Q1 2021 Intevac Inc Earnings Call

Okay.

Good day and welcome to <unk> first quarter 2021 financial results conference call. At this time all participants are in a listen only mode. A question and answer session will follow the formal presentation. If anyone should require operator assistance. During the conference. Please press star zero on your telephone keypad. Please.

This conference call is being recorded two day may 3rd 2021 at this time I would like to turn the call over to Claire Mcadams Investor Relations for <unk>. Please go ahead.

Thanks, Stacy and good afternoon, everyone. Thank you for joining us today to discuss <unk> financial results for the first quarter of 2021, which ended on April 30.

I shift to discussing the company's recent results, we will discuss our outlook looking forward. Joining me on today's call are Wendell <unk>, President and Chief Executive Officer, and Jim Monies, Chief Financial Officer, Wendell will start with a review of our business on our current outlook then Jim will review first quarter results and provide further details.

Guarding our financial outlook before turning the call over to Q&A.

I'd like to remind everyone that today's conference call can contain 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.

As well as comments regarding future events and projections about the future financial performance of Interac. 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 reports on form 10-Q. The contents of this may 3rd 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 it over to call the windows.

Thanks, Claire and good afternoon.

We reported first quarter results that were within our guidance ranges for both revenue and earnings.

As expected it was a challenging quarter driven by a near term pause on investments by our hard drive customers occurring at the same time as we were completing the funded development work on the Ipass contract.

Photonics in particular came in light on revenue, primarily due to milestones in the quarter that moved to the right and the Delta I program.

Gross margin was below forecast largely due to an additional $1 $4 million on investment required to complete the integration of our cameras into the army is digital vision system.

I'll discuss this further in a moment.

Despite these challenges we have simple highlights from the first quarter.

We successfully completed on matrix evaluation program for advanced semiconductor packaging, which resulted in our first purchase order and revenue in this new market for us. Additionally.

Additionally, we announced a new $7 million development program in photonics, demonstrating in the U S. Militaries continued commitment to <unk> guidance, where LIBOR technology from new weapons system applications.

We also successfully managed our cash and discretionary spending during this channel challenging period, notably we improved upon our already strong balance sheet generating positive cash flow from operations ending the first quarter was $53 6 million and total cash and investments an increase of $3 two.

Since year end 2020.

Now for a review of each of our businesses starting with photonics.

Yeah.

After delivering its best year ever in 2020, we are seeing a reduction in the quarterly revenue run rate for photonics in early 2021 as forecast for.

For the last several quarters, our photonics business has been heavily focused on the I've asked night vision camera development program and in Q1, we completed the initial integration of our Cmos cameras into the diverse platform.

While some deliveries of our Cmos with game cameras were completed early in Q2 for the most part Q1 marked the completion of the development phase for the <unk> contract.

This totaled approximately $32 million on contract R&D on initial camera revenue for us since late 2018.

In Q2.

We also will be shipping additional Cmos cameras incremental from the $32 million development program.

The final stages of our initial camera deliveries required several iterations of firmware enhancements and integration adjustments as well as the support of new functionality requirements deemed necessary during the development phase.

Detailed last quarter.

On the completion of this program required investments by interfax, causing margin pressure on our business incremental costs in Q1 resulted in a short term dip in margins, which we expect will reverse in Q2.

The Cmos with game cameras that were delivered early in Q2 are based on our August 19 technology and provide visual acuity in the lowest of light conditions no moving over cash skies. This acuity level is far beyond the capability of Cmos Imagers and we believe that the incorporation of the proprietary.

We currently supply to the Apache helicopter and the F 35 joint strike fighter will enable the highest level of digital night vision capability from the Ipass system.

The Big news around the Ibs program since last quarter was the announcement of the production agreement between the army and Microsoft in the transition from a from development to rapid fielding.

The agreement was widely reported to be worth up to $22 billion over 10 years and includes the first deployment of approximately 120000 I've asked systems to close combat force over the first five years.

When we look at the army as a whole, including the National Guard and the reserves. The total number of soldiers was just over a million at the end of 2020. Therefore, the initial rollout of bypass system addresses only around 10% of army personnel.

