Intevac, Inc.
Q1 2021 Earnings Call Transcript

Published: 3 May 2021

[Operator:]

Good day and welcome to Intevac’s First Quarter 2021 Financial Results Conference Call. At this time, all participants are in a listen-only mode. A question-and-answer session will follow the formal presentation. Please note this conference call is being recorded today, May 3, 2021. At this time, I would like to turn the call over to Claire McAdams, Investor Relations for Intevac. Please go ahead.

[Claire McAdams:]

Thanks, Stacy, and good afternoon, everyone. So thank you for joining us today to discuss Intevac’s financial results for the first quarter 2021, which ended on April 3. 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 Blonigan:]

Thanks, Claire. Good afternoon. Today, we reported first quarter results that were within our guidance ranges for both revenue and earnings. As expected, it was a challenging quarter, driven by a near-term pause in investments by our hard drive customers occurring at the same time as we were completing the funded development work on the IVAS contract. Photonics in particular came in light on revenue, primarily due to milestones in the quarter that moved to the right in DELTA-I program. Gross Margin was below forecast largely due to an additional $1.4 million of investment required to complete the integration of our cameras into the Army’s digital vision system. I’ll discuss this further in a moment. Despite these challenges, we had several highlights in the first quarter. We successfully completed our MATRIX evaluation program for advanced semiconductor packaging, which resulted in our first purchase order and revenue in this new market for us. Additionally, we announced a new $7 million development program in Photonics, demonstrating the U.S. military’s continued commitment to Intevac’s Gated SWIR LIVAR technology for new weapon system applications. We also successfully managed our cash and discretionary spending during this challenging period. Notably, we improved upon our already strong balance sheet, generating positive cash flow from operations and ending the first quarter with $53.6 million in total cash and investments, an increase of $3.2 million since yearend 2020.

[James Moniz:]

Thank you, Wendell. Turning to the first quarter results, consolidated first quarter revenues totaled $16.2 million within the range of our guidance of $16 million to $16.5 million. Thin-film Equipment revenue totaled $9.2 million and included 1 MATRIX PVD system for advanced semiconductor packaging as well as upgrades, spares and service. Photonics revenue of $7 million included $3.8 million of product revenues, and $3.2 million of contracts research and development revenues. Q1 consolidated gross margin was 18.8% below our guidance of 26% to 28%. Thin-film Equipment gross margin was 23.1%, which was lower than forecast primarily due to lower overall volume, which affected factor utilization and product mix to the less high-margin upgrade revenue, and the lower margin MATRIX evaluation system as the first tool of its kind. Photonics gross margin was 13.1%, 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. This increase was partially offset by decreased by R&D spending in Photonics. Q1 operating expenses were $9.6 million, below our guidance due to lower Photonics IR&D as their efforts were spent finishing the initial integration of our camera into the IVAS platform. We expect quarterly operating expenses to remain below the $10 million level for the remainder of 2021. This resulted in a net loss of $6.5 million or $0.27 per share within our guidance of $0.25 to $0.27 per diluted share. Our backlog was $43.1 million at quarter end. Thin-film Equipment backlog of $4.2 billion, included non-systems HDD backlog. The backlog in our Photonics business was $38.9 million. Now turning to the balance sheet. We ended the quarter with cash and investments including restricted cash of $53.6 million, equivalent to approximately $2.22 per share based on 24.1 million shares at quarter end. Cash flow generated by operations was $2.5 million during Q1. Q1 capital expenditures were $243,000, and depreciation and amortization was $791,000 for the quarter. Now turning to our outlook for 2021. As Wendell indicated, our preliminary full year view is Thin-film Equipment revenues of $38 million to $39 million, and Photonics revenue of $30 million to $34 million for a combined $68 million to $73 million within this revenue range and expected mix, we expect full year gross margins between 30% and 32%. As mentioned, our OpEx run rate is below $10 million per quarter, and thus, expected to be around $39 million for the year. We’re forecasting interest income of around $200,000 for the year and income tax expense of around $1 million for the year. While our operation results will be challenged in 2021, we will continue to prudently manage our cash and maintain our strong balance sheet. Specifically for Q2, we see revenue in the range of $12.5 million to $13 million. At this range, we would forecast gross margins to be around 27%. OpEx should come in between $9.6 million and $9.9 million. Interest income should be around $50,000 for the quarter with no income tax expense. Therefore, forecasting a loss in the quarter of around $0.26 per share using 24 million shares outstanding. This completes the formal part of our presentation. Stacy, we’re ready for questions.

[Operator:]

At this time, we will be conducting a question-and-answer session. Our first question comes from Peter Wright with Intro-act. Please go ahead.

[Peter Wright:]

Great. Thank you, guys, for taking my question. Two questions actually. The first one on the IVAS side, if we look at the $32 million spend on the development part of the contract, what is a good rule of thumb or how should we think of the relationship between how much projects like this typically spend on development and how that converts over a multiyear period into kind of the commercial contract if there is any multiple or way of thinking about that? And then, the second part to that would be, can we extrapolate a similar type ratio or way to think about the next 3 programs that you outlined today for us?

[Wendell Blonigan:]

Yeah, so from a program perspective, I think what’s unique about this development that we’ve been doing with the Army for the cameras, for the IVAS platform, is how fast the programs were. Normally, a development like this would take well over the 2.5 years that we’ve been working on it, the more typical military procurement cycle. So I think in that perspective, it’s a very unique procurement process that’s going on around this program for the primes and as well as all of the suppliers to the primes. But can you repeat your second question for me, please?

