Intevac Q2 2024 Earnings Call Transcript

Quartr
Provided by Quartr
August 5, 2024

There are 7 speakers on the call.

Operator

Good afternoon, and welcome to Intevac's Second Quarter 2024 Financial Results Conference Call. At this time, all participants are in a listen only mode. McAdams, Investor Relations for Intevac. Please go ahead.

Speaker 1

Thank you, operator, and good afternoon to everyone on today's call. Thank you for joining us today to discuss Intevac's financial results for the Q2 of 2024, which ended on June 29. 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 Cameron McAuley, Chief Financial Officer and Kevin Solsby, Corporate Controller. Nigel will begin with an overview of our business and outlook, followed by Cameron's review of our financial results for the Q2 and additional details regarding our guidance before turning the call over to Q and A.

Speaker 1

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, which remain subject to adjustment in connection with the preparation of our Form 10 Q as well as comments regarding future events and projections about the future financial performance of Intevac. 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 ks and quarterly reports on Form 10 Q. The contents of this August 5 call include time sensitive forward looking statements that represent our projections as of today. We undertake no obligation to update the forward looking statements made during this conference call. I will now turn the call over to Nigel.

Speaker 2

Thanks, Claire, and good afternoon to all of you on today's call. I'm very pleased to welcome Cameron McAuley, our new CFO, to his first earnings call with Intevac. Cameron joined Intevac in July after a successful exit at Transform, which just completed in June, its roughly $340,000,000 acquisition by Renaissance. Kevin, who is here with us today for Q and A, now returns to his previous role as Corporate Controller, and we all greatly appreciate his stepping into the CFO role for the last year. Turning to our Q2 results.

Speaker 2

Total revenue of nearly $15,000,000 was significantly stronger than our forecast entering the quarter due to increased demand for HDD technology upgrades and solid execution from the team in Singapore. Given the revenue upside and the resulting mix of upgrades delivered in the quarter, gross margin exceeded 38% and our net loss per share was also favorable to guidance at $0.12 With strong collections in the quarter, our accounts receivable balance declined by $7,500,000 and total cash and investments at quarter end surpassed $70,000,000 an increase of nearly $5,000,000 from Q1. The revenue upside reported for Q2 is also evident in our increased HDD revenue outlook for the full year, which we now expect will approach $45,000,000 up from $40,000,000 at our last update. This reflects our HDD revenue forecast for the second half of twenty twenty four remaining relatively consistent in the low $20,000,000 range after a very strong first half. HDD revenues year to date have now exceeded last year's first half by more than 10%, reflecting continued strong growth for HAMA upgrades.

Speaker 2

Given the strengthening in demand witnessed for upgrades during Q2, we now expect 2024's upgrade business to approach the record levels achieved in 2023. Even more importantly, our revenue forecast also reflects the initial installation of HAMR upgrades from a second major customer, which is a leading data storage company. We're pleased to report the successful delivery of our first HAMR upgrade for this additional customer earlier this quarter. Industry news of improving fundamentals for the hard drive industry continues to build and proliferate, driven primarily by strong nearline cloud demand growth. Demand for cloud storage has increased significantly year to date in 2024 and is expected to continue growing through next year.

Speaker 2

There are also indications that growing demand now includes data center deployments related to AI. We're encouraged by the increased momentum for AI related HDDs, which bodes well for the long term strength of our primary served market. We continue to expect the initiatives to upgrade the world's HDD media capacity to HAMR technology provides strong visibility for a solid base of HDD business for the next few years. The strength of our customer relationships and order activity to date demonstrate that our flagship 200 Lean is still the industry's leading platform for all advanced media production, an amazing achievement for a product launch 20 years ago that is still delivering new innovation at the forefront of HDD technology. Intevac is a critical enabler in the technology roadmap for the HDD industry, and we're only in the early stages of a multiyear upgrade cycle that supports a revenue opportunity exceeding $200,000,000 and that's before any additional 200 lean system orders.

