Q2 2023 Intevac Inc Earnings Call
Okay.
Good day and welcome to the inter back second quarter 2023 financial results Conference call.
This time all participants are in a listen only mode. A brief question 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 is being recorded today August 2nd 2023 at this time I would now like to turn the call over to Claire Mcadams Investor Relations for instance that you go ahead.
Thank you Maria and good afternoon, everyone. Thank you for joining us today to discuss <unk> financial results for the second quarter of 2023, which ended on July 1st 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 monies Chief Financial Officer.
Joe will begin with his prepared remarks.
Then Jim will review, our financial results before turning the call over to Q&A.
I'd like to remind everyone that todays conference call concerned contains certain forward looking statements, including but not limited to statements regarding financial results for the Companys. Most recently completed fiscal quarter, which remains subject to adjustment in connection with the preparation of our Form 10-Q as.
As well as comments regarding future events and projections about the future financial performance are in Tibet.
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 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.
Now I'll turn the call over to Nigel.
Thanks, Claire and good afternoon.
I'm pleased to have this opportunity today.
To update you on our yesterday activity.
Progress on the qualification of our first Korea.
And discuss the business environment and our primary served market.
Disk drive industry.
First though I will review, our Q2 financial results.
In Q2, we achieved revenues above the high end of our expectations, including one 200 lean system delivery.
One refurbished 200 lean.
Our revenue performance in Q2 puts us well on track to delivering a strong growth year for our HDD business in 2023.
As Jim will detail shortly our gross margin was impacted by nearly $1 billion of incremental cost above forecast, which were one off in nature.
However, with close control of operating expenses, our operating loss was aligned with our prior outlook.
And the net loss of 19 cents per share it was favorable to forecast due to higher interest income and lower taxes.
As planned we continue to bring in material receipts for both the trio in our hard drive customers during the quarter and our balance sheet total cash and investments at quarter end was $74 million.
Okay, roughly $11 million decline from Q1.
About one half was attributed to cash based lawsuits from the P&L.
But the other half comprised of continued working capital investments.
This will reverse in the second half of 2023 in large part due to our expectation it looks like the majority of our receivables from our largest customer.
Our collection of receivables in the second half is the foundation of our confidence.
We'll exit 2023 with an increase in total cash and investments compared with $74 million balance Q2s.
Yeah.
Turning to the trio and the exciting new supported today that in August we will begin the qualification process for the initial system without J D. A partner, who is one of the world's leading innovators in glass and glass ceramic materials.
This move into qualification is an important validation of the technology and capabilities of this game changing platform.
This will mark a tremendous milestone for our company demonstrating our JD eight partners continued to Exxon and the potential of the trio to be significant new manufacturing platform for glass and glass ceramic displays for consumer electronics applications.
Over the last few earnings calls we've discussed won't fetch the trio apart from other manufacturing options.
In our joint development process to date it is increasingly clear.
J D power's enthusiasm and pulling demand into the tree is primarily driven by the platform superior productivity and.
Flexibility.
I'll provide a couple of specific examples of how long treehouse is capable of providing leaps any advancements on both fronts.
Hi to available coaching auctions.
First productivity.
The reason why we were able to provide significant and very material advances in productivity.
Yes sure.
Our unique linear transport system, enabling patent protected protected high path parallel processing to take place concurrently in multiple chambers.
Each of which can be deposits in different combinations of chemistries and materials.
A drum catalytic annuity deposit one recipe good time at the lower deposition pattern.
Furthermore, drum coke as a bank systems that must be completely shut down for loading and unloading which decreases are tooled up time.
As the triage novel linear transport system enable simultaneous loading and unloading of displays at the same time as process modules deposits ink materials.
The other unique advantages is flexibility.
Trio can coat glass covers and displays and a broad array of shapes and sizes.
Very small camera lenses and an array of wearable devices to the wide variety of smartphones form factors available today or anticipated in the near future too.
