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spk05: Good afternoon, everyone. Thank you for joining us today to discuss Intivac's financial results for the third quarter of 2021, which ended on October 2nd. In addition to discussing the company's recent results, we will discuss our outlook looking forward. Joining me on today's call are Wendell Blonigan, President and Chief Executive Officer, and Jim Moniz, Chief Financial Officer. Wendell will start with a review of our business and our current outlook. Then Jim will review third quarter results and provide further details regarding our financial outlets 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, which remains subject to adjustment in connection with the preparation of our Form 10-Q. as well as comments regarding future events and projections about the future financial performance of INTIVAC. 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 10-K and quarterly reports on Form 10-Q. The contents of this November 1st 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. I will now turn the call over to Wendell.
spk03: Thanks, Claire, and good afternoon. Today we reported third quarter results that were above our forecast and up sequentially from Q2. We exceeded the high end of our guidance ranges across the board with upside in revenue and gross margin that resulted in a smaller net loss than forecast. Our revenue upside was primarily in our HDD business as our customers once again accelerated their upgrade programs, pulling in expected revenue from Q4. This benefited our thin film equipment, our TFE gross margin profile for the quarter, with Photonics gross margin also surpassing our expectations. These results, combined with lower operating expenses, reduced our net loss per share to 17 cents compared to guidance of around 25 cents. Included in our Q3 numbers was a $300,000 restructuring charge in our TFE business, which reduced expenses during this period of limited new system sales while continuing to maintain our ability to support the expected growth in our HDD business and technology development efforts in our TFE growth initiatives. To date in 2021, we have closely managed cash and maintained the strength of our balance sheet, achieving a net increase in total cash, restricted cash, and investments since year end 2020. While 2021 has been an immensely challenging year, In Q3, we continue to achieve momentum in each of our businesses and have confidence in a return to revenue growth in 2022. Intivac, for a small technology company, has many moving pieces in our revenue stream. Significant portions of our business are derived from new growth initiatives and development programs, each of which contain technical adoption, timing, and competitive risks. In addition, our core HDD business has consolidated to essentially two large customers, and their plans and timing have been historically fluid. We strive to deliver to our stakeholders accurate and transparent information that best represents the current status of our business as of the day of our conference call. As we have seen and will continue to see, things change over the course of a quarter, and the following is the state of our business as of today. This afternoon, I'll keep my prepared remarks relatively brief, addressing the questions and concerns that we believe are foremost in our stakeholders' minds. Namely, the status of our strategic process with Greenhill, the role of InnoVac Photonics in the I-VAS program, the growth trajectory of our HDD business, and our expectations for achieving success in our TFE growth initiatives. So I would begin with the review of these primary questions, discuss expectations for return to revenue growth in 2022, and provide an overview of our longer range forecast over the next three years. Our strategic work to realize improved shareholder value with our advisor Greenhill has and continues to be active and progressing. While today we are not in a position to provide a formal update, I want to emphasize that we are working diligently in advancing this initiative and will provide a detailed update when it is appropriate to do so. Next, moving to IVAS. The key message I want to convey today is that we continue to be actively and strategically engaged on this program. After being one of two suppliers down selected for production late in 2020, our last On our last call, we shared the news that the initial deliveries of low light level CMOS image sensors for the program would be minimal and that these initial units would not be supplied by us. As we addressed on our last call, with respect to discussions around our CMOS cameras and supplier selection, it was communicated to us that program uncertainty, low committed volumes, and cost of dual sourcing were the deciding factors, not camera performance. We addressed all the open technical issues and required new functionality, and the cameras were shipped, accepted, and revenued. Also on our last call, we conveyed our concerns that there may be challenges and hurdles facing the overall program, which now have been substantiated and publicly communicated. After Soldier Touchpoint 4 and the user jury activity in July to determine if the IVAS system was ready to go to operational testing, there was little public information of the results and the outcomes. In