Q4 2020 Intevac Inc Earnings Call
Good day and welcome to enter Vacs fourth quarter 2020 financial results conference call. If anyone should require operator assistance. During the conference. Please press star zero on your telephone keypad. Please note that this conference call is being recorded today February 3rd 'twenty 'twenty. One at this time I would like to turn the call of Richard.
Claire Mcadams Investor Relations for <unk>. Please go ahead.
Thank you Hillary and good afternoon, everyone.
Thank you for joining us today to discuss income tax financial results for the fourth quarter and full year 2020, which ended on January of second.
In addition to discussing the company's recent results, we will discuss our outlook for our outlook looking forward. Joining me on today's call are Wendell born-again, President and Chief Executive Officer, and Jim Monies, Chief Financial Officer, Wendell will start with a review of our business and our current outlook then Jim for.
<unk> fourth quarter results and provide guidance for the first quarter before turning the call over to Q&A.
I'd like to remind everyone that todays 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 and year, which remains subject to adjustment in connection with the preparation of our form 10-K.
As well as comments regarding future events and projections about the future financial performance have been tabak.
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.
<unk> on form 10-Q.
The contents of this February 3rd call include time sensitive forward looking statements that represent.
Represent our projections as of today.
We undertake no obligation to update the forward looking statements, making made during this conference call.
I will now turn the call over to Wendell.
The next quarter and good afternoon.
Welcome to our Q4 2020 earnings call.
I hope that you and your loved ones continue to remain the case.
Today, we reported fourth quarter results of the.
High end of expectations with revenue of $28 $6 million and earnings of <unk> <unk> per share.
The higher revenue was driven by incremental demand for system upgrades in our hard disk drive of our HDD customers.
This incremental demand drove an all time record year for upgrades in 2020 and as expected our record quarter in Q4.
Yes.
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 on operating profit.
Revenue growth for <unk>.
<unk> also exceeded the expectations going into the year.
Levering, 30% growth over 2019.
This growth was due to record contract on the revenues of $23 million driven primarily by continued strength in the Ipass night vision camera development program for the U S Army.
Combined revenue from our core photonics and HDD businesses were up in 2020 versus 2019 growing of approximately 5%. Despite two fewer 200 leans shifts during the year.
Sure.
The growth in our core business of course.
Revenue in 2020 was offset.
By the continuing delays of our customer books.
Oh, Okay. The growth on 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.
Cash generation was a highlight in the fourth quarter with total cash and investments of approximately $1 million.
For the full year cash is up $7 $5 million.
Exhibited the year with $54 million in total cash and investments an 18% increase over 2019.
Despite an overall decline in year over year revenue, given the unexpected and difficult operating environment, we experienced due to the Covid pandemic. We are very proud to have delivered profitable results and strong cash flow generation and an increase in total cash and investments in 2020.
Now for the review of each of our businesses starting with photonics.
I want it reached day that in 2020 photonics delivered its best year ever.
In Q4, there was a heavy emphasis on are up five AST night vision camera programs with night vision labs as we work. The finished the initial integration of our cameras into the <unk> platform.
The effort required several iterations of firmware enhancements and the integration adjustments as well as new functionality requirements on a very tight time line during Q4.
We were able to successfully complete this work by complementing the funded development activity with internal R&D resources. The completion of this program and subsequent of subsequent follow on activities will require investment by <unk> and will cause some margin pressure on the business in 2021.
We have completed manufacturing of all of the low light level of Cmos camera modules for the camera development program and shifts the majority to night vision labs or the designee.
We will continue to finish out the deliveries in Q1 and of <unk>.
<unk> fashion to match the system level build schedule.
Our development program deliveries include both the high performance Cmos cameras, and the Cmos with gain cameras. The latter of which are based on our ice 19, <unk> technology. These cameras with gain provide visual acuity at the lowest of light levels no moving over.
Cash skies.
We believe that incorporation of the technology, we supply to the Apache helicopter and the F 35 joint strike fighter will enable the highest level of digital night vision of acuity to the VAT system.
We anticipate the diverse development programs to complete in Q1.
And continued work on system level integration and the image optimum optimization.
Specifically, leveraging <unk> digital night vision acumen and high dynamic range of operation.
As of note as we finish up the development with the army the.
The best initiative moves into initial production and fielding the sensitivity of the program and disclosure restrictions in the supply chain will limit our ability to provide some details of our activity going forward.
