Intevac Inc (IVAC) 2020 Q4 法說會逐字稿

Good day, and welcome to Intevac's Fourth Quarter 2020 Financial Results Conference Call. (Operator Instructions) Please note that this conference call is being recorded today, February 3, 2021.

At this time, I would like to turn the call over to Claire McAdams, Investor Relations for Intevac. Please go ahead.

Thank you, Hilary, and good afternoon, everyone. Thank you for joining us today to discuss Intevac's financial results for the fourth quarter and full year 2020, which ended on January 2.

In addition to discussing the 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 fourth quarter results and provide guidance for the first quarter 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 3 call include time-sensitive forward-looking statements that represent our projections as of today. We undertake no obligation to update these forward-looking statements made during this conference call.

I will now turn the call over to Wendell.

Thanks, Claire, and good afternoon. Welcome to our Q4 2020 earnings call. I hope that you and your love ones continue to remain safe and healthy.

Today, we reported fourth quarter results above the high end of expectations with revenue of $28.6 million and earnings of $0.05 per share. The higher revenue was driven by incremental demand for system upgrades in our hard disk drive or HDD customers. This incremental demand drove an all-time record year for upgrades in 2020 and, as expected, a record quarter in Q4. Our HDD business in total exceeded our expectations entering into the year.

Photonics finished the year with an all-time record of $45.7 million in revenue and $10 million in operating profit. Revenue growth for Photonics also exceeded expectations going into the year, delivering 30% growth over 2019. This growth was due to record contract R&D revenues of $23 million, driven primarily by continued strength in the IVAS night vision camera development program to the U.S. Army. Combined revenue from our core Photonics and HDD businesses were up in 2020 versus 2019, growing approximately 5%, despite 2 fewer 200 Lean shipped during the year.

Growth in our core business revenue in 2020 was offset by the continuing delays of our custom -- okay. The growth in our core business revenue in 2020 was offset by the continuing delay of our customers solar cell capacity expansion in China. Therefore, the roughly $15 million of energy revenue recorded in 2019 did not repeat in 2020.

Cash generation was a highlight in the fourth quarter with total cash and investments up approximately $1 million and for the full year, cash is up $7.5 million. We exited the year with $50.4 million in total cash and investments, an 18% increase over 2019. Despite an overall decline in year-over-year revenue, given the unexpected and difficult operating environment we experienced due to the COVID pandemic, we are very proud to have delivered profitable results, strong cash flow generation and an increase in total cash and investments in 2020.

Now for a review of each of our businesses, starting with Photonics. I want to restate that in 2020, Photonics delivered its best year ever. In Q4, there was a heavy emphasis on our IVAS night vision camera programs with night vision labs as we work to finish the initial integration of our cameras into the IVAS platform. The effort required several iterations of firmware enhancements and integration adjustments as well as new functionality requirements on a very tight timeline during Q4.

We were able to successfully complete this work by complementing the funded development activity with internal R&D resources. The completion of this program and subsequent follow-on activities will require investment by Intevac and will cause some margin pressure on the business in 2021.

We have completed manufacture of all the low-light-level CMOS camera modules for the camera development program and shipped the majority to night vision labs or their designee. We will continue to finish out the deliveries in Q1 in a muted fashion to match the system-level build schedule.

Our development program deliveries include both the high-performance CMOS cameras and the CMOS with gain cameras, the latter of which are based on our ISIE 19 EBAPS technology. These cameras with gain provide visual acuity at the lowest of light levels, no moon overcast skies. We believe that incorporation of the technology we supply to the Apache helicopter and the F-35 Joint Strike Fighter will enable the highest level of digital night vision acuity to the IVAS system. We anticipate the IVAS development programs to complete in Q1 and continued work on system-level integration and image optimization, specifically leveraging Intevac's digital night vision acumen in high dynamic range operation.

As a note, as we finish up the development with the Army, the IVAS initiative moves into initial production and fielding. The sensitivity of the program and disclosure restrictions in the supply chain will limit our ability to provide some details of our activity going forward.

For plan, we expect our IVAS sensors to undergo field evaluations as Soldier Touchpoint 4 in the second quarter. The overall program plan of record is to equip the first fighting units with IVAS systems in the fourth quarter of 2021, which would dictate that production orders will need to commence shortly to support procurement and manufacturing lead times for the cameras.

