Q4 2023 Intevac Inc Earnings Call
Participants
Nigel Hunton; President & CEO; Intevac, Inc.
Kevin Soulsby; Interim CFO; Intevac, Inc.
Mark Miller; Analyst; The Benchmark Company, LLC
Hendi Susanto; Analyst; Gabelli Funds
Peter Wright; Analyst; PartnerCap Securities, LLC
Dan Weston; Analyst; WestCap Management, LLC
Presentation
Operator
Good afternoon to everyone on today's call. Thank you for joining us today to discuss Intevac's financial results for the fourth quarter and full year 2023, which ended on December 30. 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 Kevin Soulsby, Chief Financial Officer.
Nigel will begin with an overview of our business and outlook, and then Kevin will review our financial results. 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 and year, which remain subject to adjustment in connection with the preparation of our Form 10K 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 10K and quarterly reports on Form 10Q.
The contents of this February first 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 we'll now turn the call over to Nigel. Nigel?
Nigel Hunton
Thanks, Claire, and good afternoon. In Intevac posted strong results for the fourth quarter, marking a solid finish to what was a key year of growth and execution in 2023. Q4 revenues totaled nearly $13 million, well ahead of our expectations entering the quarter, as evidenced by our record level of upgrades in 2023. Intevac is a key technology enabler in the hard drive industry's transition.
Q4 was another period of accelerated demand from our leading customer as they ramp to deliver production quantities of hammer drives the key role of Intevac in enabling this ramp resulted in very strong 47% growth in revenues for fiscal 2023, and we achieved a full year record in annual sales for our equipment business.
The resulting favorable revenue mix drove strong gross margin performance, exceeding our guidance at 46% for the fourth quarter and 38% for the full year with continued dividends controlling discretionary spending, we sharply reduced our net losses for Q4 and the full year compared to the prior year period.
Protecting the balance sheet remains a key priority for the company, and we ended the year with over $72 million of total cash and investments. This will remain a key focus in 2024 for year end balance was just below our previous guidance of only due to the late payment of receivables by one customer. Total backlog at year end was $42 million, reflecting the continued strong order activity for hardware upgrades in Q4.
These orders included the successful rebooking of 200 Leans in favor of additional hammer process module upgrades. As a reminder, these two systems have been in backlog for the past six quarters and were originally aimed at enhancing capacity as opposed to technology.
We are pleased with the renegotiation of order backlog towards hammer initiative as these are clearly the priority in the industry right now. But from a from a financial perspective, while upgrades carry less revenue compared to total sales, the rebooking is expected to have a minimal impact on our forecast for gross profit gross profit.
Finally, as we reflect on fiscal 2023, it was a critical year for the technology development and commercial launch of our groundbreaking Trio platform. We successfully completed the development phase of our JDA and achieve system qualification as promised by year end.
This is a key milestone in the growth trajectory of Intevac as the Trio achieved key performance metrics as part of the evaluation process that will enable Intevac to address market opportunities far larger than our existing hard drive business.
We see the Trio as having enormous potential with an estimated $1 billion served market and the achievements in 2023, a key steps forward in our plan to diversify and grow our product portfolio and customer base, which brings me to a discussion of our perspectives on the future and our strategies to deliver consistent and profitable growth in the years ahead. The important developments unfolded in fiscal 2023 within each of our primary markets have underscored two key attributes of our business.
First and foremost is the Intevac plays a critical role in the global electronics manufacturing industry and that we are uniquely capable of producing equipment that addresses the needs of 10. Logically it challenging thin-film processes in highly demanding high-volume manufacturing environments and within industries require extremely low cost of ownership. This is especially evident during the challenging macroeconomic environment of 2023 a year when our customers face enormous headwinds financially and operationally yet never diverted their attention from the strategic manufacturing priorities in close partnership with Intuit, but it's the same headwinds that manifested in the second, we Antegren Intevac's leadership team in 2023.
And that is the only relevant influence that our large customers can exact on our short-term financial results, which is an issue that today we are addressing head-on as we entered the new year. We are steadfast in taking a long long-term focus on improving the underlying financial performance of Intevac. We're always going to be focused on critical aspects of our financial performance, such as revenue volumes and our cash position at this juncture.