Per plan, we'd expect our other sensors to undergo field evaluations of soldier touch point for in the second quarter the.
The overall program plan of record is to equip the first fighting units with IV systems in.
In the fourth quarter of 2021, which will dictate the production orders will need the commenced shortly to support procurement and manufacturing lead times for the cameras.
In other development work the $5 million development contract Award, we announced in December for the U S. Navy funded advanced visual acuity program or Eva is now beginning to contribute revenue to photonics.
This program supports the U S Navy and Marine Corps pilots and the executing their missions more effectively under the low light conditions.
Important for in the back. This is the first announced Tonight deficient program that incorporates our latest ice 19 sensor technology.
And is destined for the rotary aircraft pilotage applications beyond the Apache helicopter.
And our volume production programs, we continue to execute well on the joint strike fighter contract at full production rates on this multiyear contract.
We anticipate.
I suppose the additional production programs to begin in 2021, starting at low volumes for 2021 quarterly revenue run rates forecast to be between eight and 10.
Until production ramps in the back half of the year.
This revenue profile in the first half will make it difficult to achieve growth in 2021 of the historical record year of 2020, but we expect to exit the year with strong growth momentum into 2022.
The key takeaway for Photonics is that we have the increased confidence that <unk> will be of meaningful supplier for the critical all digital I've asked platform for our ground soldiers.
Beyond 2021 success in this program as well as the multiple other two night vision programs underway with the U S. Military will become the major drivers of revenue growth for for.
Photonics for years to come.
Next turning to our thin film equipment of our Tsi business, starting with the hard disk drive market.
The underlying fundamentals of the HDD media market.
Improved significantly over the course of 2020.
We will get our next view of the long term growth trajectory when trends focus comes out with an update in the next week or so.
But media unit forecasts have been improving for for six straight quarters now concurrent with four straight quarters of upward revisions in growth expectations for exabyte demand.
Mass capacity near line drives for cloud based storage data centers are driving the upside for media unit growth rates.
The expectation of of 34% annual growth rate in mass capacity HDD over the next five years.
Well require the industry to produce and ship far more discs.
Of which in turn drives demand for our systems.
As we entered 2020 the <unk>.
Forecast for media growth indicated a need to start adding incremental capacity towards the end of 2022.
The upward revisions in media unit demand, which have occurred since last March have pulled on the capacity crossover point by about a year.
The latest estimates from November forecasting demand for over $250 million. This in Q3.
We feel that the industry will be at 90% capacity or higher within the next couple of quarters.
In fact, the industry is already been running at or near historical.
The historically high immediate capacity utilization rates and have periodically exceeded the 90% level.
Other new sense November has also been incrementally more positive with upside in both PC sales in the hard drive units and given the upside in near line demand for mass capacity drives in Q4, we expect upside in Q4 media shipments as well.
HDD demand in 2020 reflected strong cloud investments to support of remote economy for digital transformation.
Cloud Datacenters demand.
Cause cloud data center demand remains healthy with the overall drivers for data demand intact.
Analysts project strong double digit growth in cloud Capex in 2021.
Which bodes well for our HDD business with the expectation of unit growth continuing from current levels.
For <unk>, increasing demand for mass capacity drives will benefit our TSA revenue growth trajectory.
And since our last call our confidence in the fundamental drivers in our HDD business continue to increase.
The discussions to significantly expand the industry's medium manufacturing capacity for the first time in more than a decade began late in 2020.
As of our last call. The timelines discussed for 200 lean orders to commence was around year end 2020.
Ultimately, while mass capacity drive forecast remain as positive as ever our customers decided to study of the industry dynamics another quarter before making a decision on the timing of order placement.
So over the next couple of quarters, we expect to start booking orders for multiple systems with shipment dates extending from late 2021 through 2022.
The quantity of expected tool bookings are unchanged from our last call. However, the shipment timing has shifted more heavily into 2022.
We believe we will participate in a significant way in support of all major capacity expansions that address the growth in mass capacity drives with our industry, leading 200 lean system.
Our market leadership position supports the strong growth year for our HDD business in 2022.
It also sets the stage for continued sustained growth of our HDD business beyond that time window.
At the same time demand for technology upgrades continue.
The fourth quarter and full year 2020 are certainly records that will be tough to repeat in our upgrade business, especially as our customers transition their focus to capacity additions.
With our current visibility, we expect 2021 upgrade sales will be lower than 2020, but still a good year overall.
