Intevac, Inc. (NASDAQ:IVAC) Q2 2022 Earnings Conference Call August 3, 2022 4:30 PM ET
Company Participants
Claire McAdams – Investor Relations
Nigel Hunton – President and Chief Executive Officer
Jim Moniz – Chief Financial Officer
Conference Call Participants
Peter Wright – Intro-act
Mark Miller – The Benchmark Company
Operator
Good day, and welcome to Intevac’s Second Quarter 2022 Financial Results Conference Call [Operator Instructions]. Please note that this conference call is being recorded today, August 3, 2022.
At this time, I would like to turn the call over to Claire McAdams, Investor Relations for Intevac. Please go ahead.
Claire McAdams
Thank you, Sherry, and good afternoon, everyone. Thank you for joining us today to discuss Intevac’s Financial Results for the Second Quarter of 2022, which ended on August 3rd — July 1st. Shortly after the close of market today, we posted our Q2 earnings release and an updated investor presentation to our IR Web site. Joining me on today’s call are Nigel Hunton, President and Chief Executive Officer; and Jim Moniz, Chief Financial Officer. Nigel will begin with his review of the second quarter and our outlook looking forward. Then Jim will review our financial 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 our documents filed by us with the Securities and Exchange Commission, including our annual report on Form 10-K and quarterly reports on Form 10-Q. The contents of this August 3 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 Nigel.
Nigel Hunton
Thanks, Claire, and good afternoon. I would like to welcome everyone, and thank you for joining us for our second quarter 2022 results conference call and hearing more about the new Intevac. It has now been over 6 months since I joined Intevac, and I feel we have made tremendous progress, building the foundation for growth and increased stockholder value. Since last quarter, I have met with existing and potential new customers in Singapore, Japan and in U.S.A. In addition, I’ve had the opportunity to meet with many new investors who are eager to understand the growth ahead in our HDD business as well as our strategy with regard to the new TRIO platform. We’re very pleased to see all the new interest coming from the investment community and the first half of ’22 has been a very exciting and productive period of time for both me and the company.
Today, I will provide an update on our HDD forecast and TRIO strategy, after first sharing the highlights of the second quarter. For our second quarter, revenues of $9.3 million exceeded our forecast due to strong execution towards our ’22 revenue forecast of $35 million. The increased mix of high-margin upgrades resulted in gross margin exceeding our expectations at over 48%. As expected, we managed operating expenses to under $7 million, which reduced our operating loss and resulted in a smaller net loss from continued operations of $0.10 per share, so once again better than forecast. We continue to prioritize the strength of our balance sheet. And as expected, we received the forecasted customer deposits in Q3, which has replenished our cash balance and provided us with even greater confidence that we will end 2022 with a similar strong level of cash and investments as where we ended 2021. We also had another strong bookings quarter for our core HDD business with an additional $22 million of new orders roughly split between systems and upgrades, which together resulted in increased backlog to over $100 million at quarter end. This record level of backlog and customer discussions provides us with confidence in and long-term visibility on our hard drive revenue forecast and supports our expectation for at least $200 million of HDD revenues through 2025.
While this expectation is consistent from our last call, much has changed since May as it relates to our expectation of the timing of shipments and our customers’ plans to increase their media capacity. One quarter ago, our industry was experiencing unabated demand and continued upside in both HDD units and media units due primarily to exceptionally strong data center spending as well as a relatively robust PC market. To support our customers’ future demand requirements, we worked with our customers to support an aggressive delivery schedule and focused on our ability to ship as many systems as possible within the time frames they requested, which certainly presented an execution challenge given the supply chain challenges that have been pervasive in the global electronics food chain over the past several quarters.
