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Intevac: Fiscal 4Q17 Financial Results

Backlog includes three 200 Lean HDD systems

(in $ million) 4Q16 4Q17 FY16 FY17
Revenue 29.0 24.8 80.1 112.8
Growth   -14%   41%
Net income (loss) 2.8 (0.0) (7.4) 4.1

Intevac, Inc. reported financial results for the fiscal fourth quarter and year ended December 30, 2017.

2017 Highlights

  • Third straight year of growth in total revenues and orders
  • Total revenues up 41% from 2016
  • New orders of $108 million, up 11% from 2016
  • Significant growth in thin-film equipment (TFE) business
  • Revenues up 75% year-over-year, with significant growth in both new TFE growth initiatives, as well as HDD systems and upgrades
  • Year-end backlog up for the 5th straight year, to $52 million
  • Revenues recognized on multiple new product platforms:
    • Intevac VERTEX in the display cover panel market
    • Intevac MATRIX in the solar market
    • ENERGi ion implant in the solar market
  • Third straight year of improving operating results
  • Return to profitability, with EPS of $0.18 per diluted share for 2017

As expected, strong growth in our TFE business led to overall revenues increasing 41% year-over-year, and a return to profitability in 2017,” commented Wendell Blonigan, president and CEO. “The continued technology investments by our HDD customers helped drive favorable results in TFE revenues, gross margins and profitability, both for the fourth quarter and for the full year. 2017 was also a pivotal year for our TFE growth initiatives, with revenues recognized on the VERTEX and MATRIX, our newest high-productivity, substrate-independent platforms serving multiple new end markets outside of the HDD industry.”

These platforms are gaining traction and represent future revenue growth opportunities for the company.

“In our Photonics business, we were successful in capturing new development programs during 2017. Importantly, we secured funding for our next-generation night-vision sensor, the ISIE-19. We were pleased to report the approval of the DELTA-I program under the Department of Defense’s Coalition Warfare Program funded by the DoD, SOCOM and several foreign nation coalition partners. The DELTA-I program includes a $12 million funding commitment to complete the design of our ISIE-19 sensor as well as the development of a digitally-fused infrared/night vision goggle. We were also placed on contract for our integrated night vision camera on the Striker II helmet for Europe’s Typhoon aircraft. Accordingly, we expect our Photonics revenue profile in the near term to transition from a product-driven one to a funded R&D profile.

Year-end backlog in our TFE business is up for five straight years, as we continue to execute against our TFE growth initiatives. 2018 will be another important year, as we continue to work toward new market opportunities for both the VERTEX and the MATRIX. Our customers in the display cover panel market continue to evaluate the VERTEX, and our oDLC coating has now been adopted for a top-5 cell phone application. We also are working with multiple outsourced semiconductor assembly and test (OSAT) vendors in advanced wafer-level and panel-level packaging to adapt our MATRIX for fan-out applications. In total, we believe we are on a path to continue to drive revenue growth and profitability for the company.

Fourth Quarter Fiscal 2017 Summary
The net loss for the quarter was $41,000, or $0.00 per diluted share. This compares to net income of $2.8 million, or $0.13 per diluted share, in the fourth quarter of 2016. The non-GAAP net loss was $83,000, or $0.00 per diluted share, compared to non-GAAP net income of $2.8 million, or $0.13 per diluted share, for the fourth quarter of 2016.

Revenues were $24.8 million, including $17.9 million of TFE revenues and Photonics revenues of $6.9 million. TFE revenues consisted of two 200 Lean HDD systems, upgrades, spares and service. Photonics revenues included $2.7 million of R&D contracts. In the fourth quarter of 2016, revenues were $29.0 million, including $19.3 million of TFE revenues which consisted of two 200 Lean HDD systems, one MATRIX PVD solar system, upgrades, spares and service and Photonics revenues of $9.7 million, which included $2.0 million of R&D contracts.

TFE gross margin was 45.0% compared to 38.9% in the fourth quarter of 2016 and 45.5% in the third quarter of 2017. The improvement from the fourth quarter of 2016 reflected a higher mix of higher-margin upgrades versus systems shipments and improved factory absorption. The decline from the third quarter of 2017 reflected lower factory absorption.

