Intevac Inc (IVAC) 2020 Q1 法說會逐字稿

Good day, and welcome to Intevac's First Quarter 2020 Financial Results Conference Call. (Operator Instructions) Please note that this conference call is being recorded today, April 27, 2020.

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

Thank you, and good afternoon, everyone. Thank you for joining us today to discuss Intevac's financial results for the first quarter of 2020, which ended on March 28. 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 and Jim will review first quarter results, 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 April 27 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 Wendell.

Thanks, Claire, and welcome, everyone. Thank you all for joining our Q1 2020 earnings call. I trust and hope all of you and your loved ones are healthy and safe.

Today, we reported stronger than forecast results for the first quarter of 2020, which was a notable achievement in light of the stress placed on our operations and supply chain by the ongoing COVID-19 pandemic. Revenue of $18.8 million exceeded the high end of our guidance range, primarily due to exceptional execution by our Photonics team ramping up to the higher quarterly revenue levels expected for this year ahead of schedule. Outstanding operational execution by both our Thin-film Equipment and Photonics businesses led to higher gross margin and lower operating expenses and resulted in a net loss of just $0.05 per share, much better than expectations.

Before we start our normal business review, I would like to first talk about the overarching topic of today, the global COVID-19 pandemic and how it relates to Intevac. First and foremost, I am pleased to report that the entire global workforce of Intevac is healthy and, albeit in a primarily remote configuration, have been on the job delivering for our customers. At our last earnings call 3 months ago, which seems a lot longer than that, during the final summary, I discussed timing uncertainties in China's return from the Lunar New Year holiday given the outbreak of the coronavirus. I think I speak for a lot of people in saying I did not imagine we would be in the middle of a global pandemic at our next call, with the world's economy fundamentally in free fall, a once-in-a-generation black swan. These are unprecedented and challenging times as the COVID-19 pandemic affects our business as well as each of us personally. The #1 priority at Intevac has been and continues to be ensuring that we do everything we can to keep our employees as healthy and safe as possible while we work through this crisis. Our #2 priority is to ensure that we continue to innovate and deliver our products and services on time with the highest quality.

As both our Thin-film Equipment and Photonics businesses have been determined as essential in support of critical IT and defense infrastructures, each day we have around 75 employees at our Santa Clara headquarters carrying out essential engineering, manufacturing and logistic responsibilities for the company. All Santa Clara employees who are able to work from home are doing so. In Singapore as well as our other Asian operations, our teams have been, like in California, working remotely where possible. Last night, however, in Singapore, we received notice that the next phase of required business closures that went into effect impacted our HDD manufacturer and operation there. We have met with our largest customer in Singapore who was not impacted and, with their assistance, are working to procure an exemption from this shutdown order, which would allow us to continue supporting them. The recent order is set to expire on June 1.

Beyond the acute challenges of today, for an integrated hardware manufacturing companies such as Intevac, operating in a remote resource environment is far from ideal. We initially saw the expected loss in efficiency. However, the team has approached the situation creatively and each day we're becoming increasingly more efficient in this new work configuration.

We have been taking and continue to take extensive precautionary measures to mitigate the risk to our employees. Prior to the shelter-in-place orders in California, Intevac instituted strict protocols for operation, including social distancing, common area layout changes, continuous disinfectant of high-touch surfaces, mask and glove requirements, hygiene protocols, twice daily fever checks and disinfection of all incoming mail and inventory. This preparation, led by our EH&S team, allowed us to quickly resume factory operations when the decision was made to do so.

On March 17, the Bay Area shelter-in-place order went into effect, and Intevac's Santa Clara operations were closed. By the end of that week, employees that could work remotely were up and running, and we have received communications from both our hard drive and defense customers that under the Department of Homeland Security Directive we were identified as an essential critical infrastructure business with a duty to continue operations. Given what we knew about the virus at the time, we remain shut down for an additional week in order to confirm no one developed symptoms and, thankfully, no one we did. On March 30, our California operations reopened.

As of today, we have experienced minimal impact on Intevac's manufacturing operations. In Photonics, 2 weeks of production was delayed but we're quickly catching up and will be back on plan by the end of May. In Equipment, we've experienced minimal impact to date. However, yesterday's shutdown order in Singapore may cause a shift in HDD revenue timing if we cannot get an exemption in a timely manner. With regards to our supply chain evaluations, our Photonics ecosystem, which is U.S.-based, to date has been solid. The last outstanding closed supplier resumed operation after 3 weeks off-line.