Too much larger displays such as tablets and <unk> devices.
I'll see if that was the only manufacturing platform that can be deployed to coat all of these various sizes and shapes really advantage of high productivity protesting.
It's providing a level of flexibility it is nonexistent in the market today.
The same advantages could likely be put in place for additional end markets not currently addressed by our J D. I just used for automotive displays.
In summary, we are extremely excited about the progress made to date on the tree and we continue to expect just received initial orders in 2023.
As we look towards next year, we believe we will revenue two to three systems.
B building several additional tools ahead of an increased order upon broad JJ partner to maintain exclusive 80 by year end 2024.
We will also continue to pursue additional customer balance sheets. The trio in end markets outside of consumer electronic devices.
Now turning to the hard disk drive market.
Since mid 2022, we've been reporting on the softening of demand across all AC D end markets, which has included the continued secular decline in legacy markets and slowing growth rates in the mass capacity market. After several years of strong growth.
Near the end of May we witnessed an unprecedented event brings it back which was the cancellation of a very large too little water.
Yes, the order cancellation, primarily affected our revenue forecast for the medium term as in fact, our near term forecast for our HDD business is stronger today than it was a quarter ago.
Since announcing the cancellation, we've been very clear in communicating and the material receipts for these systems, which at quarter end represented less than one inside of our total inventory balance are the responsibility of our customer.
Yeah.
As we look at the HDD market environment. There is no question the growth trajectory for HDD media is changing and difficult to forecast.
However, it is still a growth market given the dominance of mass capacity drives fueling the majority of customer demands.
What are your expected timeline for capacity additions has shifted multiple times first from the original expectations of late this year. So the 2020 full bench of the 2026 timeframe and now potentially to the tail end of that period in the near term our HDD business is bolstered by strong demand for <unk>.
And all of the upgrades.
We are playing a critical role in the industries advancement towards achieving its goal of significantly higher level than immediate matched capacity market, which is resulting in stronger demand for technology upgrades.
Last quarter I expressed concern that the Sop to H D forecast could result in them as much as 10% risk.
Original $40 million revenue forecast for 2023.
While our customers are in the very early stages of our fiscal 2020 for capital investment planning, we expect continued movement in coffee shifts within our HD forecast over the next several quarters. However, this time they were expecting our HDD revenues in 2023.
Approximately $44 million.
As we look ahead to 2024, we currently expect a similarly strong level of HDD upgrades and field service as 2023.
At this time the expected timing of delivery of the remaining two 200 leans in backlog is being reviewed by our customer.
Given this our expectation is that revenues next year will consist of at least $40 million in HDD sales.
As well as two to three systems for trio.
Altogether, we expect revenues in the low to mid $50 million range for fiscal 2024.
Importantly.
At this range of revenues and with the resizing of our cost structure. Currently underway, we expect our P&L can be cash neutral for the full year 2024.
It just becomes our actions announced today will result in a significant decrease in our ongoing cost structure equivalent to at least $4 million of annualized manufacturing and upgrading.
We expect our quarterly Opex run rate to drop to low 7 million dollar level beginning in Q4.
The streamline cost structure will enable us to be cash neutral at the expected revenue level for next year, given that the noncash portion of our Boston.
As expected to entirely offset a GAAP operating loss.
Therefore, the structural restructuring Atlas is enabling into back to eliminate any further use of our cash balance to fund our operations next year, which does not include capex or investments in working capital.
We will manage both of these very closely in 2020 full to ensure they are aligned with our growth prospects for 2025.
Before turning the call over to Jim I would like to express my sincere appreciation for everything he has done to lead our finance organization over the past eight years.
We announced last month that Jim will be retiring at long last and trusting the finance organization and the very capable hands of our long term controller, Kevin Solesbee, while we conduct a search for permanent CFO .
Jim initially came out of retirement to be into the back seat F. O just a few years.
Graciously agreed to postpone his return to autonomy not just once but twice.
