Intermolecular's (IMI) CEO Dave Lazovsky on Q1 2014 Results - Earnings Call Transcript

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Intermolecular, Inc. (NASDAQ:IMI) Q1 2014 Results Earnings Conference Call May 6, 2014 4:30 PM ET

Executives

Gary Hsueh - Senior Director of Corporate Development and IR

Dave Lazovsky - President and CEO

Rick Neely - Chief Financial Officer

Analysts

Harlan Sur - J.P. Morgan

Edwin Mok - Needham & Company

Operator

Good day, ladies and gentlemen and welcome to the Intermolecular’s First Quarter 2014 Earnings Conference Call. All participants will be in a listen-only mode. Please note this call is being recorded. My name is Karen. And I’ll be your operator for today.

I’d now like to turn the conference over to your host for today, Mr. Gary Hsueh, Senior Director of Corporate Development and Investor Relations. Please proceed sir.

Gary Hsueh

Thank you, Karen. Good afternoon and welcome to Intermolecular’s first quarter 2014 earnings conference call. We announced results after the close today and you’ll find a copy of the press release on our website at www.intermolecular.com. On the call with us today are Dave Lazovsky, President and Chief Executive Officer and Rick Neely, Chief Financial 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 2013 and our subsequent quarterly reports on Form 10-Q as filed with the SEC, particularly in the sections titled Risk Factors.

Before we begin, please note that during this call, we will discuss non-GAAP financial measures as defined by the SEC and 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 measures in our press release issued today.

And with that I would now turn the call over to Dave.

Dave Lazovsky

Thanks, Gary. Good afternoon everyone and thank you for joining us on today’s call and webcast. Our Q1 results were in line with guidance, headlined by $15.9 million in revenue which included an accelerated payment of $4.2 million from GLOBALFOUNDRIES.

In the first quarter, SanDisk and Toshiba informed us that they will no longer be requiring additional development services from us under our collaborative development program on next generation non-volatile memory technology. Despite introducing timely near-term revenue impact beginning in the second quarter, we believe that the ReRAM memory technology and the associated intellectual property we have developed are on track for commercialization. Any such commercialization would result in royalty revenue streams [earned] to us under the current agreement with SanDisk and Toshiba.

I’ll cover our ReRAM memory technology in more detail in a few moments, including its benefits, relative demand, our significant intellectual property portfolio and the scalability of this technology with or without EUV lithography.

In terms of our cost structure, we realigned and streamlined operations with an 18% headcount reduction in February primarily in response to the reduction in CDP services we were providing ATMI and GLOBALFOUNDRIES.

In parallel, we have focused on reallocation of our world-class technical team on existing customer CDPs. This will help to make sure that we are successful with existing customer CDPs and that our developed technologies are on track to meet customers’ commercialization timelines that will drive future licensing and royalty revenue streams. With this backdrop we reported a non-GAAP net loss of $1.3 million excluding $1.1 million in restructuring, which was in line with guidance.

Solid execution by our CDP teams has recently resulted in extensions and expansions with Guardian for advanced glass and Epistar for LED. Also in terms of R&D execution leading to the achievement of technical success, we believe that our CDP with SanDisk and Toshiba has resulted in the creation of extremely viable technology and IP.

Over a multiyear period, we have collaboratively developed and patented critical technologies, which we believe to be necessary for the commercialization of next generation non-volatile memory in a post NAND world.

The development base of this three way program, we believe is now transitioning towards the commercialization phase, which will then result in royalties own to us under the agreement that remains in place.

SanDisk and Toshiba’s decision not renew CDP services on further ReRAM development was unexpected and the timing from a financial perspective was not ideal. The introduction of revenue down between CDP services and revenue and royalties creates added financial pressure. So I think it's important to provide insight on why we believe our IT solution in ReRAM is significant and highly valuable. And that's our near-term and longer term market to support ReRAM’s commercial adoption.

This collaborative development program with SanDisk and Toshiba has resulted in the creation of what I believe to be one of Intermolecular's most valuable intellectual property assets. Working together with these two memory leader, our CDP has developed and demonstrated ReRAM technology in full level arrays and high density memory chips that are bit addressable and therefore capable of RAM and (inaudible) wide speed that are significantly superior to today's NAND technology.

In addition, since the storage mechanism is based on resistance day change versus capacity for NAND, our ReRAM memory technology is scalable beyond that. It has also been demonstrated to provide meaningful improvement in data retention and endurance performance which will enable simpler and more robust storage class memories and system level storage architectures.

