Q3 2024 Intevac Inc Earnings Call
and Prodigy.
Mother of 24 How in the world did you, have ties to Mrs. McAdams? That she never got. Did you ever ask her on the way to work for a couple million dollars... to ask her... for a catch?
Speaker Change: Greetings and welcome to INTIVAC's third quarter 2024 financial results conference call. At this time, all participants are in a listen-only mode. A question and answer session will follow a formal presentation.
Speaker Change: If anyone should require operator assistance, please press star zero on your telephone keypad. Please note that this conference is being recorded today, November 11th, 2024. At this time, I would like to turn the call over to Claire McAdams, Investor Relations for Intodact. Please go ahead.
Claire McAdams: Thank you, Operator, and good afternoon to everyone on today's call, especially our veterans.
Claire McAdams: Thank you for joining us today to discuss INTIVAC's financial results for the third quarter of 2024, which ended on September 28.
Claire McAdams: 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 Cameron McAulay, Chief Financial Officer.
Claire McAdams: Nigel will begin with an overview of our business and outlook followed by Cameron's review of our financial results for the third quarter and additional details regarding our guidance before turning the call over to Q&A.
Speaker Change: I'd like to remind everyone that today's 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.
Speaker Change: which remain subject to adjustment in connection with the preparation of Reform 10-Q as well as comments regarding future events and projections about the future financial performance to VINTAVAC.
These forward-looking statements are based upon our current expectations.
Speaker Change: 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.
Speaker Change: including our annual report on Form 10-K and quarterly reports on Form 10-Q. The contents of this November 11th call include time-sensitive, forward-looking statements that represent our projections as of today.
Speaker Change: We undertake no obligation to update the forward-looking statements made during this conference call. I will now turn the call over to Nigel.
Nigel Hunton: Thanks Claire and good afternoon to all of you on today's call.
Our Q3 results demonstrate many positive developments for Intervax business.
Nigel Hunton: including a strengthening of the HDD industry, upside in HDD upgrade demand and strong gross margin performance for the underlying business.
Nigel Hunton: This resulted in a better bottom line and a strengthening of our cash position as compared to Q2 and a more positive view of the HCE business and its financial performance going forward.
and the other.
Nigel Hunton: In addition, we are pleased to report the resolution of a customer's inventory obligation.
Nigel Hunton: Approximately $15 million of the $28.5 million of revenue reported for Q3 is related to these inventory obligations.
The $15 million of inventory-related revenue was largely passed through.
Nigel Hunton: but did include a small amount of gross profit to cover our expenses of procuring and storing the inventory.
Nigel Hunton: With a reported gross margin of 25%, this profit, along with certain other inventory adjustments,
Nigel Hunton: negatively impacted our gross margin by approximately 20 percentage points while a positive impact on earnings for sure was four cents.
Nigel Hunton: Absent this inventory-related revenue, our Q3 revenues indicate continued strong demand for HDD technology upgrades, which exceeded the high end of our forecast.
Nigel Hunton: We believe cloud data center demand trends are continuing to drive growing demand for our underlying core HDD business.
Nigel Hunton: Unfortunately a less positive development since quarter end is the conclusion of the qualification process for our first ever trio shipment which was delivered in April through a cover glass finisher in Asia.
Nigel Hunton: Over the past several months, the TRIO has demonstrated positive results through ongoing endurance testing in the field. And while the tool showed promise, the qualification concluded without the expected purchase order.
Nigel Hunton: At the end of the day, the trio, as compelling as it was, was unable to decisively demonstrate material advantages.
Nigel Hunton: to displace the sizable installed capacity of existing coding solutions and as such we miss the market opportunity this next consumer device product cycle.
Nigel Hunton: Given that this has impacted the expected TRIO opportunity, and take into account today the strengthened forecast with our HGD customers.
Nigel Hunton: Our focus for the trio has turned to rapidly monetising our inventory investment.
Nigel Hunton: We believe the most advantageous path forward to achieving this objective is to continue supporting evaluations at multiple prospects for R&D work, as well as polymer applications.
Nigel Hunton: However, to be very clear, we are no longer going to allocate any material resources to support evaluations with revenue potential that extends beyond the next 12 months.
