INTEVAC INC (IVAC)·Q3 2024 Earnings Summary

Executive Summary

• Q3 delivered $28.5M revenue, far above guidance ($10.5–$12.0M), aided by $15.0M largely pass‑through inventory revenue; reported gross margin was 24.8% (≈20ppt drag from the pass‑through), and GAAP EPS was ($0.08). Underlying HDD upgrades/spares/service exceeded $13M with underlying gross margin ≈45% .
• Strategic reset: TRIO commercialization stalled (failed to achieve 97% particle‑free yields), management ceased further TRIO development, will monetize ~$1.6M of TRIO inventory via R&D/evaluation tools, and reduced headcount by 19% to refocus on HDD opportunities .
• Outlook: Q4 guide calls for $9.0–$10.5M revenue, 30–32% GM, OpEx $8.4–$8.6M (incl. ~$0.9M restructuring), and EPS of ($0.19)–($0.21). For 2025, HDD revenue baseline targeted at ~$50M with ≥40% GM and $7.0–$7.2M OpEx run‑rate, aiming cash‑flow neutral to positive .
• HDD narrative strengthening: FY24 HDD revenue outlook raised to $46–$48M (ex pass‑through) vs “approach $45M” prior; rising HAMR upgrades and potential 200 Lean orders in 2026–27 underpin medium‑term upside .
• Governance: Intevac added investor Ryan Vardeman (Palogic) to the Board via a cooperation agreement with standstill and voting commitments, signaling aligned capital stewardship as the company pivots to HDD .

What Went Well and What Went Wrong

• What Went Well

  • Strong core HDD performance: underlying Q3 gross margin ≈45% on upgrades/spares/service, above the high end of expectations; revenue exceeded forecast even excluding the pass‑through .
  • Balance sheet improved: cash and investments rose to $72.1M (≈$2.67/share), supported by positive operating cash flow and strong receivables collections .
  • Strengthening HDD demand backdrop: management sees sustained multi‑year HAMR upgrade cycle and cites HDD’s ~6x cost/bit and ~9x capital efficiency advantage vs. enterprise SSDs; targets ~$50M HDD baseline in 2025 as mix and visibility improve .
  • Key quote: “We believe $50 million is the HDD revenue baseline ahead for 2025…” .
  • Key quote: “HDDs continue to demonstrate significant advantages… cost per bit advantage of about 6x and a capital efficiency benefit of approximately 9x compared to enterprise class SSDs.” .

• What Went Wrong

  • TRIO setback: first field qualification concluded without an order; horizontal coater failed the 97% particle‑free yield threshold required to displace vertical solutions; development ceased and resources reallocated to HDD .
  • Gross margin optics: reported GM of 24.8% missed prior guide (37–39%) due to ~$15M pass‑through revenue and other inventory adjustments that reduced GM by ~20ppt; pass‑through boosted EPS by ~$0.04 but diluted margins .
  • Near‑term earnings: Q4 guide implies continued GAAP losses with EPS of ($0.19)–($0.21) and GM of 30–32% as mix and absorption moderate; OpEx includes ~$0.9M restructuring cash costs .

Financial Results

Q/Q: Revenue +96% (boosted by $15M pass‑through); GM down ~13ppt on pass‑through; EPS improved to ($0.08) from ($0.12) .
Y/Y: Revenue +59%; GM down ~14ppt on mix/inventory items; EPS modestly worse vs ($0.06) .

Q3 2024 revenue composition

Key KPIs and balance sheet

Non‑GAAP: Q3’24 non‑GAAP net loss equaled GAAP ($2.2M; $0.08/share); YTD non‑GAAP excludes discontinued ops and prior restructuring (see reconciliations) .

Guidance Changes

Earnings Call Themes & Trends

Management Commentary

• “We have therefore ceased further development of the TRIO platform, and this will increase bottom line profitability through reduced TRIO engineering costs.”
• “We believe $50 million is the HDD revenue baseline ahead for 2025… Further upside towards a $50 million revenue level and above will be driven by the acceleration of upgrade activities by multiple media manufacturers.”
• “The inventory revenues included a small amount of gross profit… collectively impacted gross margin by approximately 20 percentage points… The strength of upgrade demand in Q3 likewise drove… underlying business of approximately 45%.”
• “HDDs continue to demonstrate significant advantages in data centers, the cost per bit advantage of about 6x and a capital efficiency benefit of approximately 9x compared to enterprise class SSDs.”

