Q2 2021 Intevac Inc Earnings Call
Good day and welcome to the <unk> second 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 note that this conference call is being recorded today August 'twenty 'twenty..1 at this time I would like to turn the call over to Claire Mcadams Investor Relations for any bad debt.
Net.
Thank you and good afternoon, everyone. Thank you for joining us today.
Financial results for the second quarter of 2021, which ended on July for.
Moving to discussing his company.
He will discuss our outlook looking for.
Joining me on today's call are Windows, Monaghan, President and Chief Executive Officer, and Jim money, Chief Financial Officer, Wendell will start with a review of our business and our current outlook then Jim will review second quarter results and provide further details regarding our financial outlook 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, 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 for.
Financial performance moving to that.
These forward looking statements are based upon our current expectations and actual results could differ materially as a result for various risks and uncertainties relating to these comments.
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 content.
The August 2nd 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'll now turn the call over to Wendell.
Yes.
Thanks, Claire and good afternoon.
Today, we reported second quarter revenue that exceeded our guidance, primarily as a result of an acceleration of technology upgrades for our hard disk drive for HDD customers Inc.
In June we announced a record HDD upgrade order of $10 million, which we began shipping against before the end of June providing upside to our Q2 revenue.
This order also drove the majority of the $15 million increase increase in backlog in our thin film equipment or <unk> business during the quarter Inc.
<unk> Tonics, we announced 2 new development awards in June, bringing our new I've asked phase 1 development work count to 3 and as of today.
These latest awards are targeted at improving the night vision performance Stuffy Ipass headset.
Yeah.
During the quarter Ive asked related investments exceeded our forecast by approximately $1 million, which resulted in Q2 gross margins coming in about 450 basis points below guidance. However, we successfully managed our cash and discretionary spending during this challenging period and our net loss per share.
It was a little better than expected.
Notably we improved upon our already strong balance sheet generating positive cash flow from operations ending the second quarter with $54.1 billion in total cash and investments an increase of $3.8 million since year end 2020.
During the quarter, we as most companies began to feel the impact of semiconductor component shortages as well as supply chain constraints. These factors are impacting lead times in our equipment business and volume production levels in photonics.
We exited Q1, knowing that the next couple of quarters would be our most challenging in over 5 years, but.
But the major initiatives underway in both here for you in photonics position us for growth ahead in 2022 and in Q2, we continued to make progress on a number of fronts.
Which brings me to a review of each of our businesses starting with our Tia for the hard drive media business.
For the fourth straight straight quarter.
Market demand for hard drives in Q2, again, well outpaced expectations with close to 4 million additional drive shipping in the quarter versus the trend focus forecast for me.
And their preliminary Q2 report published on July 14th day.
He said extremely active airline market resulted in record unit and capacity shipments for this category.
Total approximately 19 million units in 240 extra bytes, respectively.
They also reported that entering Q2, Hyperscale expansion was well underway at some other major cloud companies and OEM demand for traditional I T was trending ahead of earlier forecasts, creating a demand environment, which HDD vendors scrambling to meet.
At that point and channel demand for high capacity drives spiked as the hype surrounding the chia crypto currency launch for the new airline market into extreme allocation.
While trends focus hasn't yet published a revised short term forecast for the next 4 quarters or our long term forecast for the next 5 years. Their July report did indicate that demand for near line HDD should continue to improve through the third and fourth quarters.
And while the initial hypersound she has cooled somewhat channel demand for an airline hard drives remains strong and the supply is tight.
Importantly for <unk>, the discussions with our customers to add media capacity resumed during the second quarter.
Whereas earlier in the year, we reported on delays in our customers' capacity expansion plans those discussions ramped up again in Q2 and the delivery schedule for 200 leans into 2022 and 2023 time frame is now beginning to take shape.
Keep in mind, our supply chain remains constrained and lead times for 200 leans have stretched from 6 to 8 months. This means that orders commencing in Q4, well see deliveries beginning in the second half of 2022.
These capacity expansion plans are with multiple customers and our 200 lean shipments through 2023 are currently expected to be at their highest level since 2010.
Based on these expansion plans for forecasting strong growth ahead for HDD media business in both 2022 and 2023.
As for technology upgrades, we reported in bond the pull in of upgrade sales into Q2, but for the year overall, our expectations have not changed.
