Intevac Inc (IVAC) 2021 Q2 法說會逐字稿

Good day and welcome to Intevac's Second Quarter 2021 Financial Results Conference Call. (Operator Instructions) Please note that this conference call is being recorded today, August 2, 2021. At this time, I would like to turn the call over to Claire McAdams, Investor Relations for Intevac. Please go ahead.

Thank you and good afternoon, everyone. Thank you for joining us today to discuss Intevac's financial results for the second quarter of 2021, which ended on July 3. In addition to discussing our company's recent results, we will discuss our outlook looking forward.

Joining me on today's call are Wendell Blonigan, President and Chief Executive Officer; and Jim Moniz, Chief Financial Officer. Wendell will start with a review of our business and our current outlook, then Jim will review second quarter results and provide further details regarding 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, 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 report on Form 10-K and quarterly reports on Form 10-Q.

The contents of this August 2 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 Wendell.

Thanks, Claire, and good afternoon. Today, we reported second quarter revenue that exceeded our guidance, primarily as a result of an acceleration of technology upgrades by our hard disk drive, or HDD, customers. In June, we announced a record HDD upgrade order of $10 million, which we began shipping against before the end of June, providing upside to our Q2 revenue. This order also drove the majority of the $15 million increase -- increasing backlog in our Thin-Film Equipment, or TFE, business during the quarter.

In Photonics, we announced 2 new development awards in June, bringing our new IVAS Phase 1 development award count to 3 as of today. These latest awards are targeted at improving the night vision performance of the IVAS headset. During the quarter, IVAS-related investments exceeded our forecast by approximately $1 million, which resulted in Q2 gross margins coming in about 450 basis points below guidance. However, we successfully managed our cash and discretionary spending during this challenging period, and our net loss per share was a little better than expected.

Notably, we improved upon our already strong balance sheet, generating positive cash flow from operations and ending the second quarter with $54.1 million in total cash and investments, an increase of $3.8 million since year-end 2020.

During the quarter, we, as most companies, began to feel the impact of semiconductor component shortages as well as supply chain constraints. These factors are impacting lead times in our equipment business and volume production levels in Photonics.

We exited Q1 knowing that the next couple of quarters would be our most challenging in over 5 years, but the major initiatives underway in both TFE and Photonics position us for growth ahead in 2022. And in Q2, we continue to make progress on a number of fronts, which brings me to a review of each of our businesses, starting with our TFE hard drive media business.

For the fourth straight quarter, market demand for hard drives in Q2 again well outpaced expectations with close to 4 million additional drives shipping in the quarter versus the trend focused forecast from May. In their preliminary Q2 report published on July 14, they said the extremely active nearline market resulted in record unit in capacity shipments for this category totaling approximately 19 million units and 240 exabytes, respectively. They also reported that entering Q2, hyperscale expansion was well underway at some of the major cloud companies and OEM demand for traditional IT was trending ahead of earlier forecast, creating a demand environment which HDD vendors scramble to meet. At that point, channel demand for high-capacity drives spiked as the hype surrounding the Chia cryptocurrency launch threw the nearline market into extreme allocation.

While Trend Focus hasn't yet published a revised short-term forecast for the next 4 quarters or a long-term forecast for the next 5 years, their July report did indicate that demand for nearline HDD should continue to improve through the third and fourth quarters. And while the initial hype around Chia has cooled somewhat, channel demand for nearline hard drives remains strong and the supply is tight.

Importantly, for Intevac, the discussions with our customers to add media capacity resumed during the second quarter. Whereas earlier in the year, we reported on delays in our customers' capacity expansion plans, those discussions ramped up again in Q2 and the delivery schedule for 200 Leans in the 2022 and 2023 time frame is now beginning to take shape.

Keep in mind, our supply chain remains constrained and lead times for 200 Leans have stretched from 6 to now 8 months. This means that orders commencing in Q4 will see deliveries beginning in the second half of 2022. These capacity expansion plans are with multiple customers, and our 200 Lean shipments through 2023 are currently expected to be at their highest level since 2010. Based on these expansion plans, we're forecasting strong growth ahead for our HDD media business in both 2022 and 2023.

