Intevac - Q3 2023

Transcript

Speaker 0

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. 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.

Speaker 1

Thank you, operator, and good afternoon, everyone. Thank you for joining us today to discuss Intivek's financial results for the Q3 of 2023, which ended on September we will discuss our outlook looking forward. Joining me on today's call are Nigel Hunton, President and Chief Executive Officer and Kevin Solsby, 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 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 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 we will be conducting a report on Form 10 ks 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.

Speaker 2

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 $5,000,000 of revenue upside in response to both pull ins as well as increased orders received within the quarter. And as a result today, we are reporting our largest revenue quarter in nearly 3 years. Following the restructuring, I met with our new leaner team in Singapore, and I was particularly pleased in the way they had delivered the upside in Q3 With 100 percent on time delivery from a more focused organization. This upside for Q3 revenues Culminated in breakeven earnings on a non GAAP basis, which excludes the $2,000,000 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 have collected over $13,000,000 of receivables and we remain on track to end 2020 within the $75,000,000 to $80,000,000 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 $44,000,000 revenue year to now our current expectation that we will achieve around $50,000,000 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, sets up the foundation for a 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, who is one of the world's leading innovators in glass and glass ceramic materials. I'm very proud of the entire Intevac team on the way they have collaborated together, Reached this key milestone and support Intevac's expansion into a new growth market. We began the qualification during Q3 at our Santa Clara and are progressing through the final steps. The tool has been fully integrated and is producing processed samples. As I mentioned, we are now in the final stages of qualification, which includes endurance runs to ensure consistency and run time.

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 we continue to expect our first three of revenues and cash to occur in the first half of twenty twenty four. Over the last few earnings calls, we've discussed what sets the Treo 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's superior productivity and flexibility. Today, on our IR website, we have added a live action video of our trio running in Santa Clara ASU prepares to enter ENDURANCE funds, enabling you to view the modular and compact design of this world class coating machine.

This video can be found on our IR homepage along with an updated investor presentation that accompanies today's earnings call. The slides that accompany today's conference call also now include an overview of the longer term revenue potential for Trea, which offers a significant market opportunity for Intevac. In our recently completed analysis evaluating each of the potential end market opportunities We see a roughly $1,000,000,000 revenue opportunity for tools, assuming a durable anti reflective coatings and similar applications we can well proliferated through the high end of each end market. Of course, while our initial focus is on consumer electronics applications, our efforts to ramp up a partner 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, the 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 2 to 3 Trio systems and we will be building several additional tools and leveraging our investment in inventory ahead of increased order requirements from falling by year end 2024. These expectations for initial Treo revenues and expanded customer opportunities for 2024 are incremental to our solid base of 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 in fact, canceled some orders originally slated for capacity enhancements.

The steadfast focus at this time is on our technological advancement, And this is an excellent thing for Intevac because we are proving to be a key enabler in advancing our customers' technology roadmaps. As I mentioned, our outlook for 2023 HDD revenues has improved since our last call to now around $50,000,000 for the year. Importantly, as we look to 2020 4 and beyond, technology based upgrade revenues for us are sustainable for the Seabolt Bucha. We have a steady pipeline of work to do with our customers to upgrade and optimize their existing installed base. We believe that by year end 2023 approximately 10% the World Media installed base of 1200 liens will be capable of producing HAMR Media.

Furthermore, we believe that all technology upgrade initiatives either underway or in the planning stages by each leading HDD manufacturer are on Intevac's 200 lean platform. This multiyear visibility provides us with a solid foundation of HCD business, which we estimate to be sustainable for the years to come in the range of approximately $40,000,000 annually in upgrade sales and field service. Given this, our expectation for Intevac revenues in 2024 is approximately $40,000,000 in HDD sales as well as 2 to 3 Treo systems. Altogether, we continue to focus revenues in the low to mid $50,000,000 range next year, modest growth year compared to 2023. As a reminder, our 2023 sales included 1200 Lean System as well as refurbished system, which we don't expect to repeat in 2024.

