Intevac - Q3 2022

Transcript

Speaker 0

Good day, and welcome to Intifac's Third Quarter 2022 Financial Results Conference Call. Please note that this conference call is being recorded today, November 2, 2022. At this time, I'd like I'd like to turn the call over to Claire McAdams, Investor Relations for Intevac. Please go ahead.

Speaker 1

Thank you, Michelle, and good afternoon, everyone. Thank you for joining us today to discuss Intevo Saks Financial Results for the Q3 of 2022, which ended on October 1st. Shortly after the close of market today, we posted our Q3 earnings release and an updated investor presentation to our IR website. 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 review of the Q3 and our outlook looking forward.

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 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. Uncertainties relating to these comments and other risk factors discussed in documents filed by us with the Securities and Exchange Commission, The contents of this November 2nd 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.

Speaker 2

Thanks, Claire, and good afternoon. I would like to welcome everyone and thank you for joining us for our Q3 2022 results conference call and hearing more about the new Intevac. Now approaching the end of my 1st full year at Intevac, I feel we have made tremendous progress building the foundation for growth and increased stockholder value. Today, I will provide an update on our progress with securing a partner for the Trio, as well as discussing how we see our HDD business shaping up over the near and medium term given all the changes in the industry since our last call. 1st, However, I'd briefly recap our 3rd quarter results.

Revenues were $10,800,000 above the at the high end of our guidance, as our customers elected to accelerate their technology upgrade plans during this period of reduced hard drive production volumes. This more favorable mix of revenues also drove upside in gross margin, which reduced our operating loss We had another very strong bookings quarter with new orders of $21,000,000 As a result, 2022 is shaping up to be a record setting bookings year with new orders of over $110,000,000 year to date, Driving another sequential increase in backlog, which is also exceeded $110,000,000 at quarterend. The new order activity in Q3 was primarily focused around strategic technology upgrade initiatives, which which we believe will position our HDD customers for their next generation of mass capacity drives for the cloud. We also had a strong quarter of cash flow generation, primarily as a result of our advanced customer deposits received in support of the record level backlog, And we ended Q3 with total cash and investments of $125,000,000 As I'll discuss in more detail in the Q4, we'll be investing a portion of our cash in long lead time inventory Total cash at year end is now in the $105,000,000 to $110,000,000 range.

As a reminder, The customer deposits received in Q3, which resulted in a $125,000,000 cash balance are typical of our customer engagements to fund the necessary inventory purchases and you should expect that with the sequential decline in cash during Q4, you'll also see a commensurate increase in inventory levels. In my customer and investor facing activities since our last Call. I made another trip to Asia to meet with existing and potential new customers in both Singapore and Malaysia and to ensure our high volume manufacturing center in Singapore is positioned to rapidly ramp tool and process module production in the coming months. We also reviewed our technology roadmaps with our customers in both Asia and the USA to ensure we are fully aligned with their needs. In addition, I've met with many new and prospective investors who are eager to understand our strategy and future prospects with the new Trio platform, the changing HDD demand environment and our plans related to our very healthy cash position.

We are very pleased to see all the new interest coming from the investment community. And today, I'll provide an update on our Trio strategy, We are pleased to report today that we have executed a non binding term sheet with Corning, Incorporated. The objective of our partnership is the development and deployment of the Trio platform applications. We are advancing to a definitive agreement with Corning and expect to have it signed by year end. Our confidence in the collaboration is such that we're starting to invest in long lead capital items to support the program, partnership once definitive agreement was signed.

However, we are disclosing the status of our relationship with Corning today Because of the substantial size of the opportunities being pursued across multiple applications and because the funding of some of the inventory purchase required to meet targeted deployment timelines is impacting our year end cash guidance, which we've been very consistently communicating through 2022. Speaking of our cash balance, I will add here the strength of our balance sheet has been a highly valued Intevac asset that has been vitally important in establishing our ability to grow and scale. This is commensurate with a partner with leading global market share. I look forward to updating you again once the definitive agreement is finalized. But clearly, 2022 has been a very exciting and I was very pleased to announce the recent appointments of John Dickinson as our VP of Operations and Mark Popovich as our VP of Business Development, and they are already making an impact given the announcement of our partnership with Corning today.