Our das was designed to quote allowed the soldier to fight rehearse and train using a single platform and to provide the improve situational awareness target engagement and informed decision, making necessary to achieve overmatch against current and future adversaries and quote.

We believe that the <unk> system, and derivatives oven or Apple Apple to applicable across the entire service and while they clearly will not provide eyeglass systems to the entire military we see a much larger deployment opportunity in the future. This.

This view is why we believe the Imas program holds game changing potential to our already well positioned photonics business and our role as a critical supplier to the U S military.

Per our plan <unk> systems, using the first interactive digital Cmos cameras on.

Do you want to field evaluations at soldier touch point for which was held over the last two weeks of April.

Information gathered is currently under review.

Our expectation continues to be the impact will be a supplier of night vision cameras as I've asked moves into production.

The overall program plan of record remains to equip the first fighting units with I've asked systems in the fourth quarter of this year.

The public announcement of the production agreement between the Army in Microsoft and the completion of soldier touch point for utilizing Inbox night vision should be catalyst that clearly gates to a production order from an it back.

Order to meet deliveries, we have been prudently managing component lead times from some hearing material as needed.

As a note as well.

We finished up all development programs with the army and diverse initiative moves into initial production and fielding the sensitivity of the program and the disclosure restrictions in the supply chain will limit our ability to provide fine detail of our IVAX activity going forward.

In other development work in Q1, we received a phase one Mantech development Award from night Vision Labs to continue our work on the current Ipass Cmos camera.

<unk> reduced cost improve performance and reduce power draw.

We estimate if down selected for phase II development work. This program will be around $5 million over two years.

We are also anticipating awards for two additional phase one development programs in May.

One for our next generation Cmos camera, focusing on improving low Starlight operation and the other for the development of our high performance I've asked night vision camera based on our ice 19 EPS technology.

This is effective and no moon overcast conditions.

We estimate was down selected for phase two development work. These two programs would be around $18 million over two years.

Phase One awards are meant to get the programs to the critical design review stage this year and ready for a down select process for development and initial fabrication with a period performance beginning in 2022.

And extending through 2023.

In Q1, we announced the development contract award from the joint directed energy transition office, representing the funding for year, one of a projected three year $7 million development effort.

Gilead swear sensor for fine tracking and adaptive optics and high energy laser system applications.

Directed energy systems are expected to become a critical component of our military advanced weaponry and represent a significant future market opportunity for ambac.

Our 5 million dollar development contract for the U S. Navy funded enhanced visual acuity program.

Increased in scope a bit during Q1 and it was running well. This program supports the U S Navy and Marine Corps pilots in executing their missions more effectively under low light conditions.

This program incorporates our latest <unk> 19 sensor technology, and it's destined for rotary craft pilotage applications beyond the Apache helicopter.

The Delta I program is also an important element of our photonics business.

We're developing the Delta I've used digital night vision goggle, incorporating advanced augmented reality capabilities. The program incorporates our most advanced price 19 sensor and supports the coalition warfare program for the special Operation forces of the United States, Australia, Canada, and the United Kingdom.

While Delta is an important program for us.

Unfortunately shifted to the right in Q1 due to supply chain delays. We're also seeing delays in the supply chain that are affecting our line of our revenue in the short term so between the Delta I live or delays. We saw Q1 revenues fall below the $8 million to $10 million quarterly run rate, we discussed on our last earnings call.

Yes.

With Delta on milestones upcoming in recovery and library sales, we expect to see photonics revenues back in that range in Q2.

And our volume production products, we continue to execute well on the joint strike fighter contract at full production rates on this multiyear production contract.

The key takeaway for Photonics is that we believe in about <unk> will be a meaningful supplier for the <unk> platform and that we are on multiple critical military programs, providing the best digital night vision technology available.

Beyond 2021.

The success in the Ibs program as well as the multiple other key night vision programs underway will become the major drivers of revenue growth for photonics for years to come.

Now turning to our thin film equipment business.

Starting with the hard drive market.

Demand for near line drives specifically mass capacity drives for cloud based storage and the data center hub.

We have clearly emerged as the most significant long term driver.

Of growth for discs are hard drive media media growth is what we will exhaust existing industry capacity and result in new 200 lean orders for into back.