Speaker 2

The strengthening industry fundamentals are also encouraging, and we can very possibly be looking at a return to a modest amount of new system deliveries in the near future. Our critical role in the HD industry provides significant visibility for continued solid base of business and supports our expectations for near record level upgrades in 2024 and a strong growth year in 2025, a year in which we also expect meaningful incremental growth for our Trio platform. Which brings me to an update on our progress qualifying the 1st Trio system, which was shipped in April to a top tier cover glass finisher in Asia. As discussed on our last earnings call in April, we resolved our JDA partnership and immediately proceeded to ship our first Trio system directly to a leading cover glass finisher, which is a direct supplier for the leading smartphone OEMs. We completed the delivery installation on schedule, which is a credit to our teams from around the world working closely together and are proceeding well through the qualification process, which we expect will first conclude with a cover glass finisher before continuing towards end customer qualification.

Speaker 2

The 3 months that have passed since our last update have been a period of immense progress and iterations qualifying this Trio system, while also processing samples from multiple additional customers on the Trio, which resides at our Santa Clara headquarters. Critical members of our Trio team, including myself, has spent the majority of the last few months on the ground in Asia, as we make the Trio success our number one priority. In addition, we have engaged InterLink to accelerate our expansion in Asia, whose team specialize in identifying opportunities in many fast growing Together, we will build a broader market for the Trio platform, once we maintain our focus on securing an initial order in the consumer device space. Intralink are continuing to assess the automotive sector and have highlighted the introduction of glass panels for future advanced packaging, which will take major share from the traditional silicon based applications. We continue to engage with new customers while deepening the collaboration with the key players involved in bringing ultra durable anti reflective coatings to smartphone covered glass market.

Speaker 2

The deepening level of collaboration and continued investment in research and development is yielding multiple paths for commercial success for the Trio, including a more compact footprint that can readily replace existing tool sets to provide more robust coating capabilities for the covered glass finishes. The modular architecture of Trio, which is a key characteristic of the 200 Lean, is enabling us to quickly adapt the Trio platform. We're working with both our initial cover glass finisher and multiple additional customers to make modifications to the Trio that will optimize their respective manufacturing capabilities and capacity. As the qualification process continues, we continue to expect 2 to 3 initial Trio II orders in the second half of 2024. As we evaluate the steps towards final customer acceptance and revenue recognition, we will continue to update you on orders and revenue timing as we progress through the year.

Speaker 2

As a reminder, we have the inventory on hand in order to deliver on multiple systems with relatively short lead times. With a very serious engagements with some of the world's leading customers and partners well underway, the morale and excitement among the Intevac team of exceptional employees is the strongest I've seen since joining the company, which brings me to a summary of our outlook for 2024. We have now increased our HDD outlook to the $45,000,000 level with now multiple HDD customers in the process of upgrading their media capacity to be HAMR capable. We believe this level of upgrade business is sustainable for several years and any return to new system orders will be incremental to this level of HDD business. Our expectations for 2024 also continue to include multiple Trio orders.

Speaker 2

At this stage, as with any new product launch, it's difficult to forecast the timing of revenues and our focus is on securing multiple orders. Finally, protecting the balance sheet remains a key priority for the company, and we continue to expect to exit 2024 around the $70,000,000 level. And with that, I'll turn the call over to Cameron.

Speaker 3

Thank you, Nigel. I'm quite pleased to see many familiar investor names listening to today's call as well as Benchmark, which is one of the several firms who cover Transflo. And I look forward to building upon these relationships, both new and existing as Intevac's CFO. Turning to the 2nd quarter results. 2nd quarter revenues totaled $14,500,000 and consisted of HDD upgrades, spares and service.

