Intevac, Inc. (NASDAQ:IVAC) Q4 2022 Earnings Call Transcript

Intevac, Inc. (NASDAQ:IVAC) Q4 2022 Earnings Call Transcript February 1, 2023

Operator: Hello and welcome to Intevac’s Fourth Quarter and Fiscal Year 2022 Financial Results Conference Call. . As a reminder, this conference is being recorded today, February 1, 2023. It’s now pleasure to turn the call over to Claire McAdams, Investor Relations for Intevac. Please go ahead, Claire.

Claire McAdams: Thank you, and good afternoon, everyone. Thank you for joining us today to discuss Intevac’s financial results for the fourth quarter and full year 2022, which ended on December 31. In addition to discussing the company’s results, we will provide financial guidance for the first quarter of 2023 and 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 start with the review of our business and our outlook. Then Jim will review fourth quarter results and discuss our financial outlook before turning the call over 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 and year, which remains subject to adjustment in connection with the preparation of our Form 10-K 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 February 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. I’m excited to share with all of you today, our latest earnings results and to highlight the momentum we built and the achievements we had in 2022. 2022 was quite a year for Intevac. We set out with a bold ambition of transforming the business and laid out a clear vision of the future of the company. I’m pleased to say we have taken huge strides towards our vision over the past 12 months, there’s been a year of significant change for the company. Intevac now feels and operates very differently to that over a year ago, we have transformed Intevac into a new company. The new Intevac as we refer to internally and with customers. Intevac will continue this journey in 2023. The goal of this journey is to return strong shareholder value with sustained profitable growth.

And we are already creating this momentum. I’m immensely proud of the entire team not only for the progress they have made in delivering on our ambitious aims, but how they have embraced the vast and rapid change I’ve tasked the company with through this past year. As I reflect upon, our commitments to our shareholders, started with my first earnings call one year ago. I’m pleased to share that our team has executed on every single one of the mandates that we laid out for 2022. We have refocused the business around a leaner product portfolio, streamlined our business and strengthened and diversified the leadership team and the wider business as a whole. We’ve laid out a clear plan to return to profitability, built on our existing strong position in the hard disk drive market and most excitedly of all have developed a critical strategic partnership that is supporting Intevac’s expansion into a new growth market.

We also delivered on each quarter’s commitments and our financial targets for 2022. Looking briefly back on 2022, I’m pleased to share the following highlights with all of you. Each of these achievements has been a significant contributor to the change of direction, pace, energy and momentum the company has gained recently and with a specific intent set out at the start of my tenure with Intevac. A primary goal for Intevac reestablishing momentum and focus last year was to first assess the growth potential in each of our end markets. Intevac needed to refocus its business around a leaner product portfolio. As vaccines for COVID continued the global rollout. And with the gradual reopening of travel, I took the opportunity to meet personally with each and every key customer in order to determine the correct direction and priorities for Intevac going forward.

I’m pleased to share that I’ve traveled extensively each quarter of the year and met personally with all critical stakeholders that touch our business today, and have potential to impact it greatly in the future. These efforts not only resulted in strengthen relationships, but also led to the decision to cease development of multiple equipment initiatives, in order to focus our innovation efforts on our flagship 200 Lean and to enable the development and emergence of our game changing TRIO platform. This proved to be a decision that has not only shifted energy and momentum for the company, but has changed its future growth trajectory, and also the company’s financial potential. It has also led to an early pattern toward TRIO platform, and a further nine patent applications have been submitted, key achievements as Intevac begins the process of strengthening and broadening its IP portfolio.

Looking internally, we committed at the start of 2022, to streamlining the structure of the business, and doing so took action to align internal resource to genuine revenue growth prospects. 2022 source raise the bar for employee performance, and also source dramatically enhance the capability of the organization. We introduced an internal development program within the business and recruited high caliber talent. We have taken steps to significantly strengthen and diversify the senior leadership team and unify the organization under one cohesive leadership group comprised of the best talent from both the US and Asian teams. Further still today, we repeatedly measure and assess the strength of our organizational culture, having heightened emphasis on our company values of innovation and accountability.