But we have made the determination to temporary redirect our focus away from short-term metrics, just quarterly revenue and cash targets, nor does it have a stronger long-term value proposition for our stakeholders, which means we have made the decision to temporarily withdraw near term financial guidance in order to enable our focus reside primarily on the long term and specifically on improving our longer-term growth, profitability and cash flow profile. This has implications for each of our served markets. First, in our primary HDD market.
The revenue ramp we achieved in 2023 demonstrates our operational agility and our ability to execute to meet customer time lines for hardware upgrades, even more importantly, Intevac has emerged as the enabling technology partner for the adoption of hammer on our revenue results in 2023 demonstrate that we are a direct beneficiary of the HTD media technology upgrades initiatives currently underway. We have demonstrated our critical role for the hard disk drive industry at the same time as we've supported the strength of our customers' financial position at the expense of our own.
Our cash conversion cycle has slowed to historical lows and completion delays have become pervasive or quarterly norm. We encountered an unprecedented order cancellation moments ago for slab yet to resolve the transfer of inventory and material receipts of our balance sheet. This quarter, we have made the decision to temporarily suspend our performance of HDD orders until a customer fulfilled their obligations regarding adding payables and inventory, we are confident that we can get the business back in alignment with our standard terms. So we are not using Intevac's cash to fund our customers.
I know our investors will understand the position we have taken Next turning to the actions we're taking in the display market. The recently completed qualification of our Trio system is testament for the quality of engineering resources resident within Intevac and our ability to meet key performance specifications for a very demanding and exacting customer upon achieving qualification and the successful completion of our joint development agreement. We engaged with our JDA partner in negotiations for a commercial agreement for multiple systems.
While we were not able to compete complete such agreement by year end as we had originally had hoped. We expect such negotiations to conclude by the end of the first quarter. As we said before, the supply chain for display cover glass for high-volume consumer device applications is highly complex. So the least, meanwhile, conditions in the display market have become more challenging in the face of slowing customer demand, which is manifesting itself and conservative financial planning by our JDA partner in the short term. It's also quite apparent to us.
There is significant customer pull coming from the end devices OEMs to rapidly deploy trio of systems into volume manufacturing environments. So the benefits of our tool can be realized on multiple device.
Yes, whether through the originally contemplated exclusive arrangement with our current partner, which is tied to a minimum purchase of multiple systems, estimated at approximately $100 million over a five-year period or through other customer sales.
We will work towards maximizing the long-term potential of Trio, which means probably drawing near term guidance will be firm in our negotiations regarding any commercial terms for the Trio that have long range implications while we work through this process with each within each of our markets.
I'll also note there's been no material changes in demand rent we've indicated from previously providing our preliminary outlook for 2024 for which we shared on the last two earnings calls for purposes of annual revenue guidance, our outlook for the full year is largely unchanged at $50 million level.
Furthermore, we expect to end 2024 with a similar balance of cash and investments at year end 2023. However, given our decision to halt the deployment of certain of IndyMac's resources in the short term in favor of maximizing the Company's longer-term potential. We are not providing official guidance range for margins or profitability for a specific revenue range for Q1.
And with that, I'll turn the call over to Kevin for his Q4 review.
Kevin Soulsby
Thank you, Nigel. Turning to our results, Q4 revenues totaled $12.9 million, which exceeded the midpoint of guidance by $2.7 million due to the acceleration of hardware upgrades during the quarter. For the full year, revenues grew to $52.7 million, up 47% from 2022 sales of $35.8 million.
2023 sales included a record level of HDD upgrades. It will work as well as one new 200 Lean and one refurbished 200 Lean system. Q4 gross margin benefited from favorable mix and exceeded our forecast at 46% for the full year gross margin was 38.4%.
Q4 operating expenses were $7.8 million, down both sequentially and year over year, reflecting the restructuring of our business and leaner operating structure. As a result, we were able to reduce our operating and net loss both for Q4 and the full year compared to the year-ago periods.