Speaker 3

Revenue upside for the quarter reflected over $5,000,000 of additional technology upgrade demand during Q2. Q2 gross margin was 38.2%, above the guidance range, reflecting the higher revenue volume as well as the particular composition of the mix of upgrades during the quarter. Q2 operating expenses were $8,800,000 which exceeds our current run rate, reflecting higher than typical corporate, travel and tool installation costs during the quarter. With strong AR collections during the quarter, we were able to move some of our cash to higher interest rate investments. And as a result, our quarterly interest income run rate now exceeds $700,000 The resulting net loss per share for Q2 was $0.12 significantly better than our forecast entering the quarter.

Speaker 3

Turning now to the balance sheet. We ended the quarter with cash and investments, including restricted cash of $70,400,000 equivalent to $2.63 per share based on 26,700,000 shares at quarter end. The net increase in cash was nearly $5,000,000 reflecting positive cash flow from operations of $6,000,000 and CapEx of just under 1,000,000 The strong cash flow from operations in Q2 reflects the significant collection of receivables during the quarter, with $7,000,000 of positive cash flow from working capital offset by about $1,000,000 of negative cash flow from the P and L. Non cash expenses for Q2 included $1,100,000 for stock based compensation, dollars 500,000 for depreciation and amortization and $500,000 in deferred tax. Now I'll provide further details regarding our outlook and Q3 guidance.

Speaker 3

For the Q3, we are projecting revenues to be in the range of $10,500,000 to $12,000,000 We expect 3rd quarter gross margin to be in the 37% to 39% range, reflecting the expected mix of upgrades and factory absorption levels during the quarter. Q3 operating expenses are expected to be in the range of $8,600,000 to $8,800,000 reflecting an expected moderation in some G and A costs when compared to Q2. This range also comprehends our continued investment in personnel across multiple functions as we continue to strengthen our overall organization. As detailed in my earlier comments, we expect a higher run rate of interest income on our strong cash balance for the foreseeable future. Our guidance is for interest income in the range of $700,000 to 750 $1,000 for Q3.

Speaker 3

We expect GAAP tax expense of about $500,000 most of which will be noncash. We are projecting a net loss in the range of $0.14 to $0.18 per share based on 26,900,000 shares outstanding. This completes the formal part of our presentation. Operator, we are ready for questions.

Operator

Thank you. We will now be conducting a question and answer The first question is from Peter Wright from Partner Cap Securities. Please go ahead.

Speaker 4

Great. Thank you for taking my questions and congratulations on the quarter.

Speaker 2

Thank you, Peter.

Speaker 4

I have two questions for you. My first question is looking at your installed base for HAMR now that you have an additional customer opened up. How are you looking about the rollout of your installed base? How should we think of how many are upgraded at this point and how many lie ahead of us? And kind of the cadence there, do you expect it to actually accelerate or is it more of kind of a stable number of hammer upgrade sales going forward?

Speaker 4

If you could shed some light on kind of the timing and the magnitude of that. And then my follow-up question is on the Trio side and specifically your relationship with InterLink. How are you providing sampling? Do you actually have a tool? And is there a way that you can actually put the sample in customers' hands?

Speaker 4

Or how is if you could explain a little more how that sampling is taking place, that would be appreciated.

Speaker 2

Okay. Well, thank you for those two questions. Covering the Hammer one first, and as always, it's as you know with our industry, it's always difficult to get exact predictions on what's going to happen and timing. But the in store base, I think we've said on prior calls, we've got we've shipped on the slides over 180 systems. Some of those aren't in operation at the moment.

Speaker 2

So we've said use an average of 140, 145 systems in the world that can be upgraded to HAMR. We've done about 20 to date, taken in last year and the start of this year. So there's a significant amount of opportunity to upgrade the rest of the installed base. We don't share the split. We don't talk about the customer names, as you know.

Speaker 2

But I think it gives us confidence that over the next 5 years, we'll continue to run with a similar level of upgrade business as we've seen over the last 2 years. So I think it's as far as we can tell, that's the sort of forecast and shape of the future HAMR investments. And it's great that now all the customers are talking about hammer upgrades and that technology is critical as you move from sort of 30 terabytes up to 50 terabytes and actually keep maintaining this consistent cost advantage of drives in the market. So I hope that gives you a sort of range of answers there. But I think overall, we're pretty confident that there is going to be a flow for the next 5 years of a similar level, and that will be across multiple customers, which is good for us.

