Q3 2020 Intevac Inc Earnings Call
Good day and welcome to Intevacs third quarter 2020 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. If anyone should require operator system. During the conference. Please press star zero on your telephone keypad. Please note that this conference call is.
Being reported today October 26 2020.
This time I would like to turn the call over to Claire Mcadams, <unk> Investor Relations for Intevac isn't mcadams the floor is yours.
Thank you good afternoon, everyone. Thank you for joining us today to discuss Intevacs financial results for the third quarter of 2020, which ended on September 26.
In addition to discussing the company's recent results, we will discuss our outlook looking forward.
On today's call are Wendell Blonigan, President and Chief Executive Officer, and Jim money, Chief Financial Officer Wendell.
Wendell will start with a review that's at our current outlook and Jim will review third quarter results and provide guidance for the fourth quarter before turning the call over to QNX.
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 Companys, Most recently completed fiscal quarter.
Which remains subject to adjustment in connection with the preparation of our form 10-Q as.
As well as comments regarding future events and projections about the future financial performance of into that.
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 quarterly reports on form 10-Q.
I've got to say September 26 call include time sensitive forward looking statements that represent our projections as of today Andrew.
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 good afternoon.
Thank you all for joining our Q3 2020 earnings call I.
I hope that you and your loved ones remain healthy and safe during this challenging time, we're navigating.
Today, we reported third quarter revenue in line with expectations slightly above the midpoint of guidance and with strong gross margin performance and tight control of operating expenses operating profitability and net income came in favorable to our forecast at roughly the breakeven level.
In Q3, we recorded the strongest bookings quarter for thin film equipment or to your P. in 18 months driven by strong demand for upgrades in our hard disk drive our HDD business.
Photonics revenue remained at record high levels coming in at over $12 million.
Due primarily to continued strength in the eye bass development program for the U.S. Army.
A key highlight in the third quarter was our positive free cash flow.
Further strengthened our balance sheet, increasing total cash and investments to just under $50 million.
Year to date, we've increased cash by over $6 million. Despite the incredibly challenging environment, we're operating in a 2020.
[noise], regardless of the impact incurred in our operations due to cold at night team. We continue to deliver solid results in the third quarter supporting our expectation for profitable results positive free cash flow and an increase in our cash position for the full year.
The most significant challenges we continue to face in 2020 or pandemic related delays and constraints in our PSP business now.
Nearly all of our equipment business is Asia based which means we have little to no ability to engage a customer sites on development work, nor facilitate high level regional meetings, given travel restrictions and fans onerous quarantine requirements as well as a genuine <unk> reluctance to meet face to face.
During the pandemic.
We try to facilitate these activities remotely, but this has proved to be very challenging, particularly in China.
Given our HDD customers are U.S. headquartered companies with Asia based manufacturing these constraints have been manageable.
We continued to deliver strong levels of technology upgrades in Q3 because.
Positioning 2020 to be near record in HDD upgrade revenue.
With both near term and longer term forecast for our HDD business continuing to strengthen.
That being said the ability to travel internationally and directly interact with customers is an important component of our business and the ongoing pandemic continues to be a hindrance in our T.F.B. system evaluation programs.
Each of which require a timely and close collaboration.
These programs. Unfortunately continue to elongate as the pandemic continues on.
As an example [noise].
We haven't been able to travel to China since January.
Effectively eliminating our ability to roll up diamond class to the T cell phone design engineers and executives there.
For our installed evaluation vertex system, we needed to extend the evaluation time frame to compensate for two quarters of operations lost due to our customer's facility shut down in quarantine.
So while a fresh frustrating aspect of 2020 has been the push out of vertex revenue previously forecast for the year.
We continue to make progress on multiple fronts with encouraging results.
I will share several examples with you.
First our Virtex evaluation activity in China for patterning now includes projects with the majority of the largest handset manufacturers in the region.
While the first back cover glass design, we discussed last quarter wasn't unfortunately, not selected by the end customer for release this fall.