As we discussed last quarter, our $65 million to $70 million forecast for 2023 reflected the amount of systems and upgrades we expected could revenue next year, but the value of shipments was expected to be even higher than that. Since then, our customers’ aggressive delivery requirements have moderated. While a digital transformation and data center expansions continue to be an area of relative strength, ahead of a looming economic slowdown and concerns surrounding global recession, the consumer-driven market softened and both PCs and HDD units fell sharply in the second quarter. This has allowed our customers to now spread their media capacity expansion plans more evenly over the next three years as they continue to exercise supply discipline. This is actually a good thing for our business planning as instead of a spike in 2023 revenues, followed by fewer new system sales, we are now forecasting continued year-over-year growth for our HDD business each year for the next 3 years. Our supply chain strategy supported by the customer deposits is robust, and we will also be able to respond quickly to any changes. As a reminder, our $100 million of backlog includes approximately $70 million of 200 lean systems. We continue to expect the first 200 lean will be delivered in Q4 of this year, but the delivery timing for all other systems in backlog is now more equally spread across 2023, 2024 and 2025. At the same time, our forecast for technology upgrades as well as a multiyear refurbishment agreement with a leading data storage company continues to support year-over-year revenue growth over this time frame.
It is worth noting that the industry is finally beginning to embark on heat and energy-assisted media technologies, which will be the first major technological change in the HDD industry since transition from planar to perpendicular media began nearly 18 years ago. This will require a very significant new initiative to upgrade the majority of more than 180, 200 lean systems that Intevac has shipped since 2004. We expect this next technology transition to drive significant new upgrade initiatives and revenue growth beginning in 2024. It’s also worth emphasizing again this quarter that 100% of all media capacity expansion plans taking place over the next few years are on our Lean 200 platform. And we believe that the next technology transition will provide yet another opportunity for Intevac to gain an increased share of the world’s hard drive media installed base.
So following my recent customer meetings, we now expect modest growth for HDD business in 2023, roughly in the low double-digit percentage range, followed by significantly higher revenue ramps in both 2024 and 2025. Additional upside above the $200 million revenue forecast over that time frame will be driven by the speed of the ramp to transition to heat or energy-assisted media technology. We are well positioned with deep customer relationships to help them execute on their technology road maps that enable this transition. While this new forecast is encouraging as it relates to our longer-term growth trajectory, it certainly presents a challenge to our near-term objectives for profitability, which brings us to our focused initiative to drive significant growth beyond the HDD market, which is the TRIO platform. As we discussed last quarter, we’ve discontinued the myriad of projects addressing various marketing applications and narrowed our focus solely to the very specific applications where we believe Intevac offers a compelling and differentiated solution for a customer need at the right price point to disrupt this market in pursuit of what could become large revenue opportunities.
TRIO will ensure we expand our served markets and overall customer footprint. These applications are centered on our unique capability to provide cost-effective ultra-hard protected antireflective coatings for display cover glass. Our expertise and world-leading knowledge in material science on providing both durable and high precision coatings for over 30 years of HDD developments underpins this new innovation. We believe the TRIO technology solves a consumer pull for improved scratch resistance and provides enhanced durability for multiple applications due to superior hardness, strength, service adhesion and thin film properties when compared to existing technologies and with improved optical transmission, which means not only are our coatings optically clear, but they actually enhance the optical transmission characteristics of the displays, thus enabling antireflective coatings that can actually reduce power consumption and improve battery life.
Companies in multiple markets, including cell phone manufacturers, automotive stream products and medical equipment manufacturers, among others, have been looking for a cost-effective solution to this issue for some time without any readily available options. We believe the TRIO provides a cost-effective solution. In other words, we’re not just offering an add-on feature of simply better protecting it off scratches, rather we are working with potential partners and customers to create a completely new value proposition that improves the overall performance of the next generation of handsets and other display applications. Through meeting with many new investors over the last few months, it is very clear the legacy of the company’s prior unsuccessful growth projects outside of HDD continues to affect investor confidence that we can achieve success in our TRIO initiative. On today’s call, I wish to reinforce our commitment to you that we will drive this new initiative aggressively in 2022 in order to obtain a commitment with a strategic partner or a customer before year-end.