As for technology upgrades, we reported on the pull-in of upgrade sales into Q2. But for the year overall, our expectations have not changed. The takeaway is that the hard drive industry fundamentals are very strong, driven primarily by demand for mass capacity drives and that while 2021 was a low point for us relative to the last 5 years, we have a very strong forecast for future growth in our HDD business.

Now turning to the VERTEX. As I reported last quarter, our primary objective in our VERTEX initiative is to gain initial adoption of our DiamondClad protective coating and to convert the systems under evaluation into orders and revenue. We made progress on both fronts during Q2. And today, we have increasing confidence that we'll be able to announce tool orders in 2021 and that the overall VERTEX program continues to play an important role in our longer-term growth strategy.

In our demo activity, we've been driving multiple programs. These include programs for cellphone cover glass protection, functional protection, protective coatings for wearables, decorative back cover glass applications and augmented reality component functionality. Furthest along at this point is our program to protect wearables. We are currently in the final stages of qualification prior to a decision of adoption. All the functional performance specifications have been met, and we are now focusing on optical adjustments. If adopted, we would anticipate tool bookings this year.

Next, the protective cover glass project is proceeding well, and we have passed the first performance testing targeted to ensure that by adding our DiamondClad films to significantly improve the scratch resistance of the cover glass, there is no degradation in the breakage performance. I would call this phase of the testing as first to no harm.

We have validated that in ring-on-ring and 4-point bend testing, our films, while significantly improving the scratch resistance, do not degrade the breakage resilience of the glass. While this project will take some time to move through the testing and qualification, we are optimistic as the handset-maker engaged with us late last year after witnessing the impressive scratch resistance of our latest version of protective coatings.

The augmented reality initiative continues to move along, and we delivered our first set of device samples in Q2. At this point in time, we are less focused on decorative back cover glass applications as the industry has trended to solid colors on the back glass following current iPhone designs.

Turning now to the MATRIX. Last quarter, we discussed our first revenues in the advanced semiconductor packaging market, which was an important milestone in our efforts to expand our equipment business. In Q1, the tools qualified in our leading OSAT customer's R&D site and its performance and cost of ownership benefits were validated. In Q2, our customer moved the MATRIX out of R&D and into the pilot manufacturing phase, which is an encouraging development in the road map to incorporate our solution for next-generation panel level semiconductor manufacturing.

Overall, our Q2 progress continues to indicate that the VERTEX and MATRIX can add additional upside in revenue growth, incremental to the strong long-term growth stories for HDD media and Photonics.

Now turning to Photonics. For the past 2 years, our Photonics business has been heavily focused on the IVAS development program. And the final stage of that $32 million night vision camera development award was completed early in Q2. In 2021 to date, we have announced 3 Phase 1 incremental development awards for IVAS. The first targets continued operation of our current CMOS sensor with the second and third targeting improved net vision performance of the IVAS headset.

In mid-June, we attended the detection, recognition and identification testing at Fort Pickett, Virginia and had our first opportunity to wear an IVAS system with Intevac's CMOS cameras fully integrated inside as observers of the test. The experience was quite impressive and satisfying, culminating over 2 years of ground-up development work at breakneck pace.

In Q2, we completed the shipment of cameras ordered beyond the initial cameras, including in the development contract, and have continued to work on optimizing our cameras integrated into the IVAS system. Today, the overarching questions are: When IVAS will move into volume production? How the production ramp will scale? And the role Intevac Photonics will play in the overall IVAS program.

I'll now shed some light on the current status of our discussions in regards to the production program. Starting with Soldier Touchpoint 4, or STP 4, which was held in April and at the time of our last call was under review. While details have been extremely limited, we think that additional challenges and hurdles of the overall program may remain to be resolved prior to the decision for volume deployment.

The Army's FY '22 budget plan indicates that an order for 5,000 IVAS units was placed in March of this year. An additional 1,500 units were planned after STP 4, which at this time, we cannot confirm occurred. Future orders covering the next 12 months of deliveries include only another 8,700 units after the operational testing has passed.