They are continuing the effort with six new designs plus we are currently working with two additional China based handset makers for rear glass decorative pattern development.
Given this continued engagement in multiple projects in process, we remain encouraged that our prospects to win a significant profit program in China with this technology.
Second our demo activity in the U.S. for Diamond quite applications haven't has never been busier.
In addition to the initial development work for the latest cellphone front cover glass.
We have demos underway with major screen protector companies as well as U.S. companies targeting various consumer product applications.
Adding to that we're also performing initial demos for automotive mounted camera and sensor lands protection.
So as we entered the new year study as we near the end of a very challenging year, we clearly have experienced frustrating pandemic related setbacks in our virtex initiatives, but there's there.
There has also been encouraging progress that continues to fuel our optimism as we move forward.
Looking ahead to next year given the fact, we have developed the systems and hardware needed to enable diamond cloud and decorative patterning well.
We will continue to focus our efforts on sales and marketing, including our branding initiatives via Diamond dog screen protectors and in film development, emphasizing further improvements and cover glass breakage performance.
In solar cell implants since about this time last year.
Discussions with our energy implant customers have consistently been focused on their plans targeting a multi gigawatt expansion in China.
This expansion, which was initially planned for 2020 has continued to delay.
While it is still possible the expansion will happen in 2021, which could result in meaningful meaningful business for us.
At this point, our confidence that we'll see purchase orders within the next quarter or two is waning.
This customer has been focused on transferring ownership of their solar business and it will be up to the new management team to decide if and when this expansion will happen when ownership transfer eventually occurs.
Well the matrix PVD system in advanced packaging, just as we're seeing delays in China. The matrix evaluation system, which is located in Europe is also being affected by global travel restrictions and quarantines.
The tool continues to make solid progress in its evaluation, albeit at a slower slower pace than originally planned.
This tools revenue remains in our 2021 plan and.
We believe that this evaluation and qualification process will continue at its current pace.
Given that the introduction of mainstream advanced panel level packaging technology is still a ways out in the future.
Turning now to our HDD media business, which has continued to strengthen in 2020.
As a result of the acceleration of data center investments that reflect the changes in the way we work learn and communicate as a result of the pandemic.
Heightened demand for mass capacity Nearline drives for cloud based storage and the data centers are driving upside in media unit growth rates expert.
Our expectation for growth the Nearline drive exabyte shipments both in the short term and long term have increased for three straight quarters now.
The rising expectation of 34% annual growth in Nearline hdds over the next five years will require the industry to produce and ship far more disks, which in turn drives demand for our systems.
We're in a back the enablers of increasing demand for mass capacity drives and more disks per drive will benefit our TRP revenue growth trajectory and our confidence in the fundamental drivers of our HDD business has continued to increase since our last earnings call.
At this point in 2020, the industry is running at or near historically high media capacity utilization rates, and we estimate rates to be over the 90% level periodically.
While the growth in exabyte shipments will continue to be supported in part by our customers ongoing technology upgrade initiatives the discussions to significantly expand the industry's media manufacturing capacity.
On the incremental capacity we've added in the last two years.
For the first time in a decade has begun.
To date, the most recent media demand expectations have indicated installed capacity crossover in the mid to late 2022.
However, with this accelerating growth and planning underway. We believe we will see an increase in 200 lean shipments in support of media capacity expansion beginning in 2021.
We would also expect to see initial tool bookings no later than the end of Q1 2021 to support any capacity expansions that would materialize in that timeframe.
[noise], adding to our confidence in a strengthening short and longer term forecast for our HDD business is taking into account our current application case understanding.
It is our expectation that we will participate in a significant way in support of all media capacity expansions that address the growth in mass capacity drives with our industry, leading 200 lean.
At the same time technology upgrades continue at near record levels with upgrade bookings increasing significantly in Q3 ahead of what will likely be our largest ever quarter for HDD upgrades revenue in Q4.
With current visibility. We also expect 2021 will be another strong year for upgrades as well.
The take away here is that while cobot has clearly presented challenges and delays in achieving the expected progress in our tier three growth initiatives. These this year we.