The takeaway is that the hard drive industry fundamentals are very strong driven primarily by demand for mass capacity drives and that while 2021 was a low point for us relative to the last 5 years, we have a very strong forecast for future growth in our HDD business.
Now turning to the vertex.
As I reported last quarter, our primary objective in our vertex initiative is to gain initial adoption of our diamond clad protective coating and to convert the systems under evaluation into orders and revenue.
We made progress on both fronts during Q2 and today, we have increasing confidence that we'll be able to announce 2 orders in 2021.
The overall vertex program continues to play an important role in our longer term growth strategy.
You know dental activity, we've been driving multiple programs. These include programs for cell phone cover glass protection functional protection protective coatings for Wearables decorative back cover glass applications and augmented reality component functionality.
Furthest along at this point because our program to protect Wearables. We are currently in the final stages of qualification prior to a decision of adoption.
All of the functional performance specifications have been met and we are now focusing on optical adjustments if adopted we would anticipate total bookings this year.
Next.
Protective cover glass project is proceeding well and we have passed the first performance testing targeted to ensure that by adding our diamond club films to significantly improve the scratch resistance of the covered glass. There is no degradation in the bridge break into performance.
We call this phase of the testing as first do no harm.
We have validated that in ring on ring in for Ben testing, our films, while significantly improving the scratch resistance do not degrade breakage resilience of the glass.
While this project will take some time to move through the testing and qualification we are optimistic as the handset maker engaged with US late last year after witnessing the impressive scratch resistance.
Our latest version with protective coatings.
The augmented reality initiative continues to move along and we delivered our first set of device samples in Q2.
At this point in time, we are less focused on decorative back cover glass applications as the industry has trended for solid colors on the back glass following current iPhone designs.
Turning now to the matrix.
Last quarter, we discussed our first revenues in the advanced semiconductor packaging market, which was an important milestone in our efforts to expand our equipment business.
Q1 towards qualifying at our league, leading Osaka customers R&D site.
And its performance and cost of ownership benefits for validated in.
In Q2, our customer moves the matrix out of R&D and into the pilot manufacturing phase, which is an encouraging development in the roadmap to incorporate our solution for next generation panel level semiconductor manufacturing.
Overall, our Q2 progress continues to indicate that the vertex and matrix can add additional upside in revenue growth Inc.
Mental to the strong long term growth stories for HDD media and Photonics now turning to photonics.
For the past 2 years, our photonics business has been heavily focused on the <unk> development program and the final stage of that $32 million Night Vision camera Development Award was completed early in Q2.
In 2020 once a day, we have announced 3 phase 1 incremental development awards for Ipass. The first targets continued operation of our current Cmos sensor for the second and third targeting improved net division performance.
Diverse headset.
In mid June we attended the detection recognition and identification testing at force picket, Virginia and had our first opportunity to wear and I've asked system within a vaccine loss cameras fully integrated inside as observers of the tests.
The experience was quite impressive in satisfying culminating over 2 years of ground up development work at break net back of pace.
In Q2, we completed the shipment of cameras for beyond the initial cameras, including the development contract.
And have continued to work on optimizing our camera is integrated into the system.
Today, the overarching questions are.
When I've asked will move into volume production.
The production ramp will scale and the roll into back Photonics will play in the overall I've asked program.
I'll now shed some light on the current status of other discussions in regards to the production program.
Starting with soldier touch point for our S. T P for which was held in April and at the time of our last call was under review.
While details have been extremely limited.
We think that additional challenges and hurdles of the overall program may remain to be resolved prior to any decision for volume deployment.
The Army is FY 'twenty 2 budget plan indicates that in order for 5000 Ipass units was placed in March of this year.
An additional 500 units with planned after STP for which at this time, we cannot confirm occurred.
Future orders covering the next 12 months of deliveries include only another 8700 units after the operational testing has passed.
Typically in the army desires multiple sources for critical components on key programs.
However, given the small initial volumes the cost of standing up and qualifying 2 production lines appears to be prohibited.
This time, we believe the initial units will be delivered by another company.
Looking ahead, we believe the funding of the 2 recent phase 1 I've asked development programs are evidenced that improve night vision performance is desired for the <unk> program.
To reiterate for the last quarters call Phase 1 awards are to take the project into the detailed design phase for down selection of the complete program execution phase.