First during the 2021 strategic view and again in early 2020 to support the CEO transition.
The entire board and I acknowledge a steadfast dedication to the company, but much longer than initially intended.
After supporting us through today's earnings call, we all wish him the very best as he enjoys some well deserved time off this summer.
Gratulation on you over time and Jim.
Now over to you.
Okay.
Thank you Nigel.
It's been a real pleasure to serve as <unk> CFO for the past eight years is certainly much longer time than I, originally intended and I know I'm, leaving the company in good hands now.
Now turning to the second quarter results.
Second quarter revenue totaled $10 $3 million above our guidance of $8 million to $9 million and consisted of one H D. D 200 lean system, one refurbished HDD 200, lean system, plus HDD upgrades spares and service.
Gross margin was 24, 9% we.
We mentioned on the last call, we expected margins to be down to the mid thirties due to less favorable mix and increased under absorption, but in Q2, we witnessed nearly $1 million of incremental increase in cost of sales.
About half of these incremental costs were the result of higher overhead and other indirect costs well about one third was the result of higher direct labor costs and the remainder was increased material costs. We do not expect these incremental charges to continue beyond Q2.
Q2, operating expenses were $8 million below our guidance of $8 5 million as we aggressively managed our costs in advance of the restructuring announced today.
With lower Opex, we were able to offset the one time impacts to gross profit and the resulting operating loss was aligned to our forecast at $5.5 million.
With some upside in interest and tax the Q2 net loss was favorable to forecast at $4 $9 million or <unk> 19 per diluted share.
Our backlog was $58 $2 million at quarter end, reflecting the de booking of the $54 million order cancellation that occurred in may.
We ended the quarter with cash and investments, including restricted cash of $73 $9 million.
Equivalent to $2 83 per share based on $26 1 million shares at quarter end.
Cash decreased by $10 $9 million in the second quarter cash.
Cash flow used by operations was $9 $8 million during the quarter, driven primarily by the operating loss and increase in trio inventory as well as reductions in liabilities for accounts payable contract advances and other liabilities.
We ended the quarter with a slightly lower AR balance of $20 million, the majority of which we expect to be collected in the second half.
Q2 capital expenditures were $330000 and depreciation and amortization were $371000 for the quarter.
Now, let me move to the guidance for the second half of 2023.
Today, We also announced our 2023 cost restructuring plan, which took effect in late July and which reduced our worldwide headcount by approximately 25%.
There will be about $1.8 million in severance cost in Q3 associated with this action, which we expect will result in over $4 million in annualized labor and labor related savings.
Our Q3 guidance reflects the added severance costs, while our full year guidance assumes that our Q4 results will reflect a lower ongoing opex run rate.
Our Q3 financials, specifically, we are projecting revenue to be in the range of $12 million to $13 million.
We expect third quarter gross margin to be between 38 and 40%.
Q3 operating expenses are expected to be around $8 $5 million, which includes severance as mentioned earlier.
We expect interest income of about $400000 in GAAP tax expense of about $300000 in the quarter most of the tax expense will be noncash.
We're projecting a net loss for Q3 in the range of 13 to 15 cents per share based on 26 million shares outstanding.
For the full year as Nigel mentioned, we expect our revenues to be approximately $44 million up 23% from last year.
This includes the one 200 lean system recognized in Q2, and the higher level of upgrades compared to 2022.
Given this revenue profile and expected mix, we anticipate gross margins for the year will be in the 35% to 37% range. We expect the ongoing operating expense run rate will be in the range of 7 million to $7 million to $5 million per quarter beginning in Q4.
We continue to expect interest income and taxes to roughly offset one another with both in the range of $1 million to $2 million for the full year.
Finally, it is still our expectation that we will generate cash in the second half of 2023.
And the year with a cash balance of between 75 and $80 million.