Nigel Hunton: The improving HDD industry dynamics support an increasingly strong financial forecast for Intervac.
Nigel Hunton: and our critical resources will be allocated entirely to our opportunities in the HGD sector.
Nigel Hunton: thus providing the most immediate and assured return on our investment.
Nigel Hunton: We have therefore ceased further development of the TRIO platform, and this will increase bottom-line profitability to reduced TRIO engineering costs.
Nigel Hunton: We will retain a small technology group to pursue partnerships that can leverage our compelling glass coating IP and patent portfolio into additional applications such as advanced panel-level semiconductor packaging.
Nigel Hunton: While the trio efforts of recent months have concluded in a disappointing fashion
Nigel Hunton: We continue to believe in the value residing in our material science expertise and IP.
Nigel Hunton: and our efforts in 2025 will be on monetizing the investments we've already made while assessing partnerships and collaborations that can enable additional growth opportunities for our technology without requiring further investments by Intervac.
Nigel Hunton: This is because we are firmly committed to maintain the strength of the balance sheet.
and preserving our strong cash position.
Nigel Hunton: As we assess the immediate opportunities ahead of us, we have likewise evaluated our cost structure and have made the appropriate decisions to align our resources with the strongest areas of potential growth.
Nigel Hunton: which is why we're also announcing today the restructuring of the company including a 19% headcount reduction worldwide and consolidating our resources to our growing HDD business.
Nigel Hunton: Our core HDD business remains strong and the outlook continues to improve.
Nigel Hunton: in August of 2022 when our backlog was at its highest level in recent history.
Nigel Hunton: We had the visibility for around $200 million of HDD revenues, spanning the four-year period between 2022 and 2025.
Nigel Hunton: In spite of the subsequent system cancellations, today we are firmly on track to achieve this original target through our technology enabling upgrade business.
Nigel Hunton: Even more importantly, the further strengthening of the financial outlook for the HED sector gives us confidence in significant additional revenue potential between 2026 and 2028 based on the business climate that we currently see.
Nigel Hunton: was also new to 100 Lean Orders, which are once again on our radar screen. Not necessarily for 2025, but certainly under consideration for 2026 or 2027.
Nigel Hunton: This positive outlook for our HCD business has numerous fundamental drivers.
Nigel Hunton: Recently, an initial recovery in traditional server demand led to additional upside with an overall strengthening environment in hard drive and media demand.
Nigel Hunton: The most significant growth driver remains continued strong cloud demand strength, which we believe is driven in part by the rapidly growing AI industry, which for the third quarter led to industry upside in mass capacity near-line drives within an increasingly favorable pricing and supply landscape.
HDDs continue to demonstrate significant advantages in data centers.
Nigel Hunton: The cost per bit advantage of about six times and a capital efficiency benefit of approximately nine times compared to enterprise class SSDs.
Nigel Hunton: The aerial density improvements being achieved at this time are the most significant advancements in over a decade, and these have been enabled by our tool upgrades, specifically HAMR.
Nigel Hunton: While a HAMR upgrade cycle remains in its early stages, with another three or four years ahead, the next vector for HDD upgrades is driven by additional performance enhancements.
advancements that will enable increasingly higher capacity drives.
Nigel Hunton: We are already engaged with our customers in supporting these additional future advancements which underpins the continued 200 Lean technology upgrade path through the end of the decade.
Nigel Hunton: This increasing visibility for long-term strength for our HDHD upgrade business again provides further support to our decision to focus the company's resources on the revenue opportunity supporting the HDD industry.
Nigel Hunton: with Intervac playing a critical role within HDD technology roadmap as it proceeds to develop increasingly higher capacity drives.
Nigel Hunton: With the HDD technology roadmap requiring close partnership with our customers in deployed upgrade technology through at least the end of this decade and at the same time over the last five quarters we have observed from industry analysts that media capacity utilization has recovered from a low of under 40 percent to now approximately 70 percent.
Nigel Hunton: which means that we can also start thinking about planning for new systems being required within the next few years.