In parallel with the development of the technology development effort, we have also been building a comprehensive IT portfolio since the start of the CDP in 2006. Since then Intermolecular has applied for or has been granted well over 150 U.S. patents that comprise a significant portion of the total U.S. IP landscape in ReRAM.

More importantly in the shared number of patents, our IP in ReRAM has been one of the main factors behind Intermolecular’s top 10 and top 20 positions on IEEE’s patent power ranking for semiconductor manufacturing for U.S. patents granted in 2011 and in 2012.

In addition to our royalty opportunities under the existing agreement with SanDisk and Toshiba, we have begun to explore additional avenues to monetize our ReRAM IP. In short, we are proud of our CDP team’s technology achievements in developing ReRAM and have high confidence that there exists markets for ReRAM such as the high performance done by storage market and a low power mobile storage applications.

We believe these markets will support the commercialization of our ReRAM technology in IP and that economic viability and scalability of ReRAM does not depend on the availability of EUV lithography in the near-term.

In addition to ReRAM, we are equally pleased with our CDP with Micron on advanced DRAM and non-volatile memory application as it continues to make positive forward progress. Micron’s first product post Elpida acquisition incorporating technology resulting from our collaboration are slated for production later this year.

Outside of our semiconductor programs, we recently announced a multi-year extension of our collaborative development program and royalty bearing IP licensing agreement with Epistar. The objective of this CDP is to increase the efficiency and reduce the cost of their LED devices.

With one year of the CDP development activity behind us, our CDP has gained validation with an Epistar’s R&D and manufacturing organization. And in 2014, they’re beginning to transition certain developed LED technologies into the production implementation phase.

As Epistar stated in a recent joint press release, “our CDP with Intermolecular helped to significantly increase the performance of one of our LED products during development and we’re now in the process of implementing that technology in production.” This is a similar pattern to our increased traction with Guardian which resulted in an extension and expansion of that CDP. Guardian plans to increase the pace of new product development and to begin commercializing our collaboratively developed advanced blast technology later this year.

Now, I’d like to spend some time on our pipeline of future CDPs. As you know, our business objective is to add CDP services and IP licensing agreements with Tier 1 customers in large and growing markets, focused on projects that are on the critical path of their product roadmap.

To be clearer, our growth objectives in advanced materials and integrated devices extend beyond Tier 1 semiconductor companies. We are not only continuing to invest to catalyze new CDPs and licensing deals but we’re focusing on potential customers that are the technology and market leaders in their respective industries. Demonstrating the speed and efficiency of our HPC innovation platform and the creation of valuable IP and negotiating multiyear CDP service and IP licensing agreements are complex tests that often require a significant amount of time. This is particularly true in new applications in new markets. That said I am pleased with the progress our technical team has made in new areas of focus where the company has made significant investments beginning in the second half of last year and even more recently in Q1. I look forward to providing you with updates as these opportunities within our CDP pipeline materialize.

With that I would like to turn the call over to Rick to provide an overview of our first quarter financial results, Rick.

Rick Neely

Thanks Dave. Now I will briefly summarize selected financial resulted for the first quarter. Revenue for the first quarter of 2014 was $15.9 million which was flat sequentially from the fourth quarter of 2013 and down 9% versus the first quarter of 2013. CDP revenue represented 56% of total revenue in the first quarter and licensing and royalty revenue 44% note that significant portion of the accelerated revenue that we recognized from GLOBALFOUNDRIES in Q1 was classified as licensing and royalty revenue.

We have three customers which were greater than 10% of total revenue during the first quarter, together these three customers represented 69% of total revenue in the first quarter. Net loss in the first quarter of 2014 on a GAAP basis was $3.9 million or a loss of $0.08 per basic share which includes $1.1 million of restructuring related costs this compares to a net loss of $4.4 million or a loss of $0.10 per basic share of common stock in the previous quarter.

In the same period a year ago we reported a net loss of $1.5 million or a loss of $0.03 per basic share. I would like to remind you to please review today's earnings press release for both GAAP and non-GAAP measures and reconciliation between those results. The key difference from GAAP to non-GAAP measures is the exclusion of employee severance and related restructuring charges and stock-based compensation expense.

We reported a non-GAAP net loss for the first quarter of 2014 in the amount of $1.3 million or a loss of $0.03 per basic share. This compares to a non-GAAP net loss of $3 million or a loss $0.07 per basic share in the fourth quarter and a non-GAAP net loss of $86,000, or $0.00 per basic share in the year ago period.