mid-October, the Army's Program Executive Office, or PEO SOLDIER, issued a press release regarding the status and timing of the IVAS program, which has been officially shifted right to allow for continued performance enhancement of the IVAS technology platform. First unit equip timing has been reported to be rescheduled from the end of calendar 2021 to the end of the Army's fiscal 2022. In parallel with the system testing, there are a total of three programs underway targeted at enhancing the night vision performance of the IVAS headset. And INIVAC is the only digital night vision technology provider that has been awarded all three of the phase one development contracts. The focus on improving the night vision camera performance of the IVAS system would indicate that the existing low light level CMOS technology may be inadequate to achieve the Army's ultimate objective of ensuring our ground soldiers achieve overmatch in multi-domain operations. We believe that the camera development efforts underway would indicate that a more advanced, higher performance solution is desired for the program, and that INNOVAC's proprietary and proven eBAPS night vision technology is uniquely positioned to meet the night vision performance needs for the IVAS system. We continue to be deeply engaged in the IVAS initiative and we expect the majority of our photonics contract R&D revenue in 2022 will be generated through programs focused on the enhancement and improvement of the IVAS headsets night vision performance. Overall, we're forecasting revenue growth for our photonics business in 2022 with continued sequential growth in the years to follow. Contributing to that growth forecast is our recently announced $16 million IDIQ contract for the Apache helicopter program. In our longer-range forecast for the photonics business, our current revenue outlook for the next three years is at least 40% higher than the revenue achieved in the prior three-year period and includes an initial production ramp of night vision cameras for the IVAS program. Turning now to our hard drive equipment business. Conditions in the HDD industry remain strong. Q3 industry demand was in line to slightly better than earlier expectations with flat to higher near-line drive unit shipments and likely a new record in near-line exabyte shipments. Importantly, our discussions with our HDD customers regarding their media capacity expansion plans have solidified in the third quarter after delaying for approximately a year. At this time, we expect the order cycle in support of this multi-year expansion to initiate towards the end of the current quarter. Current planning to add capacity over the next three years has enabled us to update our HDD revenue forecast for the 2022 through 2024 timeframe. Over the next three years, we expect our total HDD revenues to increase at least 40% over the three-year period we are now concluding. Now turning to our TFE growth initiatives. Our Vertex platform continued to undergo testing and evaluations in the third quarter. Last quarter, we discussed the potential of announcing Vertex orders before year end. However, the current pace of our customers' evaluations, coupled with the continued challenges in operating in China, make decision timing more likely to push into 2022. Success in our efforts here will enable us to establish expectations for the next three-year time period and solidify our plans for this initiative. In panel-level fan-out packaging applications within the semiconductor industry, we have witnessed increased customer activity in the initial planning of new manufacturing lines with discussions now underway with multiple OSAT companies. So while we have always positioned this initiative as a longer-term opportunity, we are encouraged to see this activity build in the back half of 2021. When we look at the next three years, we continue to expect combined contributions of the Vertex and Matrix high productivity platforms in industries including display cover panel, solar photovoltaic, and semiconductor packaging will add incremental revenue growth beyond the strong growth expected in HDD and photonics. As we expect a number of questions regarding customer adoption will be answered in the near future, we plan to provide more details as to our forecast for these initiatives next quarter. To sum up our key takeaways from this call, first, our strategic activity with Greenhill is active and progressing. Second, we are firmly engaged on the IVAS program, and in total, we expect photonics revenues to be up year over year in 2022, and for the next three years to be up at least 40% over the prior three years. Further upside to this growth would be driven by the speed of an IVAS production rail. Next, we are encouraged by the resumption and solidification of the median capacity expansion plans of our HDD customers, which we expect will result in strong growth in our HDD business in 2022, and for the next three years, we forecast our HDD revenues to also be up at least 40% over the prior three years. And finally, we continue to make progress in our TFE growth initiatives and expect traction in other industries will drive incremental growth above and beyond the strong growth trajectories for photonics and HDD. And with that, I'll now turn the call over to Jim. Thank you, Wendell.