The key message of our outlook for 2024 After the resizing of our cost structure completed in Q3, at this revenue level, we expect our P and L to be at least cash flow neutral for the full year. We have reduced our quarterly OpEx run rate to the low $7,000,000 level, and we expect the non cash portion of our cost structure we'll entirely offset any GAAP operating losses incurred as we look to 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 is in the early stages of the industry's multiyear initiative to progress the industry's technology roadmap.

3rd, 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 2 processes ongoing and outstanding. 1 is the strategic process announced in June, which we will comment on at the appropriate time. The other is a search for new CFO, which is progressing, but remains outstanding at this time.

And in the meantime, our financials reside in the very capable hands of our long term control Current Interim CFO, Kevin Salisbury. Now over to you, Kevin.

Speaker 3

Thank you, Nigel. Turning to the 3rd quarter results. Revenues totaled $17,900,000 well above our guidance of $12,000,000 to $13,000,000 and consisted of HDD upgrades, spares and service. We achieved more than $5,000,000 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 $8,400,000 slightly below our guidance of $8,500,000 and as expected, we recorded nearly $2,000,000 of charges associated with our restructuring plan announced last quarter. As a result, our GAAP operating loss was $1,400,000 and non GAAP operating income was a positive $500,000 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 $66,000,000 equivalent to $2.51 per share based on 26,400,000 shares at quarter end. During the quarter, total cash declined just shy of $8,000,000 solely due to the roughly $8,000,000 increase in accounts receivable in quarter as a result of delayed payments from our largest customer.

We have already added $13,000,000 of cash through the collection of receivables quarter to date and continue to expect to end the year with total cash in the $75,000,000 to $80,000,000 range. Cash flow used by operations was $7,500,000 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 Q4. We are projecting revenues in the range of $9,500,000 to $11,000,000 which at the midpoint equates to full year revenues of $50,000,000 We expect 4th quarter gross margin to be between 39% 41%.

Q4 operating expenses are expected to be around $7,250,000 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 26,400,000 shares outstanding. As we look ahead to fiscal 2024, we expect this lower OpEx run rate will enable our P and L results to be cash flow neutral for the full year, given our revenue expectations in the low to mid $50,000,000 range, gross margins of approximately 38% to 40% and that the non cash portion of our cost structure will total $7,000,000 to $8,000,000 for the full year.

Therefore, our 2023 cost restructuring program completed in Q3 is enabling Innovac 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.

Speaker 0

Thank you. We will now be conducting a question and answer session. The first question we have is from Peter Wright of Interact. Please go ahead.

Speaker 4

Great. Congratulations on a wonderful quarter and thank you for taking my question. I have 2 questions for you. The first one is looking at the HAMR upgrade cycle, I missed one number that you referred to as 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?

Speaker 2

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 sort of history of the 200 Lean has been over 182 systems shipped. We believe they are up and running around today in the sort of 140 plus level, up towards 150 if some of those upgrades are completed. And we've said around 10% of those will be HAMA ready by the end of the year.

So pretty simple, that's around 15 units We upgraded to be HAMA

Speaker 4

ready. Wonderful. And so that and that's the assumption. How do you see that trending in 24, is the opportunity set bigger or smaller if you can have that? And then I've got a follow-up as well.

Speaker 2

Yes. I think what we are looking at and we've said we're going to run the similar level of upgrades over the next 3 to 4 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 HAMA finally coming to fruition and starting to actually be seen and being evaluated and getting some successful revenue for our customer it's been key to us seeing some of that additional revenue this year. But as we've said, we see a similar level of revenues Hamburg raised next year and for the subsequent year.

Speaker 4

And is there any capacity constraints on your side, if that was to get pulled into next year, last part of the hammer and then I'll ask one other follow-up question And I'll come back to you. In the TRIO $1,000,000,000 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?

Speaker 2

Yes. I mean just if we take the HAMR serviceable available market of $1,000,000,000 first, I'll say that question first. And it's committed on that call, we put that slide in following sort of I think one of your requests. So I hope you appreciate the level of detail we're going to ensure in the size of the available market, we think it is very significant. The agreement and partnership with Corning is focusing on the consumer device.