Gross margin in the quarter was 58.7%, higher than the 46% in the prior quarter and 55% in the first quarter of 2013. The over 10 percentage point difference in gross margin in the first quarter compared to the fourth quarter was predominantly driven by the accelerated payment from GLOBALFOUNDRIES and the partial benefits from the restructuring in February offset by allocation of additional headcount and tactical resources through existing CDPs and key strategic micro CDPs. Even factoring in a full quarters worth of cost savings coming from the 18% reduction in headcount, gross margin tied to CDPs service revenue will remain below our target range of 40% to 45%.

Total operating expense in the first quarter was $13.0 million and this includes $1.1 million in restructuring tied to the 18% reduction in headcount. Excluding restructuring, operating expenses were $11.9 million compared to $11.4 million in the fourth quarter and $10.8 million in the same period a year ago.

This 4% sequential growth in OpEx is a reflection of reallocation of headcount and tactical resources from COGS to internal R&D programs necessary to support the company's pipeline of future CDPs as well as higher compensation estimates at the beginning of a new fiscal year. These factors are partially offset by the restructuring in February. We recognized roughly $700,000 of cost savings in part for the first quarter across both COGS and OpEx as a result of the corporate restructuring in early February and we expect to see continued reductions in our operating expenses.

Other net expense during the quarter of $199,000 primarily reflects our quarterly net interest expense related to our three year term loan at 3.25% interest. As of March 31, 2014, our balance sheet included cash and investments of $72.3 million, which is relatively unchanged compared to cash and investments of $72.1 million at the end of 2013.

Our first quarter ending cash position benefited from the accelerated payment from GLOBALFOUNDRIES, as well as lower CapEx reflecting only maintenance level investments to property, plant and equipment. At the end of March, backlog applicable for the remainder of 2014 revenue was approximately $25 million.

Now for the financial outlook for the second quarter of 2014, I would like to remind everyone that the following statements are based on current expectations as of today and includes forward-looking statements, actual results may differ materially.

Our guidance for the second quarter of 2014 is as follows: We project revenue in the range of $8 million to $9 million. This revenue projection includes approximately $8 million from backlog at the end of March 2014.

Non-GAAP net loss excluding stock-based compensation expense is projected between a non-GAAP net loss of $8 million and $7 million or between a negative $0.17 per share to negative $0.15 per share on approximately 47 million basic shares outstanding.

Now, I will turn the call back to Gary.

Gary Hsueh

Thank you, Rick. And now we’d be happy to answer any questions that you might have. [Karen], if you could you please provide the instructions for Q&A.

Question-and-Answer Session

Operator

Certainly (Operator Instructions) Our first question comes from the line of Harlan Sur from JP Morgan.

Harlan Sur - J.P. Morgan

Hi, good afternoon. Thanks for taking my question. Can you just help us understand the $7 million decline in revenues from Q1 to Q2? You have the one-time sure benefit on the termination of the GLOBALFOUNDRIES partnership in Q1 that closed away in Q2 and that was roughly about $4 million. You have the termination of SanDisk, Toshiba, CDP partnership. Does this make-up the remaining $3 million up? And then on a go forward basis, is the Q2 revenue run rate how we should think about the quarterly baseline revenue on a go forward basis?

Dave Lazovsky

So Harlan, this is Dave. Yes, primarily the Q2 guidance is driven by the factors that you just discussed including SanDisk, Toshiba’s decision not to continue CDP services on ReRAM. And that guidance that we provided for Q2, we are as disappointed as you are in particular actions aggressive. But keep in mind that the sales cycle does take some time and while we've got a number of good opportunities in the pipeline that we're working on now, we do not provide guidance based on deals until they’re booked.

Harlan Sur - J.P. Morgan

Okay. Can you just help us, as it relates to the Q2 revenue guidance what do you think the rough mix is of CDP versus the licensing and royalties?

Rick Neely

Yes Harlan, this is Rick. I think you would take the $4.2 million that we've talked about the GLOBALFOUNDRIES payment that was on licensing revenue for Q1, take that out as a number and that gets you pretty close to the run rate for Q2.

Harlan Sur - J.P. Morgan

Okay, got it. And then what’s the guidance for Q2, just kind of ballpark. I mean we are calculating operating cash flow of about $5 million to $7 million in the June quarter. Are we in the right range and given that you are in a [telephony] during cash burn position now, is the team considering further reductions to the cost structure and to the OpEx?