Photonics gross margin was 26.0% compared to 45.5% in the fourth quarter of 2016 and 36.5% in the third quarter of 2017. The decline from the third quarter of 2017 and the fourth quarter of 2016 was due to lower margins on products and a higher-mix of lower margin R&D contracts. Consolidated gross margin was 39.8%, compared to 41.1% in the fourth quarter of 2016 and 42.3% in the third quarter of 2017.

R&D and SG&A expenses were $9.7 million, compared to $9.0 million in the fourth quarter of 2016 and to $10.3 million in the third quarter of 2017. Higher year-over-year expenses reflected increased variable compensation program accruals. The decrease from the third quarter of 2017 resulted from lower spending on R&D programs.

Order backlog totaled $64.0 million on December 30, 2017, compared to $72.8 million on September 30, 2017 and $68.5 million on December 31, 2016. Backlog at December 30, 2017 included three 200 Lean HDD systems and twelve ENERGi solar ion implant systems. Backlog at September 30, 2017 included five 200 Lean HDD systems and twelve ENERGi solar ion implant systems. Backlog at December 31, 2016 included four 200 Lean HDD systems, four Intevac VERTEX display cover panel coating systems, one Intevac MATRIX solar system, and two ENERGi solar ion implant systems.

The company ended the year with $43.5 million of total cash, restricted cash and investments and $81.2 million in tangible book value.

Fiscal Year 2017 Summary

  • Net income was $4.1 million, or $0.18 per diluted share, compared to a net loss of $7.4 million, or $0.36 per diluted share. Non-GAAP net income was $3.9 million or $0.17 per diluted share, compared to the non-GAAP net loss of $7.5 million or $0.36 per diluted share for fiscal 2016.
  • Revenues were $112.8 million, including $79.0 million of TFE revenues and Photonics revenues of $33.8 million, of which $8.0 million was contract R&D revenues, compared to 2016 revenues of $80.1 million, including $45.3 million of TFE revenues and Photonics revenues of $34.9 million for 2016, of which $5.8 million was contract R&D revenues.
  • TFE gross margin was 42.7%, compared to 32.8% in 2016. The improvement from 2016 reflected a higher level of revenue, a higher mix of higher-margin upgrades versus systems shipments and improved factory absorption. Photonics gross margin was 35.2% compared to 44.6% in 2016, reflecting a higher mix of lower-margin R&D contracts versus product sales. Consolidated gross margin was 40.5% compared to 38.0% in 2016.
  • Total R&D and SG&A expenses were $41.0 million compared to $38.1 million in 2016. The higher level of SG&A expenses reflects increased accruals for variable compensation programs as a result of the company’s profitability for the year.

Comments

Abstracts of the earnings call transcript:

Wendell Blonigan, president and CEO:
"In the hard drive market, the program is to upgrade the technical capabilities of our customers installed base continues. We have booked 13, 200 leans over the last six quarters. Four shipped in 2016. Six in 2017 and three tools are currently in backlog for 2018 revenue.
"The growth segment in the HDD market continues to be in high capacity near line drives, which is positive for our business given significant numbers of disks in each near line drive the industry. The industry tie ratio or average number of disks per drive has been growing over 10% a year to record 2.2 disks per drive last year. If the tie ratio continues to increase this rate, demand will exceed the installed media capacity in around two years in a flat HDD unit environment.
"Our objective is to deliver similar revenue levels in 2018 compared with 2017.
"In TFE, we expect to see another strong year for our hard drive business with similar revenues as 2017 and increased revenues in our equipment growth markets."

James Moniz, CFO:
"Now turning to the fourth quarter results. TFE revenue totaled $17.9 million and included to two 200 Leans along with upgrades, spares and service.
"With all incremental growth coming from our TFE business, 2018 equipment revenues would increase by at least 15% over 2017. And our current outlook is for total revenues to grow at least 10%, while increasing net profitability for the year."

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