So consumer devices are the 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.

But our focus, as I keep saying on these calls, is very much around qualification of Trio, entering into consumer devices and building this partnership. So hopefully that slide gives you a mix of both the current focus and then the future potential. And we've also tried to explain the detail there how we've actually positioned this around the high priced Smartphones first, similar to touch screen laptops and high end tablets. And therefore, as we see over the next 3, 4, 5 years, the market adoption And we believe there's a significant upside beyond that as well.

Speaker 4

Wonderful. I'll come back to queue. Thank you so much.

Speaker 0

The next question we have is from Hendi Susanto of Gabelli Funds. Please go ahead.

Speaker 5

Good evening, Nigel and Kevin.

Speaker 2

Good evening.

Speaker 5

I would like to understand more about the pull ins. Were the pull ins Coming from Q4 or from early 2024 or both?

Speaker 2

Okay. And just to follow on for one of Peter's questions. I mean, we have a very agile workforce that's actually able to flex up demand and that enables to handle the pull ins Very effectively in the quarter, and that capability and agility of the organization is a key strength of InterVac. Some of those pull ins were from Q4, which is why you see Q4 down on the Q3. And I think part of this is as they understand their needs and they're actually ramping to ensure they meet the 2024 demand for the product line to have that capacity in place and ready.

But we believe based on the feedback from customer meetings that we can get a similar level though in 2024. But some of those pull ins were clearly out of Q4 into Q3.

Speaker 5

I see. And then I think you indicated earlier that the upgrades depend on the success of HAMR in the market. What kind of time frame to see the outcome of how successful HAMR is in the market? Like how many more months should we have any indication?

Speaker 2

I think if you look at the public Messaging and the public announcements around HAMA, if you look at our customers and what they've been saying, the successful evaluations, the amount of customers now who are trying the products and the plans to ramp in the first half of twenty twenty four are clear indications Hammer is successful and Hammer is now coming through into the market with some adoption. So we are Very positive. And I think our customers are positive and you see that in some of their announcements and guidance as well.

Speaker 5

Yes. And then Nigel, I would like to ask about the expectation that you will sell 2 or 3 of system in 2024. The slide indicated that first revenues are expected in the first half of twenty twenty four. How should we see that first revenue? Will it be just like one 3 of system first or it could be like up to 2 or 3, 1st of all?

Speaker 2

I think we've been very clear that the initial system will go through qualification. That qualification will then Trigger the shipment of the first system. So one system will go out ahead of everything. We've said there will be orders for more than one system by the end of December. So a second system will follow that first system at some point in the first half of next year.

So I would assume potentially 2 in the first half and sort of 1 later in the second half. It's a rough timing. But recognizing that you have to have left some level of flexibility around that, it wouldn't surprise me if it's 1 in the first half and then 2 in the second half. But as we get this first product into the field, we're pretty excited about getting that Intevacustomerproducingproductsanddriving the future success.

Speaker 5

Yes. And then, Anshul, any estimate how long the qualification maybe? Like will it bring us to like 2025?

Speaker 2

No. Just to clarify, because I think some people got slightly confused on the last call. The qualification by our partner on the Trio is on the first system that is running here in Santa Clara. So that qualification that is the sign off with that customer and a key part of that agreement is on the system here. So that's the real key qualification of the technology.

Clearly, once that goes into the field, we'll be our partner will be working with their customers running products onto the machine. And really that's very much confidential and between our partner and their customers How they run, what they're running on the machine. But from our perspective, the key qualification Is the qualification in Santa Clara on that first

Speaker 5

then this is a question for Kevin. Kevin, I think Jim indicated that in the fact it's willing to build inventory ahead of Exelis' upstream system, if it's successful, any further clarity on how much inventory build and the timing or the timing of when Intelspac will decide to Would working capital to build Trio Systems?