We believe this commitment could be recognized in multiple different forms, but the key is that we must have buying across solution from a major player in order to continue our investment beyond this year. We are pursuing strategic partnerships from several companies that I have approached since I began as CEO in order to validate this growth opportunity for Intevac, and we look forward to providing you with evidence on our progress as we move from Q3 to Q4. Finally, we continue to work on streamlining the cost structure to align resources with our revenue growth prospects, while we prioritize the strength of the balance sheet. As I discussed last quarter, while we eliminated a significant portion of our cost structure earlier in the year, we’re also investing in the new management team and selectively adding capabilities in support of the TRIO business. When I joined, we launched a company-wide leadership development program. Overall, I’m pleased and excited to see how everyone at Intevac has come together as a team to support our customers for both HDD and the new TRIO platform. Our culture is changing as we build a customer-centric focus throughout the organization. Investment in and development of our people is key to creating a high-performing organization, which will position Intevac for the future. We are redeploying investments into our supply chain and making targeted R&D investments in support of our growth initiatives, enabling us to move forward with a customer-focused structure in support of our most significant prospects of this revenue growth and profitability.
We will still maintain an emphasis on cost control and managing our cash. And as I mentioned at the beginning of my prepared remarks, we have increased confidence that by year-end 2022, balance of cash and investments will be similarly strong as last year’s cash position or at least $115 million. In summary, we are well positioned to benefit from the long-term industry trends for HDD, blue Chip customers aligned and the industry’s next major technology transformations and have encouraging feedback on the TRIO platform. Lastly, I look forward to continuing to work with our customers, our suppliers, our stockholders, our Board and management team and the entire organization as we build a new Intevac.
That completes my prepared remarks. And with that, I will now turn the call over to Jim.
Jim Moniz
Thank you, Nigel. Turning to the second quarter results. Revenue was $9.3 million, above our guidance of $8 million to $8.5 million and consisted of HDD upgrades, spares and service. Q2 gross margin was 48.2%, above our guidance of 45% due to favorable mix of high-margin upgrades. Q2 operating expenses were $6.9 million, within our guidance of $6.7 million to $7 million. The Q2 net loss from continuing operations was $2.6 million or $0.10 per share and better than our guidance of $0.13 to $0.15 per share. The total net loss of $2.8 million or $0.11 per share includes the impact of discontinued operations from the Photonics division sold last year. Our backlog was $100.2 million at quarter end. This is a 12-year high and an increase over last quarter by $13 million. We ended the quarter with cash and investments including restricted cash of $110.2 million, equivalent to $4.36 per share based on 25.3 million shares at quarter end. Cash flow used by operations was $7.4 million during the quarter. We added $3 million of inventory to support the growing backlog. We also saw accounts receivable grow by $13 million in the quarter and contract advances also grew by $9 million. We also collected the forecasted customer advances in the first week of July, which has replenished our cash balance back above the $120 million level. Q2 capital expenditures were $270,000 and depreciation and amortization were $331,000 for the quarter.
Moving into the Q3 2022 guidance. We are projecting revenues to be in the range of $9.5 million to $10 million, reflecting a higher level of fuel service revenue over what was reported in Q2. Given that the mix of revenue from the high-margin upgrades will be less favorable in Q3, we expect third quarter gross margin to be around 39% to 40%. Q3 operating expenses are expected to be around $7.5 million. The increase over Q2 is due to higher R&D expenses and higher stock-based compensation expense. We expect interest income of about $100,000 and GAAP tax expense of about $500,000 in the quarter. Most of the tax expense will be noncash. We are projecting a net loss in the range of $0.15 to $0.17 per share based on 25 million shares outstanding. For the full year, we continue to expect total hard drive revenues will be similar to last year at around $35 million.
Given our guidance for the year, we are also communicating today that we expect Q4 revenues to be up sequentially from Q3 as it will include one 200 Lean system. As we look at 2023, keep in mind that we expect the year to be second half weighted, given the current delivery schedule for 200 Lean systems starting in July. At the revenue level, forecasted and expected mix for fiscal 2022, we anticipate gross margins for this year will be around 40% and OpEx for the year to be around $30 million, which includes the $1.5 million for the loss on fixed asset disposals we wrote off in Q1. Finally, we continue to expect to end fiscal year 2022 with a total balance of cash, cash equivalents and investments of at least $115 million. This completes the formal part of our presentation. Sherry, we’re ready for questions.