Turning to the balance sheet. We ended the quarter with cash and investments, including restricted cash of $72.2 million, equivalent to $2.74 per share based on 26.4 million shares at quarter end. As Nigel mentioned, we would have ended the year with total cash in the range of $75 million to $80 million, if not for the persistent delay in collections from one large customer cash flow from operations was a positive $5.9 million during the quarter. Q4 capital expenditures were $500,000 and our non-cash costs for the quarter included $1 million of stock-based compensation and $400,000 of depreciation and amortization.
This completes the formal part of our presentation. Operator, we are ready for questions.
Question and Answer Session
Operator
Thank you. (Operator Instructions)
Mark Miller, The Benchmark Company.
Mark Miller
You mentioned that the Trio negotiations you expect them to be complete this quarter. I'm just wondering, did you provide any more color on them and what's being discussed?
Nigel Hunton
If you take the JDA room we have and the plan for that was to go from the JDA agreement then negotiate a commercial agreement for ongoing supply. So we're in the middle of negotiating a sales and purchase agreement for the future so that that's what I've been involved in the negotiations.
Mark Miller
So we're still looking at roughly $100 million, at least in sales for Trio?
Nigel Hunton
We are looking to include that negate calculation in this quarter and the outcome that negotiation will cover on the next earnings call.
Mark Miller
Any early thoughts about this? Is that true, Bill, that was just quantify in terms of being revenue?
Nigel Hunton
They take the JDA once this qualification then moves to a negotiation on the commercial agreements. And at this time, we wanted to get the best outcome for the best interest of our shareholders. Just really not best to discuss specific outcomes of that item.
Mark Miller
Fostering digital during its recent conference call indicated that they were going to wait until four terabytes and terabytes per platter phase and hammer. Do you have any feeling when that will be? Will that be later this year or 2025?
Nigel Hunton
I think Western Digital's announcements was very positive for us. I think as you see the industry move toward hammer and wish to participate in the focus really around one customer, I think now you're seeing that the industry following. And I think on prior calls, we've saw said that WD might be behind. I think we'll see towards the end of this year into 2025. I think it's a very positive thing for the Company.
Mark Miller
Thank you.
Operator
Hendi Susanto, Gabelli Funds.
Hendi Susanto
Good afternoon, Nigel and Kevin.
Nigel Hunton
Good afternoon.
Hendi Susanto
I would like to ask your perspective the latest forecast of 2024 for hard disk drive market and then the outlook for hammer upgrade? And then second, I'm wondering whether you can share some color of and like what kind of timing or cyclicality of hammer upgrades does? Does it tend to be lumpy or can it be somewhat like a linear, an incremental?
Nigel Hunton
I think as we've said on the prior call, we've got an installed base of around 140 systems with over 10% of our upgraded towards hammer. And we see that continuing through the next three to four years, we see the hammer opportunity is being significantly large. And as Mark Millett commented that we're actually seeing now a level of interest from WD coming in as well.
But the key for us is really is making sure we are ready to support the hammer ramp, making sure we're able to actually support that business. We've been a key enabler of the technology has helped prove the establishment of that as a step change in technology. The critical thing for now is to make sure we make the right decisions for the business.
And therefore, that's focusing on getting our one of our key customers back into standard terms, getting our cash position back to where it should be is a key focus for the moment. And then we'll once we get that done and resolved, then we'll look to continuing further shipments. And hence, we've postponed guidance for this quarter, while others have resolved that because we do believe fundamentally hammer has got a great future in it.
Hendi Susanto
May I verify forward like camera upgrade? Can it be lumpy from one quarter to another?
Nigel Hunton
I think as you've seen, it will depend on the uptake and demand and how fast the takeoff of that product is. So I think it'll be over the next couple of years it will be, as we've talked about, roughly $35 million to $40 million a year for that quarter to quarter. We have a level of lumpiness depending on what upgrades are pulled in and the timing of those investments.