Speaker 4

If I

Speaker 2

can answer that first before Kevin jumps in. So So yes, as we said on multiple calls, we have made a significant investment in inventory to enable us to do fast deployment of tools in 2024. That gives us the opportunity to not just build 2 to 3 systems, but enables to build maybe 3 to 5 systems next year to use that inventory and to ensure we can actually respond quickly to future demand. So the first objective is to make sure we actually leverage that inventory we have and utilize our CapEx to be able to respond fast to any additional demand we see in 2024 or 2025. Kevin, you want to add anything to that?

Speaker 3

Yes. So we're building the first tool that will be shipped once we Finish qualification and receive orders and then we have plans in 2024 to build additional tools for next year's revenue And to satisfy demand beyond.

Speaker 5

Yes. And then, Nigel, any additional color on the strategic alternatives, how long it may take and what kind of framework or options?

Speaker 2

Yes. As I said in my prepared remarks, we will explain that at the appropriate time. All I can say at this stage is the process is ongoing.

Speaker 5

Okay. Thank you.

Speaker 2

Thank you, Andy.

Speaker 4

Thank you.

Speaker 0

Ladies and gentlemen, we will pause for a moment to assemble the queue. The next question we have is a follow-up question from Peter Wright of Interact. Please go ahead.

Speaker 4

Great. Thank you. Just looking at the Trio model, how flexible is the system when you start moving into new markets, specifically the auto industry? Is the inventory that you're building for maybe 3 to 5 systems something flexible that could go into that industry or would Would that be a different tool configuration when you're looking at that? And then my last question is, if you look at kind of the business model Just for Trio, how should we think of the service, the spares, the upgrades, the systems?

I know upgrades not for a while, obviously, it's a new system, How should that mix look? So when we look at your hard drive business in comparison, it's maybe a 40, 15 split, but you've got an installed base of 180 systems out there. So how should we think of this Trio contract. So if we have roll forward 5 years, 20 tools out there just with your first customer, What would the service component look like on that contract a couple of years from now?

Speaker 2

Okay. A crystal ball question. First of all, to talk to the Trio. I mean, one of the really exciting things about the Trio Concept and design is the modularity of it. So the system we took some of the real learnings from the 200 Lean And build into the design, a modular build.

So as you look on the video, as you look on the enhanced investor slide that we put out this time, you can see how that modular structure enables you to add to a common chamber multiple types of process chambers. So I could actually put on And I'm being at etch stage. I can put on other bits of technology and actually expand or shrink that tool to optimize it for other materials, whether that be for an auto sector or whether that be for running a polymer through the machine. So the machine is incredibly versatile. As we look at the auto sector, the auto sector, for us, it's early days to get a real understanding of the key target applications for us.

Within that order sector, you have, as you can think about inside the inside of a car, screens that are very similar to a tablet or a laptop. And therefore, those are actually would actually fit very nicely into the common structure of the machine today. If you look beyond that into large hyperscreens that go panel to It probably would be a new machine. But our focus initially, we're about leveraging the capability, leveraging the R and D we've put into getting the tool to where it is today And utilizing that initially to get some inroads into the auto sector. So I see that the whole design concept being a brilliant bit of engineering expertise from the team To enable that flexibility.

I hope that answers that question. As I look out 5, 10 years, I mean clearly service going to be a key part of our strategy. I think one of the things we actually if I look back 20 years, I've had a very different strategy around the 200 Lean to build a much stronger Service capability. I think it is too early to give you a mix today. But as we actually build the market presence, we start putting tools into the market.

A key part of our thinking is around building a strong service capability in the service business. But also as you've seen with the concept of the design, as we've seen over the 200 Lean over 20 years, you can take a module out, put a different enhanced type of technology, a different type of sputtering component onto the machine. So I do see that the whole design concept of upgrades being possible. But I think it's for the 1st couple of years, it's about getting the standard to go down to that market, building some real learning, building a business around the spurs and service And then actually coming back to you probably in a probably 12 to 18 months to giving you a bit more granularity around the service. But certainly, it's a part we want to actually build on as part of our focused strategy.

Speaker 4

If I could have one little follow-up into your crystal ball there. If you think of upgrades just alone on this business, how does this technology evolve over time? Is it chemistry? Is it thickness? Is it I get productivity and throughput and that's more of a tool generation, but upgrading existing tools, like HAMR as an example, Different architecture or density or whatever kind of the migration is.

