Intermolecular Inc. (NASDAQ:IMI)
Q4 2015 Earnings Conference Call
February 4, 2016 5:00 PM ET
Rick Neely - Senior Vice President and Chief Financial Officer
Bruce McWilliams - President and Chief Executive Officer
Edwin Mok - Needham & Company
Gus Richard - Northland Capital Markets
Good day, ladies and gentlemen, and welcome to Intermolecular’s Fourth Quarter and Financial Year 2015 Earnings Conference Call. All participants will be in a listen-only mode. Please note, this call is being recorded. My name is Katherine, and I will be your operator for today.
I would now like to turn the conference over to your host for today, Mr. Rick Neely, Senior Vice President and Chief Financial Officer. Please proceed.
Thank you, Katherine. Good afternoon, and welcome to Intermolecular's fourth quarter and fiscal 2015 Earnings conference call.
We announced our results after the market close today, and you'll find a copy of the press release on our website at www.intermolecular.com. On the call with me today is Bruce McWilliams, President and Chief Executive Officer.
Today's conference call contains forward-looking statements. Any statement that refers to expectations, projections or other characterizations of future events, including financial projections and future market conditions, is a forward-looking statement. Actual results may differ materially from those expressed in these forward-looking statements. Intermolecular assumes no obligation to update these forward-looking statements, which speak only as of today.
For more information about factors that may cause actual results to differ materially from forward-looking statements, please refer to the press release we issued today, as well as the risks described in our Form 10-K for fiscal year 2014 as filed with the SEC, particularly in the section titled Risk Factors.
Before we begin, please note that during this call, we will discuss non-GAAP financial measures as defined by the SEC in Regulation G. We believe non-GAAP financial measures provide useful supplemental information to both management and investors, but note that these measurements are not a substitute for GAAP and should only be used to evaluate the Company's results of operations in conjunction with corresponding GAAP measures.
All non-GAAP measures are reconciled to the most directly comparable GAAP financial measurements in our press release issued today. I would now like to turn the call over to Bruce.
Thank you, Rick. Good afternoon everyone and thank you for joining us on today’s call and webcast. When I came onboard a little over a year ago, my main objective was to reestablish a solid foundation of customers, and redefine our business model. By unbundling our offering, we can serve a broader market and become a leading source of materials, discovery and understanding.
Specifically, my first goal were to rebuild the business with semiconductor market leaders and get the positive cash flow by the second half of 2016. I am pleased to report that we have accomplished these goals two quarters ahead of schedule. First and foremost, we achieved both positive EBITDA and positive operating cash flow in Q4.
Adding semiconductor customers was key to achieving fourth quarter revenues of $13.5 million, a quarter-over-quarter growth of 17%. We posted these results with three of the top five semiconductor manufacturers in the world as greater than 10% customers of Intermolecular. A year ago, only one which is in our technology platform.
We feel this is a strong indication that our new business model is working and that we have succeeded in establishing a solid foundation of durable relationships. We believe we can continue to expand engagements in this industry in the years to come.
We also needed to demonstrate that we can build a scalable business with strong operating profit. The key to achieving this is a large market beyond semiconductor and a high gross margin because of the large fixed cost of the IMI platform. It’s nice to report our gross margin in the fourth quarter was 68%, which is up significantly from the third quarter gross margin of 56%.
Thus, we are able to reduce our non-GAAP loss to only $0.02 per basic share in the fourth quarter from a loss of $0.10 in the third quarter. We are increasing revenue with very modest increase in cost. Our organization can now engage with more customers without significant capital investments or increases in personnel.
I am happy to report that we are making progress on expanding beyond semiconductor. We have a new Fortune-500 customer who is using our platform for the discovery and understanding of metal alloys. This demonstrates that the same platform IMI built for semiconductor applications can be used for a completely new and different market.
I believe our technology platform will be used for other applications in markets such as in automotive, aerospace, energy and consumer electronics. Thus enabling strong growth for the company in the years ahead. I am looking forward to telling you more about these opportunities in the course of the year.