Q&A Highlights

• Upgrade cycle length and cadence: HAMR upgrades likely span at least 3–4 years, supporting multi‑year revenue visibility; OpEx run‑rate targeted at $7.0–$7.2M from early 2025 .
• Cash neutrality and baseline: Cash neutrality roughly mid‑$50Ms sales, potentially a bit higher; management still targets cash‑neutral to positive 2025 with ~$72M cash balance .
• Use of cash: Management reiterated stewardship and optionality while prioritizing core HDD execution; strategic alternatives remain under consideration .
• TRIO technical gap: Could not achieve 97% particle‑free yields vs. vertical alternatives, preventing displacement; development halted; remaining interest limited to R&D‑level tools .
• TRIO inventory: Approximately $1.6M TRIO‑related inventory; plan to monetize through 2025; no additional reserve taken .

Estimates Context

• S&P Global consensus estimates: Not available for IVAC in our feed at this time (attempt to retrieve “Primary EPS Consensus Mean,” “Revenue Consensus Mean,” and estimate counts for Q3 2024 returned no mapping). We will monitor and update if S&P coverage becomes available.
• Given the absence of S&P data, we cannot quantify beat/miss versus Wall Street consensus for Q3. Management did note Q3 revenue far exceeded company guidance ($28.5M vs. $10.5–$12.0M), while reported GM missed guidance due to pass‑through accounting .

Guidance Changes

(See table above for detailed metrics. Notable shifts)

• FY24 HDD revenue outlook raised to $46–$48M (ex pass‑through) from “approach $45M.” Drivers: accelerated upgrades across multiple customers .
• Q4’24 guide introduced: revenue $9.0–$10.5M; GM 30–32%; OpEx $8.4–$8.6M (incl. ~$0.9M restructuring); EPS ($0.19)–($0.21) .
• Strategic pivot: TRIO development ceased; headcount reduced by 19%; HDD focus expected to support ≥40% GM, lower OpEx run‑rate, and cash‑flow neutrality in 2025 .

Key Takeaways for Investors

• Core HDD business is healthy and improving: underlying mid‑40s gross margins and raised FY24 HDD outlook suggest a sustainable ~$50M baseline into 2025 with limited reliance on new systems .
• Reported metrics can diverge from core economics when pass‑through items occur; focus on underlying HDD gross margin and mix to interpret profitability trajectory .
• The TRIO overhang has been removed; while it reduces optional upside, it also curtails spend and clarifies focus—improving path to cash neutrality and margin quality in 2025 .
• Watch Q4 execution vs. new guide (GM 30–32%) and OpEx reduction trajectory towards $7.0–$7.2M run‑rate; these are key to validating 2025 cash‑flow targets .
• Medium‑term optionality: If media utilization stays near ~70% and HAMR adoption progresses, incremental 200 Lean orders in 2026–27 could add upside to the upgrade baseline .
• Balance sheet provides flexibility: $72.1M cash/investments, no debt, and growing interest income support resilience and potential capital deployment when justified .
• Governance lens: Palogic cooperation and Board addition add shareholder alignment as the company executes a focused HDD strategy .

Appendix: Additional Items

• Backlog trajectory: $53.1M (Q1) → $42.5M (Q2) → $44.4M (Q3), excluding 200 Lean systems in Q2 and Q3 .
• Q4 guidance details: expected net interest income ≈$0.7M and GAAP tax expense ≈$0.4M (mostly non‑cash) .
• Board appointment press release: Ryan L. Vardeman joined the Board; cooperation agreement filed in 8‑K .

Sources: Q3’24 press release and 8‑K (including exhibits), Q3’24 earnings call and slides, and prior Q1/Q2’24 earnings materials .