Question-and-Answer Session
Operator
[Operator Instructions] Our first question is from Q – Peter Wright with Intro-act.
Peter Wright
Congratulations on the beat. My first question is on the hard disk drive, a two part question. The first part is, can you give us some color as to where utilization rates are in the field right now? And if you could help us understand maybe context around that, what’s happening kind of quarter-on-quarter? Any guidance there on first half, second half? And the second question is maybe looking a bit longer term at the 180 tools [Indiscernible] in the field, how should we be thinking of how many of those are kind of a legacy level versus kind of current upgrade and is there anything you can give us color on in kind of what future upgrades might happen? So what I’m really trying to get at is what is a good way to model kind of the upgrade potential of this on an annual basis over the four year forward guide?
Nigel Hunton
Peter, just turning along from the utilization rates. So from my most recent discussions, I think that utilization rates that were running on the last call are sort of in the high 90s, are at about 75% to 80% of that sort of level. So they have come down dramatically, which I think as you’ll see, of course some of the push out of those investments as they sort of optimize their facilities and are being pretty prudent. So that was answer for your first question. On the mix of legacy versus — I don’t actually know the detail of how many machines got how many modules, that’s something I’ll have to look into from a personal point of view. But I do realize that as we’re going through this, and many of these tools have been running for many years and have had multiple upgrades and there’s more upgrades coming. So I know as we move into 2023, there will be significantly more upgrades, which will model into the overall forecast.
And as we move to HAMR, which is the most exciting thing that we’re seeing coming through, the positive thing, the majority of those tools can be upgraded with further upgrades to HAMR over the next — whether it’s three, five or 10 years. So I think for me, as we look at the HDD business, it’s absolutely got strong growth potential over the next three to five years. There will be further investments that we’ve mentioned around systems, but I think upgrading those systems that are in the field to make them all available to run HAMR as that technology becomes really the HDD of choice and we look at into the instance in longer term. I think it gives us a significant opportunity to upgrade. I don’t know whether, Jim, you want to comment on that as well?
Jim Moniz
Yes, I would agree with that. I think if you looked at 2021 and 2022 and took out the system, that’s going to happen in 2022, and we were to pick out the roughly $8 million to $10 million that we get for spares and repairs, the upgrade business has been fairly steady in the low to mid-20s in ’21 and ’22 at $20 million. And we would expect, at the moment, anyway, a similar amount in ’23. We have a couple of systems going there. We would really expect with the aggressive schedule that our customers shared with us that 2024 could be substantially above that. But a little too early to quantify that at this point, Peter.
Peter Wright
No, that’s wonderful. And then if I can ask a question on the TRIO side, two part question there. Is there any update that you can share with us on how you’re thinking of that business model? What I’m getting at equipment versus license versus process tech. Is there anything different? Is it going to — how is it maybe evolving different from your hard disk drive business? And then the second part to that question, I think it’s probably too early, but any color on when first sales from your perspective to that 2023 opportunity or not visibility to that yet?
Nigel Hunton
So let me give you just a bit more color on the TRIO update. As we said on the last call as well. So TRIO is progressing exceptionally well. We went, as we said in the last quarter from nothing to test bed and actual customer evaluations on the tool at the moment. And I said before, I think there are multiple business opportunities that TRIO is going to bring to us. I think there is an opportunity for the pure play equipment sale, which is very similar to the way the HDD business has been built over the last 20 to 30 years. I think beyond that, there’s an opportunity for us and to look at partnering, whether it’s on coating to get a more sustainable revenue stream. So we’re looking into all aspects of business models for TRIO. So as we actually move into that new business area, we want to make sure we actually not just capitalize on equipment but look at opportunities of how we can partner to actually get some momentum into potentially the areas of coating and certainly looking at the overall service model as well. So I think for me, there is multiple routes, whether it is through a license agreement, whether it’s through a coating model, whether it’s through a pure play equipment sales.