Our first Phase 1 award was to continue optimization of the existing Cmos sensor technology.
However, the second award is to develop a new higher performance Cmos sensor.
And the third is to enable interfax ice 19, EBIT faster technology can be integrated into the <unk> platform.
Given the 3 development programs underway and the army as investment in the other back as a supplier for Ipass and we believe that we are an important long term supplier for the <unk> program.
For 2021, however, we're taking any meaningful I've asked production revenue out of our forecast.
In programs outside of the <unk> initiative, our $5 million development contracts for the U S. Navy funded enhanced visual acuity program, our Eva is running well and we are meeting our milestones in support of the price.
This program supports the U S Navy and marine.
For pilots in executing their missions more effectively under low light conditions.
This program incorporates our latest ice 19th sensor technology destined for rotary Air craft pilot applications beyond the Apache helicopter.
Can be a major growth driver in the future.
The Delta I program is also an important element of our photonics business.
We are developing a fuse digital night vision goggle, incorporating advanced augmented reality capabilities. The program also incorporates our most advanced Hastening 19 night vision sensor and supports the coalition warfare program for the special operation forces of Qunar.
It States, Australia, Canada, and the United Kingdom.
This program has pulled in due to the acquisition of critical components that are on allocation and wish and we should have also have first operational units this year.
And our volume production products, we continue to execute well on the joint strike fighter contract. However, due to lead times of Microcontrollers now surpassing 52 weeks.
We have temporarily temporarily reduced shipment volumes until we can acquire the component or receive our next scheduled shipment to.
To ensure there's no break occur.
Occur in our production line.
The key takeaway from Photonics is that we believe it will be a key technology provider for the army.
<unk> platform.
And then we're on multiple critical military programs, providing the best digital night vision technology.
Beyond 2021 success in the <unk> 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.
And with that I'll turn the call over to Jim.
Thank you Wendell turning to the second quarter results consolidated second quarter revenues totaled $13.8 million above our guidance of $12.5 million to $13 million.
For the film equipment revenue totaled $5.4 million and included upgrades spares and service <unk>.
Photonics revenue of $8.4 million included $5.3 million of product revenues and $3.2 million of contract research and development revenues.
Q2, consolidated gross margin was 22, 5% below our guidance of 27%.
Equipment gross margin was 18, 7%, which was lower than forecast, primarily due to lower overall volume, which affected factory utilization and product mix due to less high margin upgrade revenue.
Photonics gross margin was 24, 9%, which was lower than forecast due to higher costs related to completing the integration of our camera into the eyeglass platform.
Q2, operating expenses were $94 million below our guidance due to tight control of development spending.
We expect quarterly operating expenses to remain at or below the $10 million level for the remainder of 2021.
This resulted in a net loss of $6.1 million or 25 cents per share within our guidance of 25% to 27 cents per share loss for.
Backlog was $51.7 billion at quarter end.
This film equipment backlog of $89 million included non systems HDD backlog.
The backlog in our photonics business was $32.7 million.
We ended the quarter with cash and investments, including restricted cash of $54.1 million for equivalent to approximately $2.22 per share based on $24.4 million shares at quarter end.
Cash flow generated by operations was $832000 during Q2.
Q2 capital expenditures were $122000 and depreciation and amortization was $895000 for the quarter.
Guidance for Q3, we see revenue in the range of $12 million to $13 million.
At this range, we would forecast gross margins to be around 35 per cent.
Opex should come in around $10 million and income tax expense around $500000.
We therefore are forecasting the losses in the quarter of around 25 cents per share.
Using $24.6 million shares outstanding.
Now turning to the current outlook for 2021.
Our full year view is thin film equipment revenues of approximately $38 million relatively consistent with our view from last quarter and.
And we now expect photonics revenues could be at the lower end of the $30 million to $34 million range for combined $68 million plus or minus.
At this revenue level and expected mix.
We expect full year growth margins between 30% and 31%.
As mentioned, our Opex run rate is below $10 million per quarter, and thus is expected to be around $30 million for the year were forecasted interest income of around $100000 for the year.
Income tax expense of around 1 million for the year.
While our operational results will be challenged in 2021, we will continue to prudently manage our cash and maintain our strong balance sheet.
This completes the formal part of our presentation operator, we are ready for questions.