Nigel Hunton: Returning to the near-term outlook for our HTD business, the upside in demand witnessed this year has likewise boosted our HTD expectations for both 2024 and 2025.
Nigel Hunton: Our forecast for total HCD revenues this year has improved once again to the $46-$48 million range. This is excluding the inventory pass-through.
Nigel Hunton: This forecast has improved incrementally every quarter of the year and importantly provides us also with a strong base of business to fund our operations in 2025.
Nigel Hunton: Further upside towards the $50 million revenue level and above will be driven by the acceleration of upgrade activities by multiple media manufacturers.
Nigel Hunton: We believe $50 million is the HDD revenue baseline ahead for 2025 as we expect to play an integral role in every major upgrade initiative. We are already seeing increased demand and accelerated timelines from additional HDD customers upgrading to HAMR.
Speaker Change: Importantly for Indivac and the decisions being made today to increase our return on investment with the most assured and immediate business opportunities.
Speaker Change: The strengthening HG Revenue Baseline in combination with our restructuring and the corresponding improvements to our cost structure are enabling a revised P&L forecast, which is also expected to be cash flow neutral for the year.
Speaker Change: Before turning the call over to Cameron, I'm delighted to welcome Ryan Vardaman to our board effective today.
Speaker Change: Ryan is a principal and co-founder of Pelogic Value Fund and one of our largest investors.
Speaker Change: Ryan brings not only an investor perspective, but extensive corporate strategy, operating and financial experience. He also has an engineering background and prior board experience with B Square, where he was the board chairman prior to its sale in 2023.
Speaker Change: We very much look forward to his contributions to our board.
And with that, I'll turn the call over to Cameron.
Cameron McAulay: Thank you, Nigel. Turning first to the income statement. Third quarter revenues total $28.5 million, well above our guidance range of $10.5 to $12 million.
Cameron McAulay: The majority of this upside represents $15 million of largely passed through revenue resulted from the required accounting treatment for the resolution of a customer's obligation regarding last year's...
Thank you very much.
Cameron McAulay: Despite this revenue component, revenue still came in above the high end of the range due to incrementally strong HDD technology upgrade demand during Q3.
Cameron McAulay: Q3 gross margin was 24.8 percent. The inventory revenues included a small amount of gross profit to cover the operating expenses associated with procuring and storing the inventory related to the order and the impact of this profit along with certain other inventory adjustments collectively impacted gross margin by approximately 20 percentage points.
Cameron McAulay: The strength of upgrade demand in Q3 likewise drove strong gross margin performance for the underlying business of approximately 45 percent, above the high end of the guidance range.
The operating expenses remain stable at $8.8 million.
Cameron McAulay: Following our recent restructuring, we expect our resulting OPEX run rate to be in the range of $7 to $7.2 million by the first quarter of 2025.
Cameron McAulay: Net other income and expense was $500,000. With more of our cash moved to higher interest rate investments, interest income increased to $800,000 in Q3.
However, this income was partially offset by unfavourable foreign exchange.
Cameron McAulay: The resulting net loss was $0.08 per share. The net EPS results for the underlying business were likewise favourable to our earlier expectations.
Cameron McAulay: Moving now to the balance sheet, we ended the quarter with cash and investments including restricted cash of $72.1 million.
Cameron McAulay: Equivalent to $2.67 per share, based on 27 million shares at quarter end.
Cameron McAulay: The net increase in cash over Q2 was nearly $1.7 million, reflecting positive cash flow from operations, enabled by our cash flow neutral P&L, as well as strong collection of receivables during the quarter.
Cameron McAulay: Q3 CapEx was $400,000. Non-cash expenses for Q3 included $1,000,000 for stock-based compensation, $500,000 for depreciation and amortization, and $800,000 in deferred tax.
Now we'll provide further details regarding our outlook.
Cameron McAulay: For the fourth quarter, we are projecting revenues to be in the range of $9-10.5 million. We expect fourth quarter gross margins to be in the 30-32% range, reflecting the expected mix of upgrades and factory absorption levels during the quarter.
Cameron McAulay: Q4 operating expenses are expected to be in the range of $8.4 to $8.6 million. This range includes approximately $900,000 of cash restructuring costs in the quarter.