spk04: Turning to the third quarter results. Consolidated third quarter revenues total $14.8 million. above our guidance of $12 to $13 million. Thin film equipment revenues totaled $8 million and included upgrades, spares, and service. Photonics revenue of $6.8 million included $3.7 million of product revenues and $3.1 million of contract research and development revenues. Q3 consolidated gross margin was 37%, above our guidance of 35%, as a result of favorable mix and higher revenue volume. Q3 operating expenses were $9.5 million below our guidance due to tight control of development spending. This resulted in a net loss of $4.2 million or 17 cents per share above our guidance of 25 cents per delivered share. Our non-GAAP net loss excluded restructuring charges and was 16 cents per share. Our backlog was $44.9 million at quarter end. Thin film equipment backlog of $16.9 million consisted of non-systems HDD backlog. The backlog in our photonics business was $27.9 million. Turning to the balance sheet, we ended the quarter with cash and investments, including restricted cash of $51.4 million, equivalent to approximately $2.09 per share, based on 24.6 million shares at quarter end. Cash flow used by operations was $3.4 million during Q3. Q3 capital expenditures were $408,000, and depreciation and amortization was $882,000 for the quarter. According to guidance for Q4, we see revenue in the range of $20 to $21 million. Within this range, we would forecast gross margins to be around 45%. OPEX should come in around $10 million, interest income should be about $25,000 for the quarter, and income tax expense around $900,000. We therefore are forecasting a loss in the quarter of around 6 cents to 8 cents per share, using 24.6 million shares outstanding. For the full year, the midpoint of our Q4 revenue guidance would get us to about $66 million. a little bit below our forecast last quarter as a result of the timing of some photonics bookings shifting into 2022. This completes the formal part of our presentation. John, we are ready for questions.
spk00: Thank you. At this time, we will be conducting a question and answer session. If you would like to ask a question, please press star 1 on your telephone keypad. A confirmation tone will indicate that your line is in the question queue. You may press star 2 if you would like to remove your question from the queue. For participants using speaker equipment, it may be necessary to pick up your handset before pressing the star keys. One moment, please, while we poll for questions. Our first question comes from the line of Peter Wright with Intro Act. You may proceed with your question.
spk02: Yes, thank you guys for taking my call, and congratulations on the nice speech. My first question is trying to understand the guidance of the 40% guidance over the next three relative to the last three. My math is suggesting, my first question is, is this only on product sales that this guidance is, or can we apply this to kind of total sales across the two reported line segments?
spk03: Across the entire business.
spk02: Fantastic. So my math is suggesting, you know, kind of normalized over the next three years, you're looking for kind of $127, $128 million kind of on an annualized run rate basis, which is, you know, better quarterly revenue than you've seen since, you know, the best fourth quarter quarters, you know, in 18-19. And so my question is, you know, in light of that, How linear do you think that looks over the next three years? And I guess what I'm getting at is you've got big HDD ramp that you've got pretty good visibility to and the IBAS kicking in. If you were to look at the linearity over the next three years, do you think that 22 is kind of a build year into bigger years in the next couple of years? Or do you think you're almost at kind of that? that average number that you're getting to over the next three years as early as 2022?
spk04: Yeah, I think it's going to build a little slower in 2022, and the majority of that growth I think will be after 2022. But again, 40% is what we're saying is the next three years, including 2022 through 2024, over 1920 and 2021. But it won't be completely linear, Peter. Mm-hmm.
spk02: and so if i if i look at that then if i i'll come back my my last question i'll leave you with uh this time is on the hdd side can you can you help me understand how many units that is and kind of on a cycle to cycle compare put that in perspective i'm sorry that's it again pretty hdd unit um on the hdd units yes i i think uh
spk03: We really aren't able to say, but I want to say that we will be looking at our manufacturing capacity. We think that the bulk of the beginning of the actual installs will be late 22, early 23. In net, it's well over a dozen of systems that we're looking at.
spk02: That's wonderful.
spk03: We'll add a little more color on that as the different announcements are made as we move through the end of the year and into Q1.
spk02: If I could sneak in one very last one. If you look at the IBAS program and kind of some of the information you shared with, you know, a need for more of a technology upgrade and some performance upgrades and the push out, do you think that you're in a better position on forward business wins? than you were 18 months ago looking at the initial share expectations of the two producers?
spk03: Well, I think we have to let this whole program play out. I think that the development programs, the phase ones we're on right now, are clearly all focused at getting better performance out of the night vision. I think most of the discussion around the delay in IVASH, at least what General Potts had said during an interview, was around the display of the unit. But given the fact that we're in parallel and we've been driving these programs, I think that there was definitely a need for improvement. And I think the higher performance that's going to be required out of the IVASH for night vision programs certainly realigns it with Intivax technology, who we are the only ones providing that type of performance, uh, like we do with the Apache and the joint strike fighters operating, uh, overcast, no moon environment.