My goals for 2016 are to continue and to strengthen what we started in 2015, namely, strong revenue growth, solidification and continued growth of our semiconductor business, expansion into new markets and applications, investing in new materials for future additional revenues, and continued improvements in operational efficiency.
In summary, IMI’s business of providing technology-enabled services for the discovery and understanding of engineering materials is beginning to bear fruit. We now have a strong position in semiconductor.
I believe we can build a business that scales well beyond the semiconductor industry long-term. We have a strong team, valuable capabilities, flexible tools in place to build a great business and I am confident results will continue to improve throughout 2016.
Now I would like to return the call to Rick for more financial information and our next quarter’s guidance.
Thank you, Bruce. Let me review some selected financial results for the fourth quarter and full fiscal year of 2015. As Bruce indicated, revenue for the fourth quarter was $13.5 million, which was up 17% sequentially from the prior quarter and up 22% compared to the fourth quarter of 2014.
Program revenue represented approximately 78% of total revenue in Q4 2015 and licensing and royalty revenue came in at 22% for the quarter. We continue to see good growth in our program revenue which is up almost $2 million quarter-over-quarter as our new customers are running their programs for the entire quarter.
For the full year, IMI revenue was $45.8 million, down slightly from the fiscal 2014 result of $47.7 million. In Q4 2015, we had three customers which were each greater than 10% of total revenue. These three customers represented approximately 65% of the total revenue in the fourth quarter of 2015.
Net loss in the fourth quarter of 2015, on a GAAP basis was $1.9 million, or a loss of $0.04 per basic share. This compares to a net loss of $5.8 million or a loss of $0.12 per share in the previous quarter. The fourth quarter net loss was a dramatic improvement from the third quarter of 2015 as new program revenues came in at higher gross margins and operating expenses actually declined quarter-over-quarter.
In the same period a year ago, we reported a quarterly net loss of $6.1 million or a loss of $0.13 per basic share. For the full fiscal year 2015, our net loss on a GAAP basis was $20.4 million or $0.42 per share compared with a net loss of $21.8 million or $0.47 per share in 2014.
I would like to remind you to please review today’s earnings press release for both GAAP and non-GAAP measures and a reconciliation between these results. The key difference on GAAP to non-GAAP measures is the exclusion of stock-based compensation expense and restructuring-related charges.
On this basis, we reported a non-GAAP net loss for the fourth quarter of 2015 in the amount of $1.1 million or a loss of $0.02 per basic share. This compares to a non-GAAP net loss of $4.7 million or a loss of $0.10 per basic share in the third quarter of 2015.
For the full fiscal year of 2015, our net loss on a non-GAAP basis was $14.8 million, or $0.31 per share compared to a net loss of $14.4 million, or $0.31 per share as well in 2014.
As mentioned before, gross margin in the fourth quarter was 68% which was up significantly. Our higher gross margin reflects a greater portion of our program revenue under our new business model which leverages our platform across similar projects and better utilizes existing capacity.
Our main focus continues to be on improving our total operating margin, not just gross margin and we are pleased with the positive progress. I would like to point out however, that going forward, we would expect our typical gross margins to be in the 60% to 65% range.
As of December 31, 2015, our balance sheet included cash and investments of $35.3 million, which was up $0.8 million from the combined totals of $34.5 million at the end of the third quarter of 2015. We achieved positive adjusted EBITDA in the fourth quarter of 2015, which was one of the key goals we set for IMI.
This result was several quarters ahead of our projections and was largely due to better revenues and the operational leverage we are getting with our revised business model. Looking at our quarterly GAAP loss of $1.9 million on an adjusted EBITDA basis, there would be a profit of $0.9 million when you remove $2.1 million of depreciation and amortization and $0.8 million of stock-based compensation.
This is a significant achievement and it highlights our low actual cash consumption and the capital efficiency of our new business approach.
Now, I would like to go over the financial outlook for the first quarter of 2016. I’d like to remind everyone that the following statements are based on current expectations as of today and include forward-looking statements. Actual results may differ materially.