Typically, the Army desires multiple sources for critical components on key programs. However, given the small initial volumes, the cost of standing up and qualifying 2 production lines appears to be prohibitive. And at this time, we believe the initial units will be delivered by another company. Looking ahead, we believe the funding of the 2 recent Phase 1 IVAS development programs are evidence that improved night vision performance is desired for the IVAS program.

To reiterate from last quarter's call, Phase 1 awards are to take the project into the detailed design phase for down selection of the complete program execution phase. Our first Phase 1 award was to continue optimization of the existing CMOS sensor technology. However, the second award is to develop a new higher-performance CMOS sensor. And the third is to enable Intevac's ISIE 19 EBAPS technology to be integrated into the IVAS platform. Given the 3 development programs underway and the Army's investment in Intevac as a supplier for IVAS, we believe that we are an important long-term supplier for the IVAS program. For 2021, however, we're taking any meaningful IVAS production revenue out of our forecast.

In programs outside of the IVAS initiative, our $5 million development contract for the U.S. Navy-funded Enhanced Visual Acuity program, or EVA, is running well, and we are meeting our milestones in support of the prime. This program supports the U.S. Navy and Marine core pilots in executing their missions more effectively under low life conditions. This program incorporates our latest ISIE 19 sensor technology destined for rotary aircraft pilot applications beyond the Apache helicopter and can be a major growth driver in the future.

The DELTA-I program is also an important element of our Photonics business. We are developing a fused digital night vision goggle incorporating advanced augmented reality capabilities. The program also incorporates our most advanced ISIE 19 night vision sensor and supports the Coalition Warfare Program for the Special Operation Forces of the United States, Australia, Canada and the United Kingdom. This program has pulled in due to the acquisition of critical components that are on allocation, and we should have -- also have first operational units this year.

In our volume production products, we continue to execute well on the Joint Strike Fighter contract. However, due to lead times of microcontrollers now surpassing 52 weeks, we have temporarily reduced shipment volumes until we can acquire the component or receive our next scheduled shipment to ensure there's no break to occur in our production line.

The key takeaway from Photonics is that we believe Intevac will be a key technology provider for the Army's IVAS platform and that we are in multiple critical military programs providing the best digital night vision technology available. Beyond 2021, success in the IVAS program as well as the multiple other key night vision programs underway will become the major drivers of revenue growth for Photonics for years to come. And with that, I'll turn the call over to Jim.

Thank you, Wendell. Turning to the second quarter results. Consolidated second quarter revenues totaled $13.8 million, above our guidance of $12.5 million to $13 million. Thin-Film Equipment revenues totaled $5.4 million and included upgrades, spares and service. Photonics revenue of $8.4 million included $5.3 million of product revenues and $3.2 million of contract research and development revenues.

Q2 consolidated gross margin was 22.5%, below our guidance of 27%. Thin-Film Equipment gross margin was 18.7%, which was lower than forecast, primarily due to lower overall volume, which affected factory utilization; and product mix due to less high-margin upgrade revenue. Photonics gross margin was 24.9%, which was lower than forecast due to higher costs related to completing the integration of our camera into the IVAS platform.

Q2 operating expenses were $9.4 million, below our guidance due to tight control of development spending. We expect quarterly operating expenses to remain at or below the $10 million level for the remainder of 2021. This resulted in a net loss of $6.1 million or $0.25 per share within our guidance of $0.25 to $0.27 per share loss.

Our backlog was $51.7 million at quarter end. Thin-Film Equipment backlog of $18.9 million included nonsystems HDD backlog. The backlog in our Photonics business was $32.7 million.

We ended the quarter with cash and investments, including restricted cash, of $54.1 million, equivalent to approximately $2.22 per share based on 24.4 million shares at quarter end. Cash flow generated by operations was $832,000 during Q2. Q2 capital expenditures were $122,000, and depreciation and amortization was $895,000 for the quarter.

Guidance for Q3. We see revenue in the range of $12 million to $13 million. At this range, we would forecast gross margins to be around 35%. OpEx should come in around $10 million and income tax expense around $500,000. We, therefore, are forecasting a loss in the quarter of around $0.25 per share using 24.6 million shares outstanding.