The takeaway here is that we are incrementally more positive about the growth trajectory for our HDD business in the short term, we will see soft revenues in the first half as we rebuild 200 lean backlog.
In the medium and longer term, we expect upside to our prior growth expectations due to both the pull out of the capacity crossover point as well as favorable shifts in market share.
As mass capacity becomes the dominant component of the.
HDD unit demand.
Finally, I'll provide an update on our <unk> growth initiatives.
There is no doubt that the COVID-19 pandemic and the related disruptions to the global electronics manufacturing and supply chain.
As well as the restrictions on international travel significantly impeded our efforts to achieve more progress in our growth initiatives in 2020.
Clearly as the majority of our initiatives are focused in China, the pandemic impacted our ability to secure new customers and bookings in 2020.
As we look into 2021, our primary objective is to gain initial adoption of our diamond clad protected coating.
And to convert the systems under evaluation in the orders and revenue.
We continue to make good progress with both vertex and the matrix <unk> evaluation tools currently on the field.
These tools will soon be approaching the end of the evaluation periods.
And we expect to be able to revenue them in 2021.
We continue to be engaged with cell phone manufacturers on patterning and protective coating development in our demo labs in the U S remains full with multiple development programs with new potential customers.
At this time, we're taking the conservative view on these initiatives in 2021 until we can attain some visibility on the lifting of travel restrictions, which are impeding our progress.
We continue to be encouraged by continuous demo activity and the ongoing dialogues with multiple end customers for <unk>.
For an array of cell phone and wearable applications.
Given that we expect the eval tools to convert to orders. These TSV growth initiatives should contribute to our 2021 revenues and establish a foundation across multiple markets that can be part of our growth strategy in 2022 and beyond.
At the same time over the course of the last year, our growth story in our core businesses of the HDD and photonics has improved significantly.
We believe the media capacity crossover point has pulled in by about a year and we also have increased confidence that we will be a supplier for the first major all digital program for the ground forces.
Incremental success in our <unk> growth initiatives present additional upside on top of this growing strength in our core business.
So the sum up our overall outlook is today.
The first half of 2021 as all of our bookings first half <unk> revenues will be soft due to the second.
Due to light second half of 2020 bookings.
But the first half of 2021 will also be an exciting period as we begin.
To bring in the expected orders and build the backlog in both businesses supporting a better second half in 2021, and a strong growth year in 2022.
The expectations for our hard drive and photonics businesses and the critical role that in the back pleased on them continues to be very positive.
We now have the scenario for both of our core businesses HDD and photonics are becoming meaningful growth drivers on their own.
For 2021 in particular, both of these growth businesses will experience a soft patch in the first half as we receive orders and build backlog.
This will lead to a heavily back half weighted year in 2021, given both HD the system shipments and the <unk> production ramp or late 2021 events. This ramping of the revenue run rate as we exit 'twenty, one however for <unk>.
Set the stage for a strong growth year in 2022.
Incremental for this positive outlook for HDD and Photonics is that we continue to be encouraged by our progress and additional TSV markets and believe they too will contribute to our long term growth story.
As for our preliminary outlook on the full year.
We expect important questions to be answered over the next few months with respect to HDD media capacity expansion launch evaluation tool conversion to revenue as well as production rollout of timings for Ipass.
These answers will help clarify our revenue outlook for the year.
And given that we do not currently have that visibility we're on.
Not in a position to provide full year guidance today.
While the first half of 2021 will be of challenging period for our reported results. We are of a strong balance sheet that allows us to weather any soft patches, while continuing to invest in ramping our core businesses.
Once we have orders and backlog and the visibility of that supports the strong growth here in 2022, we feel that we will be on a solid path for sustainable profitable revenue growth for 2022 and beyond.
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 fourth quarter results fourth quarter results consolidated fourth quarter revenues totaled $28 6 million.
Our guidance of 26, 5% of $27 $5 million due to the upside in the HDD upgrades.
On the film equipment revenue totaled $18 $2 million on included upgrades spares and service.
Photonics revenue of $10 $4 million included $5 $1 million of product revenue and $5 $3 million of contract R&D revenue.
Q4, consolidated gross margin was 48% 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 for.
Products 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 net.
Integration of our camera.
Into the odds of that platform as we near the completion of the development.
Yes.
Q4, R&D of SG&A expense expenses were $10 million at the high end of our guidance range due to slightly higher higher bid and proposal costs.
Q4, net income was $1 $1 million or <unk> <unk> per diluted share above our guidance of <unk> two <unk> per zone.
