Q1 2022 Intevac Inc Earnings Call
Good day and welcome to <unk> first quarter 2022 financial results Conference call. A brief 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. As a reminder, this conference is being recorded. Please note that this conference is being recorded.
Today May 19, 2022 at this time I'd like to turn the call over to Claire Mcadams Investor Relations for in the back. Please go ahead.
You Devin and good afternoon, everyone. Thank you for joining us today to discuss <unk> financial results for the first quarter of 2022.
For a second.
In addition to discussing the company's recent results we will discuss our outlook looking forward. Joining me on today's call are Nigel Hunton, President and Chief Executive Officer, and Jim <unk>, Chief Financial Officer, Nigel will begin with his prepared remarks, and then Jim will review our financial results before turning.
On 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.
Vince and projections about the future financial performance. 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.
Emission.
Our annual report on Form 10-K.
And quarterly reports on Form 10-Q the.
The contents of this may 9th 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 Nigel.
Yeah.
Thanks, Claire and good afternoon.
Thank you for joining us today and hearing more about the new into that.
It's now been just over 100 days since I started with in Tibet.
And that's been a very exciting and productive period of time for both me and the company.
We have eliminated a laptop management.
Consolidated on development efforts and stopped programs that would deliver a positive return.
I've started to develop a new management team I'm.
I've traveled to Singapore, and I've met with our employees major customers and suppliers.
So busy and very active stocks to the.
We've also announced record bookings and I'll call H D D business and identified how to focus our growth initiatives to expand our business beyond the HDD market areas.
I won't get into all of these in a moment, but first let me quickly recap on our financial results for the quarter, which came in as expected.
We have some upside in HDD upgrades business, resulting in total revenues of $4.4 million.
Our non-GAAP results exclude $2 $7 million of restructuring related costs, including severance and disposals of fixed assets.
The resulting non-GAAP loss was <unk> 20 cents per share so better than forecast.
The primary highlights of the quarter center on orders and backlog both of which achieved a new 12 year record highs.
New orders in the quarter totaled $67 million.
Which enabled us to grow backlog to over $87 million as of quarter end.
The $87 million of Battle includes nearly $60 million of 200 lean systems.
One 200 lean will ship in Q4, this year and the systems ordered at the end of Q1 will ship over multiple quarters beginning in mid 2023.
The remaining $27 million in backlog at the end of Q1 consists of H D upgrades spares and field service.
And given this month's significant new order.
Also expect to report a sequential increase in backlog for the end of Q2.
In February we announced a multiyear refurbishment and upgrade agreement with a major data storage company being deployed on the 200 lean platform rather than on the incumbent equipment suppliers platform.
Valued at over $20 million orders released in this program will be added to backlog on a system by system basis over the 2022 to 'twenty 'twenty four time frame.
At the end of Q1 less than $5 billion of the 20 million agreement was impactful.
But since November of last year, we have now announced four orders and agreements that firmly establish our 200 lean system is a platform of choice for the entire industry media capacity expansion plans being put into place for the next few years.
To recap.
Novembers announcement mountain the very beginning of U 200 lean capacity orders.
February's announcements highlight the major agreement with a leading data storage company to add capacity.
The $54 million of order received at the end of Q1 was the largest 200 lean system order received since early 2010.
And finally, our most recent press release includes an additional $11 million of 200 lean system orders.
As I mentioned on the last call I'm happy to confirm we expect H D. D revenue in 2022 will be similar to last year at around $35 million.
Importantly, we already have the backlog in place and support for the $65 million to $70 million in 2023, giving us confidence for the future.
The key in 2023.
Achieving profitability and positive cash flow generation at this revenue level.
Which brings me back to our priorities.
First assessing our growth potential in each of our end markets, which entail strengthening relationships with each of our key customers both existing and perspective.
I'm pleased to say that during my visit to Singapore, I met with our employees suppliers and customers ensuring that in my first 90 days and has promised I met with all key existing and prospective customers in the USA in Singapore.
A great stopped positioning interbank is a customer driven organization and more importantly, understanding the potential future business opportunities.
Next.
I've worked internally on streamlining the cost structure and to align resources with our revenue growth prospects.
In the first quarter of 2022, we made significant progress in support of our new business model.
With a focus on our core HDD media business and a vastly more targeted approach of pursuing any equipment growth opportunities outside of our core HDD market.
As I mentioned earlier, we're also investing in a new management team to leverage the strengths of each person supported by focused leadership development program that can propel the company forward.
We will still maintain an emphasis on cost control and managing our cash while selectively adding capabilities to support future growth.
And third positioning the company for a return to profitability as soon as possible, while preserving the strength of the balance sheet.