Our internal metrics and measurements are already showing strong evidence that our global team of employees feel invested in, energized and excited for the future and our customers and partners have also validates the strength the organizational culture, plays in our ability to deliver outstanding engineering. This past year, has not only seen Intevac in personal and professional development. We’ve invested in our physical space too. We know the importance of having an environment that encourages collaboration, something that in turn enables innovation. And the changes made to our building to the creation of a dedicated collaboration space has been a key enabler of greater cohesion throughout the business, and also led to the rapid development of our game changing TRIO platform.

2022 was momentous from an organizational perspective. Our products, people, culture and customers have been part of this positive change. And I’ve seen this all year. Today, our R&D, engineering and operational teams are developing into world class high performing teams. And we have begun the process of enhancing and developing our commercial team. I believe we are beginning 2023 with a strong team and are poised for continued execution in the year ahead. In relation to returning the company to profitability, we are firmly on track to return Intevac to profitability for the full year in 2024. And remain fully invested in preserving the strength of our balance sheet. I have personally met and engaged with dozens of investors, each of which have expressed their preference for a measured protection of our balance of cash and investments.

Whilst also showing the reassurance and how we have executed on these preferences to date. In 2022, we maintain the strength of balance sheets, and are committed to do the same in 2023. Turning to our existing hard disk drive market and our flagship 200 Lean product, we believe firmly that we’re increasing our share of worldwide media capacity. And that customer partnerships have resulted in is rapidly advancing business opportunities through HAMR upgrade initiatives, and the securing of $70 million in 200 Lean orders which will be delivered over the next four years. We continue to believe in the future of the hard drive business. And our efforts in 2022 have kept us in a prime position to continue to be at the forefront of the market and its development.

Finally, in what is now highly regarded internally with Intevac as well as externally as a game changing development, 2022 source deliver on our commitment to develop a meaningful partnership relating to a new product craft category. Intevac’s development of the TRIO platform, A new product that supports consumer electronics and other applications has the potential to provide a runway of compelling and sustainable long term growth opportunities and revenue for Intevac far into the future. It is by far and away the most important development achieved by the company, since the launch of the 200 Lean product 20 years ago. The recently announced partnership on December 30 is a key milestone in our growth strategy. It broadens our product line and dramatically increases the total addressable markets we can now reach.

As we sit today, we have a stronger, leaner, more diverse team, delivering world class products to the forefront of the markets we’re operating in and pursuing. Our objective on this call today is to ensure that our investors, analysts, employees, suppliers, customers and all stakeholders recognize the achievements of the past year and our competence and commitment in our strategy to deliver strong growth and financial performance of the years to come. Now turning towards the TRIO. In late December, we completed our joint development agreement with a leading provider of glass and glass ceramic materials. The completion of this definitive agreement was a transformational event for Intevac. The agreement includes a minimum revenue requirement of approximately $100 million over five years, in order for our customer to maintain exclusive access to the TRIO platform for consumer electronics applications.

The agreement also includes a minimal annual commitment to maintain exclusivity. We are currently completing the first TRIO system which will begin qualification later this quarter. We anticipate that once the first TRIO completes qualification, we will receive a purchase order for the qualified unit. At this time, we are planning to deliver at least two additional TRIO systems within 12 months of qualification. We will be building several additional tools this year in advance of 2024 shipments, so it’d be ready for some upside to support our key partner. I would like to point out at this time that going forward we will be limited to what we can communicate about our work with this customer. However, I can share with you a bit of what makes the TRIO such a compelling manufacturing platform for the coating of glass on consumer electronic devices, which is what excited this customer to engage with us and seek a level of exclusivity, which we granted.

And it can also share why we see the potential for this partnership to be well in excess of $100 million over the next five years. The TRIO offers three primary advantages over current coating options. First, it offers tremendous flexibility compared to existing coating equipment, as the platform can accommodate almost limitless configurations of device form factors, including both 2D and 3D shapes. Second, building from our 20-year history of leadership in the hard disk drive market, our systems have a proven track record of depositing highly uniform and defect free films of the highest quality standards for durability and precision executed with very high yield over a long operating life. And lastly, also critical to our TRIO customer is its productivity, throughput and competitive cost of ownership in a compact footprint.