At our last conference call.

Train folks expected media shipments to exceed 90% of capacity by Q3 of this year and we expected imminent orders to support in support of the first major media capacity expansion that will occur in over 10 years.

Since then.

While the long term growth expectations are unchanged in the near term. This demand is now expected to be spread more ratably over the balance of 2021.

This has mostly to do with the timing of cloud and data center Capex investments being made by the five biggest cloud infrastructure providers.

Recent reports indicate stronger than expected near line drive demand for the first half of 2021 <unk>.

<unk>, followed by a period of more moderate growth in the second half and then a return to strong near line growth in 2022.

This softening of the quarterly peaks and valleys in 'twenty one.

Or more specifically a flattening of the mass capacity shipment curve. This year is enabling our customers to delay the start of the media capacity expansions.

And pushed to the right new 200 lean purchases.

As of our last call the timelines communicated to us from capacity 200, lean orders where to begin in the March April timeframe.

Because of this more ratably deployment of mass capacity drive demand over the course of 2021 latest estimates now indicate media capacity utilization, peaking at around 90% in the fourth quarter and as such capacity orders looked to be delayed two to three quarters.

We expect to start booking orders from multiple 200 lean systems as we progressed through 2021. However, our current outlook has those tools beginning to install in 2022 and accelerating into 2023.

We believe we will be the major player in supporting all major capacity expansions that address the growth in mass capacity drives with our industry, leading 200 lean system.

As such our market leadership position in HDD media and your expected growth in media unit demand sets. The stage for continued sustained growth in our HDD business beyond this year.

The other major driver of HDD revenue growth from any of that comes from our customers technology upgrade programs.

Fourth quarter and full year 2020, both saw record levels of upgrades and upgrades were down sharply in Q1 as expected.

On our February call, we expected 200.

2021 upgrade sales would be lower than 2020, but still a good year overall.

Since then well reported plays in next generation drive technology, such as heat assisted magnetic recording have enabled our customers to push a significant amount of technology upgrade orders from 'twenty one to 'twenty two just puts more pressure on our HDD revenue forecast for 2021.

The takeaway here is that the long term growth trajectory of our HDD business remains strong and is unchanged over the last few quarters for 2021. However, this year is proving to be more challenging than we believed a quarter ago.

Now turning to our thin film equipment growth initiatives.

The conversion.

Of our first matrix <unk> evaluation system for advanced semiconductor packaging into revenue was an important milestone in our efforts to expand our equipment business beyond the HDD market.

The conversion to revenue reflects the fact that this leading <unk> purchase the system to support his technology roadmap that the tool has been qualified and its performance and cost of ownership benefits have been validated.

This provides us with optimism that this market could be a meaningful one for us in the years to come although we don't expect immediate follow on orders until the industry begins to wholesale transition from wafer level to panel level fan out architecture.

And our first checks initiative. Our primary objective is to gain initial adoption of our Diamond club protective coating and to convert the systems under evaluation into orders and revenues, we continue to be active with our tier one display cover panel customer on a key program for backside cell phone glass decorative patterning and.

Our latest version of Diamond clad is also under evaluation.

In our demo activity here in the U S. We're currently driving three separate programs one for cell phone cover glass protection, one for wearable functional protective coating and the other for augmented reality component functionality.

Given the stages, we are out with our evaluation programs and in house demo activity.

We expect to get some key answers on the future direction of our vertex initiative over the next couple of quarters.

We had net originally debuted our marathon system in Diamond cloud technology in early 2020 with plans to introduce them to our customer base, specifically in China throughout the year.

Unfortunately, we were impacted in our rollout plans by two or three quarters students pandemic.

We also anticipate that in this timeframe will have a much better clarity on the post pandemic environment and how our activity in China will normalize.

Overall, our Q1 progress continues to indicate that the vertex and matrix can add additional upside in revenue growth incremental to strong long term growth stories of HDD media in photonics.

So to sum up our overall outlook is today.

The long term expectations for our hard drive and photonics business and.

And the critical role <unk> plays in them continue to be very positive and we continue to expect both of our core businesses to be meaningful growth drivers for <unk> with incremental growth driven by our growth initiatives.