Hendi Susanto
And then in order to position into fact, to support the hammer Ram, any advice on how should we should be thinking about the inventories/
Nigel Hunton
A key thing for us is to resolve the inventories around a system cancellation. That's a key aspect of our focus. And as we look at actually building the business, we've got to actually make sure we actually minimize inventory, look at the best use of our cash and ensure we can deploy the inventory against those key hammer shipments as we get orders for them moving forward.
And I think our inventory is sort of split in a roughly a third, a third, a 3rd of the month between HDD, we have systems and the cancellations. So we've had a lot to do on inventory, did reduce inventory, make sure we actually turn that return inventory to our customer for the cancellations and then deploy our inventory to maximize our business moving forward.
Hendi Susanto
Can you use the cancellation inventories for or upgrades?
Nigel Hunton
One of the key things that happened last quarter we talked about in the prepared remarks was to actually successfully negotiate an exchange to the systems into hammer upgrades. And by using the relevant parts of those systems, we can actually then move them into hardware upgrades pretty successfully because one of the things why was it a successful renegotiation to transfer those two systems into hardware upgrades? And actually, as you said, rightly point out, we can leverage and actually transfer a significant part of that into him.
Hendi Susanto
And then I don't know whether you can answer these questions up. Can you indicate how many home installed base units that receive the hardware upgrades in Q3. And then I'm also wondering when it affects that like record sales of hardware upgrades, whether you can quantify what the magnitude of the hammer upgrade in dollar terms?
Nigel Hunton
And I think we what we've said on prior calls is 2023 source completed runs have put about 15 or 16 hammer upgrades, and that was the amount we did through the year, and that's the sort of the number we're giving for 2023. And as we've said on many occasions, the hammer upgrades value does depend on the upgrade of the system. Some systems need additional process modules, and it's gone from a five process module to a seven process module.
And then the addition of the cooling and heating stations and other key upgrades systems. Well, some have already got seven process modules, and it's just some of the key upgrades around heating and cooling. So the range of upgrades can between $1 million to $2 million. So it's it changes depending on the mix of the system that we're upgrading, which again adds to some of the lumpiness quarter-to-quarter and
Hendi Susanto
Nigel, one last question for me. When it comes to negotiation on 42 of system sales, any background on the likelihood of the customers buying one, two or three in other words, what will drive customers to buy two instead of one or three instead of two? I think in the past you mentioned that customers has like multiple locations, but besides location, are there other factors that drive the decisions in terms of the number of system that they want to produce?
Nigel Hunton
And I think the key message at the moment was so the original JDA we completed the previous system was qualified. And the critical next step is to finalize a formal agreement for Trio tool shipments. And I said we had hoped to conclude that for the end of December. However, they are in negotiations are ongoing now and we really can't say anymore at this stage other than to confirm, we expect to ship multiple systems in 2024.
Hendi Susanto
Okay. Thank you, Nigel. Thanks, Kevin.
Nigel Hunton
Thank you.
Operator
Peter Wright, PartnerCap Securities.
Peter Wright
Great. Good afternoon, guys. And thank you for taking my questions.
Nigel Hunton
Thank you, Peter.
Peter Wright
I have three questions. The first one is on your shift to a long-term focus on the financial model. And I think that makes sense just on number of customers and it's easy to understand, but what I'm hoping you can do is kind of reflect on this comment.
If I look at your backlog helping to guide kind of services and call that about $40 million and across a four or five year cycle, you're looking at about 10 hard disk drive tools and about 20 some tools on the contract with your existing one customer there, it averages about $30 million a year. It's going to be lumpy and it's tough to figure that out, but that's about a $70 million on average cross-cycle revenue run rate given kind of where your expenses are now that that's suggesting to me about a four or $5 million free cash flow yield on an annualized basis kind of on a cross cycle. Is there anything I'm missing there at a high level of what your long-term guidance and picture would look like.
Nigel Hunton
Yes, I think for me, it's critical that we focus our time at moment, ensure we actually optimize the long-term and get the right deals and the right negotiation to get the right forecast for the future. And so I don't really want to comment on the detail within the agreements were actually in the middle of negotiating, but if you take the base from prior announcements, I think that's probably a logical analysis of what we announced on prior earnings calls. I don't know whether, Kevin, you want to add anything to that?