So the compelling advantages of the TRIO platform are flexibility, cost competitiveness, and providing one platform for many different applications. Our plans for 2023 will be focused on qualifying the initial TRIO system for our customers thin film technologies by mid-year, delivering the initial systems and working with our customers to ramp in the field. As our customer gains confidence in the value of TRIO, we expect that many additional systems will be deployed potentially beyond the minimum contract or volume required to maintain exclusivity. The investments in inventory that we’re making today, and which began in earnest during Q4. support the build of multiple TRIO systems. These include not only the systems we expect to deliver this year, but substantially more systems to ship in the following 12 months.

In the short term, these investments will be enabled by our strong cash balance. It is worth noting that the strength of our balance sheet is critically important to each of our customers, not just for the TRIO partnership but also for our HDD business. And the investments we’re making in 2023 will set us up for a profitable year in 2024 and consistent positive cash flows and returns on invested capital beginning next year. As I mentioned earlier, the $100 million revenue level is merely the minimum required to maintain exclusivity with our first customer, we will continue to pursue additional customers in TRIO and outside of consumer devices. Once successful with the first few tool deployments, we continue to expect our TRIO opportunity will be very significant.

In summary, the development of this innovative and game changing platform will make a significant contribution to our growth plans. Which brings me to an update on our HDD business. Recent news indicates encouraging signs on the horizon, setting up a return to growth in datacenter investments and mass-capacity drive. In the meantime, as we discussed last quarter, we’re seeing a greater level of customer investments in new technology during this period of reduced factory utilization. We’re very proud to be a critical technology partner in the industry’s transition to HAMR which is proceeding ahead of schedule, testament to our strong upgrade revenues in Q4 and another strong quarter expected ahead upgrades in Q1. A fundamental part of our strategy is to maintain a focus on innovation in collaboration with key partners.

As such our roadmaps are aligned with them. Our HDD guidance for 2023 as well as the five-year revenue forecast remains consistent with what we communicated last quarter. We continue to see an extended investment cycle in both capacity and technology upgrades. That is providing visibility for at least $300 million of HDD revenues from 2022 to 2026. We expect this strong revenue growth the next few years will be driven by upgrades in support of the install base of over 150 systems that will require additional process modules to be HAMR capable, as well as a system backlog today of about $70 million. In summary, 2022 was a transformational year for Intevac. We are very excited about the year ahead and our new partnership TRIO platform. 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 as we grow the business and transform into back into a consistently growing and profitable cash generating company with a leading position in each of its key markets.

That completes my prepared remarks. And with that, I will now turn the call over to Jim.

Jim Moniz: Thank you, Nigel. First, I will briefly summarize our fourth quarter results. Revenues came in a bit stronger than forecast at $11.3 million, compared to our guidance of $10 million. As expected Q4 revenues were comprised of HDD upgrades, spares and service. The primary reason for the upside in Q4 was our customers prioritization and pooling of certain upgrade investments which resulted in a more favorable mix of revenue in the quarter. This resulted in Q4 gross margins of 44.3%, well above our guidance of 32% to 34%. The mix of lower margin business that was expected in Q4 is now spread across our full year 2023 forecast. So we expect to continue to maintain our quarterly gross margins of 40% or more for the forthcoming quarters.

Q4 operating expenses were $8.3 million, slightly above our guidance of $8 million due to the prioritization of certain R&D spending for TRIO as well as an increase in variable compensation due to the exceptional work of the team and executing key milestones before yearend. The Q4 net loss was $3.2 million, or $0.13 per diluted share, and better than our guidance of $0.17 to $0.21 per diluted share, primarily as a result of the favorable revenue profile in the quarter. With total new orders of $133 million in 2022. We ended the year with 12-year record high backlog of $122 million. As we have communicated throughout 2022, the strong level of order activity for both systems and upgrades resulted in quarterly increases in backlog during every quarter of 2022 of the 11, 200 Lean HDD systems in backlog we expect to deliver one in Q4 and multiple Leans in each of the following three years.