Over the past couple of quarters, we've communicated our progress on increasing confidence in the growth potential for both HDD and photonics given the beginning of both one BDO capacity additions into the rollout of the Ibs program.

We fully.

We anticipated that current and forthcoming purchase order announcements expected in both businesses would significantly improve our backlog visibility and in turn investor confidence in <unk>. However, we do not control the timing of these orders.

For 2021 in particular, both TSV and photonics are experiencing a soft patch until we booked multiple significant orders and rebuild backlog.

Both at the beginning of HDD system orders, Andy I've asked production ramp or late 2021 events.

This ramping of the revenue run rate as we exit 2021 will set the stage for a strong growth year in 2022.

As for the preliminary preliminary outlook for the full year, we've taken a conservative view, assuming no 200 leans shipments.

And reduce technology upgrades for the year.

Given that scenario, we expect in total our HDD business will be in the range of 34% to $35 million this year, consisting of upgrades spares and field service.

And we will return to growth in 2022, we believe 2022 growth will be driven both by technology upgrades and capacity tool sales.

In total incremental to our HDD revenues in 2021 will be the matrix. That's already recorded in Q1 as well as any vertex evaluation is converting to revenue.

At this time, we expect total thin film equipment revenues in the range of $38 million to $39 million for the year with potential upside if we revenue either one of the two vertex evaluation systems.

Q2 will be down sequentially from Q1, given the current low level of HDD upgrades. So therefore this is a back half weighted year.

On the Photonics side, we're also taking a conservative view of the timing of the <unk> production ramp we.

We expect a sequential improvement in photonics revenues in Q2, followed by continued growth through the end of the year setting the stage for a strong growth year in 2022.

We currently expect photonics revenues will be in the range of 30% to $34 million in 2021.

So with the $34 million, including the first production shipments on the Ipass contract a few on occurring in Q4.

While 2021 will be a challenging period for our reported results. We have a strong balance sheet that allows us to weather any soft patches, while continuing to invest in ramping our core businesses.

Once we have the orders and backlog and the visibility that supports a strong growth year from 2022, we feel that would be on a solid path for sustainable profitable revenue growth for 2022 and beyond.

To conclude we strongly believe in the significant long term opportunities that lie in both our equipment and photonics businesses.

We have proprietary technology, particularly strong customer positions and leading market share in our courts course served markets.

Additionally, we believe we're extremely well positioned to benefit from the secular growth being driven by overall industry trends and key military programs such as data center spending for cloud storage and digital night vision systems to the dismounted soldier.

In our view in Iraq.

<unk> enterprise has significant unrealized value embedded across the range the range of our products technology and customer relationships that we've developed over the years and we believe our current market capitalization does not fully reflect the value of <unk> critical role in both our core markets.

To that point today I'm sharing with you that the board of directors have formed a strategic committee with a broad mandate to consider a wide range of possible ways that we may increase shareholder value. The goal of this effort is to identify strategies to unlock the value on each of our businesses in parallel with executing our core.

<unk> growth activity.

Our determination to investigate these strategies is consistent with our focus on delivering long term value for our shareholders. While we would typically not disclosed board initiatives until such time as a specific new strategy or transaction had been decided decided upon and was being pursued we wanted to make.

Sure that our shareholders clearly understand that we are leaving no stone unturned in our valuation of avenues to increase shareholder value.

The committee has retained from the investment banking firm Greenhill income company to work with management and the board to evaluate a broad range of strategic alternatives that may be available to the company to enhance our value.

There can be no assurance that any transaction or other strategic alternatives that will take place as a result of this evaluation and <unk> has not set a definitive timetable for completion of the process.

Note also that we do not expect to disclose further developments relating to the strategic evaluation process unless and until the board approves a specific transaction or otherwise concludes this review of strategic alternatives.

And with that I'll now turn the call over to Jim.

Thank you Wendell.

Turning to our first quarter results consolidated first quarter revenues totaled $16 2 million within the.

Range of our guidance of 16% to $16 $5 million.

Thin film equipment revenue totaled $9 2 million and included one matrix <unk> system for advanced semiconductor packaging.

As well as upgrades spares and service photonics revenue of $7 million included $3 $8 million of product revenues and $3 $2 million of contract research and development revenue.

