Good day and welcome to Intevac’s First Quarter 2021 Financial Results Conference Call. At this time, all participants are in a listen-only mode. A question-and-answer session will follow the formal presentation. [Operator Instructions] Please note this conference call is being recorded today, May 3, 2021.

At this time, I would like to turn the call over to Claire McAdams, Investor Relations for Intevac. Please go ahead..

Thanks, Stacy, and good afternoon, everyone. So thank you for joining us today to discuss Intevac’s financial results for the first quarter 2021, which ended on April 3. In addition to discussing the company’s recent results, we will discuss our outlook looking forward.

Joining me on today’s call are Wendell Blonigan, President and Chief Executive Officer; and Jim Moniz, Chief Financial Officer. Wendell will start with a review of our business and our current outlook. Then Jim will review first quarter results and provide further details regarding our financial outlook before turning the call over to Q&A.

I’d like to remind everyone that 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 remains subject to adjustment in connection with the preparation of our Form 10-Q as well as comments regarding future events and projections about 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-K and quarterly reports on Form 10-Q.

The contents of this May 3 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. And I will now turn over the call to Wendell..

1, media capacity additions; and 2, the rollout of the IVAS program. We fully anticipated that current and forthcoming purchase order announcements expected in both businesses would significantly improve our backlog visibility and, in turn, investor confidence in Intevac. However, we do not control the timing of these orders.

For 2021, in particular, both TFE and Photonics are experiencing a soft patch until we put multiple significant orders and rebuilt backlog. Both the beginning of HDD system orders and the IVAS production ramp are late 2021 events. This ramping of the revenue run rate as we exit 2021 will set the stage for a strong growth year in 2022.

As for the preliminary outlook for the full year, we’ve taken a conservative view assuming no 200 Lean shipments and reduced technology upgrades for the year.

Given that scenario, we expect, in total, our HDD business will be in the range of $34 million to $35 million this year, consisting of upgrades, spares and field service, and we’ll return to growth in 2022. We believe 2022 growth will be driven both by technology upgrades and capacity tool sales.

In total, incremental to our HDD revenues in 2021 will be the MATRIX is already recorded in Q1, as well as any VERTEX evaluations converting to revenue. At this time, we expect total Thin-film Equipment revenues in the range of $38 million to $39 million for the year, with potential upside if we revenue either 1 of the 2 vertex evaluation systems.

Q2 will be down sequentially from Q1 given the current low level of HDD upgrades. So, therefore, this is a back-half weighted year. On the Photonics side, we’re also taking a conservative view of the timing of the IVAS production ramp.

We expect a sequential improvement in Photonics revenues in Q2 followed by continued growth through the end of the year, setting the stage for a strong growth year in 2022.

We currently expect Photonics revenues will be in the range of $30 million to $34 million in 2021 with the $34 million including the first production shipments on the IVAS contract occurring in Q4.

While 2021 will be a challenging period for our reported results, we have a strong balance sheet that allows us to weather any soft patches, while continuing to invest in ramping our core businesses.

Once we have the orders in backlog and the visibility that supports a strong growth year for 2022, we feel that we’ll be on a solid path for sustainable profitable revenue growth for 2022 and beyond. To conclude, we strongly believe in the significant long-term opportunities that lie in both our equipment and Photonics businesses.

We have proprietary technology, particularly strong customer positions, and leading market share in our core served markets.

Additionally, we believe we’re extremely well positioned to benefit from the secular growth being driven by overall industry trends and key military programs such as datacenter spending for cloud storage and digital night vision systems for the dismounted soldier.

In our view, the Intevac enterprise has significant unrealized value embedded across the range of our products, technology, and customer relationships that we’ve developed over the years. And we believe our current market capitalization does not fully reflect the value of Intevac’s critical role in both our core markets.

To that point, today I’m sharing with you that the board of directors have formed a strategic committee with a broad mandate to consider a wide range of possible ways that we may increase shareholder value.

The goal of this effort is to identify strategies to unlock the value in each of our businesses in parallel with executing our core revenue growth activity. Our determination to investigate these strategies is consistent with our focus on delivering long-term value for our shareholders.

While we would typically not disclose board initiatives until such time as a specific new strategy or transaction had been decided upon and was being pursued, we wanted to make sure that our shareholders clearly understand that we are leaving no stone unturned in our valuation of avenues to increase shareholder value.

The committee has retained the investment banking firm Greenhill and Company to work with management and the board to evaluate a broad range of strategic alternatives that may be available to the company to enhance our value. There can be no assurance that any transaction or other strategic alternative will take place as a result of this evaluation.