As we look ahead to fiscal 2024, we expect our P&L results will be cash flow neutral for the full year, given our revenue expectation in the low to mid $50 million range gross margins of approximately 38% to 40%.
Q3, Q4, opex level, continuing through next year and that the noncash portion of our cost structure will total $7 million to $8 million for the full year.
Therefore, our 2023 cost restructuring plan is enabling either back to eliminate any future use.
He further use of our cash balance to fund our operations in fiscal 2024.
This completes the formal part of our presentation Maria we're ready for questions.
Thank you we will now be conducting a question and answer session. If you would like to ask a question. Please press star one on your telephone keypad.
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One moment, please while we poll for questions.
Our first question comes from Peter Wright with partner cap security.
Yes.
Proceed with your question.
Great. Thank you for taking my questions and congratulations on a great quarter and.
I'm also I want to offer my congratulations and thank you for the education over the years on in the Bakken and the industry in general.
Thank you Peter.
My first question is it looks like.
Clearly.
I was too conservative in 2024 on kind of some mid quarter updates that.
Happen some optimism came out of your two key hard disk drive suppliers over the last week as well body since it it may be but help us think about.
Awesome.
And continued so in between digestion. So for US it's absolutely as you rightly point focusing on the technology shifts in this in the industry.
And these shifts that are I'm proving your identity. These upgrades it was doing to actually take.
The 200 lean platform, which is a modular platform, which was incredibly flexible and that has helped us really drive this upgrade revenue over the last couple of quarters. So.
So we see that revenue continuing as they continuing to roll out.
Great programs.
See the level of upgrades to be at a sort of all remaining level for the next couple of years and that one is is underpinned by.
The visibility be getting into that technology roadmaps.
The requirements invisible with you on this whole for clan around those upgrade requirements.
And that's that's why one of the reasons, we've done the restructuring it to make sure. We have the organization now absolutely aligned to that level of revenue for the next couple of years and that's I think we've now got a very Ah business online to that revenue.
Believe there was upgrades will maintain a support that business.
Over the next couple of years. So I think we're in a very good position now nobody you want to add to that gym.
No I would just reiterate that I agree with you you know we we do over we'll go we'll do over $30 million in upgrades this year and <unk>.
Thank you to believe that that'll be strong next year do somewhere between eight and 9 million.
Spears and field service and that's what gives us the confidence of next year being able to do $40 million cause upgrades revenue in the hard drive business.
So I reiterate what <unk>.
Yeah, and just add to that on the the cancellation I mean, clearly the cancellation of the order does not impact any of those upgrades at all.
Fantastic so.
One one small follow up before he moved to trio on that if I look at that now on your replies breakeven with Opex upset with the 725, it's about two cents just looking at hard disk drive alone you think it's about two system sales a year is is a breakeven situation for you.
Yeah, what we what we said is our guidance for 2024 is.
A couple of things, we said today in the prior calls.
That we believe will have two to 330 system next year and we've communicated previously that those.
Revenues are similar to a 200 lean so with about a 40 million dollar hard drive business then <unk>.
Another 10 to 15 million to get us too.
Low to mid fifties revenue that from a cash flow standpoint, when you add back in stock based carpet depreciation we won't utilized cash.
And you touched on my my second question, if I'm looking at kind of 60 million potential guide and 40 on hard drive in two to three systems. One of my questions was just a little bit of price appreciation of movement upwards on on some of those systems.
I think you've got that but if you could clarify that and then the last part of that question is on the qualification process you're in now on trio.
Is.
Is that only with your partner or are your partners customers also part of that process.
If if I can <unk>.
You take care of them at first that you know cover the qualifications.
Okay. Yeah, we've said historically that we expect the initial.
<unk> with the joint development agreement, we signed 100 million dollar joint development agreement.
The average price will be similar to a hard drive system, which we've kind of set is around $5 million. So that's why when you take two to three and you add the $40 million you get into the low to mid fifties. So that's that's pretty much. How we have initially set the pricing certainly over time like any business, we would expect that the volumes.