Rick Neely

Yes Harlan, actually estimate is about correct, if I estimate $5 million to $6 million cash burn so you are definitely in the ballpark. And the second part of the question is certainly we’ve had some significant changes in our CDP revenues recently and we are adjusting as quickly as we can and we are trying to balance the necessary cost cuts to match our cost structure to the current revenues at the same time investing sufficiently for growth in the future. So that’s the balance we are trying to strike. We certainly are planning to continue to do that as we have done in the past.

Harlan Sur - J.P. Morgan

So, I guess maybe a better question to ask is and I am not asking you for numbers or to tell us about specific customers, but if you look at your pipeline over the next two to three quarters and if you can execute on that pipeline, does the team anticipate exiting this year in a kind of at least the cash breakeven position?

Dave Lazovsky

Yes. Harlan, this is Dave. So, let’s talk a bit about the pipeline and we have had an objective in the near-term prior to the build-up of licensing and royalties to ensure that we are operating the business from the standpoint of operating cash flow neutral and that remains the objective.

The pipeline that we are focused on extends beyond the expansion and extension of existing customer programs including what we have recently done just last quarter with Guardian and Epistar. And we are really focused right now on new customers and applications in semiconductors and clean energy and in display.

And it’s a variety of engagement opportunities including our standard CDP and intellectual property licensing model. It also includes the monetization of existing intellectual property. And it includes HPC tool sales and IP licensing that we’re focusing on selectively, but with a consorted effort in the interest of ensuring that we’re growing the top-line. This we’re focusing on in addition to the build-up of licensing and royalties resulting from the successful commercialization of CDP technologies with our existing customers.

Harlan Sur - J.P. Morgan

Okay, all right. And then my final question and I’ll get back into the queue. Total backlog exiting the year last year was about $56 million, of which $30 million was kind of applicable to 2014. Obviously given all of the changes in your customer base and some of the partnerships here gets probably changed fairly substantially. So, can you just give us an update on the team’s backlog position as we stand now?

Dave Lazovsky

So, the backlog that Rick covered that’s applicable to the balance of the year is $25 million. If you couple that with the results that are 59 from Tier 1, you get to the slightly north of 40 run rate in terms of book business applicable to 2014. So that’s as much guidance as we’ve provided based on the business that is booked currently.

Harlan Sur - J.P. Morgan

Okay, great. And then just one last question; on the Epistar CDP extension that you recently announced in kind of late April, was there a step-up in dollars in terms of the quarterly run rate of that CDP? And then Dave given your commentary about sort of potential production this year is the team going to start to generate royalties this year from this engagement?

Dave Lazovsky

Yes, the program with Epistar start on this -- focused expanding -- extending that program for multiyear engagements and application space that is similar to the areas that we’ve had some meaningful success. And as Epistar has pointed out, they do intend to move that technology into volume manufacturing at some point this year and that would initiated volume based throughout this associated with the commercialization of that technology. Yes.

Harlan Sur - J.P. Morgan

Okay, great. Thanks a lot.

Dave Lazovsky

Sure.

Operator

Thank you. (Operator Instructions). Our next question comes from the line of Edwin Mok from Needham & Company.

Edwin Mok - Needham & Company

Great, thanks for taking my question. So first question I have just I guess around the financial question I had but regarding the offering expense with the cost reduction that you got to put in place [$700,000] that you talked about, how do you think about OpEx going forward into the second quarter and to the second half. And to the extent that some of these project you are working on the pipeline can turn into full grown CDP, should we assume that could potentially happen and if that does who can actually result into lower OpEx beyond this quarter?

Rick Neely

I will talk about the current outlook on OpEx and Dave may talk about the pipeline. Relatively what we are trying to do is we had announced in February when we had a headcount reduction that our goal was to take $6 million $7 million out of operating expense on a run rate basis and we are still tracking to that and my goal now is to change in revenue just to try and do better than that. So I can’t make any commitment other than that’s definitely what we want to do because we need to get back by the end of the year, or we want to get closer towards our operating cash flow breakeven, which if you look at our current balance sheet and depreciation amortization, there are about $4 million of quarter of stock comp and depreciation, about $2.5 million and $1.5 million of each of those. And then if you say we have some minimal of just $4 million, you say maybe a minimal $1 million a year -- a quarter CapEx, we've got to get our loss of about $3 million. To that end, our revenues not have to get back to $17 million or $18 million a quarter as it was, but it does need to get closer to what we did in Q4 of ’13 and Q1 of this year to get to the cash flow breakeven.