This year. In talking with our customers and other industry experts, the most recent revisions to forecasts and build plans are the result of a number of factors, which together have impacted both supply chain and demand levels for hard drives. In the short term, this multitude of factors, which include inconsistent components availability, excessive inventory bills, Higher costs overseas against a strengthening dollar, a rapid contraction in drive demand for both the client and cloud quarter of 2022, this would be nearly halved compared to the levels expected just 6 months ago. As a result, Whereas prior industry expectations were for media capacity utilization to be completely exhausted by year end, instead our customers currently running media production at less than 60% of capacity. This is expected to be a temporary cut to production levels we're steadily increasing levels anticipated as we move through 2023.

There has been no change in the long term importance of In the cloud, the need for capacity is insatiable. Workloads continue to grow in complexity and to quote from a recent keynote, Hard drives are still the king of big data. Given the continued robust demand profile for mass capacity HDDs for the cloud over the next several years, our customers are continuing to execute on their multiyear plans for capital investments, both in capacity additions and technology upgrades. Our longer term revenue forecast for our HDD business is essentially unchanged since our last earnings call. What has been adjusted by our customers, however, is the balance of the demand between systems or you call it new capacity and technology upgrades.

The steep reduction in production has afforded them a unique opportunity to take advantage of idle capacity and upgrade these systems in support of next Generation Media. New tool installations, however, are being deemphasized, while upgrades are being pulled in. Part of the $21,000,000 in new orders received during Q3 were for accelerated deployment of upgrades in the current quarter as well as early 20 20 anticipated 200 lean tool shipments previously planned for Q4 revenue and our revenue forecast for 'twenty We also continue to expect that our HDD revenues in 2023 will show modest growth over 2022 in the low double digit percentages, as we said last quarter, to approximately $40,000,000 The recent order announcement for $12,000,000 of HAMR upgrade supports our forecast for 2023 revenues. The 200 Lean system that has been scheduled for the current quarter has been rescheduled for July of 2023, which drives the incremental revenue growth next year. We We expect revenues from HDD upgrades and field service will be similar next year compared to this year and the installations of new 200 lean capacity will now begin in earnest beginning in 2024 2025.

Our close collaboration with our customers on their future plans, Along with solid backlog of $110,000,000 and growing, provides us with continued confidence in our longer term hard drive revenue forecast Incremental to this unchanged forecast for growth in our HDD business is that we now see an extended investment cycle in both capacity and technology It's beginning to give us visibility for at least $300,000,000 of HDD revenues through 2026, With upside being driven by the installed base of over 150 systems that will need to be upgraded to 7 process modules to be HAMR It's also worth emphasizing again this quarter that 100% of investments of our customers in both technology and capacity are currently being made on our 200 Lean platform, and we believe that the next technology transition will provide yet another opportunity for Interact again and increase share of the world's hard drive media and store base. In summary, 2022 has been a transformative year for InterVac. We are very excited about the year ahead and our new partnership with Corning for our groundbreaking Trio platform. Over the next quarter, we'll be finalizing our strategic plan And starting to develop a forecast for 2023 that reflects the expected HDD revenue profile along with the initial Trio tool shifts.

In the meantime, 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. 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 Q3 results. Revenues were $10,800,000 above our guidance of $9,500,000 to $10,000,000 due to upside in HDD upgrades. Q3 gross margin was 45.5% above our guidance of 39% to 40% due to more favorable mix of upgrades. Q3 operating expenses were $8,100,000 above our guidance of 7 point $5,000,000 due to higher R and D expenses and higher stock based compensation expense.

The Q3 net loss from continuing operations was $3,200,000 or $0.13 per share and better than our guidance of $0.15 to $0.17 per share. Our backlog was $110,400,000 at quarter end. This is the highest level since Q1 of 2010 and an increase of $10,000,000 over the 2nd quarter. The recent $12,000,000 order received to date in Q4 indicates that we expect backlog to grow again at year end. We ended the quarter with cash and investments, including restricted cash of $124,900,000 equivalent to $4.91 per share based on 25,400,000 shares at quarter end.

Cash flow generated by operations was $15,300,000 during the quarter. We saw accounts receivable decline $19,000,000 in the quarter due to collections of customer down payments. We added $6,000,000 in inventory to to support the growing backlog. Q3 capital expenditures were $538,000 And depreciation and amortization were $329,000 for the quarter. Now moving to Q4 guidance.

We are projecting revenues to be approximately $10,000,000 reflecting continued prioritization of HAMR upgrades in a lower level of field service returns. We expect 4th quarter gross margin to be around 32% to 34%. Q4 operating expenses are expected to be around $8,000,000 We expect interest income of about $400,000 And GAAP tax expense of around $500,000 in the quarter. Most of the tax expense will be non cash. We are projecting a net loss in the range of $0.17 to $0.21 per share based on 25,500,000 shares outstanding.