Kevin Soulsby
No, I would agree that that's consistent what we said at the last couple of quarters.
Peter Wright
Okay, fantastic. And if I look at the one comment you made on end market pull. Can you give us a little more color of what it is that some of these and end market customers are looking at and what they specifically like about them.
Nigel Hunton
There are couple of key points to that one capability, the Trio and the qualification being completed as proven that we have a machine that has great capability and the ability to deliver hard scratch resistant anti-reflective coatings on substrates, it's critical and that has been proven. And if you look at the market opportunities, whether that be in the consumer device markets were very apparent the need for those sort of coatings and those sorts of applications.
As we've looked look beyond that and start to talk to some key automotive customers and some of the coating people in that sector in a similar way, the deployment of glass of the auto sector, whether that be touch screens in cars, whether it be looking at applications externally, what do you have accurate and NT. chip coatings on some of those substrates around the cameras on our accelerator card, LiDAR, et cetera, et cetera, approving the opportunities in auto are going to come through and come through over the next three to five year period pretty strongly as well.
So we see multiple applications now for the Trio platform, we see being able to be expanded beyond consumer devices into multiple other sectors and the ability of the tool to put specialized coatings with the key attributes that we've proven onto multiple and materials is also going to prove benefits long term. So we've proven and a phenomenal tool that it's taken us.
There's over 18 months of development time and focus, but having gotten that to a point where it's now fully qualified and it is absolutely the right time to think about the long-term opportunities for that and the feedback we've been getting about the quality of the coatings gives you more and more competence on the future.
Peter Wright
I could infer from your last press release and the naming of your partner in it that clearly they see your value in this equation. Can you help us understand in these negotiations? Is there a certain element that you're more I'm excited about or has changed over the course last year, whether it be from consumer electronics to consumer electronics plus, whether it be an evolution of the business model from equipment to equipment plus or are the negotiations at this point? On the Trio side, primarily about numbers?
Nigel Hunton
I think we've proven that we have great technology and the work we've done around the material science to what we've done are developing Nutrio platform to meet the key market needs. Show me that we've got a capability to not just deliver high-quality coatings into consumer devices but into other sectors. So as we've as we've looked at in the negotiation and I want to get, I do not want to get into details of that today because clearly it's a very key time in the negotiation.
It's about making sure we do the right for the company, the right decisions. And with the right agreement for the long term, that's going to maximize value for Intevac. And that's my key focus is how do we actually ensure we have an agreement that enables us to tap into that forward on a much stronger growth trajectory. I'm with key partners. So I'm pretty excited about the opportunities with existing partners, but I'm also equally excited about the opportunity of seeing outside of that.
Peter Wright
Fantastic. My last question is it just seems that no matter what you do the market is not giving you credit for your cash and what are the best uses of your cash when you look forward here, is it organic, inorganic, when you look at the balance sheet, even though it might be down a little bit on the collections, it's still an extremely large number on the balance sheet, what is the uses in '24? You'll be sharing with us what you're most excited about.
Nigel Hunton
I think the opportunity to continue to protect this business and continue to protect the balance sheet is a key focus for me, and we've done that pretty successfully through 2023. And there are some minor uses. We need to expand some of our capabilities around inspection and test equipment. I think one of the things that we've got to absolutely be expert at this is we do world-class coatings is have the capability in-house to do key testing and key understandings the materials, whether that be into the optics into the harvest into the material science.
So there will be some use of that cash, but not significant around enhancing our capability for in-house metrology as we look it up with the other feedback in our customers, see the strength of our balance sheet is a key asset for a company. Our size is maintaining that strong balance sheet is critical and to protect the Company moving forward. And we're going to look to how we actually grow the Company. And as we actually think through what the key strategic moves we have to do to take the company forward, then we'll think about how we actually optimize that cash and use effectively some. But the first focus at the moment is absolutely protecting the balance sheet and protecting that cash position.
Peter Wright
Fantastic. Thank you for the call here and Corp.