Cameron McAulay: We expect net interest income of approximately $700,000 in Q4 and gap tax expense of about $400,000, most of which will be non-cash.
Cameron McAulay: We are projecting our net loss in the range of 19 to 21 cents per share based on 27 million shares outstanding.
Cameron McAulay: As we look ahead to Fiscal 2025, our strategic three-year plan and forecast for the next fiscal year is currently being concluded.
Cameron McAulay: We believe this is achievable through a combination of factors, gross margins of at least 40%, the reduced OPEC's run rate as a result of today's announced restructuring, and the income generated by our investments.
Cameron McAulay: This completes the formal part of our presentation. Operator, we are ready for questions.
Speaker Change: Thank you. We'll now be conducting a question and answer session. If you'd like to ask a question, please press star 1 on your telephone keypad. A confirmation tone will indicate your line is in the question queue. You may press star 2 if you'd 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. One moment please while we poll for questions.
Speaker Change: Thank you. Our first question is from Peter Wright of Partner Cap Securities. Please, here's your question. Great. Thank you for taking my question, guys. I've got a couple questions. So, firstly, Nigel, I guess when looking at the 22 to 25 cycle, you had some pretty good insight into calling that.
Speaker Change: at about $200 million, and we're now looking at kind of the next cycle of 26 to 28, three-year cycle instead of four-year cycle. Any comfort in kind of guiding what you think this cycle looks like and what the unit count of 200 liens would look like in that assumption?
Thank you.
Thank you for that first question.
Speaker Change: As I said in the prepared remarks, we feel that this next period has the opportunity to be as strong as that four-year cycle, giving you a guidance of a similar level of revenues over that three-year period.
That really is absolutely underpinned by upgrades.
But the upgrade business is going to stay strong.
Speaker Change: We believe we're playing a key part in that industry transformation.
Speaker Change: And as we said, as we see the utilization improving and we see the continued growth.
Speaker Change: of demand over that period. We believe that there will be a couple or a few, I think we've said on previous calls, of 200 liens likely in that 2026-2027 period.
Speaker Change: So the majority of that business will still be very much continuing this upgrade cycle that we've seen Maintaining the strength for Indivac and that will continue into the future
Speaker Change: Thank you for watching. I'm Nick Schifrin. We'll see you next time.
Speaker Change: Can you guide on when you think the installed base of 200 leans will be hammer upgraded? Is that largely complete in the 26 through 28 cycle? Is that the underlying assumption?
Speaker Change: No, the timeline for that is probably at least 3-4 years, which is good, it's going to maintain that strength.
Speaker Change: of multiple upgrades each year over the next three to four years.
Speaker Change: and I think beyond that, I think there'll be further upgrades. I think there'll be upgrades beyond that, which is good as technology and advancements keep continuing.
Speaker Change: and on the 7 to 7.2 OPEX guide that that is a guide for where you think it's going to average out and in 2025 did I did I catch that right?
Speaker Change: Yes, that's right, the 8.4 to 8.6 this quarter, and then once the op-ex will level out, 7 to 7.2 pretty much from the start of 2025, that's right.
Speaker Change: That's absolutely linked to this restructure we've announced today and the refocusing, and that's a key part of that.
Speaker Change: Wonderful. And then, so from a cash flow perspective, cash neutrality for you guys suggest mid-50s then on the sales side? Is that about right?
at that level.
Speaker Change: Roughly yes, roughly. Perhaps a little bit higher for cash neutrality, but we with the actions that we've announced today You know, we think we can be cash neutral to cash positive
Speaker Change: Kevin Soulsby, Claire McAdams, Nigel Hunton, Kevin Soulsby, Kevin Soulsby, Kevin Soulsby,
Speaker Change: And my last question, sitting on the cash that you're sitting on, clearly more cash than you need to run HDD, what is the use of cash from a priority perspective going to be looking forward?
Speaker Change: yeah and I think as if you've known all along one of the key things we've done is by maintaining the strong balance sheet in that cap position
Speaker Change: They've given us confidence from our HGD customers that the business is going to be robust.