We are incrementally more positive about the growth trajectory for our hard drive business and.
In the short term, we now expect HDD revenue to approach approximately $50 million and 2020.
With a slightly stronger second half driven by upgrades.
In the medium and longer term, we expect upside to our prior growth expectations both do.
[laughter] due both to a.
Due to both a pull in in capacity crossover point.
As well as favorable shifts in market share as mass capacity becomes a dominant component of the HDD unit demand.
Which now brings me to an update on our photonics business.
Expectations for a strong growth year for photonics in 2020 has further solidified since our July call.
We continue to see a modest sequential downtick in revenues in Q4 due to the completion of our latest program for the Apache helicopter.
We have multiple programs underway that continue to support our forecast for strong growth and profitability.
[noise], while the I've asked program continues to be a major revenue contributor in the second half of 2020. Our forecast is also supported by the can can you deliveries against programs for joint strike fighter.
The Delta our coalition Goggle development as well as the next generation I've asked camera development.
We also expect to be on contract for the enhanced visual acuity or Eva program within the current quarter.
[music].
Second half revenue is expected to be at least equal to the first half the implied 2020 year over year growth is over 30% for our photonics business.
As we look to 2021, our growth expectations for photonics will be directly dependent upon production order selection timing and initial volumes of cameras for the I've asked program.
Per plan, we expect our night vision sensors to be fully integrated into the I've asked program and began initial qualifications in December and.
And undergo field evaluations at soldier touch 0.4 in the first quarter of 2021.
The overall program scheduled to equip the first filing units with Divests systems in the fourth quarter of 2021 is remaining on track.
In Q3, we commenced initial shipments of our IPO last night vision cameras.
And the initial startup in character characterization work is nearing completion.
Currently we are working on system level integration any image optimization.
Specifically, leveraging innovative digital night vision acumen and high dynamic range operation.
Which allows low to high light level trends positions without washing out the imagery.
An automatic contrast algorithms that provide differentiated fidelity and acuity in night vision performance.
We anticipate several iterations of firmware enhancements will occur during the qualification optimization and field testing to leverage our know how and maximize performance.
Camera shipments will increase month to month in Q4, and we expect to deliver all the cameras and the development program by the end of the year, including both the high performance Cmos cameras and the sea Moss with game cameras, which are based on our ice 19, aircrafts technology and provide visual acuity in the lowest of life.
Conditions, No Moon overcast skies.
Our direct engagement with both Microsoft and night Vision labs on the I've asked program has been continuous as we continue to work through initial delivery integration and longer term program planning.
Initial I've asked production feedback could be possible as early as year end 2020.
Which will give us greater visibility into the growth forecast for 2021.
The key takeaway for photonics.
Is that we continue to expect Intevac will be a meaningful supplier for this critical all digital I've asked platform for our ground go round soldiers.
As it moves into production sometime next year so.
Success in this program will be a significant driver of continued revenue growth for photonics for many years to come.
So to sum up our overall outlook as of today.
Our forecast for 2020 has improved for two straight quarters now after taking a conservative approach in April and pushing to you have to be growth initiative revenue into 2021.
The expectations for our hard drive and photonics businesses and the critical role that interact closing them continue to strengthen.
While in total we expect our revenue to be down 11% to 12% in 2020.
Due to the year over year decline due to the year over year decline in solar implant revenue growth.
Gross margins will be higher operating expenses are being held flat and we expect to be profitable at both the operating and net income lines for the full year.
With positive cash flow from operations and continued prudence in capital spending we're generating a significant net increase in total cash and investments year over year in 2012.
Looking beyond 2020, we now have a scenario where both our core businesses HDD in photonics are becoming meaningful meaningful growth drivers on their own and we continue to be encouraged by our progress in our TRP growth initiatives.
And that they too will contribute to our longer term growth story in spite of the ongoing cobot related impact we continue to experience.
As for 2021 in both our core businesses, we expect important questions to be answered over the next few months with respect to HDD media capacity expansion plans as well as production rollout plans for I bass.