We ended the year with cash and investments including restricted cash of $113 million, equivalent to approximately $4.42 per share, based on 25.5 million shares at yearend. Our yearend cash balance was stronger than our forecast of $105 million to $110 million, primarily due to Q4’s TRIO inventory purchases, still residing in AP at the close of fiscal 2022. And we have since paid down that AP year-to-date. Cash flow used by operations was $11.3 million during the quarter and $7.4 million for the year. During Q4, we added $11.9 million in inventory to support the growing backlog and anticipated shipments of TRIO systems in 2023. Q4 capital expenditures were $493,000 and depreciation and amortization were $383,000 for the quarter. Now moving to Q1 2023 guidance, we are projecting revenues to be between $10.5 million and $11.5 million, consistent with our commentary last quarter, we do not expect system revenues until the second half of 2023.

But the level of upgrades and field service for the first half of 2023 is a bit stronger than we indicated last quarter. We expect first quarter gross margin to be between 40% and 42%. Q1 operating expenses are expected to be between $9 million and $9.5 million, slightly higher than our expected run rate for the full year due to timing of investments in research and development, along with some typical seasonal increases. After Q1, we expect quarterly OpEx to be around the $9 million level for the remainder of 2023. We expect interest income of about $400,000 and GAAP tax expense of about $400,000 in the quarter. We are projecting a net loss in the range of $0.16 to $0.20 cents per share, based on 26 million shares outstanding. As we look ahead to the full year’s financial results, I’ll recap some highlights from Nigel’s remarks.

We continue to expect approximately $40 million in HDD revenue in 2023, which will be relatively evenly weighted between the first half and second half, with upgrades driving most of the first half revenue and one system expected to revenue in the second half. The TRIO activity in the first half will be to build the — production system and work with our customer to pass qualification in Q2 on that system. After we pass qualification, we expect to receive the purchase order for the initial unit. We are currently planning to deliver at least two additional TRIO systems within 12 months of successful qualification. On our May call once we are well into the qualification process, we expect to be able to provide a range of how many systems could revenue in 2023.

With this revenue profile, which is largely HDD driven, but should also include some level of TRIO systems revenue, we expect full year gross margins to be around 40%. And as I mentioned earlier, OpEx of approximately $36 million to $37 million. We expect both interest income and taxes to be in the range of $1 million to $2 million in 2023. Finally, we will continue to closely manage cash to support the business strategy. This completes the formal part of our presentation. Kevin, we’re ready for questions.

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Q&A Session

Operator: Our first question today is coming from Hendi Susanto from Gabelli Funds.

Hendi Susanto: Good afternoon, Nigel and James. Yes, so, Nigel, congratulation on the TRIO partnership. May I inquire like more colors on what kind of let’s say like profiles that we can expect, let’s say for the TRIO system once the customer ramp up, should we expect a linear sales profile? Or it will resembles more like a step up profile from let’s say like one period to another?

Nigel Hunton: Yes, Hendi, thanks for the question. I mean, very clearly and hope it was coming across on the call, our focus absolutely has to be this month on completing the build of the first tool, we then move into the qualification of the tool. And we are optimistic and enthusiastic and excited about the process, we’re going through on this qualification. And that’s a qualification of the production tool, mean, the tool was qualified on the testbed and now moved to production tool. And really, that process is going to take the next couple of quarters and that’s a critical thing for me is to maintain this organization’s focus on delivering and executing on that plan. If I look out way beyond that, and the profile, I think it’s too early to say, I mean, I think for me, the opportunity, as we’ve said, is pretty compelling.

It’s a very significant opportunity. It’s a very different market we’re entering, it’s one that is the partner and us are going to maintain a level of confidentiality, which is why I said, we’re going to have to be cautious what we actually share with people on these calls moving forward. Because the key for me is to maintain our strength, maintain that technology advantage, and then move forward. So really, for this call, it’s very much about we’re absolutely on track with that first unit, we’re on track with our partners to get that qualify. I think once we get through that, we’ll have a much better view on what the market potential opportunity is. And the great thing for me is the commitment from that partner for the $100 million over five years as a minimum for that period.

But I think it’s too early to say that that’s a linear or anything else, I think the excitement for me is to get the first tool completed into the market, and actually start building success and securing some orders. So that’s going to be my absolute focus. So it’s really too early, we’re so excited about and that the potential is huge. So I don’t think it’ll be linear, let’s say that’s probably anything to say.