Speaker Change: is going to be supported. And as we look at moving some of that technology support onto HDD, we'll continue to sort of invest and focus on what is, as I've said, is a more assured business for us going forward. We always look at cash allocation. We'll continue to look at cash allocation.
Speaker Change: We've talked in the past about strategic process. Strategic process is there. It continues to look at all alternatives.
Speaker Change: But for us, I mean, the difficult decision today, I think if you go back to 2022, when I shut down all the sort of programs except one.
Speaker Change: we believe at that point there was value to extract from the one coating business we kept
Speaker Change: The consumer device market then needed a horizontal quota. We made a decision to invest in that.
Speaker Change: We believe that by eliminating the need for tape in the industry, we'd have an opportunity.
Speaker Change: If we thought it was easy, someone else would have done it. We gave it our best shot, we talked with a glass partner, we talked with a glass finisher, and that's resulted in today's restructuring and tough decision we've taken.
Speaker Change: But we have, throughout this process, maintained a critical focus on maintaining a strong cash balance, and that will continue into the future.
Speaker Change: Great. Well, excellent job being a steward of capital. Sometimes it's tougher. If it's easy, it's easy, but good job being a good steward of capital.
Thank you.
Speaker Change: Thank you. Our next question is from Mark Miller with Benchmark. Please proceed with your question.
Mark Miller: Yes, I'm just curious, in terms of the TRIO qualification, you said...
Mark Miller: I'm just curious, was it yields or throughput or uptime, what caused that situation?
Thank you, Mark. A very good question.
Speaker Change: As we said, if it was easy someone would have already done it and we'd have a horizontal coat that can actually eliminate that tape. We've put a lot of effort in, we worked hard with a glass partner, then we worked with a leading glass finisher.
But we couldn't deliver the required yield performance.
The Yield Performance to Compete
with the vertical coaters had to be 97% particle free.
Speaker Change: At the moment, there is no horizontal technology that can achieve particle-free coating.
Speaker Change: We believe that was not a reason not to have a go at this task and we applied our capabilities to try and create what would have been the only horizontal coater with zero particles in the market.
Speaker Change: At this stage, with us not being able to achieve the particle or yield performance.
I felt we needed to stop further development costs.
focus on our core business which was growing again.
Speaker Change: and I hope you appreciate it. It was not an easy decision, but it is the right one for Intervac.
Speaker Change: When I started my role here in 2022 I stated very clearly that we would invest in TRIO because of a real market need.
Speaker Change: And that if we were not confident in the success of the product, we would shut it down fast. And that is what we've done today.
Speaker Change: I appreciate that out of the color. So there's no more qualls or anything else. You've just basically put Tree over the bed. You're not trying to explore any other customers. Is that correct?
We have some active qualifications in the Research and Development
with equipment for sampling and testing.
Speaker Change: Anything we can do with that will be up side on the forecast we've given.
Speaker Change: So therefore the qualifications that we had that we thought could deliver revenue in the 12-month period, we'll complete those qualifications.
Speaker Change: So there is still interest in a sort of R&D level tool.
Speaker Change: but not in the high volume, high throughput we were hoping in the early stage of this development cycle.
Thank you. Bye.
Speaker Change: Thank you. Our next question is from Hendy Srisanto with Covelli Funds. Please proceed with your question.
Good evening, Nigel, Cameron, and Claire.
My first question is...
Yeah, my first question...
Speaker Change: Excluding the customer's inventory obligation, what was the pro forma gross margin in Q3?
Thank you.
Speaker Change: We have mid-40s margin, just over mid-40s margin excluding the pass-through and other inventory adjustments.
Thank you.
Nigel Hunton: Okay, yeah. And then, Nigel, maybe you can give us some color on what kinds of up or down, seasonality, cyclicality of the hard-disk drive business.
Nigel Hunton: that is typical in Q4, Q1, Q2, Q3. Maybe you can remind us. I know that this may not represent a normal cycle yet, but in terms of expectation and colors, any guideposts?
The End.
I think if you look through this year and...
Nigel Hunton: the sort of upgrade cycle, which is, we really have been in.