In other development work, the $5 million development contract award we announced in December for the U.S. Navy-funded advanced visual acuity program, or EVA, is now beginning to contribute revenue to Photonics. This program supports the U.S. Navy and Marine Corps. pilots in executing their missions more effectively under low light conditions. Important for Intevac, this is the first announced night vision program that incorporates our latest ISIE 19 sensor technology and is destined for rotary aircraft pilotage applications beyond the Apache helicopter.

In our volume production programs, we continue to execute well on the Joint Strike Fighter contract at full production rates on this multiyear contract. We anticipate additional production programs to begin in 2021. Starting at low volumes, with 2021 quarterly revenue run rates forecast to be between $8 million and $10 million until production ramps in the back half of the year. This revenue profile in the first half will make it difficult to achieve growth in 2021 of the historical record year of 2020, but we expect to exit the year with strong growth momentum into 2022.

The key takeaway for Photonics is that we have increased confidence that Intevac will be a meaningful supplier for the critical all-digital IVAS platform for our ground soldiers. Beyond 2021, success in this program as well as the multiple other key night vision programs underway with the U.S. Military will become the major drivers of revenue growth for Photonics for years to come.

Next, turning to our thin-film equipment, or TFE business, starting with the hard disk drive market. The underlying fundamentals in the HDD media market improved significantly over the course of 2020, and we'll get our next view of the long-term growth trajectory when Trend Focus comes out with an update in the next week or so.

But media unit forecasts have been improving for 4 straight quarters now, concurrent with 4 straight quarters of upward revisions in growth expectations for Exabyte demand. Mass capacity nearline drives for cloud-based storage data centers are driving the upside in media unit growth rates. The expectation of a 34% annual growth rate in mass capacity HDD over the next 5 years will require the industry to produce and ship far more discs, which in turn drives demand for our systems.

As we enter 2020, the forecast for media growth indicated a need to start adding incremental capacity towards the end of 2022. The upward revisions in media unit demand, which have occurred since last March, have pulled in the capacity crossover point by about a year. The latest estimates from November, forecasting demand for over 250 million disks in Q3, reveal that the industry will be at 90% capacity or higher within the next couple of quarters. In fact, the industry has already been running at or near historical -- historically high media capacity utilization rates and have periodically exceeded the 90% level.

Other news since November has also been incrementally more positive with upside in both PC sales and hard drive units, and given the upside in nearline demand for mass capacity drives in Q4, we expect upside in Q4 media shipments as well. HDD demand in 2020 reflected strong cloud investments to support a remote economy and digital transformation.

Cloud data center demand remains healthy with the overall drivers for data demand intact. Analysts project strong double-digit growth in cloud CapEx in 2021, which bodes well for our HDD business with the expectation of media unit growth continuing from current levels.

For Intevac, increasing demand for mass capacity drives will benefit our TFE revenue growth trajectory. And since our last call, our confidence in the fundamental drivers in our HDD business continue to increase. The discussions significantly expand the industry's media manufacturing capacity for the first time in more than a decade, began late in 2020.

As of our last call, the timelines discussed for 200 Lean orders to commence was around year-end 2020. Ultimately, while mass capacity drive forecast remain as positive as ever, our customers decided to study the industry dynamics in other quarter before making a decision on the timing of order placement.

So over the next couple of quarters, we expect to start booking orders for multiple systems with shipment dates extending from late 2021 through 2022. The quantity of expected tool bookings are unchanged from our last call. However, the shipment timing has shifted more heavily into 2022.

We believe we will participate in a significant way in support of all media capacity expansions that address the growth in mass capacity drives with our industry-leading 200 Lean system. Our market leadership position supports a strong growth year for our HDD business in 2022 and also sets the stage for continued sustained growth of our HDD business beyond that time window.

At the same time, demand for technology upgrades continue. The fourth quarter and full year 2020 are certainly records that will be tough to repeat in our upgrade business, especially as our customers transition their focus to capacity additions. With our current visibility, we expect 2021 upgrade sales will be lower than 2020 but still a good year overall.

The takeaway here is that we are incrementally more positive about the growth trajectory for our HDD business. In the short term, we'll see soft revenues in the first half as we rebuild 200 Lean backlog. In the medium and longer term, we expect upside to our prior growth expectations due to both the pull-in of the capacity crossover point as well as favorable shifts in market share as mass capacity becomes the dominant component of HDD unit demand.

Finally, I'll provide an update on our TFE growth initiatives. There is no doubt that the COVID pandemic and the related disruptions to the global electronics manufacturing and supply chain as well as the restrictions on international travel significantly impeded our efforts to achieve more progress in our TFE growth initiatives in 2020.