spk02: Wonderful. Thank you guys.
spk04: Hey Peter, let me, let me clarify something. I think I said the 2022, you talked about the linearity. I think I said that 2022 should be less than the 40%. It's going to be greater than 40%. Just wanted to clarify that. If you look year over year.
spk02: Fantastic. Greater than, but not linear in kind of the average of the three years. So building year over year, but building better than 40% in 2022.
spk04: That is correct. Yes. Sorry, I misspoke.
spk02: No, very clear. Thank you.
spk00: As a reminder, we are in the question and answer session. If you would like to ask a question, please press star 1 on your telephone keypad. A confirmation tone will indicate your line is in the question queue. You may press star 2 if you would like to remove your question from the queue. One moment please while we poll for more questions. Our next question comes from Mark Miller with the Benchmark Company. You may proceed with your question.
spk01: Thank you for the question. You indicated last call that there were some final stages quals for a wearable application, and you also indicated in terms of protected cover, you were undergoing, you were completing a first performance test. I was wondering if you could give us a little more color on what's going on there.
spk03: Yeah, all of that work is still ongoing. On the cover panel initiative, We talked about last quarter being able to clear some of these breakage hurdles. So that is active and ongoing. On the wearables, we've gotten to a point on the wearables where we're looking at when the right phase-in timing would be, whether that's on a 2022 or 2023 product. So I think that one particular program is pretty much completed as follows the qualification. I think we have one more hurdle, which is some of the transmission of the light through the film. But again, I mentioned in our comments that operating in China has become quite difficult because not only can we not get in there to install and qualify the equipment, but our customers have the same problem getting into China as well. to qualify new features and equipment. So that one's still moving forward. We actually, last call, thought we may be able to get these units ordered this quarter. I did mention I think they're pushing into 2022 at this point, and that's really based on when they're going to be required to be up and running for the product launch that they would be on, which year that is.
spk01: Okay, so it's more just a product timing issue that pushed those orders into 2022. Is that correct?
spk03: That's what we're looking at right now, yeah.
spk01: There's been a lot of talk about impacts of supply chain issues. Have you had any impact either in a VAC or with your customers in terms of supply chain issues? You mentioned China, I know.
spk03: Yeah, I think a couple of areas. Certainly everywhere where we share components with the SEMI guys. Those lead times have extended quite a bit. I think Jay was telling me this morning the vacuum pumps are out 36 weeks, something like that. It's all rolled up in our lead times, but our lead times have extended out almost to 10 months at this point. And then we have seen, at least on the photonics side, issues with microcontrollers. We had some microcontrollers that pushed out a year. So fortunately we had inventory So we're managing through that. But, yes, we definitely see, you know, the stress on the supply chain at this point. But we believe we can manage through it.
spk01: The HD upgrade pull-ins, is that basically being driven by new types of media in terms of the prescription?
spk03: Yeah. A lot of the upgrades that we're doing right now are based on, you know, a change in the processing to support the higher density media.
spk01: Do you see anything down the road, say in six months or a year, that there'll be even more changes coming and that will allow more upgrade cycles for you?
spk03: Yeah, we have a number of different programs that we're working on. They're not completed at this point, but we plan on being right at the edge of our customers' technology roadmaps as far as it – right now and enhancing perpendicular media and then ultimately the transition to hammer i just wanted to confirm you did say there was an opportunity next year for 12 lean systems is that correct and was that for next year no i think kind of in total when we look at the ramp and again it'll be uh it will be less than that certainly for the 2023 time frame but we're given many times right now we do have some inventory so we can get some systems out this year um you know The lead times on the equipment are putting that into, you know, the end of 2022-23 cycle for shipments.
spk01: So the 12 systems was over two or three years?
spk03: A couple years, yeah.
spk01: Okay. Thank you.
spk03: Thanks, Mark.
spk00: At this time, there are no further questions. I'll now turn the call back over to Mr. Blonigan.
spk03: Thank you. I want to again thank the dedicated employees of INNOVAC all around the world for their continued resilience and dedication in a challenging operating environment. I also want to thank our customers and suppliers for their business and appreciated partnerships. And finally, I'd like to thank our stockholders for the continued support of INNOVAC. I thank all of you for joining us today and we look forward to updating you again during our Q4 call in February.
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