And Intevac has not set a definitive timetable for completion of the process. Note also that we do not expect to disclose further developments relating to this strategic evaluation process, unless and until the board approves a specific transaction or otherwise concludes this review of strategic alternatives.

And with that, I’ll now turn the call over to Jim..

Thank you, Wendell. Turning to the first quarter results, consolidated first quarter revenues totaled $16.2 million within the range of our guidance of $16 million to $16.5 million. Thin-film Equipment revenue totaled $9.2 million and included 1 MATRIX PVD system for advanced semiconductor packaging as well as upgrades, spares and service.

Photonics revenue of $7 million included $3.8 million of product revenues, and $3.2 million of contracts research and development revenues. Q1 consolidated gross margin was 18.8% below our guidance of 26% to 28%.

Thin-film Equipment gross margin was 23.1%, which was lower than forecast primarily due to lower overall volume, which affected factor utilization and product mix to the less high-margin upgrade revenue, and the lower margin MATRIX evaluation system as the first tool of its kind.

Photonics gross margin was 13.1%, which was lower than forecast, primarily due to higher costs related to the additional work needed in order to finish the initial integration of our camera into the IVAS platform as we near the completion of the development stage. This increase was partially offset by decreased by R&D spending in Photonics.

Q1 operating expenses were $9.6 million, below our guidance due to lower Photonics IR&D as their efforts were spent finishing the initial integration of our camera into the IVAS platform. We expect quarterly operating expenses to remain below the $10 million level for the remainder of 2021.

This resulted in a net loss of $6.5 million or $0.27 per share within our guidance of $0.25 to $0.27 per diluted share. Our backlog was $43.1 million at quarter end. Thin-film Equipment backlog of $4.2 billion, included non-systems HDD backlog. The backlog in our Photonics business was $38.9 million. Now turning to the balance sheet.

We ended the quarter with cash and investments including restricted cash of $53.6 million, equivalent to approximately $2.22 per share based on 24.1 million shares at quarter end. Cash flow generated by operations was $2.5 million during Q1. Q1 capital expenditures were $243,000, and depreciation and amortization was $791,000 for the quarter.

Now turning to our outlook for 2021. As Wendell indicated, our preliminary full year view is Thin-film Equipment revenues of $38 million to $39 million, and Photonics revenue of $30 million to $34 million for a combined $68 million to $73 million within this revenue range and expected mix, we expect full year gross margins between 30% and 32%.

As mentioned, our OpEx run rate is below $10 million per quarter, and thus, expected to be around $39 million for the year. We’re forecasting interest income of around $200,000 for the year and income tax expense of around $1 million for the year.

While our operation results will be challenged in 2021, we will continue to prudently manage our cash and maintain our strong balance sheet. Specifically for Q2, we see revenue in the range of $12.5 million to $13 million. At this range, we would forecast gross margins to be around 27%. OpEx should come in between $9.6 million and $9.9 million.

Interest income should be around $50,000 for the quarter with no income tax expense. Therefore, forecasting a loss in the quarter of around $0.26 per share using 24 million shares outstanding. This completes the formal part of our presentation. Stacy, we’re ready for questions..

At this time, we will be conducting a question-and-answer session. [Operator Instructions] Our first question comes from Peter Wright with Intro-act. Please go ahead..

Great. Thank you, guys, for taking my question. Two questions actually.

The first one on the IVAS side, if we look at the $32 million spend on the development part of the contract, what is a good rule of thumb or how should we think of the relationship between how much projects like this typically spend on development and how that converts over a multiyear period into kind of the commercial contract if there is any multiple or way of thinking about that? And then, the second part to that would be, can we extrapolate a similar type ratio or way to think about the next 3 programs that you outlined today for us?.

Yeah, so from a program perspective, I think what’s unique about this development that we’ve been doing with the Army for the cameras, for the IVAS platform, is how fast the programs were. Normally, a development like this would take well over the 2.5 years that we’ve been working on it, the more typical military procurement cycle.

So I think in that perspective, it’s a very unique procurement process that’s going on around this program for the primes and as well as all of the suppliers to the primes.

But can you repeat your second question for me, please?.

Is there like a ratio of how to think – if you spend $100 on development, how much should be spent on a commercial program? Is there any multiple that is kind of the good rule of thumb to think about that?.

Not, not really. I think they’re all pretty much are similar. You might have a little more work done on the component reliability on the military programs, but they’re similar..