In Equipment, which is Asia-based, there have been challenges with regional and factory shutdowns, travel restrictions, transportation and freight disruptions as well as support logistic issues. Fortunately, we've been able to work around these temporary disruptions or the issues have resolved for the most part. The evolving situation in Singapore is our next challenge to resolve. In our Equipment business, international air travel is an important part of our operation, and this remains an issue, particularly for installations, upgrades and, most importantly, engineering collaboration in China and other countries hard hit by the pandemic.

Currently, with U.S. travel restricted to only essential travel outside the country and China fundamentally restricting foreign nationals from entry until further notice, for all intents and purposes, our non-HDD equipment business activity that requires U.S. and/or Singapore employees to be on-site is on hold. We have local employees in China supporting the current installed base, but new equipment installations and startup activities will pose a significant challenge if restrictions do not ease in the second half of the year.

Regarding customer demand, we currently have not seen any reductions for our products, particularly in Photonics and hard drive-related businesses. However, Thin-film Equipment sales, engineering collaborations and product evaluation cycles have elongated in this environment, particularly in our growth initiative activity. Therefore, we're taking a prudent approach and are expecting some of the revenues previously forecast for 2020 will move into 2021.

In a downside scenario, where all non-Photonics and non-hard drive revenues events delay into 2021, we would expect to maintain our current target level of $40 million in cash on the balance sheet with a net usage of cash of under $5 million, enabling us to continue driving our growth strategy through this turbulent year. While this is certainly not the scenario we're planning for today, if it were to materialize, we have very solid financial footing with a strong cash position and no debt and proven acumen navigating through previous challenges by managing operating expenses and minimizing cash use to maintain the strength of our balance sheet.

I think we would all agree that in this environment, it's difficult to determine how things will develop, how long the situation will last and the impact the pandemic will have on the global economy. We're taking all the necessary steps in terms of safety, risk mitigation and financial controls to best manage through these challenging times. It has been very encouraging to see the resilience and dedication of the Intevac team and the customers we serve as we work through this unprecedented time together.

So with that being said, I'll now provide an update on each of our businesses. First, starting with Photonics. The team did an outstanding job executing despite uncertainties in Q1. The strong growth expectations for this business in 2020, despite the pandemic, remain intact. We continue to have visibility for revenue growth in the range of 20% to 25% for the Photonics business this year, and Q1 deliveries and profitability were executed ahead of expectations. While we incurred -- encountered some temporary time crunches getting product out the door, given the mandatory shutdown period, those challenges are behind us, and we have the visibility needed to achieve our growth expectations for the year, absent any further disruptions. This level of visibility in our forecast is supported by the continued prioritization and progress of the IVAS program for the U.S. military as well as multiple new contract awards, which we talked about on our last earnings call.

The IVAS program continues at a rapid pace. However, impact from the coronavirus has caused about a 3-month delay in soldier touchpoint #3, pushing it from July into October. Despite the delay, the overall program scheduled to equip the first 5 units with IVAS systems in the fourth quarter of 2021 remains on track. Our forecast for steady revenue flow from the IVAS program and now full rate production of cameras for the Joint Strike Fighter program gives us the visibility to forecast quarterly Photonics revenues around Q1 levels throughout 2020. We will continue to announce incremental awards that will build upon our Photonics backlog, which provides multiyear visibility for continued growth and profitability.

In the most recent of news, the EVA program, or Enhanced Visual Acuity, which has been under protest since November, has been resolved. After 2 denied protests of the prime contractor selection by a competitor, the protest moved to Federal District Court, which once again denied the protest. This is outstanding news for Intevac as the winning prime incorporates our ISIE 19 technology. We expect to be on contract for the EVA program late quarter -- second quarter or early third quarter.

With regards to our ongoing technology advancement efforts, we recently completed the first ISIE 19-based camera system as well as initial field trials and final fine-tuning activity. This unit will shift to night vision labs this quarter. We are currently building the ISIE 19 sensors in small quantities in support of several programs that will be the launch vehicles for the ISIE 19. We have multiple ISIE 19 cameras in backlog to support not only new programs such as IVAS, DELTA-I and EVA, but the future upgrade program for the F-35 Joint Strike Fighter as well. All of these contract awards and developments have built a strong foundation for our future growth. We have multiyear visibility for our manufacturing operations, continued validation of our digital night vision technology, and we are pleased to report that the significant growth forecast for Photonics in 2020 has remained on track.