At this time, we will have a question and answer session.
To ask a question. Please press star 1 on your telephone keypad, a confirmation tone will indicate your line is open.
Thank you you may price starting to she'd like to remove your question from the queue for participants using speaker equipment. It may be necessary to pick up your hands free before Christmas Darkies.
1 moment, please while we poll for questions.
Yeah.
Your first question comes from Peter right in Germany. Please proceed with your question.
Great. Thank you guys for taking my question. My first question is on the Bridgetex.
We will start to materialize in the second half of this year when do you think that revenue opportunity.
What happened is it any different from.
For the lean systems forecast it out.
Yes.
For the <unk>.
Wearable project, we would intend to revenue the eval systems that are already out there.
So there is some opportunity building on what that timing is.
That they could.
Revenue, we have to get them.
Through their final testing and acceptance before we can take revenue, but the tools, we're actually already built so we have.
Near term with those.
And that's 2 systems is that correct.
Those 2 evolves right now.
The ones that were targeting correct.
And if I understood. It correctly, you are suggesting orders as well on top of that could materialize in the second half of this year for protection on top of debt.
Understand that correctly.
The tools out there our evaluation tools at this point so once the evaluation terms the accepted theirs in order for it and then it's I can share.
So theyre not all generates instantly.
And then a couple of housekeeping ones that are quick.
Cash projection at the end of the year and.
Yeah.
If you could clarify I missed at the Opex I think you said 30, something but I'm, assuming it's $40 million at the Opex for the full year can you just repeat that number as well.
Answer that question first the Opex for the full year, we still.
Spectra remained around $39 million, which is what we also said last quarter.
And then our cash we came into the year with $5 million and obviously, we have 50 for I'm sorry, we came into the year with $50 million excuse me.
And we ended this quarter at $54 million and we would expect.
Debt, our cash will still remain above the $40 million. If you remember we've been saying we want to keep it at a minimum of 40.
So we expect cash to still remain high some of that use will just depend on what happens with regards to any orders in the remainder of the year and any buildup of inventory for.
For some late shipments of.
Receipt of receivables still be non and collections, but we expect to end the year with a strong amount of cash Peter.
Wonderful well come back in.
Yes.
And our next question comes from Mark Miller with the Benchmark Company. Please proceed with your question.
Congratulations on your upgrade order.
I assume that's what's pushing margins up next orders is coming from the upgrades compared to the year for.
The June quarter.
Yeah that that'll certainly be a contributor for sure and then with it.
I've asked development deliveries, we would expect <unk> margin to go up again in Q3 as well.
T V force.
It looks strong again is that coming from for vertex or what is the the higher anticipated sales coming from.
The majority of that is coming from the strong orders. We got in Q2, we will ship some of those in Q3, but we will have a stronger upgrade quarter in Q4.
Well, it's coming from upgrades, Okay. Just wanted to clarify something about interest expense you said it was going to be 500000 for this quarter, but net net of interest income of 100000 for this year.
No I'm, sorry, if I said that it was a mistake.
Didn't give a comment on Q3 interest income.
I don't know did you say interest income or income tax expense interest I'm, sorry interest expense or income sorry, yes. The interest expense is the only been running at about 20 to $30000 per quarter.
And year to date on income tax expense, we've actually had a credit in the first few quarters.
We should see an expense based on the profitability in our international subsidiaries of about a half a million dollars in cash.
Q3, and then about a million dollars for the year, but you can think of interest income for the year at about $100000.
Okay.
And then finally your vertex tools have moved into pilot production any idea of what these will be revenue.
They haven't moved into production.
Thinking about the matrix tool matrix I'm, sorry, the matrix tool in public so what you do.
1 is it qualify their process and other working to qualify their production line.
So.
We've already revenue that tool with revenue in Q1, so once they get through with the all the qualification of their lines I think the next step there is to us.
Upgrade that that entire line for higher volume operation right now there's a lot of manual work being done on that but we are encouraged by the fact that.
How does that project continues to move forward.
And that.
They're looking at qualifying their actual production devices. So we think there's more opportunity there, but it's probably out there.
Probably towards the mid to back half of 'twenty 2.
Thank you.
Thank you Mark Thanks, Mark.
And just as a reminder, if anyone has any questions you May press star 1 on your telephone keypad doing so will ensure you spotted the question Ricky.