Clearly, as the majority of our initiatives are focused in China, the pandemic impacted our ability to secure new customers and bookings in 2020. As we look into 2021, our primary objective is to gain initial adoption of our DiamondClad-protected coating and to convert the systems under evaluation into orders and revenue. We continue to make good progress with both VERTEX and the MATRIX PVD evaluation tools currently out in the field. These tools will soon be approaching the end of their evaluation periods, and we expect to be able to revenue them in 2021.

We continue to be engaged with cellphone manufacturers on patterning and protected coating development and our demo labs in the U.S. remain full with multiple development programs with new potential customers. At this time, we're taking the conservative view on these initiatives in 2021 until we can attain some visibility on the lifting of travel restrictions, which are impeding our progress.

We continue to be encouraged by continuos demo activity and the ongoing dialogues with multiple end customers for an array of cellphone and wearable applications. Given that we expect the eval tools to convert to orders, these TFE growth initiatives should contribute to our 2021 revenues and establish a foundation across multiple markets that can be part of our growth strategy in 2022 and beyond.

At the same time, over the course of the last year, our growth story in our core businesses of HDD and Photonics has improved significantly. We believe the media capacity crossover point has pulled in by about a year, and we also have increased confidence that we will be a supplier for the first major all-digital program for the ground forces. Incremental success in our TFE growth initiatives present additional upside on top of this growing strength in our core business.

So to sum up our overall outlook as today, the first half of 2021 is all about bookings. First half TFE revenues will be soft due to second -- due to light second half 2020 bookings, but the first half of 2021 will also be an exciting period as we begin to bring in the expected orders and build the backlog in both businesses, supporting a better second half in 2021 and a strong growth year in 2022.

The expectations for our hard drive and Photonics businesses and the critical role that Intevac plays in them continues to be very positive. We now have a scenario in both of our core businesses, HDD and Photonics are becoming meaningful growth drivers on their own. For 2021, in particular, both of these growth businesses will experience a soft patch in the first half as we receive orders and build backlog. This will lead to a heavily back half-weighted year in 2021, given both HDD system shipments and an IVAS production ramp are late 2021 events. This ramping of the revenue run rate as we exit '21, however, will set the stage for a strong growth year in 2022.

Incremental to this positive outlook for HDD and Photonics is that we continue to be encouraged by our progress in additional TFE markets and believe they too will contribute to our long-term growth story. As for a preliminary outlook on the full year, we expect important questions to be answered over the next few months with respect to HDD media capacity expansion launch, evaluation tool conversion to revenue as well as production rollout timings for IVAS. These answers will help clarify our revenue outlook for the year, and given that we do not currently have that visibility, we are not in a position to provide full year guidance today.

While the first half of 2021 will be a challenging period for our reported results, we have a strong balance sheet that allows us to weather any soft patches, while continuing to invest in ramping our core businesses. Once we have orders in backlog and the visibility that supports a strong growth year in 2022, we feel that we will be on a solid path for sustainable, profitable revenue growth for 2022 and beyond.

I'll now turn the call over to Jim to discuss the details of our recent financial results. Jim?

Thank you, Wendell. Turning to the first quarter results -- fourth quarter results. Consolidated fourth quarter revenues totaled $28.6 million, above our guidance of $26.5 million to $27.5 million due to upside in HDD upgrades. Thin-film equipment revenue totaled $18.2 million and included upgrades, spares and service.

Photonics revenue of $10.4 million included $5.1 million of product revenues and $5.3 million of contract R&D revenues. Q4 consolidated gross margin was 40.8%, slightly below our guidance of 41%. Thin-film equipment gross margin was 48.3%, up from the fourth quarter of last year and the third quarter of this year due to higher margin HDD upgrades. Photonics gross margin was 27.7%, which was lower than forecast, primarily due to higher costs related to the additional work needed in order to finish the initial integration of our camera into the IVAS platform as we near the completion of the development stage.

Q4 R&D and SG&A expenses were $10 million at the high end of our guidance range due to slightly higher bidding proposal costs. Q4 net income was $1.1 million or $0.05 per diluted share, above our guidance of $0.02 to $0.04 per diluted share, driven by better gross profit from our thin-film equipment business. Our backlog was $46.9 million at year-end, of which $41.3 million is Photonic's backlog and $5.6 million is thin-film equipment backlog.