Speaker 2

Moving on to the Trio question. I mean Trio sampling is a critical part of the strategy. Today, we have if a customer has interest, whether that's through InterLink or through our direct contacts with customers, We do that customer sampling and run those parts through our test Trio 1 test bed in Santa Clara. If you remember, we capitalized that tool, enables us to do fast turns of samples in a controlled environment in our headquarters where our R and D teams and process engineers more importantly reside. So the material science about running samples, putting the coatings down and putting those down either on glass repurchased or customers' glass samples, which is very often the case.

Speaker 2

So they'll be shipped in from us, whether that be from any parts of Asia into the facility. We do those coatings and are controlled. We actually then seal those back up in a natural environment and then we ship those back across to the customer. They then do their testing and analysis. In parallel, we do testing analysis in our development and test lab in Santa Clara where we have instrumentation that can look at hardness and look at key features around optics.

Speaker 2

And those go back to customers and then typically that then goes through a process of there maybe want a slight tweak on the performance. They'll send us more samples. We'll go through that iteration. And I'm really pleased to say that the number of samples we've been running and the number of customers who are sending in parts to us is increasing. And not just for glass parts for consumer devices, we're getting parts in for polymers with some unique applications.

Speaker 2

And also we're seeing the style of some requests around advanced packaging. So for me, it's pretty exciting. And it's a core capability that we've invested in. And that's why we capitalized the tool last year for the Santa Clara facility.

Speaker 3

That's very Can I

Speaker 4

have one more clarification if you can define the end market that polymer is servicing? And then also, are these how customized are these samples going out? How much back and forth customization is it versus you sending your specific SKUs to these different end markets?

Speaker 3

And that's the last one. Thank you.

Speaker 2

I think if you think about and if you see the machine operation, the capability of the Trio platform is not just for 2 dimensional, it actually goes towards 3-dimensional shapes. Clearly, we can't give you the customer name or specific application. But if you can imagine, these polymer pieces are in curved platforms. That will give you some sort of idea as you look at optical lenses and other sort of areas where polymers and non glass is used in extremely high volume applications. So for me, there's a lot of excitement around the opportunities beyond the consumer devices for some of these polymers.

Speaker 2

And even within consumer devices, some of the headsets and things are looking at polymers and other organic, inorganic compounds for the future technologies. So for me, the versatility of the Trio platform enables us to do multiple applications. And one of the critical things in the tool, the way we actually manage the temperature inside that processing, so it's a high plasma environment. It's like lightning being controlled within a plasma operating environment. And actually our ability to control the temperature means that we can actually put polymers through the machine.

Speaker 2

So it's a critical part of our design technique is allowing us to run polymers as well as glass. So we're pretty excited about the flexibility and versatility of the platform. Hope that answers the question.

Speaker 4

Very much. Thank you guys.

Speaker 2

A pleasure,

Operator

The next question is from Mark Miller from Benchmark. Please go ahead.

Speaker 5

I'm sorry, I got a little late. I just was wondering the upside in revenues this quarter, was that pull ins or orders you didn't expect?

Speaker 2

Yes. That's fine. That's fine. Hold on. I've got music coming on the back.

Speaker 2

Music coming into my line. I don't know what was in that music. One moment. Can everyone else mute that?

Operator

Yes. One moment. I'll mute that line. There we go. You can go ahead.

Speaker 2

Apologies for that. I'm not sure apologies for that, Mark. I'm not sure what caused that Southern music. It wasn't my taste in music either. So the question is, so the pull ins for the quarter.