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 as photonics backlog of $5 $6 million is simple.
Of equipment backlog.
We ended the year with cash and investments, including restricted cash of.
$54 million a seven.
$705 million increase from 2019.
And the equivalent to approximately $2 of <unk> 11 per share based on the $23 9 million shares at year end.
Cash flow generated by operations was $1 1 million during the quarter.
The $8 $9 million for the year.
Q for capital expenditures for $283000 of depreciation and amortization were $835000 for the quarter.
For the full year, Capex was $2 $6 million of depreciation and amortization of three 5 million.
Now moving to the Q1 'twenty 'twenty one guidance.
We are projecting consolidated revenues to be between 16 and $16 5 million.
As Wendell mentioned, the quarterly run rate for Photonics will decline from 2020 levels.
The $10 million range until the production ramp begins later this year.
We also expect significantly lower HDD upgrades in Q1 compared to a record Q for Tim.
Film equivalent of revenues in Q1 are expected to include the conversion of the matrix of evaluation system for advanced packaging into revenues.
Given the lower Q1 revenues gross margins will be impacted.
On film equipment, lower overall volume will affect factory utilization and gross margins will also be impacted by the mix as we will have less high margin upgrade revenue in the matrix of evaluation system as the first tool of its current carries a lower margin than a production system for it.
In Photonics, we expect a margin similar to what we had in Q4 due to continued higher I've asked integration costs.
Overall, we expect first quarter gross margin to be between 26 of 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 of.
Along with some typical seasonal increases.
We expect quarterly opex to be around the $10 $5 million level for the first half of the year, and then below $10 million per quarter for the second half.
We expect interest income of about $50000 GAAP tax expense of about $200000 on the quarter.
We are projected in the Q1 net loss in the range of 25% to 27 per share based on 24 million shares outstanding.
This completes the formal part of our presentation operator, we are ready for questions.
Yes.
Okay.
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Our first question comes from Mark Miller of the benchmark company.
Good afternoon.
Just listen to.
Just listen to see they were painting certainly of brighter picture for a second half which was consist.
Consistent with what you're saying just curious in terms of the.
They are ramping and the mix continues to evolve towards mass capacity.
But what is your estimate for the number of disparate drag currently and where would that be maybe on a year.
Hum.
My estimate on disk per drive changing of the number.
Got it.
The four to five at this point in total.
But.
Do you see that growing by another platter of next year.
Sure.
When we look out at a net.
Next year.
Let's see.
Probably at least of <unk>.
Just one I would say.
Right around one of them.
Are they of it are you talking about basically revenue on one of the matrix tools other any other non HDD tools.
Do you expect the revenue this year.
Yes, right now we have two evaluation tools out there one that's doing it one of the vertex and the other ones of the matrix the matrix.
The evaluation period ends in the first quarter. So as Jim said, we expect to revenue that and the vertex is out towards the late spring early summer.
And it's our intention to revenue of that one as well.
Would that be a second half of the year.
Probably writing up right around that time line.
Thank you.
Thank you Mark.
Our next question is from Gus Richard of Northland.
Yes. Thanks for taking my question I was hoping you can give us a little bit more color on.
When you would expect to see bookings both for the other <unk> program for production and and when you might start to see 200 lean.
Orders as well.
Yes.
Well I think in my remarks.
As set of on around I've asset the schedule of holds true.
Outfit the first fighting units in Q4.
On that those orders should have to happen shortly just to manage the procurement and manufacturing lead times.
For the on the hard drive side, we would expect to see.
Dialogue.
And the next couple of months as I said the.
The customers wanted to see the data for a quarter, we're going to get some information from trend focus.
We have the internal type discussions and then.
Expect to see those orders in the late.
The Q1 early Q2, probably in that timeframe in order to meet the.
Initial shipments heading out into Q4.
Again because of the three types.
Right and just.
Remind me whats the lead time on the lean 200.
It's about six to seven months, but there is some.
Shortages of components for fighting with the semiconductor guys. So lead times are possibly extending a little bit.
Okay. So there is some potential of those systems. The pushout of the year of your customers don't get busy placing orders.
That's correct and if it goes inside of the lead time than it would push into 2022 and what we saw since.
Since our last call is that net quarter delay in making the orders has pushed the.
200, lean revenue more heavily into 2022 and 2021 and.
And we do anticipate starting those shipments in 2021.
Okay got it and then you know.
Are all of the.
HCP guidance participating of course.