[Peter Wright:]

Is there like a ratio of how to think – if you spend $100 on development, how much should be spent on a commercial program? Is there any multiple that is kind of the good rule of thumb to think about that?

[Wendell Blonigan:]

Not, not really. I think they’re all pretty much are similar. You might have a little more work done on the component reliability on the military programs, but they’re similar.

[Peter Wright:]

Or how many quarters would you think that it would take to be able to get kind of a commercial ramp equivalent to your better quarters on the development side? Second half last year type run rate?

[Wendell Blonigan:]

3, probably around 3.

[Peter Wright:]

3 quarters, fantastic. And then, if I can ask one other question on the Thin-film side of your business, kind of in a similar way, hard disk drive is a mature business, we know how to think about that kind of on a cross-cycle basis. If you look at MATRIX and VERTEX, how would you think of the size of those markets and kind of your positioning within those markets in relation to hard drive? I look at this year as kind of a year where, as your Board is figuring out, you’re reinventing many parts of the business that are good multiyear growth stories. How is the best way to be thinking of MATRIX and VERTEX in relation to kind of the size of ?

[Wendell Blonigan:]

Well, I think from a 2021 perspective, we have the MATRIX that’s already revenue. We have 2 VERTEX developed eval tools that are available to revenue, as well as Marathon. So the opportunity is there. I think the big issue we have is the ongoing situation in China and accessing that covered last business. So I think from a – we’ve been running roughly $50 million in hard drive over the last several years. So I would say that, that opportunity is similar, but it’s going to require adoption in the VERTEX side of the business. And it’s going to require, say, on the MATRIX side of the business, a transition to panel-level packaging from wafer-level that’s going on right now.

[Peter Wright:]

So to understand that, I’m sorry, you think it’s about a $50 million cross-cycle opportunity in each in those business lines at maturity, is that the way to…?

[Wendell Blonigan:]

Yeah, I think it’s really dependent on adoption rates. The VERTEX opportunity can be very, very large. If one of the large cell-phone manufacturers adapt on their phones, just they’re driving 25% of the overall the glasses being made. So that takes quite a few tools. We estimated before that 10% adoption drives $500 million worth of equipment to support. But I think we’re looking at now some of the more incremental opportunities rather than the hockey-stick opportunities. But that still exists for us there. But I would model it somewhere similar to – between the 2 of them to at least a year in hard drive.

[Peter Wright:]

Right. Thank you, guys.

[Wendell Blonigan:]

Thank you, Peter.

[Operator:]

Your next question comes from Mark Miller, The Benchmark Company. Please go ahead.

[Mark Miller:]

Just had a question about the – you’re projecting first half revenues are going to be lower than second half. Besides the IVAS shipments later this year, are you hopeful that you’re going to get these 2 VERTEX tools qualified? Is that in kind of your assumptions for second half? Where does the besides IVAS, where does the improved revenues in the second half come from?

[Wendell Blonigan:]

Yeah, the range we gave in Thin-film Equipment would include the 2 VERTEX in the back-half, second-half of the year. And then, the other thing is, we would expect the upgrade revenue to be much stronger in the back-half for the hard drive business than what were going to be seeing in the first two quarters. And then again, we did point out that with an IVAS production contract. That’s why the range of $30 million to $34 million in Photonics. It would include if we can get the order in time to ship that in Q4 of this year for the IVAS production contract.

[Mark Miller:]

Your expenses were actually up year-over-year, yet revenues were down. Are you taking any steps to bring down some of your operational expenses over the next 2 quarters, because of the sales decline?

[Wendell Blonigan:]

Yeah, we don’t have anything that we’re executing on right now. I think we want to see just how well the back-half responds. But we certainly are doing some discretionary things around the company to minimize the OpEx.

[Mark Miller:]

So could you explain why even though sales were up by $2.5 million similar quarter last year by – OpEx was up this quarter or the March quarter by $250,000, what drove the difference despite the lower sales?

[James Moniz:]

It was higher IR&D. One of the things we said I think in the last couple of conference calls is in 2021, as Wendell mentioned that ManTech award that we got and these potential other 2 Phase-I awards that we’ll get in Photonics will require some investment on Intevac side in Photonics IR&D, so that we can keep some of the IP. And so, we will see a higher amount of IRAD coming from Photonics than they historically have spent. And they didn’t spend as much as we had forecasted in Q1, because some of that effort went into finalizing what I’ll call the cost of goods sold, which is why there were some margin pressure. But we would expect to see more IR&D, but it’ll still be below a $10 million at quarter level.

[Mark Miller:]

Yeah, just it looks like, yeah, most of it is coming from R&D compared to last year. Okay. Thank you.

[James Moniz:]

That’s correct. All right. Thanks, Mark.

[Operator:]

I will now turn the call over to Mr. Blonigan for closing remarks.

[Wendell Blonigan:]

Thank you. I want to, again, thank the dedicated employees of Intevac all around the world for continued resilience and dedication in a challenging operating environment. I’d also like to thank our customers and our suppliers for their business and appreciating partnerships. And finally, I’d like to thank our stockholders for the continued support of Intevac. Thank you for joining us today and we look forward to updating you again during our Q2 call in August. Until then, so long.

[Operator:]

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