Q1, consolidated gross margin was 18, 8% below our guidance of 26% to 28%.

Thin film equipment gross margin was 23, 1%, which was lower than forecast, primarily due to lower overall volume, which reported factory utilization and product mix due to less high margin upgrade revenue and lower margin matrix <unk> evaluation system.

First tool that's going on.

<unk> gross margin was 13, 1%, which was lower than forecast, primarily due to higher costs related to the additional work needed in order to finish the initial.

Integration of our camera into the <unk> platform as we near the completion of the development stage.

This increase was partially offset by decreased by R&D spending FERC index.

Q1, operating expenses were $9 $6 million below our guidance due to lower for comments on R&D efforts were spent finishing the initial integration of our camera into the ipass platform rigs.

We expect quarterly operating expenses to remain below the $10 million level for the remainder of 2021.

This resulted in a net loss of $6 $5 million or 27 cents per share within our guidance from 25 to 27 cents per diluted share.

Our backlog was $43 $1 million a quarter.

Thin film equipment backlog of $4 $2 million included non systems HDD backlog.

Backlog on our photonics business was $38 $9 million now turning to the balance sheet.

Ended the quarter with cash and investments, including restricted cash on a $53 6 million equivalent to approximately $2 22 per share based on 21, 24 1 million shares this quarter.

Cash flow generated by operations was $2 $5 million during Q1.

Q1 capital expenditures were $243000 and depreciation and amortization was $791000 for the quarter.

Now turning to our outlook for 2021.

As Wendell indicated our preliminary full year view is thin film equipment revenues of $38 million to $39 million.

In photonics revenue of 30% to $34 million for a combined 68 million to $73 million.

Within this revenue range and expected mix.

Full year gross margins between 30% to 32%.

As mentioned, our Opex run rate is below $10 million per quarter on gross is expected to be around $39 million for the year.

We are forecasting interest income of around $200000 for the year.

Net income tax expense of around $1 million for the year.

Well on our operational results will be challenged in 2021, we will continue to prudently manage our cash and maintain our strong balance sheet.

Specifically for Q2, we see revenue in the range of 12 $5 million to $13 million.

At this range, we would forecast gross margin to be around 27%.

Opex should come in between $9 6 million and $9 $9 million.

Interest income should be around $50000 for the quarter with no income tax expense.

Therefore, our forecast of a loss in the quarter of around 26 cents per share using 24 million shares outstanding.

This completes the formal part of our presentation safety, we're ready for questions.

At this time, we will be conducting a question and answer session. If you would like to ask a question. Please press star one on your telephone keypad income.

Information total will indicate your line is that the question queue. You May press star two if he would like to remove your question from the queue.

For participants using speaker equipment, it may be necessary to pick up your handset before pressing the star keys.

Once again Thats star one to ask a question.

Our first question.

Comes from Peter Wright with interact please go ahead.

Great. Thank you guys for taking my question two.

Two questions actually on the first one on the IV side, if we look at the.

32 million spend on the development part of the contract what is a good rule of thumb or how should we think of the relationship between how much projects like this.

Typically spend on development and how that converts over a multiyear period into kind of the commercial.

Contract. If there is if theres any multiple or in some way of thinking about that.

On the second part to that.

Would be can we extrapolate similar type ratio or way to think about the.

The next three programs that you outlined a two day for us.

Yeah, so from a program perspective.

Think what's unique about this development that we've been doing with the army for the cameras for the <unk> platform is how fast the programs work.

Normally development like this would take well over the two five years that we've been working on it some more.

Typical military procurement cycle.

So actually give that perspective, it's very unique.

Procurement.

Process, that's going on around this program for the Prime zone as well as all of the.

Suppliers to the price.

But can you repeat your second question for me please.

Okay.

Is there is there like a ratio of how to think of it.

If you spend $100 on development, how much should be spent on the commercial.

Program is there any multiple that is kind of a good rule of thumb to think about that.

Not not really I think they all pretty much.

Our similar you might have a little more.

Work done on that.

Hum.

Component reliability on the military programs.

Similar.

Or how many quarters would you think that it would take to be able to get kind of a commercial.

Ramp.