Operator
Dan Weston, WestCapital Management.
Dan Weston
Yes, thank you very much for taking the questions. Most of which have been answered, just some clarity relating to the receivables that you discussed in that the collection process, is there any dispute with your customer on what the receivable number is?
Nigel Hunton
No doubt there is out of this candidate, absolute clarity on what that number is yet. And we have a long-term relationship with this was something that we will. This will be worked through with them. They've been a key partner of ours, we've helped enable a successful evolution to hammer. So there's no dispute from the receivables.
Dan Weston
Okay. So this is what you would classify as more of a timing issue as opposed to a dispute of the numbers.
Nigel Hunton
Correct.
Dan Weston
Fine. I appreciate that. Also, Nigel, just to get some additional clarity, not to belabor the point, but I think you mentioned on your last call that the successful completion of the evaluation would then trigger the shipment of the first system. So I assume that did not trigger the shipment of the first system and maybe you can just add a little color for us in terms of what took place was?
In other words, weren't the terms already outlined in the JDA that would define exactly what the numbers were once the qualification was completed?
Nigel Hunton
Original JDA with the way that was written and that was completed successfully by the end of December. The next step within the JDA is once successful completion of the JDA was done, the next step is to then complete a formal agreement for Trio tool shipments. We had hoped to conclude that as well. But for the end of December, however, those negotiations are still ongoing. Probably I cannot say anything more at this stage of the confirmed. We expect to still ship multiple trials in 2024. But the process was goes, it goes from JDA qualification, JDA completion, then we go into a formal and the agreement for sales and purchase. So that's the key steps.
Dan Weston
Okay. Fine. And then back to your HTD. business, just to make sure I'm very clear here since there's no guidance that you're offering for the quarter. Did I hear you right that that your company will not be providing any upgrades until the receivables are collected? Just some clarity on that, please?
Nigel Hunton
Correct. So we will not be supplying any materials until we've actually got resolution on the receivables.
Dan Weston
Okay. Got it. And I guess I mean, is there a way that you can predict what the timing would be to resolve that receivable issue.
Nigel Hunton
I think it's best to actually leave that for me to resolve receivable issue without some fitting in time line against that.
Dan Weston
Okay. Okay. Fair enough. And I appreciate your camper And best of luck.
Nigel Hunton
Thank you.
Operator
Hendi Susanto, Gabelli Funds.
Hendi Susanto
So Nigel, when let's say the negotiation of three a system has been concluded and you have the agreements. How soon can the sales of to your system take place? And then I'm also wondering upon the completion of the negotiation, whether or not in effect will filed like an SEC filing.
Nigel Hunton
And I think if you we as we said, we are in the middle of those negotiations with confidence, those negotiations will get concluded. We're pretty clear that as we move forward, we have our aim is to do up updates on revenues and performance on a quarterly basis and therefore, the next earnings call, hopefully, we'll share a lot more of a progress we've made and we have a very clear policy when it comes to both borders and system orders. When we get system orders, normally, we would actually do press releases against orders when they received in the company.
And as our basic customer policy will be following for many years. So I don't see any change to that happening. So I'm my aim is to conclude the negotiations, secure orders for this company drive into that forward, comfortably into the future. And we're as we get orders to announce them under the sort of existing practice we have as a company as we did with over 200 Lean orders. I don't see any change to that as a practice.
Hendi Susanto
Thank you, Nigel. All the best.
Operator
Thank you. There are no further questions at this time. I will now turn the call back over to Nigel Hunton for his closing remarks.
Nigel Hunton
Thank you, and thank you for all of questions. And I wish to thank all of our employees and as well as their counterparts with our industry partners for all their hard work and dedication as we proceeded through a critical milestone in 2023, which was achieving qualifications for Trio while the same time achieving a significant growth year as a key technology enabler in the HDD industry transition to hammer. So overall, an amazing achievement.
I also wish to thank our investors for their ongoing support. And as always, please reach out to clear directly do not follow it with us and look forward to updating you all on our Q1 call in early May.
With that, I will conclude today's call.