We ended the year with cash and investments, including restricted cash, of $50.4 million, a $7.5 million increase from 2019 and equivalent to approximately $2.11 per share based on 23.9 million shares at year-end. Cash flow generated by operations was $1.1 million during the quarter and $8.9 million for the year. Q4 capital expenditures were $283,000 and depreciation and amortization were $835,000 for the quarter. For the full year, CapEx was $2.6 million and depreciation and amortization was $3.5 million.

Now moving to the Q1 2021 guidance. We are projecting consolidated revenues to be between $16 million and $16.5 million. As Wendell mentioned, the quarterly run rate for Photonics will decline from 2020 levels to the $8 million to $10 million range until the production ramp begins later this year. We also expect significantly lower HDD upgrades in Q1 compared to a record Q4. Thin-film equipment revenues in Q1 are expected to include the conversion of the MATRIX evaluation system for Advanced Packaging into revenues.

Given the lower Q1 revenues, gross margins will be impacted. In thin-film equipment, lower overall volume will affect factory utilization and gross margins will also be impacted by mix as we'll have less high-margin upgrade revenue and the MATRIX evaluation system, as the first tool of its kind, carries a lower margin than a production system would. In Photonics, we expect a margin similar to what we had in Q4 due to continued higher IVAS integration costs.

Overall, we expect first quarter gross margin to be between 26% and 28%. Q1 operating expenses are expected to be around $10.5 million, slightly higher than our expected run rate for the full year due to the timing of increased investments in research and development, along with some typical seasonal increases.

We expect quarterly OpEx to be around this $10.5 million level for the first half of the year and then below $10 million a quarter for the second half. We expect interest income of about $50,000 and GAAP tax expense of about $200,000 in the quarter. We are projecting a Q1 net loss in the range of $0.25 to $0.27 per share based on 24 million shares outstanding.

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

(Operator Instructions) Our first question comes from Mark Miller of The Benchmark Company.

I just listened to Seagate, and they were painting certainly a brighter picture for second half, which was consistent with what you're saying. Just curious, in terms of their ramping and the mix continues to evolve towards mass capacity, what is your estimate for the number of disk per drive currently? And where would that be maybe in a year?

My estimate on disk per drive. J, do you have a number?

4 to 5.

4 to 5 at this point in total.

Do you see that growing by another platter next year?

When we look out at next year, we'll see, probably, at least one, I would say. Right around one.

Are they -- are you talking about basically revenue in one of the MATRIX tools? Are there any other non-HDD tools you expect to revenue this year?

Yes. Right now, we have 2 evaluation tools out there. One that's doing -- one is the VERTEX and the other one is the MATRIX.

The MATRIX evaluation period ends in the first quarter. So as Jim said, we expect to revenue that. And the VERTEX is out towards late spring, early summer, and it's our intention to revenue that one as well.

Would that be second half of the year?

Probably right around that timeframe. Yes.

Our next question is from Gus Richard of Northland.

I was hoping you could give us a little bit more color on when you would expect to see bookings both for the IVAS program, for production? And when you might start to see 200 Lean orders as well?

Well, I think in my remarks, I said around IVAS that the schedule holds to outfit the first fighting units in Q4. That -- those orders should have to happen shortly just to manage procurement and manufacturing lead times.

For the -- on the hard drive side, we would expect to see dialogue in the next couple of months. As I said, the customers want to see the data for a quarter. We're going to get some information from Trend Focus. They have their internal type discussions, and then we would expect to see those orders in late Q1, early Q2, probably in that timeframe in order to meet the initial shipments heading out in Q4 again because of lead times.

Right. And just remind me, what's the lead time on the Lean 200?

It's about 6 to 7 months, but there is some shortages of components. We're fighting with the semiconductor guys. So lead times are possibly extending a little bit.

POkay. So there is some potential those systems could push out of the year if your customers don't get busy placing orders?

That's correct. If it goes inside a lead time, then it would push into 2022. And what we saw since our last call is that, that quarter delay in making the orders is pushed the 200 Lean revenue more heavily into 2022 than 2021, and we do anticipate starting those shipments in 2021.

Okay. Got it. And then are all of the HDD guys participating? Or is it just 1 or 2 of them in terms of capacity?

It's really not for me to identify, but we look at the overall industry and see that, that -- they're going to be out of capacity. Individual companies and end-market shares and what's driving them is probably not my space to talk about.