Or how many quarters would you think that it would take to be able to get kind of a commercial ramp equivalent to your better quarters on the development side? Second half last year type run rate?.

3, probably around 3..

3 quarters, fantastic. And then, if I can ask one other question on the Thin-film side of your business, kind of in a similar way, hard disk drive is a mature business, we know how to think about that kind of on a cross-cycle basis.

If you look at MATRIX and VERTEX, how would you think of the size of those markets and kind of your positioning within those markets in relation to hard drive? I look at this year as kind of a year where, as your Board is figuring out, you’re reinventing many parts of the business that are good multiyear growth stories.

How is the best way to be thinking of MATRIX and VERTEX in relation to kind of the size of [references] [ph]?.

Well, I think from a 2021 perspective, we have the MATRIX that’s already revenue. We have 2 VERTEX developed eval tools that are available to revenue, as well as Marathon. So the opportunity is there. I think the big issue we have is the ongoing situation in China and accessing that covered last business.

So I think from a – we’ve been running roughly $50 million in hard drive over the last several years. So I would say that, that opportunity is similar, but it’s going to require adoption in the VERTEX side of the business.

And it’s going to require, say, on the MATRIX side of the business, a transition to panel-level packaging from wafer-level that’s going on right now..

So to understand that, I’m sorry, you think it’s about a $50 million cross-cycle opportunity in each in those business lines at maturity, is that the way to…?.

Yeah, I think it’s really dependent on adoption rates. The VERTEX opportunity can be very, very large. If one of the large cell-phone manufacturers adapt on their phones, just they’re driving 25% of the overall the glasses being made. So that takes quite a few tools.

We estimated before that 10% adoption drives $500 million worth of equipment to support. But I think we’re looking at now some of the more incremental opportunities rather than the hockey-stick opportunities. But that still exists for us there. But I would model it somewhere similar to – between the 2 of them to at least a year in hard drive..

Right. Thank you, guys..

Thank you, Peter..

Your next question comes from Mark Miller, The Benchmark Company. Please go ahead..

Just had a question about the – you’re projecting first half revenues are going to be lower than second half.

Besides the IVAS shipments later this year, are you hopeful that you’re going to get these 2 VERTEX tools qualified? Is that in kind of your assumptions for second half? Where does the besides IVAS, where does the improved revenues in the second half come from?.

Yeah, the range we gave in Thin-film Equipment would include the 2 VERTEX in the back-half, second-half of the year. And then, the other thing is, we would expect the upgrade revenue to be much stronger in the back-half for the hard drive business than what were going to be seeing in the first two quarters.

And then again, we did point out that with an IVAS production contract. That’s why the range of $30 million to $34 million in Photonics. It would include if we can get the order in time to ship that in Q4 of this year for the IVAS production contract..

Your expenses were actually up year-over-year, yet revenues were down.

Are you taking any steps to bring down some of your operational expenses over the next 2 quarters, because of the sales decline?.

Yeah, we don’t have anything that we’re executing on right now. I think we want to see just how well the back-half responds. But we certainly are doing some discretionary things around the company to minimize the OpEx..

So could you explain why even though sales were up by $2.5 million similar quarter last year by – OpEx was up this quarter or the March quarter by $250,000, what drove the difference despite the lower sales?.

It was higher IR&D. One of the things we said I think in the last couple of conference calls is in 2021, as Wendell mentioned that ManTech award that we got and these potential other 2 Phase-I awards that we’ll get in Photonics will require some investment on Intevac side in Photonics IR&D, so that we can keep some of the IP.

And so, we will see a higher amount of IRAD coming from Photonics than they historically have spent. And they didn’t spend as much as we had forecasted in Q1, because some of that effort went into finalizing what I’ll call the cost of goods sold, which is why there were some margin pressure.

But we would expect to see more IR&D, but it’ll still be below a $10 million at quarter level..

Yeah, just it looks like, yeah, most of it is coming from R&D compared to last year. Okay. Thank you..

That’s correct. All right. Thanks, Mark..

I will now turn the call over to Mr. Blonigan for closing remarks..

Thank you. I want to, again, thank the dedicated employees of Intevac all around the world for continued resilience and dedication in a challenging operating environment. I’d also like to thank our customers and our suppliers for their business and appreciating partnerships.

And finally, I’d like to thank our stockholders for the continued support of Intevac. Thank you for joining us today and we look forward to updating you again during our Q2 call in August. Until then, so long..

This concludes today’s teleconference. You may now disconnect..