Turning now to our Thin-film Equipment division, starting first with our HDD business. As expected, the first quarter was a slow period for the business, but our team did an excellent job delivering the customer upgrades forecast for the quarter while tightly controlling operating expenses. We've been working through issues with the supply chain with COVID-19-related shutdowns affecting multiple regions producing components, particularly in Malaysia. At this time, we do not expect material changes to the hard drive business forecast we entered 2020 with, but the risk environment has certainly heightened.

There are many factors affecting both the supply and demand for hard drives this year. For example, a record number of nearline drives were shipped in the first quarter, and there are multiple positive signs being reported on data center and notebook computer demand driven by a significant increase in working from home and virtual learning activities. Video game demand is also on the rise, which increases demand for hard drive media. At the same time, the negative impact of lower consumer spending and reduced corporate IT budgets will present a headwind for our industry that we're just beginning to understand.

The 2 200 Leans in backlog scheduled to ship in the second quarter may move into Q3, depending on the timing of the resumption of Singapore manufacturing operations. We also have process module upgrades scheduled to ship from our Singapore facility throughout the year where we also may see some timing impact. Given the overall uncertainties in the global macroeconomic environment as well as the role Singapore and Malaysia play in the supply chain for HDDs, we continue to watch the industry dynamics very closely to gauge the risk to our plans. So for the time being, we are maintaining our forecast of a mostly -- modestly down year in the hard drive business, due to fewer system shipments compared to 2019. And just as before, we believe the strong growth in Photonics will offset this decline in 2020.

Next, moving to our progress in expanding our current footprint in the display cover panel market with our VERTEX platforms, which continues to present the largest growth potential over the next few years for our Thin-film Equipment business. Q1 was an important quarter for us. We announced our Diamond Dog tempered glass screen protector, which we debuted at the Consumer Electronics Show, and we finalized the agreement to deliver a second VERTEX Spectra evaluation system to another leading display cover glass manufacturer. This agreement took longer than expected and was further complicated by the extended shutdowns in China around the Lunar New Year. We were very pleased to complete this agreement in Q1 in spite of the emergence of COVID-19.

In regards to our VERTEX evaluation programs for decorative coding applications now in process, we remain optimistic that these will convert to revenue and result in follow-on orders in support of multiple programs currently in development. The first eval tool has finished the initial pilot production samples for a top handset maker which resulted in a second design cycle, which is in process now. This same handset maker has another design in queue for a different model, and a second handset maker has a design in queue as well. The second evaluation tool, which ships out of our Singapore operation, is there in Singapore awaiting import by our customers in China.

While our projects and opportunities remain intact, the timing for revenues this year is at risk due to impact that COVID-19 is having on several aspects of the business. In China, we're projecting roughly 4 to 6 months of delay on development engineering programs. When the factories in China were shut down over the Lunar New Year, all development engineering work had stopped. When the factories came back online, which is still an ongoing process, all available resources, including engineers, were deployed to the manufacturing area in order to get the factories back up and running at some level of capacity as quickly as possible. We are only just recently beginning to see a resumption of focused development work by our customers in China for our VERTEX programs.

In addition, given the current international travel situation, we're supporting these tools with only our China-based teams. However, the Santa Clara development team is integral to the effort as well. Rather than having our development teams working on-site hand in hand with our customers, we have to work remotely with them, which elongates the duration and complicates the execution of the effort. Beyond the difficulty executing development programs remotely with our partners and customers trying to get their business back up and running, compounding the situation is the deteriorating forecast for mobile handsets and the pressure that this will undoubtedly place on the display cover glass industry.

At this time, while VERTEX project delays persist, we have been encouraged by the initial soft launch of our branded Diamond Dog screen protector. The Diamond Dog is a best-in-class screen protector that we showcased at the ShowStoppers event at CES in January. And it's had encouraging reception so far. Diamond Dog is a branded consumer product selling for $29.99, utilizing our DiamondClad coating on a retail cellphone screen protector. We believe this performance surpasses the best screen protectors on the market today and at a lower cost. Its sapphire-like protection against scratches, abrasion and breakage is several times better than competing products.

Since our soft launch in January, we've been hard at work preparing for a full launch of the product. We're now up and running on Amazon, where the bulk of our current sales are coming from today, and currently have a low profile social media ad campaign ongoing on Facebook and Instagram. Initial sales volumes are modest as expected as we work to establish our brand and continue to gain momentum. Today, we are close to depleting our initial seed inventory we soft launched with. Going forward, we have -- once we have significant inventory on the shelf at Amazon, we will ramp up our marketing campaign currently finishing development with an outside e-marketing specialist.