Nigel Hunton: 12 months of an upgrade cycle and we'll see most of that going through 2025.
So, yes, there's always going to be some.
Nigel Hunton: minor levels of cyclicality between quarters, especially as some of our customers
Nigel Hunton: different year ends to us and therefore timing of some of their investments.
Nigel Hunton: can change and be modified through a calendar year. But overall for the year, you know, we see this year sort of just under the 50 million and next year about the same level.
Nigel Hunton: and therefore keeping that relatively smooth throughout the whole financial year. So overall we've seen the upgrades flow through each quarter and we expect that to continue through 2025.
So it's it's not like it's got big system
Nigel Hunton: upgrades or new systems this year or into 2025. It's all about upgrades and they're relatively
even Corkly Performance.
And, Nigel, when it comes to upgrades,
What kind of timing does customers usually pursue?
Nigel Hunton: whether it's more coming in waves, whether it's more like a step-up, upgrades, and then followed by, let's say,
Some inactive upgrade activities.
Speaker Change: So what kind of upgrade patterns in terms of the orders?
The customer's place.
Speaker Change: Yeah, I mean, I think as you know, typically we get...
Speaker Change: We have very, very good relationships with our customers and all of our customers give us good forecasting and longer term visibility and we typically run with a lead times in the 9 to 12 month period.
Speaker Change: So if you look at our order backlog in the sort of 45 million level
Speaker Change: We get good visibility that gives us confidence in the level of ordering through 2025. I think the biggest driver as you go beyond 25 into the future will be the industry adoption of Hama, which, you know, if you listen to some of the.
our customers.
Speaker Change: Earnings releases. Everyone is talking about the opportunities, not just for Hammond but increased terror violence for hard disk drives.
Speaker Change: And as those keep increasing and there's adoption of the latest technology, that could see some pull-in or some acceleration, but at the moment we've got good visibility out for the next 12 months, which is a good position to be in.
And then one question on TRIO. Now that TRIO is...
putting on
Speaker Change: You put aside TRIO. Is there any risk of inventory write-off?
for joining us and bye-bye. Bye.
in your infanteries.
Speaker Change: I think the key thing there is, as I said on the...
Jamal, we've got...
Speaker Change: Some good opportunities to conclude on evaluations for R&D tools for glass substrates. We've got an opportunity with some polymer substrates.
Speaker Change: So even though the efforts of recent months have concluded in what is a clear disappointing fashion.
Speaker Change: We continue to believe in the value residing in our material science and expertise and our efforts through 2025 will be on turning that inventory into revenues.
Speaker Change: So at this point, we're not taking any additional inventory reserves, as we believe we have opportunities to actually turn that inventory into revenue for R&D units.
Speaker Change: Any information on how much trio-related inventory in the balance sheet?
Speaker Change: The balance of inventory pertaining to TRIO is just over $16 million in the moment.
16 million? 1.6, my apologies. Oh, 1.6, okay, 16, okay.
Speaker Change: So let's say if the R&D turned into something more meaningful, you believe that it can consume that $16 million in 2025?
Speaker Change: That is our hope, which is why there's been no inventory reserve taken.
Okay.
Yeah.
Speaker Change: That's all. Thank you so much, Nigel, Cameron, Claire. Thank you, Andy. I appreciate the questions and your support.
Thank you very much. Thank you.
Speaker Change: As a reminder, if you would like to ask a question, please press star 1 on your telephone keypad.
Speaker Change: Thank you. There are no further questions at this time. I'd like to hand the floor back over to Nigel Hunton for any closing comments.
Thank you.
Nigel Hunton: and thank you for all your questions and I also want to wish to thank all of our employees as well as their counterparts with our industry partners all the hard work and efforts
and they're grieving a very strong quarterly performance.
I'd also like to wish our investors their ongoing support.
Nigel Hunton: And we're also welcoming a new IR firm, KCSA. So if you want to reach out to Cameron in the short term for any followups as they transition into their new role. And I also look forward to updating you on our progress on our Q4 call in early February. So thank you for joining me today.
Speaker Change: This concludes today's conference. You may disconnect your lines at this time. Thank you for your participation.