Or is it just.
One or two of them in terms of capacity.
It's really not for loopnet to identify but globally. When you look at the overall industry.
And see that that there's going to be out of capacity.
At the individual companies in their market shares on what's driving the EMS.
Not much space to talk about.
Okay.
And then just on the <unk> program could you talk a little bit about I know you just part of the assembly, but do you have a sense of.
On the lead times on this it's the.
If the orders are placed.
Let's say this quarter.
Does that give you enough time more or the contractors enough time to get product in the field and sort of once the drop dead date to have units in the field.
Yes, we would need to have the coupons.
We would need to have those orders in the first quarter to make those type.
The rescheduled.
Okay, and just to be clear the the development of the soldier mounted Imas night vision system.
Is to some extent.
<unk> at this point or is there.
Significant amount of work to do on does that work needs to be completed for the orders are placed.
I think that.
So I'll share touch point for which is happening in the second quarter.
Yes.
To some degree of validation and integration of all of the.
Previous touch points, and putting all of that knowledge into those units.
From a camera perspective.
That's completely different than the whole system right I assume.
For the soldier touch point for system level of work will continue but I think for my camera perspective, it should be pretty set.
Okay.
We have some more work to do in Q1 here, but it's mostly in.
In firmware on algorithms and things like that that's all field.
Applicable.
Okay. So you were at the point, we'd the hardware system as is locked down in June the just tweaking the software in terms of.
You know the deliverables.
Pretty much yes.
Got it alright, that's it for me. Thank you so much.
Yes.
Our next question comes from Peter Right of Intro Act.
Great. Thank you for taking my question a couple of questions. One is when when looking at 2021 day you.
I 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 Ipass and and it's a multi part question, but if we look at it I best should we look at the development to production.
On.
The transition can you help us understand maybe on kind of of multiple basis, whether it be peak of run rate type of 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 of the cyclicality of this business may be compared to the how.
How do you think this business is changing in the back over the next several years.
Well, that's a tough question so.
From a from a quarterly run rate that.
That's something we can't talk about right now because that would be part of the.
Some details about the overall program and how it is going to rollout and I did mentioned 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 the rollout program.
As well as some constraints.
Constraints in the supply chain.
But we've estimated that opportunity given the market.
And assumed market share of the night vision cameras to be on an annual basis between 30% and $50 million worth of opportunity for us how the.
Net ramps up as their stops and starts.
We don't know yet.
Alright got it and on the backlog quarter on quarter growth sorry.
Sorry about that yeah, I believe that when we look at our backlog.
And where we projected to be two to really get to the point, where we're launching into 2022 of the big growth trajectory, we would see backlog.
Most likely.
In the first half one on.
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.
And then if I could sneak in one very last one cash use in 'twenty 2021, any thoughts around kind of the.
The range, where you think cash use might be.
Yes.
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 the execution on the bookings. So we believe we will 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 will manage cash very prudently.
And I think a year ago, you were looking to kind of keep it above the $40 million range, you see that being sustainable through 2021.
I, certainly don't see of dropping below that number.
And like one of the let's say it depends on the timing of the bookings growth I don't see us probably below that number.
Well, thank you guys.
Okay, Great I'm sorry.
I'd say of would actually expect it to be a little higher reported given that we entered this year with revenue.
Okay.
Wonderful.
Thanks Peter.
Income from Mark Miller of the benchmark company.
Just curious you didn't at least from what Im looking ahead of you didn't report any interest income for the quarter as the reason for that.
There was interest income of about 40000, but we also had some other expense I think it was mostly FX of about similar amounts of the kind of work there both small numbers, but the kind of washed each other out.
We have quite of bit of cash, but you can imagine the COVID-19.
The interest rates. These days are so small theres just not much in there at all.
Is that also the reason it's been trending down for the whole year.
Yes, and Thats also of the reason why.
For the Red Lake 19 in early 'twenty was closer to 100000.
Quarter now is closer to 50 valve for the quarter.
Very conservative on what we did to invest our cash in so theres just not much return on that right now.
Thank you.
Youre welcome.
Okay.
There are no further questions at this time I will now turn the call back over to Mr. <unk> line again.
Thank you.
I want to again, thank the dedicated employees of <unk> all around the world for their heroic efforts of 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 <unk> back in.
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.
Thank you for joining us today, and we look forward to updating you again during our Q1 call in May.
And so on.
This concludes today's teleconference. You may now disconnect.
Yeah.
Yeah.
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