Speaker 2

So as you know, you've been covering the space for a long time and each quarter can have different fundamentals depending on budgets and cycles for the customers we specifically have. I mean, this was pull ins of HAMR and other upgrades into the quarter from the second half of the year. So those are, I'd say, probably at least half of pull ins. And as we've said on the call, that we now believe that the full year number is going to be near a €45,000,000 €40,000,000 So overall, it's a strong year, but those were absolutely pull ins in the second half to get some more upgrades done. And those upgrades covered both PMR and HAMR.

Speaker 2

So it was and again, it's testament to the team in Singapore that we could respond quickly. We have a very, very, as you know, professional team in Singapore that's been able to respond very fast over the last 2 years plus as I've been in this role. And every time we've thrown a challenge and they've delivered and performed and stepped up to meet the demand. So these are meeting real custom demand and

Speaker 3

it was great to be

Speaker 2

able to achieve that and beat my guidance.

Speaker 5

I'm just wondering, I apologize again. What were your orders during the quarter?

Speaker 2

So the orders are mixed. The exact number of those orders, I'll just pass it over to Kevin just to confirm the number. But a lot of that was about timing of orders. And so I think we're going to see I think it was the full year for this year, the orders are already in place. I know that for now.

Speaker 2

I think Kevin, what was the final order number for this quarter?

Operator

So it looks like Kevin's line currently is playing music.

Speaker 3

It's under $4,000,000 for the quarter.

Speaker 5

I'm sorry, how much was that?

Speaker 3

Just under $4,000,000 for the quarter, Mark. The backlog as we sit here is just over $42,000,000 at the end of June as well. So solid backlog to allow us to project the $45,000,000 that Nigel was articulating.

Speaker 5

That's for the year now, dollars 45,000,000 is your sales goal,

Speaker 3

let's say.

Speaker 5

What percent of sales upgrades are HAMR related?

Speaker 2

We don't give that exact number away, but the majority have been HAMR over the last 2 years. But more recently we've seen some PMR coming through as well. So the good news is there is some enhancements going on around PMR as well as HAMR. So as both technologies run-in parallel, both technologies do the level of upgrades, but the majority have been around HAMR upgrades.

Speaker 5

And what about gross margins for this quarter?

Speaker 2

I mean gross margins again so gross margins were strong again for the quarter. And again, a lot of the gross margins is linked to the mix of the upgrades. I mean, some of the upgrades we have, have competitive offerings, some of them don't. So some of the margins mix and change each quarter. I don't know whether Cameron you want to add anything on the margin comment, but there's a good mix of upgrades in the quarter.

Speaker 3

Margins will be similar. Margins will be similar, Mark, yes. We're forecasting for September. 39. Yes, similar for September, 37 to 39 against the 38.2 we did in the June quarter.

Speaker 3

So any variability to those, the margins is really a mix of the different characteristics of the upgrades that Nigel mentioned.

Speaker 5

Did you provide cash from operations? Your cash went up a 0.

Speaker 3

Yes, we did in the prepared remarks. So we had $7,000,000 of positive cash flow from working capital and about $1,000,000 of negative cash flow from the P and L, but strong quarter. We exited with just over $70,000,000 of cash.

Speaker 5

So $6,000,000 net in cash from operations?

Speaker 2

Yes.

Speaker 5

Okay. Thank you.

Speaker 2

Thank you, Mao.

Operator

There are no further questions at this time. I will now turn the call back over to Nigel Hunton for his closing remarks. Pardon me. There is one more question just now from Peter Wright from Partner Cap Securities. You can go ahead.

Speaker 4

Wonderful. So I'm sorry, one clarification on gross margin, if you can. So just building on Mark's question. So, gross margin is the guidance is reflective of the HDD business or that is reflective of inclusive of any Trio systems that would sell you think it's going to remain stable?

Speaker 2

Yes. So the gross margin for the next quarter is assuming HDD, which we've said that.

Speaker 4

Yes. And I'm sorry, did I mishear you? Did you say you're expecting margins to remain flat through the course of the year?