We have completed our launch inventory build of 3,000 units, and they will ship to Amazon for fulfillment as soon as possible. Unfortunately, the COVID-19 pandemic has had some impact here as well as Amazon halted all nonessential products in the inventory and are slowly bringing them in now. We received the go-ahead to ship late last week, and we are now moving forward with our product launch plans.

As a reminder, the primary objective behind this direct-to-consumer launch is to create industry and customer awareness of our DiamondClad coatings capability to accelerate DiamondClad demo activity on our eval tools and to drive demand for VERTEX Marathon systems. So while the focus is generating tool sales, there is, however, a large and lucrative market for high-end screen protectors of around $300 million annually. And from our testing, Diamond Dog is a superior product. We look forward to keeping you up-to-date on the consumer response and handset maker interest resulting from the Diamond Dog product launch.

So the overall takeaway on VERTEX is that we're encouraged by our progress, our strategy to be unchanged, and we continue to believe this business has substantial growth potential for our Thin-film Equipment business. However, this component of our business has been impacted by COVID-19, and our visibility for revenues in 2020 is extremely clouded. We shall see in the coming months as things gradually recover in China, whether these projects take hold in 2020 as planned and time is available to revenue them or if the revenue events we push to 2021.

Next, regarding the ENERGi platform. In our solar cell ion implant business, we continue to have confidence in the future potential for the energy product line and discussions for the need of additional tools similar in scope to our previous multi-tool order in support of a multi-gigawatt capacity expansion in China are ongoing.

At the time of our last call, our customers' plan of record was to place follow-on orders within the first half of 2020 with deliveries during the second half. With the shutdowns and quarantines experienced in China to date, similar to our VERTEX evaluation activity, this expansion project in China is delayed by approximately 6 months. Construction of our customers' expansion factory was delayed. And when we were finally able to meet face-to-face with senior leadership, they communicated that the capacity expansion will go forward, but the project delay -- is delayed and tool orders will push to the third quarter of this year. Given the lead times for our tools, this will shift most, if not all, of the ENERGi revenues out of this year and into the first half of 2021.

And finally, for the MATRIX platform. The MATRIX to date has been serving the high-efficiency solar cell manufacturing market and now advanced semiconductor packaging. Just as we're seeing with delays in China, the MATRIX PVD evaluation system is located in another country also affected by global travel restrictions and shutdowns. The tool continues its evaluation and qualification at their R&D facility, albeit at a slower pace. And we expect the evaluation cycle will be longer than planned due to these challenges. This tool continues to remain in our 2021 plan.

So in summary, based on our current plans in our Photonics and HDD businesses and without further COVID-related interruptions, our forecast for these 2 components of our business in 2020 is relatively unchanged since our last call. We continue to execute on this plan. However, there is significant uncertainty about how the current crisis will ultimately impact global GDP end markets, our manufacturing capability, supply chain and most importantly, our customers. In addition, the situation continues to evolve rapidly, and we're experiencing unforeseen changes almost on a daily basis. In light of these risks and uncertainties and the dynamic nature of the pandemic, we feel it would not be prudent to provide formal guidance at this time.

What we've communicated today is that so far through this crisis, it is clear that our TFE growth initiatives with customers in display cover panel, solar and advanced semiconductor packaging sectors are experiencing delays with elongated sales development and evaluation cycles and therefore clouding the revenue timing associated with these programs. In a downside scenario, where the majorities of revenues into these new markets move into 2021, we have confidence in our ability to closely manage expenses to limit nonstrategic operating and capital expenditures and to preserve the strength of our balance sheet. These are unprecedented and challenging times, but we have the ways and the means to get through it. The world looks a lot different today than it did 3 months ago, and it is sure to look different 3 months from now when we report again. We continue to look at the facts in real-time, day-by-day and react and adapt accordingly.

Despite the fact that current environment acutely imposes near-term challenges and uncertainties affecting our growth potential in 2020, we see this as a temporary disruption caused by the current pandemic. None of the industries we serve or initiatives we're driving are going away or have they been permanently disrupted. We continue forward driving our strategy with confidence that while the achievement of our goals may become delayed, they are not beyond our reach.