Hendi Susanto: And then Nigel, with regard to the TRIO system, what is the latest estimate of the production rate? And that I would like, also to know, let’s say, when there’s estimate for production rate will be it’s somewhat like semi fixed, meaning that that’s the run rate. And then there is no, like, big window, let’s say it’s like from, like early into like a full ramp up, whether there’s like a big range, like how many units they can produce? Yes, would you share some color on that?

Nigel Hunton: Yes, I mean, I think probably one of the really exciting things about the product is this new platform, which is very different to anything we’ve done before. So people are going to start thinking about segregating in their minds, the traditional business to this new platform, this platform has huge flexibility, not only can it do two-dimensional coating, but it can-do three-dimensional coating, which is a phenomenal step forward. But it also has the ability to actually do multiple size structures through the machine. So it’s not like we’re just putting through, if I go back to the HDD business, a machine that has billions of one size disk, day in, day out, and so on its platform concept. And the flexibility of the design is one of the key things that attracted us this technology to our partner.

And so the machine can have multiple sizes running on it. It can be running on different programs. So you can’t really say it’s going to be a fixed number. So I think that level of flexibility is probably one of the unique capabilities of the technology. And is it going into a consumer electronics market, I mean, again, that market is huge, has different components within it. And therefore this flexibility of the tool is probably fundamentally one of the game changer and why we’ve been selected by the partner. I hope that answers your questions, but hopefully it gives you some flavor that this machine can do it. So this isn’t about one machine it is about multiple machines supporting a very large industry that we’re actually going to start entering.

Hendi Susanto: And, Nigel, with regard to the annual minimum commitment of that partnership. Like when is the timing of like the exclusivity like will it start when the annual minimum commitment like got — was — is met, or whether now you can explore potential sales with other customers while waiting for the annual minimum commitment to be met sometime later in 2023.

Nigel Hunton: The agreements, I think we’re pretty clear when we announced it does not restrict us from looking at other market opportunities. So the exclusivity is that is within the consumer electronic devices, for glass and glass substrates. So that is very clearly documented and was in the announcement. So outside of that we can look for other opportunities from the starting point of the agreement. So the agreement that we announced was signed in December. That’s the start date for the agreement. But for me, it’s the real focus today is making sure we get the first production unit, executed on finished that first unit qualified, and then move forward with that strategic partner.

Hendi Susanto: Got it. And then questions for James. James, would you be able to share how much like cash consumption we can expect in 2023, especially considering that Intevac needs to build TRIO systems. And then I also notice that there is a long-term customer expenses of $22 million on the balance sheet. I’m wondering whether the cash on the balance sheet got boosted by that $22 million. And that’s why the cash balance is higher than the prior estimates?

Jim Moniz: Sure, I can answer a couple of questions. First, let me answer your second question first. The cash, ending cash of $113 million, was not influenced necessarily by the $22 million that was known quarters ago. that is one of our customers who placed large orders that are in our backlog, customary for that customer to give us cash down payments or customer deposits, we use those customer deposits to secure inventory. So if you look at the inventory growth through the year, inventory went up by about $24 million from the beginning of the year to the end of the year. The majority of that was not TRIO, TRIO inventory started to build in earnest in the fourth quarter. So we were using the customers down payments, to support the backlog and to buy the inventory as the customer requested.

But that number of the cash down payment, the $22 million had been reflected in our estimations of $105 million to $110 million and when we ended at $113 million, the slightly higher $113 million above our last call guidance was we did security inventory for TRIO that we expected but it came later in the quarter. So it’s still the payment was not made did not draw down the cash. It was in accounts payable we since drawn that down. As far as the cash being used for the business, I think if you look over the last number of years, and especially in 2022, we’ve been excellent stewards of the cash, we’ll continue to use the cash strategically. And as Nigel said in his prepared remarks, we’re building inventory beyond whatever the minimum order quantity is for 2023.

So you’ll likely see inventory continue to go up as we go through the year, but we will still manage cash, you won’t see cash go down, let’s say to an $80 million or $90 million level right away. If you see cash go down, there’ll be normally a corresponding increase with less building inventory to support customer requirements.

Operator: Next question from Mark Miller with Benchmark.