Finally, as it relates to our cash forecast. As Nigel discussed, we are investing in long lead time inventory during Q4 to support both multiple Trio system shipments as well as the acceleration of HDD process module upgrades in 2023. Total inventory investments are in the range of $5,000,000 to $10,000,000 and we also expect that a portion of the pending customer deposits and Q3 ending receivables will be paid in January instead of December. For these reasons, we are now expect to end fiscal 2022 with a total balance of cash, equivalents and investments As we looked into 2023, while our strategic plan and forecast for next year is still in process, Keep in mind that we do expect the year to be second half weighted, given the current delivery schedule for 200 lean systems starting in July. We currently expect our revenues over the next three quarters to consist solely of HDD upgrades, spares and field service And that upgrades in Q1 will be down sequentially from Q4.

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

Speaker 0

Thank you. Our first question comes from the line of Mark Miller with Benchmark. Please proceed with your question.

Speaker 4

Thank you for the question. Just wanted to make sure I understand the lean shipments now. You're talking about maybe the first tools Going out in July of next year, but really the bulk of liens will be 24, 25, is that correct?

Speaker 2

Yes. What has happened is the shift and change of prioritization to focus on the HAMR up Rates and the new technology was being prioritized by our customers. And because of that, they've moved the systems have moved out And they brought in the upgrades to drive this next generation of technology and to use this time in the markets to actually accelerate This upgrade program.

Speaker 4

Your Trio tool, you've attempted or Intevac has attempted previously to enter the market For glass coatings, I'm just wondering what is different with this tool? I assume this tool will be used also to deposit oxides besides metals?

Speaker 2

Great. To answer that in a couple of sections. I think I've said on several calls, it's absolutely critical when you develop technology. You develop technology with a real partner And you look to solve real problems in the market. And the Trio technology we've developed to solve A real challenge with scratching of anti reflective glass on consumer devices.

And we've done, as I think I've mentioned on the prior couple of calls, The level of meetings has increased, the customer engagements increased, and that's probably the real key one of the key reasons we've announced the non binding term sheet today. Because For the last since the summer, myself, the Board, the entire team working on this have been blacked out from trading or buying in shares. To continue to keep this partnership of this magnitude confidential. And therefore, if you think about the partnership with Corning, If you think about how we're now partnering with this leading glass supplier and we're actually delivering a coated solution, which is very different to anything we've done in prior years. This is Unique is taking the Trio expertise, is taking our really our phenomenal expertise of years, 30 years of coating, if we think about it, I think you know more than anyone, every bit of data that people store information on and expertise in coating is clearly what's developed in this unique partnership and that's why we announced it today.

This is a complete change for the company. It's very new, it's solving a real customer problem or a real consumer problem and it's partnering with a leading glass company. It's a phenomenal change for this Intevac.

Speaker 4

So the Trio will be focused on tribological coatings to prevent scratching. What about anti reflective coatings? Will that An option for the Trio? Yes.

Speaker 2

Correct. That's a very good question. The Trio is absolutely targeting anti reflective coatings. And that's one of the things we found, I think we mentioned in the last call, one of the benefits of some of the anti reflective coatings we put into the technology Has enabled an improvement in power usage of a handheld. So there's some unique capabilities that were additional benefits from actually solving the requirements to provide a solution to give a scratch resistant anti reflective coating.

So I mean that's the work that the technology team have done here to produce what is a world leading process tool is phenomenal. So it's we're very proud of what they've done. Thank you.

Speaker 3

Thank you, Mark.

Speaker 0

Thank you. There are no further questions at this time. I'd like to turn the call back over to Nigel Hunton for closing remarks.

Speaker 2

Thank you. I mean, As I just said, as I look at where we are today compared to 10 months ago when I joined, I feel we've made tremendous progress in creating a new InterVac. And I wish to thank all of our employees as well as their counterparts with our as well as the HDD's industry historic transition to HAMR. So we believe the Intevac is not just a sound investment, But an exciting growth and turnaround story, and we're eager to continue meeting with as many interested investors as possible. And if people are interested, our next investor event is in New York with the CEO of Summit on December 13, followed by the Needham Growth Conference in January.

So if you can please reach out to Claire directly if you'd like to follow-up. And with that, I'd like to thank everyone for their contributions and conclude today's call. So thank you.