So at this stage, we are looking at all potential revenue streams, and I think they’ll all play a key part as we look out — if we go out five years, I think you’ll see a mix of revenue streams within the TRIO and a range of sizes of equipment. So I’m pretty excited about the opportunities for multiple business streams. As I’ve said, our objective is we are driving hard. We’ve got phenomenal momentum in the organization. We’ve got an energized sort of workforce with everyone focusing around ensuring not only we protect and sustain our HDD business, but make sure the TRIO is absolutely successful. And therefore, as part of that, we are driving towards making some level of announcement by the end of this year, is by equipment and drive. And as we actually complete and execute on that, I’m looking and hoping to have the first sales in 2023. They will be in the initial sales. I think you’ll see volume over the following sort of two to three years. So hopefully that answers your question.
Operator
Our next question is from Mark Miller with The Benchmark Company.
Mark Miller
Based upon the guidance you gave us, revenue guidance for the third quarter and your assumption you’ll be shipping a Lean tool in the fourth quarter assuming $35 million in sales for 2023, are you expecting a decrease in revenues from upgrades and service in the fourth quarter?
Jim Moniz
We would expect a slight decrease in the upgrades, yes, because if you looked at just giving you three parts of the equation in the total, it’s probably going to be somewhere just around $11.5 million to $12 million for Q4 at the run rate of $35 million. And if you know a system runs between $4.5 million to $5 million so it will be a little bit less of the upgrades, including the spares in global repairs, yes, in the fourth quarter. That is correct, Mark. The other thing is we. I was just going to say, as you know, having covered us for a long time, and we talked about in the prepared script back half loaded of 2023, there won’t be any system in the first 2 quarters, the first quarter for sure of 2023. So we would expect sequential decrease in revenue in Q1 2023 from Q4 2022.
Mark Miller
And now you’re projecting low double-digit growth for 2023 sales?
Jim Moniz
That is correct.
Mark Miller
You mentioned customer deposits. How much were they?
Jim Moniz
They were a little over $20 million. And what you’ll see when you see the press release you’ll see that the accounts receivable was quite high. It was over $30 million, and we have customer deposits for more than just a single customer. And if you looked at the customer contract advances on the balance sheet, it’s almost $25 million. So again, most of that had not been collected prior to the first week of July when we collected it. So it’s not reflected in the cash at the end of Q2, but it was collected very early in Q3.
Mark Miller
You mentioned improving upgrades next year. Are there process changes coming in the media stack that are driving this?
Nigel Hunton
So as I think I said in my comments, the HAMR technology is finally coming through. And some of that HAMR technology is — requires some upgrades, some additional process models onto the existing Lean platforms. So the Lean platforms are all designed to accommodate the upgrade, the HAMR, which is good news. So those upgrades, I think, will enhance some of the business in 2023. Clearly, it’s early days as that technology is starting to come through, but I think we are making sure we are aligned with our customers to support them in that technology transition.
Mark Miller
With the HAMR upgrades will occur more in the second half or ramp more in the second half 2023?
Jim Moniz
Yes, I think that there’ll be a lot of activity that happens in HAMR in 2023, but I think you’re going to see substantial sales in late 2023 and beyond 2023, ’24 and ’25 based on our discussions with the customer.
Operator
We have reached the end of our question-and-answer session. I would like to turn the conference back over to management for closing comments.
Nigel Hunton
Thank you. I mean from my perspective, as I look at where we are today compared to 6 months ago, I feel we’ve made tremendous progress creating a new Intevac. We believe Intevac is a sound investment, and we’re eager to continue meeting with as many interested investors possible over the coming months. Our next investor event is at Jefferies Technology Conference in Chicago at the end of August and if anyone wants to reach out Claire directly, we can follow up on that or on other calls. And again, I appreciate everyone’s involvement today and the support and commitment from the team to deliver on the next phase of our growth. And with that, I’ll conclude today’s call.
Operator
Thank you. This does conclude today’s conference. You may disconnect your lines.
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