I would also like to take this opportunity to thank the entire Intevac team, their families as well as our many partners who have stepped up in these unprecedented and distressing times in support of our company and stakeholders. I have seen many examples of incredible teamwork and creativity being employed to ensure we continue to work and serve our customers, all while keeping our #1 priority and focus, ensuring the safest possible environment to operate in while fulfilling our obligations as an essential business. The team has moved forward with strength, courage and wisdom, and I'm proud to be part of the team during this moment in history. I can confidently say that the Intevac team is not only doing the best we can do under these circumstances, I believe we are doing the best that can be done.

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. Consolidated first quarter revenues totaled $18.8 million. This was above our guidance of $18 million to $18.5 million, primarily as a result of faster than expected ramp in Photonics towards our growth plan for the year. Thin-film Equipment revenue totaled $8 million and included upgrades, spares and service. Photonics revenue of $10.9 million included $5.9 million of product revenues and $5 million of contract, research and development revenues.

Q1 consolidated gross margin was 43%, above guidance of 39% to 40%, with both businesses delivering above forecast. Thin-film Equipment gross margin was 44% due to strong execution and a higher mix of upgrades versus forecast. Photonics gross margin was 43%, primarily driven by higher revenue and higher margins on both products and contract R&D versus forecast.

Q1 operating expenses were $9.3 million, below our guidance due to tight control of development spending. We expect quarterly operating expenses to remain around the $9.5 million level for the remainder of 2020. This resulted in a net loss of $1.2 million or $0.05 per share, better than our guidance.

Our backlog was $87.2 million at quarter end. Thin-film Equipment backlog of $22.4 million included 2 200 Lean HDD systems and non-system HDD backlog. The backlog in our Photonics business was $64.8 million.

We ended the quarter with cash and investments, including restricted cash, of $43.2 million equivalent to approximately $1.84 per share based on 23.5 million shares at quarter end. Cash flow generated by operations was $1.1 million during Q1. Q1 capital expenditures were $1.1 million, and depreciation and amortization was $858,000 for the quarter.

We purchased approximately 100,000 shares of our stock on our repurchase program at an average price of $3.97 during the quarter. These purchases were pursuant to a 10b5-1 trading plan already in place. As we entered the second quarter, we made the decision to suspend buybacks against the remaining $10 million available on our plan.

Now turning to our outlook for 2020. Given the strong visibility and backlog in Photonics, we remain on track to grow Photonics revenue levels in 2020 in the range of 20% to 25% above 2019. We continue to expect a softer year in our hard drive business this year, given fewer system shipments, with the revenue growth in Photonics offsetting the lower hard drive revenue, consistent with our view as of the last earnings call.

Beyond these views, given the global uncertainties Wendell discussed, we're taking a conservative approach and will refrain from providing formal guidance at this time. I would like to say, however, even with these uncertainties, we will prudently manage our expenses and cash. We expect to use no more than $5 million of our cash this fiscal year, even in a downside scenario, and to maintain our balance sheet of cash and investments around $40 million level. This completes the formal part of our presentation.

Operator, we are ready for questions.

(Operator Instructions) Our first question comes from Craig Ellis with B. Riley FBR.

Yes. And guys, in a very difficult environment, congratulations on managing to the financials that you reported. I'm just going to start off with a clarification question on OpEx. So Jim, the positive variance to what we expected in the quarter was clear, the development expense item. But as you look ahead and you maintain OpEx at around $9.5 million, is that because some of those development expenses are held down? Or are there other sources of production that would step in? I'm just looking for the composition of lower OpEx going ahead.

Yes. Some of that in the near term would be the limited travel that would go into OpEx is going to be reduced as well as we're managing the expenses, including OpEx, just down to a lower level. It just makes sense to do that. It's prudent thing to do at this point in time.

Yes. And then, Wendell, it was very helpful to get the detailed description on what you're seeing with the supply chain in display, advanced packaging and solar. And it's clear that just all the disruption that we've seen and continue to encounter anew, to your point, on Singapore, is having some impact. The question is across those 3 areas: solar, display and advanced packaging. Advanced packaging was something where you expected revenues next year. But the other 2, is there any greater or lesser confidence between the 2 on what might be able to rev rec this year versus next year?

Well, I think if I look at all of the equipment that is out there, the VERTEX tools are fundamentally all in China. So they carry a bit of a different concern because right now there's a complete travel ban coming into China. And when that gets lifted, we don't know.

On the HDD side, the majority of our deliveries actually go in Singapore. So that's really a function that's going to be them opening the businesses back up or I think they call them circuit breakers in Singapore. They can turn one of the circuit breakers back on.