Our guidance for the first quarter of 2016 is as follows, we project revenue in the range of $13.7 million to $14.2 million, non-GAAP net loss which excludes stock-based compensation expense is projected between $2.0 million and $3.0 million loss or between minus $0.04 and minus $0.06 loss per share on approximately 49 million shares outstanding.
Now I would like to return this call to the operator for any questions.
[Operator Instructions] Our first question comes from Edwin Mok with Needham. Your line is open. Mr. Mok, could you please check your mute button?
Hi, apologies. I apologize for that. Congratulations for a good quarter. So, first question I have is on the program that you mentioned with some of the newer customer. I think on your prepared remarks, you mentioned that new customer is now running a full quarter of programs and as a result help drive the upside for the quarter. Should we assume those customers fully ramped up and you need to have additional – could come later on the year to further grow those customers? Or are we looking for adding additional customers to drive growth?
I think both will happen. So, we are seeing, the indication is semiconductor customers want to grow further and the new customer in the metal alloys, that really just came on at the very end of the fourth quarter. So that will contribute to growth and we are generally, we are seeing that what we are offering the industry is unique and the ability to materials discovery and understanding. So we believe long-term we’ll continue to have more customers and in certain cases, those customers will continue to grow beyond where they are at.
I see, okay. I guess, the question on, I guess, revenue and profit, gross profit, so, in the fourth quarter was there any kind of one-time benefit or one-time item that benefits your revenue or gross margin for the quarter and if I use your commentary correctly, you expect your gross margin to be back in the 60% to 65% range in the first quarter. Is that what you are saying, Rick?
Yes, Edwin, relatively gross margins specifically, there was some year end you true up your bonus and there is also a drop-off in benefits costs because of everything gets maxed out for a lot of people on some securities. So, I hope you call it a one-time or more of a cyclical situation but there were some bonus true ups and things that lowered expenses and gross margin. It went the other way in some of the other operating expenses but that’s how gross margin was up a bit higher than we expected. It’s why, typically 60% to 65% would be what we are shooting for in our new business model. 68% is great, but that’s probably not a go-forward number every quarter.
And then, there were no significant one-time revenue things.
No, revenue was all just the new programs.
Yes, recurring customers. I mean, we expect to recur.
I see, and then, if I use that 60% to 65% range that you mentioned and I assume you are mulling OpEx to increase in the first quarter? How do you kind of think about OpEx come beyond this quarter? Longer term, do you expect to continue have increase out as you’d evolve momentarily though or as some of the programs come online your OpEx can actually going to moderate or stabilize?
Yes, as you can tell from the guidance, we are projecting some operating expense increases partly because some of it at the beginning of the year you are going to reset your benefits rates and things. So you are going to go up a little bit. We also have the impact of – we are hiring modestly and those people will be onboard a full quarter. So we do expect some increase, but the way to think about, what we are seeing in our business model is we think we can achieve, in fact we’ve achieved in the last year and last five quarters is, when we grow revenue, let’s say we’ll grow revenue $100 we don’t want to increase expenses more than $30. In other words, 70% incremental improvement. You’ve seen that over the last five quarters. We think we can keep that up particularly in the near term because we have a lot of excess capacity. So, you will see modest increases in OpEx but then you’ll also see more than that, much more than that on the revenue side.
I see, okay, great. That’s helpful. And then lastly, you mentioned that, beyond semi, which you guys have obviously done a good job in securing these new customers and ramping on those customers. You mentioned also about expanding the new markets including this new metal alloy win that you mentioned, right. Anyway you guys think about how you think about your mix of semi versus non-semi, longer term, that’s basically your five years out, do you expect that non-semi piece to become bigger and bigger as you find those biggest new option within auto, aerospace, some of these newer markets that you have historically not touched or do you think semi will still be a core business over the next three year timeframe let’s say?