This will help clarify and drive our outlook for the next year.
We also expect the progress in our TFT initiatives to accelerate from the current pace once business interactions with the U.S. and other countries start to normalize in this prolonged co Dan pandemic environment.
All in all we currently feel that we are on a solid path for sustainable profitable revenue growth for the years to come.
I'll now turn the call over to Jim to discuss the details of our recent financial results Jim.
Thank you Wendell.
Consolidated third quarter revenue totaled $21.6 million within our guidance range of 21 to 23 million simply.
Good film equipment revenue totaled $9.4 million and included upgrades spares and service.
Botox revenue of $12.2 million included $5.7 million of product revenue.
Point $5 million of contract research and development revenue.
Q3, consolidated gross margin was 43.1% and above the guidance range of 40% to 41%.
Result of favorable mix for both businesses.
Q3, operating expenses were $9.4 million up slightly from Q2, but just under our guidance primarily due to a more focused emphasis on selected programs and R&D.
This resulted in a net loss of $357000 or two cents per share.
Smaller loss than our guidance.
Non-GAAP net loss excluded restructuring charges them was one cents per share.
Our backlog was $63.3 million at quarter end and consisted of $45.2 million of Protonix backlog and $18.1 million of non systems.
Backlog in our thin film equipment business.
Now turning to the balance sheet.
Cash flow generated by operations was $4.2 million during Q3.
Q3 capital expenditures were $492000 and depreciation and amortization were $840000 for the quarter.
We ended the quarter with cash and investments, including restricted cash of.
$49.4 million or equivalent to approximately $2.07 per share based on 23.9 million shares at quarter end.
The company continues to manage cash very closely.
With increasing confidence that we will significantly grow our cash balance year over year.
For Q4, we are projecting consolidated revenues to be around $27 million plus or minus $500000.
We expect fourth quarter gross margin to be around 41%.
Q4, operating expenses are expected to be between $9.5 million and $10 million.
Higher than Q3, driven by an increase in R&D expenditures in photonics as well as the impact of a 14 week included in this fiscal quarter.
We expect interest income of about $100000 and GAAP income tax expense of about $700000 in the quarter as I mentioned previously our cash taxes will be lower.
For Q4, we are projecting net income in the range of two cents to four cents per share assuming approximately 24.4 million shares.
Given the midpoint of our Q4 guidance, we expect full year revenues to be just under $96 million.
At this revenue level and expected product mix.
We expect gross margins to be approximately 41%.
Operating expenses of around $37.8 million for the year using the midpoint of our Q4 guidance.
We expect interest income of about $300000 and GAAP income tax expense of about $1.8 million for the year, which more than half will be non cash.
We are projecting full year profitability of around two cents to four cents per share.
This completes the formal part of our presentation Omar we are ready for questions.
[noise] right guys.
So.
[noise] [noise], we're ready for questions.
I'm sorry, guys. Your first question comes from Mark Miller with the benchmark benchmark company.
[noise] I was just wondering if.
Good afternoon, you have <unk>.
You've had such strong orders for photonics.
And the backlog is still decent do you expect.
You indicated several API.
What's your news next year the shipping in volume to that for the I've asked ground soldier would you expect photonics revenues next year to grow.
But when we were just starting our planning about 2021 planning and back.
Back to some of the commentary commentary.
The growth trajectory in photonics is going to have a large lever which is going to be.
The success in the buyback program and beginning our shipments there and there's still a lot of course.
Questions to answer timing volume selection that kind of thing so.
For right now we believe there are certainly as the opportunity to do that but I think as we get.
Through the end of this year and and certainly by the first quarter will be able to see.
Not clear on what the photonics trajectory looks like but the opportunity is definitely there.
Do you have any feeling if there's any change in leadership and the white house, if that would have any impact on the news programs.
From our discussions with our business development.
Director that's out in on the East Coast.
Initially I don't believe that there is a feeling that it would change either way, particularly on the I've asked programs programs got a lot of momentum.