What we don't know right now is what other parts of the supply chain may be being affected by this latest move in Singapore. And literally, I finished the conference call script last night at 5:00, and I got a call at 5:30 from Singapore that we've been told that we were going to have to shut down in 48 hours. Now Singapore certainly handles things well. They have been the poster child for how to deal with this pandemic, and I expect that they'll come back quickly. But we're going to work on getting an exception because our customers are operating as essential business in Singapore as well as here in the U.S. So we're heading down that path immediately. Those meetings already took place, Monday, Singapore time.

Okay. And just to understand, is that just potentially significantly impacting 200 Leans? Or is there also potentially a meaningful impact to what you could rev rec in upgrades and software?

Well, I think when we look at our business flow in HDD, the upgrade business is relatively consistent. The process module upgrades and things like that, they flow up through the year and tools going to come in a bunch. I can see you can make a case that the 2 200 Leans could come back into Q2, one of them could push to Q3 and they both could push. So we just really don't know at this moment. And like I said, we found out about this last night. So we're in the process right now. We've got meetings set up that'll start here in a few more hours when Singapore wakes up on Tuesday to start assessing where we think everything's at.

(Operator Instructions) Our next question comes from Mark Miller with The Benchmark Company.

I just want to make sure I understand all the ramifications. You mentioned the HDD, the Lean tools could slip in the second -- from the second quarter to the third, also some process module upgrades may also be slipping. It seems like the biggest issues might be the VERTEX and ENERGi ion implant tools that they both could be -- some of these expected sales could be slipping into 2021. Photonics is really not that affected. Is that a good summary? Or did I miss something?

No. I think that's a pretty good summary. We had a little bit of an impact in Photonics because we did take the Santa Clara campus down for 2 weeks. That was kind of the prescribed time frame where people would show some type of symptoms if they were ill. But we were able to catch up. We got the final shipments out for the quarter, and we're catching up now. Right now, the Photonics, it looks pretty good. Clearly, the Homeland Security orders were very clear about the defense infrastructure staying working and letting it know it was our duty to do so.

I think that the tools in China have a little bit more of a complicated situation. But -- so if those would be the most likely that could slip, particularly follow-on orders, but you can also say we've got a VERTEX eval tool. If that moves into full production, that would revenue almost right away. So we're just going to have to wait and see how things are playing out.

But the good news on VERTEX is after a pretty long hiatus, the engineering teams are back working on the tool. And there's some focus on engineering work going and development work going on with the cover glass makers rather than just trying to get some production out the door with anybody that can possibly man a machine.

The drive companies are all reporting, in part due to the coronavirus, more stay-at-home-type activities, but they're all reporting very strong demand for nearline storage. Any idea what the intermediate plans in terms of running, in terms of what percent up -- are they up in terms of capacity?

I think right now, the utilization rates have come down a bit. But I believe that's more of a function of component supply rather than hard drive demand. I think the demand is there. And I think when we look at one of the comments I made in the prepared remarks is really what the impact Malaysia has on the food chain in HDD, which is something to pay attention to since their borders have all closed down and there's very limited activity there. So the demand seems very high, again, especially on the nearline side.

And a lot of the things that are being discussed is data infrastructure is going to be one of the longer-term winners in all of this pandemic as people remote out, and I think some of those people will never remote back in. And same with some of the virtual learnings and how schools and classes are being done. So I think in a big picture, HDD should -- it should be a positive, not a headwind necessarily. But certainly, near term, the disruptions that we're dealing with has been painful.

And on the other side of the -- the other side is the concern over consumer electronics. Obviously, that's slowing. Smartphone sales are supposed to be down low double digits. Any idea how the -- your display customers' plants are operating? Are they operating at half production? Or any feeling what's going on there? Or are they starting to ramp back up? Or what's your thoughts about that business in terms of the activity in the plants?

I think in general, they're ramping back up from a standstill basically. But I believe there is a fair amount of hand wringing in the entire industry space, that there's going to be a downturn in handsets that they're going to have to manage through the second half of this year, just because nobody's buying phones right now.

And I think Apple just announced they are 1 month away...

And certainly, demand is down, yes.

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

Thank you. Before I sign off, I'd like to again thank the dedicated employees of Intevac all around the world for their tremendous efforts and dedication in 2020. I also want to thank our customers for their continued business and appreciated 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 we look forward to updating you again during our Q2 call in July.

Thank you. This concludes today's teleconference. All parties may now disconnect.