in Q2 and Q3 that will result in turns business in the year. And we did talk about, there's like I said, there's about $27,000,000 of the backlog was the non systems backlog part of
Speaker 2
the 87,000,000 And it's probably worth reiterating the comment I made on the last call as well, where we felt that $35,000,000 was right for this year, 65 next year, but that over the 4 years that a 200 number was absolutely achievable. As I touched on, I've sort of visited our Existing customers, we look to prospective customers and other businesses. And that's given me a level of confidence. We've sort of said it in the sort of prepared remarks That we're confident about the demand now and the feedback that gives us the sort of visibility that says that, that number is still a good number.
Speaker 5
$400,000,000 and just to clarify that includes 2022.
Speaker 2
So $200,000,000 is 2022, 2023, 2024, 20 25. So we did over 4 years. If Remember on the last call, I said it really wasn't realistic to say that would be delivered in 3 years. But 4 years, I was relatively confident. And I said, as I've touched on, We visited the customers.
We're focusing very much on the customer focus. And that's an important part of the new strategy about being much more understanding of the customer requirements. So that's not just about the future technologies, but about the existing HDD business and getting much closer to our customers.
Speaker 5
Great. Very last question. What about the strategic review? Is that now over at this point, with the restructuring that you did? Or is that still on
Speaker 2
So we're talking about the strategic review with Greenhill, you're talking about. So that engagement continues. We're always and regularly assessing our strategic opportunities and how absolutely how do we increase Stockholder shareholder value. And we believe that the Photonics was step 1 in that process. But we're still focusing very much on what is the real opportunity so we Turn the new Intevac into and I've said it's key for me to make sure we actually put in the right R and D and the right focus On the potential future opportunities.
That's why we focus very much around this ballistic coating and the opportunity for the sort of scratch resistant technologies and leveraging our strengths. And I believe having the customers I've brought in and talked to already in the 1st 100 days, We have an opportunity there and it's going to take we've worked very hard to get that first Trio tool up and running. Key now is to keep everyone updated on each of the subsequent calls, how those developments go, how the feedback comes from the customers. And that for me is an opportunity for us to grow and develop and maintain our own focus independently and build a stronger InterVac in the future. But that doesn't stop me from maintaining sort of dialogue and engagement with Greenhill.
Speaker 5
Great. Thank you for answering my questions and congratulations again on especially this market doing what you've done in the last 100 days.
Speaker 3
Thank you, Peter.
Speaker 0
Thank you. There are no further questions at this time. I'd like to turn the floor back over to Nigel for his closing remarks.
Speaker 2
Thank you. As I look at where we are today compared to 100 days ago, I feel we've made tremendous progress creating a new Intevac. We believe Intevac is a sound investment and I'm eager to meet with as many interested investors as possible over the coming months. And that was what I'd say, once I highlight that our upcoming investor events include the Virtual Ideas Conference on June 23, And the face to face with the CEO Summit in San Francisco on July 13. So please, if anyone wants to talk to me face to face, Please reach out to Claire directly and follow-up with her and then we can meet with you.
And we'll also be updating a new investor slide deck to our IR website within the next week. So I invite you to also check back and download that. And with that, I'll say thanks again for joining the call. Appreciate your support for Intevac. And with that, I'll conclude today's call.
So thank you.
Speaker 0
This concludes today's teleconference. You may disconnect your lines at this time. Thank you for your participation and have a wonderful day.