Our next question is from Peter right with <unk>. Please proceed with your question.
2 quick follow ups actually so is there any I think you can give us on the Ibs program as well.
A way to think of market share and it's about $400 million, we're still camera units still a fair assumption to have out there on the 5 year outlook.
Yes.
Well, there's really not a lot we can say about it.
Just because of the NDA for their own place.
But what we did say is that these initial units that we've looked at that we've been able to verify some public records.
At least 5000 on order for an opportunity.
Almost 10.
The next 12 months.
But we won't be delivering cameras on that.
It was too costly to scale up.
To volume production lines with.
Very small initial volumes forecast and still some uncertainty.
Until you get through the operational testing, which would be in the September August August and September timeframe as we're currently planning.
Before you get through that that's that stage of the program whether there is some risk that it may need more work or move to the pipe that was a decision that was made.
Okay.
Wonderful that makes sense. So is it fair to assume debt.
Volumes were to ramp you would be executing on some of that near the 1 walking away from the business because that the volume isn't there for you to be able to profitably execute.
Oh no.
We didn't walk away from the business. It's just the decisions that are being made by the prime on what their manufacturing change looking like.
So.
I don't know if that answered the question, but you know as the volumes come up and moving the need for <unk>.
More manufacturing capacity.
We are 1 of the 2 companies that was actually brought from the original development programs and integrated into the Ipass units.
Okay.
Thank you and then my very last question is any update on the strategic review.
We're basically not going to talk about that.
We announced it last quarter. So people knew what we were doing it.
But we won't be fully talking much about debt until at such time that the board has decided that.
Actual debt.
Okay. Thank you guys so much.
Thank you Peter.
Okay.
Question is from <unk>.
Mark Miller with the benchmark company. Please proceed with your question.
Just wondering what is driving the lean the lean times for your lean tool from 6 to 8 months is that component supply.
Yes, I think the longest pole in the tent is turbo pumps, because we use the same kind of pumps net semiconductor guys do and we've seen this historically when there's a surge the turbo pump guys don't.
Put in extra capacity.
Just to pull out the lead time, so we have to manage around that but that's 1 of the fundamental pieces, that's driving lead times.
Thank you.
Okay.
Steve with your question.
Okay.
Yeah.
And our next question is from Gus Richard from Northland. Please proceed with your question.
Yes, thanks for taking the question.
Are you seeing any hello are you seeing any.
Competitive.
Competitors in our debt.
Deposition market for it for media at this point as Ken and still in the game.
Yes, Ken and although they still have offerings.
We're not aware of them selling much equipment over the last several years, but certainly 1.
We're having discussions with large customers there.
They're also looking for business as well.
Well, we feel really good about the way we're positioned in the back and our equipment is as we go to these higher density.
Areal density media formats.
We're in a very leading position there.
Okay, and then Uh huh.
I'll follow up on the on the inventory question I believe you guys built up inventory for the lean systems earlier in the year can you just talk about what the long lead time items were that you.
Pulled in and.
And how turbo pumps fit into that.
Yeah, we did buy some.
Long lead parts last year or so as we look at that 8 week lead time, there are a couple of systems work.
8 months 18 months.
As we look at that for the first couple of tools, we will be able to deliver those inside of that 8 month window, because we'd already procured some inventory in Singapore to be able to react quickly and that was really last year moving being pushed quite hard to have tools to leverage in the middle of this year.
And what do you think the opportunity for deposition systems in 'twenty 2 'twenty 3 is for <unk>.
Leanne.
I think round numbers of units.
Alright.
I think in 'twenty, 2 we're probably just because of timing and lead times on some of those things probably single digits.
But I think there's an opportunity in 'twenty 3 for double digit deliveries.
Got it that's it for me thanks.
Hey, Doug discussed.
Yes, because we have no further questions at this time.
We will now turn the call back over to Mr. Ryan.
I want to again, thank the dedicated employees at the end tobacco all around the world for continued resilience and dedication in this challenging operating environment. I also wanted to thank our customers and suppliers for their business and appreciated partnerships.
Finally, I'd like to thank our stockholders for their continued support of an attack.
I. Thank all of you for joining us today and I look forward to updating you again during our Q3 call in November I told them so long.
This concludes today's teleconference. You may now disconnect.
Okay.
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