With prudent control of working capital in the quarter.
We were able to limit the decline in our cash balance to solely transaction related costs related to the sale of the photonics business, which were about $4 million.
We ended Q1 with a total of $117 million of total cash and investments a great achievement by the management team.
We effectively eliminated an entire level of executive management as we significantly simplified our operating structure.
We now have a strong foundation for growth and profitability in our core HDD media business.
We redeployed investments into our supply chain and made targeted R&D investments in support of our additional growth initiatives, enabling us to move forward with a customer focused structure.
<unk> of our most significant prospects for revenue growth and profitability.
Our sole activities outside of our core HDD media business today are focused on very specific applications, where we believe internet offers a compelling and differentiated solution at the right price book just to disrupt the market and pursuit of what could put him large revenue opportunities.
Yes.
We believe these are centered on our unique capability to provide cost effective optically clear ballistic coatings.
On Youtube will approach that addresses the specific market needs is the trio, which the brand new concept and importantly, a very cost effective machine based on recent feedback from our prospective customers.
The trio also Leverages off 200, lean expertise and producing advanced films at high productivity on a small substrate platform.
We are pursuing strategic partnerships from several companies that I have approach since I began as CEO .
In order to validate this growth opportunity between tobacco and we look forward to providing you with updates on our progress each quarter.
This customer focused approach is enabling the company to move forward with a clear vision and we have stopped the initiatives that no longer fit with our revamped strategy.
Yeah.
We believe the combination of interfax ballistic coating and the trio technology provides scratch resistant protection and enhanced durability for multiple applications.
With superior hardness strength surface adhesion and thin film properties, when compared to existing technologies and with improved optical transmission.
Before turning the call to Jim.
I'll provide a few more comments around what we see in our core HDD media market.
The headlines are rife with debates over signs of near term pockets of softening demand.
The trajectory of mass capacity drive growth for data centers, the impact of supply chain challenges and much more.
These are bound to result in increased volatility and speculation around the particular dynamics of the HDD market.
There are a few trends in the industry, However, which drive interfax HDD media business is it worth highlighting.
First while the overall HDD units ran decline HDD media returned to being a growth industry and 2020 and is expected to remain a growth industry for the foreseeable future.
Second media unit growth is being driven by new airline demand for mass capacity drives which contain as many as eight to 10 to stage.
This growth in data center storage needs, which is estimated at upwards of 35% annually cannot be fully served by the solid state drive market and in fact expectations for exabyte shipped on ssds over the next five years still.
A small fraction of those being shipped on hard drives.
7% to one cost advantage of hdds in terms of price per bit that's not narrowed and is not expected to narrow meaningfully in the coming years.
Third the industry is effectively maxed out this current media capacity and the leading drive manufacturers have worked within Tibet to add capacity solely on the 200 leap platform.
So while near term fluctuations supply chain challenges and volatility of the hard drive market is certainly making headlines the growth foundation for our core media business is firmly established and the visibility and backlog. We have today provide the competence for future revenues and in combination with our restructuring program.
Order secured with volume shipments were on track for a return to profitability by mid 2023.
Lastly, I look forward to continue working with our customers our suppliers our stockholders our board the management team and the entire organization as we build new in tobacco.
That completes my prepared remarks, and with that I will now turn the call over to Jim.
Thank you Nigel.
Turning to the first quarter results.
Consolidated first quarter revenues totaled $4 $4 million above our guidance of $4 million and consisted of HDD upgrades spares and service.
Q1 gross margin was 16, 3%.
Below our guidance of 25% due to inventory reserves of $755000.
Mainly attributed to reserving our engineering sold inventory in older generations of our display cover panel inventory, where we will no longer focus our efforts.
Without these reserves gross margin would've been 32% above guidance.
Q1, R&D and SG&A expenses were $8 4 million, which included $1 $5 million charge to dispose of certain lab equipment as well as $1 $2 million in settlements, which was largely offset by stock grants forfeitures in the quarter.
Net of these adjustments operating expenses would've been just below our guidance of $7 million.
The Q1 net loss was $7 9 million or <unk> 32 per share.
The non-GAAP net loss was $5 million or 20 cents per share and excludes the impact of restructuring charges and discontinued operations from the Photonics Division.
Our backlog was $87 million at quarter end.
The $67 million of new orders booked in the quarter.
First quarter close we announced an additional $11 million of systems orders, which builds backlog for the current quarter.
We ended the quarter with cash and investments, including restricted cash of $117 million.
<unk> to $4 71 per share based on $24 9 million shares at quarter end.
The net decrease in cash from year end 2021 was limited to the transaction costs related to the sale of the photonics business. That's cash flow used by operations was $4 $1 million during the quarter.