Now turning to the current outlook for 2021. Our full year view is Thin-Film Equipment revenues of approximately $38 million, relatively consistent with our view from last quarter, and we now expect Photonics revenues to be at the lower end of the $30 million to $34 million range for a combined $68 million, plus or minus. At this revenue level and expected mix, we expect full year gross margins between 30% and 31%. As mentioned, our OpEx run rate is below $10 million per quarter and thus expected to be around $30 million for the year.

We are forecasting interest income of around $100,000 for the year and income tax expense of around $1 million for the year. While our operational results will be challenged in 2021, we will continue to prudently manage our cash and retain our strong balance sheet.

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

(Operator Instructions) Your first question comes from Peter Wright with Intro-act.

My first question is on the VERTEX. If orders were to materialize in the second half of this year, when do you think that revenue opportunity will happen? Is it any different from the Lean systems that you forecasted, the count?

Yes. For the wearable project, we would intend to revenue the eval systems that are already out there. So there is some opportunity, depending on what that timing is, that they could revenue. We have to get them through their final test and acceptance before we can take revenue. But the tools are actually already built. So we have opportunity near term with those.

And that's 2 systems. Is that correct?

Those 2 evals right now are the ones that we're targeting, correct?

And if I understood it correctly, you're suggesting orders as well on top of that could materialize in the second half of this year with VERTEX on top of that. Did I understand that correctly?

No, the tools out there are evaluation tools at this point. So once the -- in the evaluation terms, they accept that there's an order for it, and then it's supposed to...

I got you.

That will generate subsequently, yes.

Fantastic. And then a couple of housekeeping ones sort of quick. The cash projection at the end of the year. And if you can clarify, I missed it, the OpEx, I thought you said 30-something, but I'm assuming it's $40 million. The OpEx for the full year, can you just repeat that number as well?

Yes, I'll answer that question first. The OpEx for the full year, we still expect to remain around $39 million, which is what we also said last quarter. And then our cash, we came into the year with $5 million. And obviously, we have 54 -- I mean I'm sorry, we came into the year with $50 million, excuse me. And we ended this quarter at $54 million. And we would expect that our cash will still remain above the $40 million. If you remember, we've been saying we want to keep it at a minimum of $40 million.

And so we expect cash to still remain high. Some of that use will just depend on what happens with regards to any orders in the remainder of the year and any buildup of inventory or some late shipments of receivables still being not in collection. But we expect to end the year with a strong amount of cash, Peter.

Your next question comes from Mark Miller with The Benchmark Company.

Congratulations on your upgrade order. I assume that's what's pushing margins up next quarter. Is that coming from the upgrades compared to the June quarter?

Yes. That will certainly be a contributor for sure. And then with the IVAS development deliveries, we would expect Photonics margin to go up again in Q3 as well.

Okay. The fourth quarter looks strong again. Is that coming from VERTEX? Or what is the higher anticipated sales coming from?

The majority of that is coming from the strong orders we got in Q2. We will ship some of those in Q3, but we'll have a stronger upgrade quarter in Q4.

Those are coming from upgrades, okay. Just wanted to clarify something about interest expense. You said it was going to be $500,000 for this quarter but a net of interest income of $100,000 for this year.

No, I'm sorry. If I said that, it was a mistake. I didn't give a comment on Q3 interest income. I don't know, did you say interest income or income tax expense?

Interest -- I'm sorry, interest expense or income, sorry.

Yes. The interest expense has only been running at about $20,000 to $30,000 a quarter. And year-to-date on income tax expense, we've actually had a credit in the first 2 quarters, but we should see an expense based on the profitability in our international subsidiaries of about $0.5 million in Q3 and then about $1 million for the year. But you can think of interest income for the year at about $100,000.

Okay. And then finally, your VERTEX tools have moved into pilot production. Any idea when these will be revenued?

They haven't moved into production. Are you talking about the MATRIX tool?

MATRIX. I'm sorry, the MATRIX tool.