Will be ordered will be higher on the trio and there'll be the ability for us to lower our costs and therefore, lower some prices over time to be able to saturate the market even more.
<unk> you answered the second question about qualifications.
Yes. It is we've said is an exciting time to move napped a formal qualification.
Qualification is to qualify the tool for R. J D eight partners <unk>.
Process chemistry.
And that's the key things this is about qualifying a tool that can actually deliver.
<unk> process chemistry that satisfies meets they're pretty stringent requirements of a J D a partner.
And that's the key thing this nation machine will be qualified for doing the J D. A partners.
Chemistry, and that'll be the key part of the qualification we go into and out in the next couple.
A couple of weeks months as we actually go through that and <unk> testing and that full qualification.
The customers are separate the customers and the market you know.
They go through a different process with a J D a partner.
And that gets you a qualification to Coney and what we're doing is qualifying the tool.
Absolutely can deliver that coaching which is qualified in the market already so it's a bad qualify.
<unk> on the trio technology, it's gonna help enable the growth.
Tastic, so a game changing technology and into the market.
So hopefully that helps clarify.
That that's all come back into cute.
But thank you bye.
Thank you Mark <unk> theater.
After a reminder, we'd like to ask a question. Please press star one on your telephone keypad.
Our next question comes from Mark Miller with a bunch Mark. Please proceed with your question.
For the question the strength, you're saying <unk>.
Upgrade business.
Are you concerned that the.
Your customers are basically pulling in upgrades because there there was a limited capacity utilization and they Wanna do it now before things heat up next year.
Yeah. So I think that if you go back to listen to some of the <unk> cool some our customers one of the key things they are doing to this industry danson.
Is taken advantage of that opportunity.
To actually accelerate and ensure we actually deliver the upgrade so that the equipment staff.
It starts to become ready for delivering hammer technologies, so for us, it's been exciting and and great to see that they're putting that level of investment and capacity into the upgrades rather than not doing any investments through this downturn.
So we see it as a very positive step from our customers to maintain this level of investment in upgrades of the 200 Lane product.
So even though they're pulling upgrades in you're you're still expecting similar upgrade from.
2024 is that correct.
Correct. There is you know if you look at any product launch and and and I think I'm gonna have to talk about a time with that product launch of their products and evaluation you face.
Ramp capacity and I think what we're saying is there are lining a hammer upgrades.
To their requirements of the future so as they see adoption of <unk>, we're seeing those upgrades <unk> gonna continue over the next couple of years and then you'll be until a similar level of the next two to three years.
Besides your primary customer for Korea, or you were in discussion with other firms about the sale of trio trailed type tone equipment.
Yeah, the absolute priority is without J D a <unk>.
C.
The absolute focus for the company and that's what we're really making sure we actually get that done S.
That's why I think Simon about getting that into qualification.
That would be the critical focus for the next couple of months.
Absolutely that empower us so that we are getting interest and approaches around other technologies.
Would that be the auto sector.
This means I'm interested in is some unique solar applications, but for us it's about maintaining that focus getting the product qualified and the product into the market. The consumer devices. I think it's once you've done that we've achieved success with that then there will be opportunities will open up rather market sectors that we're not we're not ignoring them, but that is not the area of focus.
I estimate when you might be shipping a qualification system too.
To any of these other opportunities.
Now we're aiming the moment just to get <unk>.
Qualified tool for the consumer devices completed this <expletive> and shaped into the field by the end of the the qualifications in the field in Q1 2024, and that's been consistently the message of the last couple of calls.
That's gonna take time, we need to get that in the machine qualified get through all of that reliability endurance testing et cetera.
I think once was successful on the back of that will then looked at actually putting tools into other market opportunities.
Oh no question.
The trio sales expected for next year is this gonna be a more back any bloated year because of those sales.
It's it's too early to say.