One to your better quarters on the development side.

It happened last year type run rate.

Great.

Probably around three three.

Three quarters fantastic.

And then if I can ask one other question on the thin film side of your business Similarly kind of in a similar way.

On your hard disk drive is a mature business we know how.

So to think.

Think about that kind of on a cross cycle basis, we'd be looking at matrix and vertex how would you think of the size of those markets and kind of your positioning within those markets in relation to hard hard drive.

I look at this year is kind of a year where.

As a board is figuring out your reinventing many parts of the business that are good multiyear growth stories.

How should how is the best way to be thinking of matrix and vertex in relation to kind of the size of their preferences.

Well I think from a 2021 perspective, we have the matrix that's already revenue.

We have two vertex of valves develop tools that are available to revenue as well as a marathon.

So the opportunities there I think the big issue. We have is the ongoing situation in China on accessing that.

That covered glass business.

From a.

We've been running roughly $50 million in hard drive over the last several years. So I would say that that opportunity is similar but its going to require adoption in the vertex side of the business and it's going to require a say on the matrix side of the business.

Our transition to a panel level packaging from wafer level.

Just going on right now.

So to understand then I'm sorry, if you think it's about a $50 million across cycle opportunity in each of those.

<unk> business lines.

Yeah.

And with that he said.

Weighted most really dependent on adoption rates on the vertex opportunity can be very very large if one of the large.

Cell phone manufacturers adopt on.

Their phones because of driving 25% of the all the glasses being made so that takes quite a few tools.

We estimated before that 10% adoption drives.

Slide $500 million.

Equipment to support.

But I think we're looking at now from some of the more incremental opportunities rather than the hockey stick on opportunities, but that's still exists for us there but.

I would model it somewhere similar to <unk>.

Between the two of them to have a decent year in the hard drive.

Great. Thank you guys.

Thank you Peter.

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

Just had a question about the <unk>.

You're you're projecting in the first half revenues are going to be lower than second half. Besides the I bet that shipments later this year.

Are you hopeful that you're going to get these two vertex tools are quantified is that kind of your assumptions for a second half where does the besides diverse where where does improve revenue as the second half come from.

Yes.

The range, we gave in thin film equipment. It would include the.

Two vertex in the back half second half of the year and then the other thing is.

We would expect the upgrade revenue to be much stronger in the back half for the hard drive business than what we're going to be seen in the first two quarters.

And then again you did point out that with and I've asked production contract. That's why the range of 30% to $34 million in photonics. It would include if we can get the order in time to ship them in Q4 of this year.

<unk> production contract.

So your expenses were actually up year over year, yet revenues were down are you taking any steps to.

To break down some of your operational expenses over the next two quarters because of the sales decline.

Yes.

We don't have anything that we're executing on right now I think we want to see just how well the back half response.

We certainly are doing some discretionary things around the company to minimize the opex.

So could you explain why even though sales were up by two and a half million.

Uh huh.

Similar quarter last year.

Opex was up this quarter or the March quarter by $250000 was what drove the difference despite the lower sales.

It was there was high on my R&D one of the things we said I think in the last couple of conference calls as in 2021.

As Wendell mentioned that Mantech award that we got and these potential other two phase one awards that will get in photonics will require some investment on the <unk> side in photonics My R&D. So that we can keep.

Some of the IP and so we will see a higher amount of.

Iran coming from Photonics revenue historically.

And they didn't spend as much as we had forecasted in Q1, because some of that effort went into finalizing what I'll call. The cost of goods sold which is why there was some margin pressure.

But we would expect to see more R&D, but it will still be below a $10 million per quarter level.

Just looks it looks like most of it's coming from our R&D comparator last year. Okay. Thank you that's correct alright, thanks Mark.

I will now turn the call over to Mr. Bill on again for closing remarks.

Thank you.

I want to again, thank the dedicated employees from <unk> all around the world for continued resilience and dedication in a challenging operating environment I'd also like to thank our customers and our suppliers for their business and appreciated partnerships.

And finally I'd like to thank our stockholders for their continued support of antibody. Thank.

Thank you for joining us today, and we look forward to updating you again during our Q2 call in August until then so on.

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

Yes.

Yeah.

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