Yes. What they're doing is they qualified their process and now they're working to qualify their production line. So we've already revenued that tool, we've revenued it in Q1. So once they get through with all the qualification of their lines, I think the next step there is to upgrade that entire line for a higher-volume operation. Right now, there's a lot of manual work being done on that. But we are encouraged by the fact that, that project continues to move forward and that they're looking at qualifying their actual production devices. So we think there's more opportunity there, but it's probably out there probably towards the mid to back half of '22.

(Operator Instructions) Our next question is from Peter Wright with Intro-act.

Great. Two quick follow-ups, actually. So is there any update you can give us on the IVAS program of the way to think of market share? And is about 0.25-million-or-so camera units still a fair assumption to have out there on a 5-year outlook?

Well, there's really not a lot we can say about it just because of the NDAs that are in place. But what we did say is that these initial units that we've looked at, that we've been able to verify through public records, there's at least 5,000 on order and an opportunity to be almost 10,000 over the next 12 months that we won't be delivering cameras on that. It is too costly to scale up 2 volume production lines with very small initial volumes forecast and still some uncertainty until you get through the operational testing, which would be in the September -- August and September time frame is where it was currently planned. Before you get through that stage of the program where there's some risks that it may need more work or move to the pipe, that was the decision that was made.

Wonderful. That makes sense. So is it fair to assume that if volumes were to ramp, you would be executing on some of that? You're the one walking away from the business because the volume isn't there for you to be able to profitably execute?

No. We didn't walk away from the business. It's just the decisions that are being made by the prime on what their manufacturing team's looking like. So I don't know if that answered the question, but as the volumes come up and the need for more manufacturing capacity, we are 1 of the 2 companies that was actually brought from the original development programs and integrated into the IVAS units.

That's clear. And then my very last question is any update on the strategic review?

We're basically not going to talk about that. We announced it last quarter, so people knew that we were doing it. But we won't be really talking much about that until at such time that the Board has decided that there's some action that they're going to take.

And our next question is from Mark Miller with The Benchmark Company.

Just wondering what is driving the lead times for your Lean tool from 6 to 8 months. Is that component supply?

Yes. I think the longest pole in the tent is turbo pumps because we use the same kind of pumps that the semiconductor guys do. And we've seen this historically when there's a surge, the turbopump guys don't put in extra capacity. They just pull out the lead times. So we have to manage around that. But that's one of the fundamental pieces that's driving lead times.

And our next question is from Gus Richard from Northland.

Are you seeing any competitors in the deposition market for media at this point? Is Canon still in the game?

Yes. Canon, and although they still have offerings, we're not aware of them selling much equipment over the last several years. But certainly, when we're having discussions with hard drive customers, they're also looking for business as well. So we feel really good about the way we're positioned in the back and our equipment is as we go to these higher density -- higher aerial density media formats, that we're in a very leading position there.

Okay. And then a follow-up on the inventory question. I believe you guys built up inventory for the Lean systems earlier in the year. Can you just talk about what the long lead time items were that you pulled in and how turbopump fit into that?

Yes. We did buy some long-lead parts last year. So as we look at that 8-week lead time, there are a couple of systems worth of -- what?

8 months.

8 months, sorry. As we look at that for the first couple of tools, we'll be able to deliver those inside of that 8-month window because we'd already procured some inventory in Singapore to be able to react quickly, and that was really last year when we were being pushed quite hard to have the tools deliveries in the middle of this year.

And what do you think the opportunity for deposition systems in '22, '23 is for Lean? The round numbers of units, sorry.

I think in '22, we're probably -- just because of timing and lead times and some of those, it's probably single digits. But I think there's an opportunity in '23 for double-digit deliveries.

We have no further questions at this time. We will now turn the call back over to Mr. Blonigan.

I want to again thank the dedicated employees of Intevac all around the world for their continued resilience and dedication in this challenging operating environment. I also want to thank our customers and suppliers for their business and appreciate their partnerships. And finally, I'd like to thank our stockholders for their continued support of Intevac. I thank all of you for joining us today, and I look forward to updating you again during our Q3 call in November. Until then, so long.

This concludes today's teleconference. You may now disconnect.