Intevac, Inc.
Q4 2020 Earnings Call Transcript

Published: 4 Feb 2021

[Operator:]

Good day, and welcome to Intevac's Fourth Quarter 2020 Financial Results Conference Call. Please note that this conference call is being recorded today, February 3, 2020. And at this time, I would like to turn the call over to Claire McAdams, Investor Relations for Intevac. Ms. McAdams, the floor is yours.

[Claire McAdams:]

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.

[Wendell Blonigan:]

Thanks, Claire, and good afternoon. Welcome to our Q4 2020 earnings call. I hope that you and your loved 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 here 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 earned to the revenues of $23 million, driven primarily by continued strength in the IVAS night vision camera development program to the US Army. Combined revenue from our core Photonics and HDD businesses were up in 2020 versus 2019 growing apart approximately 5% despite two fewer 200 Lean's shipped during the year. 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.

[Jim Moniz:]

Thank you, Wendell. Turning to the 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 than in 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 Photonics 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 revenues. 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 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:]

At this time, we'll be conducting a question-and-answer session. First question comes from Mark Miller of the Benchmark Company.

[Mark Miller:]

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

[Wendell Blonigan:]

My estimate of disc per drive - Jay you have a number.

[Jay Cho:]

45.

[Wendell Blonigan:]

45 at this point in total.

[Mark Miller:]

Do you see that growing by another platter next year?

[Wendell Blonigan:]

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

[Mark Miller:]

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

[Wendell Blonigan:]

Yeah, right now we have two 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.

[Mark Miller:]

And would that be second half of the year?

[Wendell Blonigan:]

Probably right around that time, yeah.

[Mark Miller:]

Okay. Thank you.

[Jim Moniz:]

Thank you, Mark.

[Operator:]

Our next question is from Gus Richard of Northland.

[Gus Richard:]

Yes, thanks for taking my question. 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.

[Wendell Blonigan:]

Well, I think in my remarks I said around IVAS, the schedule holds to outfit the first fighting units in Q4. Those orders should have to happen shortly just to manage the procurement and manufacturing lead times. 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 TRENDFOCUS. 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 into Q4, again, because of the lead times.

[Gus Richard:]

Right and just remind me what's the wait time on the Lean 200?

[Wendell Blonigan:]

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

[Gus Richard:]

Okay, so there's some potential those systems can push out a year if your customers don't get busy placing orders.

[Wendell Blonigan:]

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, but we do anticipate starting their shipments in 2021.

[Gus Richard:]

Okay, got it. And then are all of the HDD guys participating or is it just one or two of them in terms of capacity?

[Wendell Blonigan:]

Actually not for me to identify, but when we look at the overall industry and see that that - there's going to be out of capacity, individual companies and their market shares and what's driving them is probably not my space to talk about.

[Gus Richard:]

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 once a drop-dead date to have units in the field? Thank you.

[Wendell Blonigan:]

Yeah, we would need to have those orders in the first quarter to make those delivery schedules.

[Gus Richard:]

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

[Wendell Blonigan:]

I think that Soldier Touchpoint 4, which is happening in the second quarter as to some degree of validation, and integration of all of the previous Touchpoint's and putting all that knowledge into those units. From a camera perspective, that's completely different than the whole system, right. I would assume from Soldier Touchpoint 4 system level work would continue. But I think from a camera perspective it should be pretty set. As I 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.

[Gus Richard:]

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

[Wendell Blonigan:]

Pretty much, yes.

[Gus Richard:]

Got it, alright, that's it for me. Thank you so much.

[Wendell Blonigan:]

Thanks Gus.

[Operator:]

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

[Peter Wright:]

Great, thank you for taking my question. 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 multi part 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 would 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 Intevac over the next several years?

[Wendell Blonigan:]

Well, it'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's 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 - an assumed 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 their stops and starts? We don't know yet.

[Peter Wright:]

I get it and on the backlog quarter-on-quarter growth.

[Wendell Blonigan:]

Sorry about that. Yeah, 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 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 come in more towards the end of the year that's in support of some of the 2022 activities.

[Peter Wright:]

And then if we 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?

[Jim Moniz:]

Yeah, Peter, 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 inventory for the bookings, but we'll manage cash very prudently.

[Peter Wright:]

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

[Jim Moniz:]

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

[Peter Wright:]

Wonderful. Thank you, guys.

[Jim Moniz:]

Okay, great.

[Peter Wright:]

I'm sorry.

[Jim Moniz:]

I said we're actually expected to be a little higher than the 40 given that we ended this year with 50.

[Peter Wright:]

Wonderful.

[Wendell Blonigan:]

Thanks Peter.

[Operator:]

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

[Mark Miller:]

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?

[Jim Moniz:]

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 wash - they're both small numbers that they kind of wash each other out. We have quite a bit of cash, but you can imagine the interest rates these days are so small, there's just not much in there at all.

[Mark Miller:]

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

[Jim Moniz:]

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's just not much return there right now.

[Mark Miller:]

Thank you.

[Jim Moniz:]

You're welcome.

[Operator:]

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

[Wendell 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. I thank you for joining us today and we look forward to updating you again during our Q1 call in May.

[Operator:]

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