Speaker 2

Yes. So we've given margin guidance for the quarter coming up. And again, we were set with a range for that and that is predominantly made or it's 100% made out of HDD business. As we've talked about, we're focused on getting orders for Treo and then the revenue will not be in this next quarter. So it will be 100% HDD business in the next quarter.

Speaker 4

Fantastic. Great. Thank you, guys.

Operator

The next question is from Dan Weston from West Capital Management. Please go ahead.

Speaker 6

Yes. Hi, good afternoon, everybody. Nigel, just a couple of quick points of clarification, if you would. The on the Trio front, is the trajectory to get the first tool qualified by the glass finishing customer? And then is there a second qualification period to their end customer?

Speaker 2

Correct. And we said on the call, so the key processes, and as we highlighted, it's great to get that product into the market quickly. That goes through a process and qualification with the glass finisher. That then goes through a process with the final product before launch. So you have to go I think we said this on the previous call as well.

Speaker 2

Any product evaluation into the market, one goes through proving the technology, getting the tool qualified glass finisher, they then take that and put the actual customer finished product, so it gets that qualified prior to launch. So we have to go through that second level of qualification.

Speaker 6

Great. Yes, thanks for the clarification there. And then finally, I want to make sure I heard you correctly in your prepared remarks. On the lean side, did you say that there's a possibility to have additional capacity expansion tool orders in the near future?

Speaker 2

I think as we look at what's going on in the industry and we're seeing some of the AI driving demand and we're seeing demand starting to go up. I think we're going to maintain the focus around upgrades and that will predominantly be part of the business. But I think over the next couple of years, I think there is potential for, I think I said, a small number of systems. I think there will be some incremental. I think the majority of focus on getting the capacity up to hammer readiness is going to be the key investments from our customers.

Speaker 2

But there's always room. I think there's going to be potential for some additional, but it's going to be a small number if it happens.

Speaker 6

Understood. Yes. No, I appreciate that clarity. Thank you very much, Nigel and again, and congratulations on the excellent quarter.

Speaker 2

Thank you, Dan. Appreciate your support.

Operator

There are no further questions at this time. I'll turn the call back over to Nigel Hunton for his closing remarks.

Speaker 2

Thank you. And thank you for all of the questions. And I also want to thank all of our employees, all of those sort of working closely with me in Asia at the moment and all their counterparts with our industry partners through all the hard work and dedication to deliver another strong upgrade quarter and equally importantly work towards qualifying our first tool in the field, 1st Trio. I also like to thank all the investors on the call for their ongoing support. And just to remind people, our IR activity is going to include the Benchmark Conference in New York on September 4.

Speaker 2

And as always, please reach out to Claire directly to arrange a follow-up. And I look forward to updating you all on our Q3 call in early November. So at that point, thank you and we can close the call.

Operator

Thank you. This concludes today's conference. You may disconnect now.

Powered by Quartr

Key Takeaways

  • In Q2 Intevac delivered nearly $15 million in revenue—well above guidance—achieved a gross margin above 38%, reported a net loss of $0.12 per share, and ended the quarter with over $70 million in cash and investments.
  • The company raised its full-year HDD upgrade revenue outlook from $40 million to approximately $45 million, driven by continued strong demand for HAMA and initial HAMR installations for a second major customer.
  • Industry fundamentals for hard drives—powered by nearline cloud growth and emerging AI-related storage needs—underscore a multi-year HAMR upgrade cycle with more than $200 million in potential revenue.
  • Significant progress on the Trio platform includes the April shipment of its first production tool to a leading cover glass finisher, active qualification work with multiple customers, and an expectation of 2–3 initial orders in H2 2024.
  • Looking ahead to Q3, Intevac forecasts $10.5–$12 million in revenue, a 37–39% gross margin, operating expenses near $8.6–$8.8 million, and continued strong cash generation to maintain a balance sheet around $70 million by year-end.
A.I. generated. May contain errors.
Earnings Conference Call
Intevac Q2 2024
00:00 / 00:00