Intevac: Fiscal 3Q20 Financial Results

(in $ million)	3Q19	3Q20	9 mo. 19	9 mo. 20
Revenue	26.3	21.6	73.4	69.2
*Growth*		-18%		*-6%*
Net income (loss)	(0.5)	(0.4)	(4.1)	(0.1)

Intevac, Inc. reported financial results for the quarter and nine months ended September 26, 2020.

“Q3 revenues were aligned with our expectations, and with favorable product mix driving solid gross margins, our bottom-line results were better than forecast,” commented Wendell Blonigan, president and CEO. “The team continued to execute extremely well in this challenging operating environment, delivering continued strength in the IVAS program as well as strong levels of technology upgrades for our HDD customers. While our inability to travel due to Covid-19 continues to delay our Thin-film Equipment (TFE) growth initiatives, VERTEX demo activity with customers outside of China has increased, and forecasts for our two core businesses have further solidified since last quarter. Media capacity utilization by our HDD customers is approaching historical highs, and growing demand for nearline drives is benefiting our HDD media business in both the short- and longer-term. In Photonics, the IVAS program continues to push forward at a rapid pace, driving a record year for this business in 2020. We continue to gain momentum, and expect that Intevac will play a meaningful role in this critical, all-digital groundsoldier platform, which is expected to move into production sometime next year. We again strengthened our financial position in the third quarter, with total cash and investments growing to $49.4 million, and today have increasing confidence for profitable bottom-line results in fiscal 2020, with multiple drivers for a return to growth in 2021.”

3FQ20 Summary
The net loss was $357,000, or $0.02 per diluted share, compared to a net loss of $480,000, or $0.02 per diluted share, in 3FQ19. The non-GAAP net loss was $254,000, or $0.01 per diluted share, compared to a non-GAAP net loss of $480,000, or $0.02 per diluted share, for 3FQ19.

Revenues were $21.6 million, including $9.4 million of TFE revenues and $12.2 million of Photonics revenues. TFE revenues consisted of upgrades, spares and service. Photonics revenues included $6.5 million of R&D contracts and $5.7 million of product sales. In 3FQ19, revenues were $26.3 million, of which $17.1 million in TFE revenues consisted of five solar implant ENERGi systems, upgrades, spares and service, and $9.2 million in Photonics revenues consisted of $5.2 million of research and development contracts and $4.0 million of product sales.

TFE gross margin was 43.5% compared to 28.2% in 3FQ19 and 36.4% in 2FQ20. The improvement compared to both periods reflected more favorable product mix. Photonics gross margin was 42.8% compared to 43.1% in 3FQ19 and 43.9% in 3FQ20. Consolidated gross margin was 43.1%, compared to 33.4% in 3FQ19 and 39.6% in 2FQ20.

R&D and SG&A expenses were $9.4 million, compared to $9.2 million in 3FQ19 and $9.3 million in 2FQ20.

Order backlog totaled $63.3 million on September 26, 2020, compared to $69.0 million on June 27, 2020 and $115.4 million on September 28, 2019. Backlog at September 26, 2020 and June 27, 2020 did not include any 200 Lean HDD systems. Backlog at September 28, 2019 included four 200 Lean HDD systems.

The company ended the quarter with $49.4 million of total cash, restricted cash and investments and $99.1 million in tangible book value, defined as total stockholders’ equity, less intangible assets.

First 9 Months 2020 Summary
The net loss was $57,000, or $0.00 per diluted share, compared to a net loss of $4.1 million, or $0.18 per diluted share, for the first 9 months of 2019. Non-GAAP net income was $46,000 or $0.00 per diluted share, compared to a non-GAAP net loss of $4.0 million, or $0.18 per diluted share, for the first 9 months of 2019.

Revenues were $69.2 million, including $33.9 million of TFE revenues and $35.3 million of Photonics revenues, compared to revenues of $73.4 million, which included $49.3 million of TFE revenues and $24.1 million of Photonics revenues, for the first 9 months of 2019.

TFE gross margin was 40.2%, an improvement compared to 32.4% in the first 9 months of 2019, as a result of more favorable product mix. Photonics gross margin was 43.2% compared to 34.9% in the first nine months of 2019. The improvement from the first nine months of 2019 was primarily due to higher revenue levels and improved margins on both product sales and research and development contracts. Consolidated gross margin was 41.7%, compared to 33.2% in the first nine months of 2019.

R&D and SG&A expenses were $28.0 million compared to $27.7 million in the first 9 months of 2019.

Comments

The company has two completely different businesses: thin-film equipment (TFE), a storage activity here commented, and photonics.

TFE revenue totaled $9.4 million and included upgrades, spares, and service.

In 3FQ20, Intevac recorded the strongest bookings quarter for TFE in 18 months, driven by strong demand for upgrades in its HDD business.

Given its HDD customers are US headquartered companies with Asia-based manufacturing, the constraints of Covid-19 have been manageable. The firm continues to deliver technology upgrades in 3FQ20, positioning 2020 to be a near record in HDD upgrade revenue, with both near term and longer term forecasts for its HDD business continuing to strengthen.

HDD media business has continued to strengthen in 2020, as a result of the acceleration of datacenter investments that reflect the changes in the way the company works, learns and communicates as a result of the pandemic. Heightened demand for mass capacity nearline drives for cloud based storage, and the datacenters are driving upside in media unit growth rates. Expectation for growth in nearline drive exabyte shipments, both in the short-term and long-term have increased for 3 straight quarters now. The rising expectation of 34% annual growth in nearline HDDs over the next 5 years will require the industry to produce and ship more disks, which in turn drives demand for company's systems.

At this point in 2020, Intevac said that the industry is running at or near historically high media capacity utilization rates and it estimates rates to be over the 90% level periodically. While the growth in exabytes shipments will continue to be supported in part by its customer's ongoing technology upgrade initiatives, the discussions to significantly expand the industry's media manufacturing capacity, beyond the incremental capacity the firm has added in the last 2 years, for the first time in a decade has begun.

Most recent media demand expectations have indicated installed capacity crossover in the mid to late 2022. However, with this accelerating growth and planning underway, the firm believes to see an increase in its 200 Lean shipments in supportive media capacity expansion, beginning in 2021.

Intevac also expects to see initial tool bookings at the end of 1CQ21 to support any capacity expansions that would materialize in that time frame. Adding to its confidence in strengthening short and longer term forecasts for its HDD business is taking into account its current application case understanding.

Technology upgrades continue at near record levels, with upgrade bookings increasing significantly in 4FQ20 ahead of what will likely be its largest ever quarter for HDD upgrades revenue in 4FQ20.

Furthermore, the firm expects 2021 will be another strong year for upgrades as well. The takeaway here is that while Covid-19 has presented challenges and delays in achieving the expected progress in its TFE growth initiatives this year, the vendor is incrementally more positive about the growth trajectory for its HDD business. In the short-term, it expects HDD revenue to approach approximately $15 million in 2020 with a slightly stronger second-half, driven by upgrades. In the medium and longer term, it expects upside to its prior growth expectations due to both a pull-in capacity crossover point as well as favorable shifts in market share as mass capacity becomes a dominant component of the HDD unit demand.

Earnings call transcript