I think, in the next three to four years, semi will be, maybe 50% of our business versus today, it’s 80%, 85%. So, now, I do believe we will continue to grow in semi and we will capture more significant players there and in those accounts, some of them we will grow. But, I think, our growth opportunity in other industries is even greater that as we get out there and talk to everybody about our platform, all of these industries need new materials and our platform is very good for discovery and understanding of new materials and it help them find solutions for their problems. And so, I think that’s why this is a very exciting company that the total market that we can grow into is very large, much bigger than semi. I think, near-term semi is what moves the needle and that’s why we are focused on it first because we understood that market and we were tuned for that. But, where we have increase spending is in marketing and sales and we are now getting position to really get out there and go to these other industries with the same platform. And that’s why we are convinced this company can scale for many, many years.
Okay, that’s helpful. Last question, and I’ll let the other guys ask. So, when we got to the non-semi or these newer industrial markets that you guys up at time and trying to understand what you can and seems like you believe there is good option there. Do you think that those markets could potentially more receptive to some kind of royalty arrangement, because I think Percy guys have suggest that. In the semi space you will focus more on standard programs which help drive the program business and contribute great margin but cuts basically scaling back on pursuing these royalty revenue from those programs. Is it the same strategy for the non-semi or the industrial market or are you seeing – idea of actually a better option to extract a royalty from those markets?
Yes, so, we see the licensing revenue as still an important component of our business long-term. We are going to be adjusting our strategy. We are going to be talking about it more later in the year how we are going to make that work long-term. Near-term we don’t expect a lot of – this year a lot of growth in royalty licenses. But, to give you a clue to how our thinking is, in certain areas the material is close to the essence of a complete product. In the area of semiconductor, we are developing materials for some – a component of a large complex process, right. Our platform works very good for that, but there the royalty model is much harder to drive because it’s a small piece, a very big bill of materials. So, we are going to be focused on applications where the material is the essence of a product and in those industries we think we can make that line in our income statement grow long-term and that long-term is what leads to a business model with a very high operating profit because their gross margins are essentially 100%. But, we are going to tell you more later in the year once we have all the pieces together and can forecast things.
Okay, great. Thanks. Looking forward to hearing that from you Bruce and thanks Rick.
Thank you. [Operator Instructions] Our next question comes from Gus Richard with Northland. Your line is open.
Yes, thanks for taking my question. Couple of quick ones. First of all, how are you getting any interest from the larger portion of the market, or is your revenue primarily still from the memory market?
We are getting interest from that side of the market and that’s what we see as a growth opportunity in 2016.
Our current revenue growth Gus, is all in memories.
Okay. And then, you mentioned you had a Fortune-500 customer you are working on alloys. Could you give us a little color on what the end application is? Is it for – or characteristics of the alloy you are looking for, is it where, light weight, any color there would be helpful.
Well, prior problem is, we actually plan a press release on that customer in the next month or so and it will be very sensitive for that customer to tell them specifically, because they have competitors. So we have to be careful. But I can say more generally, in the area of light weighting, high temperature, we see – consumer electronics, we see a broad range of applications. But we can’t tell you specifically what they are doing first and one of the things we are learning here, these new range of customers, most – all of them put in their contracts that we cannot disclose who that we are doing work for or what we are doing. So, I wish we could tell you, but there will be a press release later.
In this case, we do have.
Yes, in this case, we’ve got them to give us a press release because it’s a new market.
Okay and was this a new customer in the fourth quarter?
Part of the…
They started paying us in the fourth quarter.
Part of the fourth quarter, but you will see the full impact in Q1.
Okay. Is this, let me try this, one final way. Is this associated with the DOE contract that you got a while back or is it something separate?
It’s not the DOE contract.
Okay, so it’s a separate contract in alloy.
Yes, the good news is there will be a press release in a couple weeks and we can tell you everything, we let you’ll know everything then.
Okay, perfect. They all stop asking 50 questions on one thing. I appreciate it. Great quarter, guys. Thank you.
Thank you, Gus.
Thank you, Gus.
Thank you. And I am showing no further questions at this time. I would like to turn the call back to the company for any closing remarks.
Well, thank you everyone for listening to our conference call this quarter, and we are certainly looking forward to talking to you at the end of Q1. We will see you then. Thanks.
Ladies and gentleman, thank you for participating in today's call. That does conclude today’s program. You may all disconnect. Everyone, have a great day.
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