Behind it.
Thank you.
That.
We'll see we need to see the budgets past all of that Hoopla has got to get closed up here in a couple of weeks hopefully and then we will see but right now we're not building anything like alternate forecast between lever.
Takes the White house and the Senate and the house at this time.
Your projected pretty solid.
Projecting higher revenue higher revenues for the fourth quarter, but margins are lower and you had a strong quarter for upgrades, which are usually higher margin type of sales for you I'm just wondering why the margins are coming down from.
From the third quarter.
We see a good contribution this year, specifically in photonics and specifically on the Apache program. We shipped the backlog of that program in Q3, we did about a million and a half in revenue in Q3 that will not repeat that is going to drive the margin down a little bit and we do expect the upgrades to be higher.
Higher in the fourth quarter than they were in the third quarter, we did almost 43% gross margin in the third quarter right now we're forecasting somewhere around 41%.
Hey, you see work Okay. My last question I will jump back in the queue.
I mean any thoughts about the Apache program coming back next year is that dawn or they're going to be some follow on programs for Patrick.
We believe there will be continuing follow follow on programs for Apache whether that's a.
Actions with the.
Upgrades to new technology into our new technology or upgrades of night vision systems for gardeners, we think there's opportunity out there I don't expect that theres going to be anything.
At least in the beginning part of 2021.
But we certainly remain in contact and in discussions with the Apache sensors group in.
And there are programs that are being put together for that.
We'll see how that plays out and in 2021.
Thank you.
Thanks, Mark if you Mark.
Your next question comes from Gus Richard with Northland.
Okay. Thanks.
Hey, thanks.
Thanks for taking the question just on the hard disk drive side upgrades are really strong now or are those for.
Energy assisted magnetic recording or are there other upgrades and incorporated there.
I think that.
There's also some of both I think what we see on the upgrade side on for the hard drive business.
Is there is a number of steps to ultimately get to some type of energy assisted recording.
Including adding additional functionality to the tool.
Which is all and that functionality is also being required for standard TMR. So we're kind of seeing a little mix of both some of its completely dedicated to summit advanced.
Advanced technology some of its.
Advancing the current technology, but is would be part of the upgrade for the energy assisted later date.
Got it and are all free.
Dr. companies participating or is it limited to to one or two.
Oh.
There is without giving too much away, we have a different type of upgrades going to certainly more than one.
Okay.
And then and then your expectation for.
No additional new tools sounds like.
Probably by late 2021 mid 2021 is that is that a reasonable expectation.
Yeah, I think that you know.
If you were to take to keep my comments in the script and say okay. If it's 2021, if he puts it into Q4 2021 being 2021 shipment.
It really means just given the math of lead times those orders.
In the <unk> by the end of the first quarter.
Got it got it very helpful. Thanks, so much.
All right. Thanks.
[noise] Mark.
Our next question is from Mark Miller with the benchmark company.
So your your quarter I mean backlog.
There were no liens and there are there any implanters and the backlog or is it mainly the up the upgrades.
Yeah. There there are no pools in thin film equipment that are in backlog, it's pretty much upgrades and then some spares and service.
Thank you.
All right. Thank you mark thanks.
There are no further questions at this time I'd like to turn the floor back over to Mr. window Blonigan.
All right. Thanks.
Before I sign off I'd like to take a moment to pay respect to our founder and longtime chairman Norman Pond.
Passed away in September after a brief illness to.
The norms family, our thoughts and prayers are with you and to norm rest in peace I'm sure you're continuing to watch over Intevac just as you always have.
I want to thank again, the dedicated employees of Intevac all around the world for their tremendous effort and dedication in 2020 to date I also want to thank our customers and our suppliers for their business and appreciated partnerships.
And finally I'd like to thank our stockholders for their continued support of Intevac I. Thank you all for joining US today, we look forward to updating you again during our Q4 call in February.
[noise] [noise]. Thank you and this concludes today's teleconference. You may now disconnect your lines. Thank you.
[noise].