What is the metric that is going to be kind of how these systems get better over time?

Speaker 2

I think if you think about material science, I think one of the ex things we've done with the last, I suppose, 10 years within the HDD business is leveraging our material science and making sure we keep absolutely aligned with our customers' roadmaps. In a similar way, we want to make sure we stay aligned with our customers' roadmap maps and consumer devices and order. So I think I'm not sure what will happen, but I know that the technology will keep shifting. The important Thin glass in automobiles will keep expanding. And therefore, for me over time, I think there will be more and more it will be driven by material science.

Anything else?

Speaker 4

Wonderful. Congratulations again on a great quarter. Thank you. Thank you.

Speaker 0

Ladies and gentlemen, just a final reminder. The next the next question we have is a follow-up from Hendi Susanto of Gabelli Funds. Please go ahead.

Speaker 5

Hi Nigel, I look at Slide 11 that has estimate of how many 3 or 2 across like different markets. My thoughts are, I think it depends on the area, the yield, and then the initial market penetration. Maybe you can give us some insight into how you calculate the number of Thio tools there? And then my second question is in the wearables section, it is said that it can be replacement of sapphire. Is it more of, let's say, if a glass display coated with a trio system, it can be stronger than Sapphire?

I would like to verify my understanding there.

Speaker 2

Okay. If I run through at a high level a model for The smartphones. So literally, if you look at the smartphone market opportunity, you look at the total market size, you can actually break that down into high end model premium sector, you can break it down into sort of medium and then the lower end. And so therefore, by taking a percentage of the market opportunity and really focusing that on the higher end percentage gave a sort of reduced market size opportunity. So we took the TAM down to lower TAM.

And then I've taken an average throughput per year of the tool and converted that into number of tools. So it is Quite a thorough bit of analysis as you walk your way through the total smartphone market through the high end markets So an average size of phone that can go into a machine, average number of those phones that we can go to per year and that gives you a total number of 302s. And that's why we've said initially that we believe that number will be for the sort of higher price model market opportunity. Similarly, in the wearables we've said, some of those wearables that are sapphire glass today, we've assumed will not move to a new technology in the short term. But as our technology and the capability and the sort of the market acceptance of having a hard scratch resistant anti reflective coating into the wearable market becomes more accepted, then you'll see that being considered for complete replacement, I think, of sapphire glass in the future.

In a similar way, as we've gone to tablets, I've taken the tablets. I've said there's a premium level of high end tablets, which I think will get looked at first for these coatings. We've taken them by again assumed a certain number of tablets Panel to go through the machine that gives us a smaller number of smartphones a year, but gives us a number of tools per year And that then goes into the number of tools we require. And a similar way for laptops, I've taken the touchscreen laptops, not all laptops. So at the world market size of laptops have taken only the touchscreen element of it.

So we're trying to make this a very clear serviceable addressable market rather than go for the much bigger TAM to give you some initial views on the size of this market opportunity. So hopefully that helps give you some of the detail and the granularity behind our thinking around these numbers of tools.

Speaker 5

Thank you, Nigel.

Speaker 0

Thank you. There are no further questions at this time. I will now turn the call back over to Nigel Hunton for his closing remarks.

Speaker 2

Thank you, Arlene. First, I wish to thank all of our employees, as well as their counterparts with our industry partners for the hard work and dedication as we proceed to the qualification phase for the Trio. And during the same time, we've actually we managed to ramp our largest revenue quarter in nearly 3 years, thanks to our role as a key technology enabler in the HDD industry's transition to HAMR. We have a great team here in Santa Clara, and we have a great team in Singapore driving our HDD business. I also wish to thank our investors for ongoing support.

And as always, the investors can reach out to Claire directly if they want to follow-up with us either in November or at the New York Summit in December. I look forward to updating you all on our Q4 call in early February. With that, I will conclude today's call. Thank you.

Speaker 0

This concludes today's conference. Thank you for joining us. You may now disconnect your lines.