Q1 capital expenditures were $618000 depreciation and amortization were $445000 for the quarter.
Now moving to Q2.
2022 guidance.
We are projecting consolidated revenues to be in the range of 8 million to $8 $5 million.
Flex in a higher level of HDD upgrades spares and field service revenue than we reported in Q1.
For the first half of 2022 this represents about a 20% increase.
The HDD business versus what we reported in the first half of 2021.
Given the higher Q2 revenues and favorable mix of upgrades, we expect second quarter gross margins to be around 45%.
Q2, operating expenses are expected to be around $6 $7 million to $7 million.
We expect interest income of around $20000 and GAAP tax expense of around $500000 in the quarter most of the tax expense will be noncash.
We are projecting a net loss in the range of 13 to 15 cents per share based on 25 million shares outstanding.
For the full year as Nigel mentioned, we continue to expect hard drive revenues will be similar to last year at around $35 million.
This includes one 200 lean system, and therefore, a slightly lower mix of upgrades.
Given the timing of deliveries during the year, we expect over 60% of 2022 revenue will be recognized in the second half.
At this revenue level and expected mix, we anticipate gross margins for the year will be in the high Thirty's.
We expect ongoing cash based operating expenses will decrease compared to last year.
Finally, we expect to end fiscal 2022 with a total balance of cash.
Cash equivalents and investments of at least $115 million.
That completes the formal part of our presentation, Devon, we're ready for questions.
Thank you we will now be conducting a question and answer session. If he would like to ask a question. Please press star one on your telephone keypad, a confirmation tone will indicate your line is in the question queue. You May Press Star two if you 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.
It's dark ease.
One moment, please while we poll for questions.
Our first question comes from the line of Mark Miller with the Benchmark Company. Please proceed with your question.
Congratulations on your cash management and all your orders.
That's good news.
Yeah, just I mean, the supply chain. It is as everyone knows is extended apps and extend it out.
2022, we placed significant orders for inventory placed orders for the demand that was coming in.
So from a from a confidence level for 2022, we've got a pretty high confidence level that the numbers. We committed to 35 million are achievable I'm, making manage that within the supply chain constraints around so I think the team are doing a very good job around that.
As we mentioned on the call that the Big Challenge really is around 2023.
We are confident around the level of the sort of 65 to 17 I think supply chain.
If the supply chain opens up and deliveries come in as potential upside on that but I think being conservative at the moment based on the supply chain dates we have and.
We're pretty confident around the 2023 number as well.
It is it is challenging to try and push for additional revenue and actually drive high volumes.
Yeah.
In terms of you took a number of inventory reserve pits last quarter, which impacted margins are we done with this in the future quarters.
Let's see inventory been cleaned up.
Mark as far as we're concerned we are done with this we took a big hit as you know in a lot of the fixed.
Finished goods in Q4, and then we did a more thorough look at some of the.
Stock room inventory and took that last year in Q1, we believe we're we're done with any major hits, yes, we are.
Okay. The one 200 lean is expected to ship. This year I know you mentioned is that going to be the third quarter.
No that will be in the fourth quarter right. Okay.
As originally scheduled.
Thank you.
Barbara.
Thank you. Our next question comes from the line of Peter right with <unk>. Please proceed with your question.
Great. Thank you for taking my question and congratulations on the Amazing first hundred days.
Mike.
My first question is understanding the backlog.
At $87 million does that mean, there's about $13 million in upgrades embedded in that if I'm backing out your $20 million urban your 54 system.
Yes, that's a good number of Peter.
And so if I add the 11 year, just probably right around 100 million backlog active ish today.
Mike My question is on the precision of that but you know if I look into the second half of this year.
What is the opportunity to sell incremental business in 2023, and what would it come from would it come from the same customers that are in backlog today or would it come from new customers.
So I think if we saw you talked about the sort.
65 to 70 range, we've given is HDD business around existing customers.
And that is the number we feel pretty confident that we can actually revenue in the year I mean, if the supply chain opened up there could be upside, but I think realistically we have tissue in the supply chain constraints are going to be around for the next.
Two to three years being realistic some some components if gone extending out so two year lead time. So they have to make sure that we have put in a number that we know with comfort and living actually revenue in the year.
Yeah.
If you were to look at those orders do you think that they reflect the kind of the best in full demand from those customers or.
For a period of time or are you starting to get visibility on the other side of kind of the mid 23 deliveries.
Yeah, I think the other thing I mentioned and Mark.
One of the upgrade orders, which is $20 million.
Hum.
Got less than $5 million of that already taken as order so there'll be additional orders coming through for that as well.
So we see that the order book because you rightly say is just under $100 million today.