So, that's our goal on the to get the expenses, so that we can get back to cash flow breakeven at that level. On the ability to get back to those revenue numbers, I'll turn it over to Dave.

Dave Lazovsky

Yes, and as Rick pointed out, the objective here is to make sure that we have the resources necessary to support the growth in the business. And I just highlighted the areas of growth. So, we're ensuring that we have the team and the infrastructure and resources to support growth with new customers and applications in semi, clean energy and display.

Edwin Mok - Needham & Company

Okay, great, that's helpful. And then I guess following a little bit about that right, so in the revenues for your term you highlighted Micron technology into production based on the hard work just to [figure] up here right. So, I was wondering, I'm sure it’s hard to pin point exact timing for that. But I was wondering how does that structure, is that just a one-time step up that we shift that when that happens, or it based on a number of factors they have or any color kind of around on that, when that [royalty] comes or how that coming?

Dave Lazovsky

Yes, Edwin, so it's not a one time, it's a quarterly step up associated with the implementation of that technology that will occur for the use of that technology in production. And we do expect that the base of licensing and royalties that we're drilling from will increase, not just from Micron this year, but on a quarter-by-quarter basis from materials, royalties as materials ramp ATMI product sales at the 28 nanometer node and sub-28 nanometer node type of wafer starts. The Epistar opportunity that we talked about earlier, we expect some initiation of that stream to begin later in the year as well as with Guardian with Low-E glass based on the initial production implementation of the Low-E glass technology which we expect also later this year.

Edwin Mok - Needham & Company

Great, that's helpful. And then third question I have, I guess given the IP that you guys have, on the patent that you guys have created over the last few years and IP that’s generated. Any opportunity for more near-term monetization of maybe potentially some patents or with utilizing that on a more near-term basis or is that still more long-term discussion and is the focus still driving towards doing CDP or you're looking also monetizing the patents…

Dave Lazovsky

So we're certainly looking at monetization of intellectual property, but we're not factoring it into any immediate reflection to the growth of the top-line in 2014 in medium term. The intellectual property portfolio has grown significantly and many of those intellectual property assets we have the ability for license either outside the field of existing licensing agreements with existing customers or we have internally developed intellectual property that has significant value in many cases that we have licensing opportunities. So, we are looking at a variety of opportunities to build and continue to build our IP licensing business.

Edwin Mok - Needham & Company

Great. That's all I have. Thank you.

Dave Lazovsky

Yes. Thanks Edwin.

Operator

Thank you. And our next question is a follow-up from the line of Harlan Sur from JP Morgan.

Harlan Sur - J.P. Morgan

Hey guys. Thanks for taking my follow-ups. So as a relates to termination of the CDP engagement with SanDisk back in February, I think our I recall that there was an outstanding decision for SanDisk, Toshiba on the licensing front for development access and I thought that that decision comes down like around sometime this month. Any updates on that?

Dave Lazovsky

So there is no updates on that at this point. So, I think, the information that you've accessed is correct, so it’s based on the SEC filings. So as soon as there is an update Harlan on that intellectual property election and licensing election, we will provide an update on it.

Harlan Sur - J.P. Morgan

Okay. And then my final question and Dave you talked about the pipeline, and I know that you can't disclose customers that you're working with. But I mean the team has demonstrated the value-add and the capabilities with four major semiconductor suppliers now Micron, SanDisk, Toshiba, GLOBALFOUNDRIES, next generation technologies are only getting more complex. What's your confidence on securing and new major semiconductor CDP engagement this year?

Dave Lazovsky

So what I'm going to do is we're going to talk to results rather than forecasting what is going to happen. We're committed to ensuring that we are engaging with Tier 1 customers, both in semiconductors and outside of semiconductor industry including clean energy and display. We are seeing significant pull across a variety of different applications and we'll provide update Harlan as those deals close just as we haven’t included in the numbers and guidance, we’ll talk about the specifics of the deal that close -- upon the deal’s closing.

Harlan Sur - J.P. Morgan

Okay, thank you.

Dave Lazovsky

Yes. Thank you.

Operator

Thank you. (Operator Instructions). I see no further questions in the queue at this time, I would like to turn the conference back to Intermolecular for concluding comments.

Gary Hsueh

Okay Karen. we’d like to thank everybody for joining us today. And just a reminder that a webcast replay of today’s call will be available on our website at ir.intermolecular.com. Thank you.

Operator

Thank you. Ladies and gentlemen, thank you for your participation in today’s conference. This does conclude the program. And you may now disconnect. Everyone, have a good day.

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