Yeah, that's what I would say is well we we we certainly will have tools shipping early in the year, but depends on how they get it installed and call, but it is too early to say.
And Jim Let me just add my thanks and congratulations.
To you for your service to interact.
And best of luck.
For your future.
Thank you Mark and it's great working with you in the back another companies throughout the years. Thank you.
You're welcome.
Our next question comes from Peter Wright with partner Cap Security. Please proceed with your question.
Great. Thank you uhm by Jewel I was I was hoping you could help us understand if.
If there is any opportunity to two part question any opportunity to monetize the coating chemistry separate from the tools from Celtic discussions are there whether it be a royalty or whatever and the second part of that that question is when you look to non C nonconsumer electronic markets.
Is the chemistry going to be the same or is it gonna be different or too early to tell.
And then Jim I don't know if it's too <unk> too early to say this but would we be able to get any idea or your best guess on number of units Uhm a tree outside for books delivered and you gave us revenue for trio in 2024.
Okay, just to pick those apps if I if I cover the question round royalty and we'd be clearly have a strong partner, we have announced that.
As part of that agreement, we have 100 million commitments over five years for set number of tools and those are based around equipment style. So so that's what we have a very clear initial business case in business plan around equipment sales into this industry.
Longer term Army said <unk>.
We are looking at all types of models for the future we recognize absolutely.
Value of sustainable revenues in line with coaching.
I would think you'd be looking to the future would it be at two to three years I think you'll see.
And interest level of looking at royalties and different types of revenue streams.
I think is that in particular as we look at other market sectors as well.
Some of that is more common in some sectors like the auto sector.
So therefore that is an area that we are considering we've said all along we look up multiple models for this we see the trio platform.
Game changing not just for the industry, but for interbank overall, so I do see at some point in the future some level of sustainable revenue through whether it's a license model of royalty model or a should earnings. So I do see that being part of our future strategy. It is not part of any sort of short term strategy and we have a clear agreement with a J J pop in at the moment.
At around.
<unk> for the consumer device market.
One clarification the coating.
Noting that you're developing is <unk> is that correct. The chemistry is colon by you and your partner.
No. The the chemistry that we've we have done we have we have our own chemistry, which again if I go back in time, we developed some phenomenal.
<unk> capabilities.
That capability was <unk> partner.
Partner has their own unique abilities, which <unk>.
We've talked about those coatings that over time it'd be <unk>.
Able to be applied to a very small parts.
The consumer device market.
<unk>.
Is a game changer enables that technology now to be.
Coach it very cost effective way and opens up a much broader application for the product into the future. So there's the coaching there'll be wrong on unqualified on off too.
Fantastic.
Alright. So then Peter all answered the question I think you have for me is wallet. It's it's a little too early to give you specific numbers, but we have consistently said, we expect trio bookings this year.
I think it's nicer listed there is a minimum quantity that R. J D. A partner has to ordered this year and it's increases each year throughout the five years. So we expect multiple orders to be brought this year and as far as revenue next year. We said that we expect two to three in our forecasts that we shared with you today.
And so therefore, we would expect multiple units to be booked in 2023, and you can imagine we would expect higher number than that to be booked in 2024, but for revenue. We said there'll be two to three trio tools for revenue next year.
Fantastic.
Thank you guys.
Thank you paid a few Peter.
There are no further questions at this time I will now turn the call back over the Nitrocotton first closing remarks.
Thank you.
I mean I wish to thank all of our employees as well as their counterparts with our industry partners for the hard work and dedication as we entered the qualification phase for the trio.
And continue to be a key technology enabler in the H C DS industry transition to hammer.
Oh, it's just wish to thank all of our investors cause their ongoing support during this period of immense change in operational challenges during the daytime.
Again, please we have to clear directly to follow up with any with US and look forward to update you on a Q C. Cool in early November .
With that I will conclude today's cool thank.
Thank you.
This concludes today's teleconference. You may now disconnect.
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