I'm confident that there'll be some more upgrades and things coming through but for new lean so our systems.
I don't expect any any significant orders coming through this year or beyond.
And very last question is just the gross margin assumption.
If you look at the 23 number with the system mix in there.
Any thoughts on.
Where our margin would be and and and then as Opex kind of most of the heavy lifting is behind you at this point and kind of a six 7% to seven ish a quarter is a is a doable number.
Now sales ramp as an offset to the cost cuts as well.
Yes. So the first question I would expect margins next year to be you.
You know low Forty's 40 to 45, depending on the mix in any given quarter, but certainly a little low forty's.
Your observation about Opex I think is a good observation keep in mind that included in this year's off our run rate is going to be around 7 million were not giving guidance beyond that we still think there could be some room.
Half of the year to look at that and then can I just ask for clarification on your first question again, because I think you gave a number like 11 or $13 million for upgrades in <unk>.
Backlog.
Is that correct is that.
And there's another system in there I got it so 13 million, how does that break down of upgrades versus.
Non 200 lean systems, yeah. So I think that number is low because I don't know.
The system's refurbishments that we talked about those are actually going to be and upgrades and so if you look at the 87 million in backlog at the end of Q1.
Theres, probably closer to around 28 million pets upgrades field service and spares.
Okay.
Hard to outpace echo.
That that was that one.
And that goes out to.
Covers.
Nigel said it covers most of 2023, but we still have.
Somewhere around maybe three or 4 million that were booking in Q2 and Q3 that will that will result in turns business in the year and we did talk about.
Like I said, there was about $27 million of the backlog was the non systems backlog part of the $87 million.
And it's probably worth.
So reiterating that comment I made on the last call as well, where we felt that.
35 million was rock the rock this year 65 next year, but that over the four years that are 200 number with absolutely achievable as I touched on also visits at all.
Customers look to prospective customers and other businesses.
And that's given me a level of confidence we've sort of settled in in this whole prepared remarks that we're confident about the demand now and the feedback that gives us the.
Visibility that says that that number is still a good number.
$400 million and just to clarify that includes still a 2022.
<unk> 2022, three 'twenty four 'twenty five so we have over four years. If you remember on the last call I said it really.
It wasn't realistic to say that would be delivered in three years.
Oh, Yes, I was relatively confident and I said, there's a touchstone we visited the customers we're talking very much on the customer focus.
And that's an important part of the new strategy about being much more understanding of the customer requirements and that's not just about the future technologies, but about the existing HDD business and getting much closer to our customers.
Great very last question what about the strategic review is that now over at this point with the restructuring that you did or is that is that still ongoing.
So if we're talking about the strategic review.
With greenhill.
Yes.
So that engagement continues we are always in regularly assessing our strategic opportunities and how absolutely how do we increase stockholder shareholder value.
And we believe that the Fatone extra step one in that process, but we still fucking very much on what is the real opportunities that we can turn the new into back into and I've said is key for me to make sure we're actually putting the right R&D and the right focus on the potential future opportunities.
Why we focus very much around as ballistic coating and the opportunity for the solar scratch resistance technologies and leveraging our strengths and I believe the customers are brought in to talk to already in the first 100 days.
We have an opportunity there and it's going to take.
It worked very hard to get that first trio tool up and running.
Keane asked to keep everyone updated on each of the subsequent calls how those developments go.
How the feedback coming from our customers.
And that for me, it's an opportunity for us to grow and develop and maintain our own focus independently and build a stronger and get back in the future, but that doesn't stop maintaining so a dialogue and engage with greenhill.
Great. Thank you for answering my questions and congratulations again.
Especially this market doing what you've done in the last 100 days.
Thank you Peter.
Thank you there are no further questions at this time I'd like to turn the floor back over to Nigel for his closing remarks. Thank you.
As I look well beyond today.
<unk> to 100 days ago I.
I feel we've made tremendous progress, creating a new in tobacco.
We believe Intervacua sound investments.
And I'm eager to meet with as many interested investors invested as possible over the coming months.
And that was what was the highlight in the upcoming Investor events include the virtual ideas conference on June 23rd.
And the face to face with the CEO summit in San Francisco on July 13th. So please if anyone wants to talk to my face to face. Please reach out to Claire directly and follow up with her and then we can meet with you and we'll also be updating and your investor slide deck to our IR website within the next week. So I invite you to also check back and download of that and.
With that I'll say, thanks again for joining the call appreciate your support for <unk>.
And with that I'll conclude today's call. So thank you.
This.
Todays teleconference. You may disconnect your lines at this time. Thank you for your participation and have a wonderful day.
Yeah.
Yeah.