Okay. And then just on the IVAS program. Could you talk a little bit about -- I know you're just part of the assembly, but do you have a sense of the lead times on this? If the orders are placed, let's say, this quarter, does that give you enough time or the contractors enough time to get product in the field? And sort of when is the drop-dead date to have units in the field?

Yes. We would need to have those orders in the first quarter to make those delivery schedules.

Okay. And just to be clear, the development of the soldier-mounted IVAS night vision system, is it, to some extent, complete at this point? Or is there significant amount of work to do? And does that work need to be completed before the orders are placed?

I think that Soldier Touchpoint 4, which is happening in the second quarter, is, to some degree, a validation and integration of all of the previous touchpoints and putting all that knowledge into those units.

From a camera perspective, that's completely different than the whole system, right? I assume from Soldier Touchpoint 4 system-level work would continue, but I think from a camera perspective, you should be pretty set.

As mentioned in my comments, we have some more work to do in Q1 here, but it's mostly in firmware and algorithms and things like that. That's all field uploadable.

Okay. So you are at a point where the hardware system is locked down, and you're just tweaking the software in terms of deliverables?

Pretty much, yes.

Our next question comes from Peter Wright of Intro-act.

A couple of questions. One is, when looking at 2021, do you think that it would be logical to think backlog could grow quarter-on-quarter through the year?

And my follow-up question is looking at IVAS. And it's a multipart question, but if we look at IVAS and we look at the development to production transition, can you help us understand maybe on kind of a multiple basis, whether it'd be peak or run rate-type quarterly number, what do you think the opportunity is there for how good this can be? And if you can help us understand kind of the cyclicality in this business maybe compared to TFE, how you think this business is changing in the back over the next several years?

Well, that's a tough question. So from a quarterly run rate, that's something we can't talk about right now because that would be part of some details about the overall program and how it's going to roll out. And I did mention in the comments that going forward, there is going to be some restrictions on what we can really talk about because it's part of a rollout program as well as some constraints in the supply chain.

But we've estimated that opportunity given a market, it assumes market share of the night vision cameras to be on, an annual basis, between $30 million and $50 million worth of opportunity for us.

How that ramps up? Is there stops and starts? We don't know yet.

I get it. And on the backlog quarter-on-quarter growth?

Sorry about that. Yes, I believe that when we look at our backlog and where we project it to be to really get to the point where we're launching into 2022 with the big growth trajectory, we would see backlog, most likely, in the first half, would probably peak a little bit, and then we'd expect to see additional backlog coming more towards the end of the year that's in support of some of the 2022 activities.

And then if I could sneak in one very last one. Cash use in 2021, any thoughts around kind of the range where you think cash use might be?

Yes. So we think we've done a great job of growing and managing cash in 2020, and we will continue to maintain a high level of cash on the balance sheet, but we will use it to fund executing on the bookings. So we believe we'll still have a high level of cash. There may be a little bit of fluctuations quarter-to-quarter as we sustain building the inventory for the bookings, but we'll manage cash very prudently.

And I think a year ago, you were looking to kind of keep it above the $40 million range you see that being sustainable through 2021?

I certainly don't see it dropping below that number. And like Wendell has said, it depends on the timing of the bookings, but I don't see us probably below that number.

I said we'd actually expect it to be a little higher than the $40 million, given that we ended this year with $50 million.

Our next question comes from Mark Miller of the Benchmark Company.

Just curious, you didn't -- at least from what I'm looking at, you didn't report any interest income for the quarter. Is there a reason for that?

There was interest income of about $40,000, but we also had some other expense. I think it was mostly FX of about a similar amount. So they kind of -- they're both small numbers, but they kind of washed each other out. We have quite a bit of cash, but you can imagine the interest rates these days are so small. There is just not much in there at all.

Is that also the reason it's been trending down for the whole year?

Yes. And that's also the reason why -- when we were in late '19 and early '20, it was closer to $100,000 a quarter. Now it's closer to $50,000 a quarter.

We're very conservative on what we do to invest our cash, and so there is just not much return there right now.

There are no further questions at this time. I'll now turn the call back over to Mr. Blonigan.

Thank you. I want to, again, thank the dedicated employees of Intevac all around the world for their heroic efforts and dedication in 2020. I also want to thank our customers and suppliers for their business and appreciated partnerships. Also, I would like to thank our stockholders for their continued support of Intevac.

And finally, as we enter 2021, we are optimistic that we will soon emerge from the COVID and the challenges it has brought us all. Thank you for joining us today, and we look forward to updating you again during our Q1 call in May. Until then, so long.

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