Intevac, Inc.

Thank you for joining us today to discuss Intivac's financial results for the fourth quarter and full year 2021, which ended on January 1st, 2022. 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 Jim Moniz, Chief Financial Officer. Nigel will begin with his prepared remarks then Jim will review our financial results before turning the call over to Q&A. I'd like to remind everyone that today's conference calls contain certain forward-looking statements, including but not limited to statements regarding financial results for the company's most recently completed fiscal year, which remain subject to adjustment in connection with the preparation of our Form 10-K. 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 February 9th 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 Nigel.

Thanks, Claire, and good afternoon. I'm very excited to be joining Intervac and leveraging my expertise in the semiconductor capital equipment and other high-tech industries to execute on the company's objective to create long-term stockholder value. Most recently, I was CEO of Photon Control, a critical component company serving the leading process equipment companies in wafer fab equipment. I joined the company in mid-2019 and two years later had grown revenues by 250% and completed the sale of the company to MKS Instruments for over 300 million US dollars. I have a long history in the industry and in fact was the CEO of one of Intervac's key suppliers in years past and I'm fully committed to building on this company's strong legacy of leadership in thin film processing technology in order to drive value for our stockholders. Since joining three weeks ago, I've been able to talk to several customers and Intervac employees working in both Santa Clara and Singapore to ensure that they fully understand my commitment to building strong relationships and creating a successful business. I've been very impressed by the depth of talent in the business and especially the expertise in thin film processing in ultra high volume small substrate applications. My initial areas of focus will be based around the key mandates and priorities outlined in our recent press release. First, assessing our growth potential in each of our end markets, which entails meeting with each of our key customers, both existing and prospective. Next, I'm working internally to fully understand the organization, aligning resources with our revenue growth prospects, and streamlining the cost structure. given that we are now a standalone capital equipment company without the added complexity of also running a wholly different photonics business. And third, positioning the company for a return to profitability as soon as possible while preserving the strength of the balance sheet. I have met multiple times with the leadership group, and we are quickly developing our near-term targets and priorities. We have a customer-centric culture, and an experienced team that is highly attuned to our customers' needs and challenges for each of our end markets. I expect to meet with every key customer within my first 90 days as CEO. The objective of these customer meetings is to understand their commitment to Intervac's thin-film processing solutions in their future technology roadmap and to both identify and size our revenue growth opportunities. Next, as it relates to streamlining operations. As we build the forecast, customer by customer, gaining a clear understanding of their tool purchase and technology upgrade plans for the next two to three years, we will begin optimizing our company's resources with our growth prospects. We are also identifying costs that can be reduced with our newly simplified structure. Number three. prudent fiscal management, including positioning the company for profitability and preserving the strong balance sheet, including our significant cash reserves. We are continuing our strategic review work with Greenhill in concert with my immediate efforts to size our revenue growth and streamline operations. My objective is to provide you with a near-term forecast as well as longer-term objectives on the next earnings call in early May. So for today's call, I will be deferring an official look for 2022 financials until I can personally meet with all of our key customers and make that assessment. That being said, at this time, I believe it's prudent to assume that the HDD business will be pretty similar to 2021, given the timing of the first new HDD system to be delivered later in the year. In the meantime, we are laser focused on minimizing our use of cash as we streamline interact. Before turning the call over to Jim, I'll make a few more comments about the results published in our Q4 press release today. For fiscal 2021 and Q4 in particular, for the most part, our results were in line with what the company had guided a quarter ago for the thin film equipment business. The main difference on the P&L other than the photonics business moving to discontinued operations, is that we took additional reserves against some of our inventory in non-HDD markets. I have taken a conservative viewpoint on our ability to turn over some inventory to revenue. For example, two of the three Vertex tools we built were intended for decorative back cover glass coatings and will require significant modifications for the applications we've been working on more recently. We also feel it's prudent to reserve the inventory associated with our energy product line for solar implant, which has continued to get pushed out of the forecast for the last two years. Absent these additional inventory reserves taken in Q4, our results for the year came in pretty much as expected. I look forward to meeting with and working with our investors, our customers, our board, the management team, and the entire Intervac organization as we take the company forward. That completes my prepared remarks. And with that, I will now turn the call over to Jim.

Thank you, Nigel. Our earnings release reflects the Q4 2021 and full year 2021 financial results per GAAP accounting, which reports the photonics business as discontinued operations. My remarks here will close out Q4 2021 as compared to what was forecast for the equipment business and which drove our prior guidance for revenue, gross margin, OPEX, and profit or loss. Fourth quarter revenues were $15.9 million, and total revenues for the year were $38.5 million. This was slightly above our forecast for the equipment business, given a pull-in of HDD upgrades from Q1 into Q4. For the full year, revenues included one matrix plus HDD upgrades, spares, and service. Q4 gross margin was 4%, below our forecast for the equipment business, as we took additional inventory reserves of $8.4 million, as Nigel described. Without those reserves, our gross margin would have been 57%, above forecast, driven by favorable mix of higher margin HDD upgrades. Full year gross margin was 18.3%, and excluding the inventory reserves taken in Q4 would have been 40%. Q4 operating expenses were $7.3 million and included a $1 million litigation settlement cost that is excluded from our non-GAAP results. The net operating expenses of $6.3 million was below forecast due to less spending on IR&D efforts and the absence of operating expenses from the photonics business. The Q4 net loss from continuing operations was $7.3 million or a loss of 30 cents per share for the quarter. Excluding the impact of the inventory reserves, which were equivalent to 34 cents per share, as well as the litigation settlement, we would have reported net income from continuing operations of 7 cents per share. GAAP net income for the quarter was $43.5 million, or $1.77 cents per share, as a result of the gain recorded on the sale of our photonics business. which contributed a net profit of $2.10 per share for Q4. For the full year, GAAP net income was $1.09 per share. Driven by our strongest bookings quarter for equipment in the last three years, our backlog grew to $24.7 million at year end and includes one 200 lien system, as well as HDD upgrades and service business. We ended the year with cash and investments, including restricted cash of $121.1 million, equivalent to approximately $4.93 per share based on 24.6 million shares at year end. The increase in cash year over year, less the $70 million of gross proceeds from the sale of photonics, was about $1 million. We incurred about $3 million of transaction costs associated with the photonics sale, and these were paid in Q1. So these costs will be reflected in the balance sheet and investments at the end of this quarter. The litigation settlement payment will be made in Q2. Cash flow generated by operations was $318,000 during the quarter and $278,000 for the year. Q4 capital expenditures were $425,000 and depreciation and amortization was $888,000 for the quarter. For the full year, CapEx was $1.2 million, and depreciation and amortization was $3.5 million. Now moving to Q1 2022 guidance. We are projecting revenues to be around $4 million. The Q1 projection includes HDD upgrades, spares, and field service revenue, and no thin-film equipment systems. As a reminder, we did see a pull-in of upgrades from Q1 into Q4. The fourth quarter is typically our largest quarter for upgrades, and the first quarter is typically our lowest quarter for upgrades. Given the lower revenue volumes in Q1, which will affect factory utilization, we expect first quarter gross margin to be around 25%. Q1 operating expenses are expected to be around $7 million, with some typical seasonal increases. We are working to reduce our quarterly OPEX, and we'll have more to report on our next earnings call. We expect interest income of about $40,000 and GAAP tax expense of about $100,000 in the quarter. We are projecting a net loss of around 24 cents per share based on 25 million shares outstanding. This completes the formal part of our presentation. John, we are ready for questions.