Intevac, Inc.

Thank you for joining us today to discuss Indivac's financial results for the first quarter of 2022, which ended on April 2nd. 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. and 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 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 remain 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 May 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'll now turn the call over to Nigel.

Thanks, Claire, and good afternoon. Thank you for joining us today and hearing more about the new Intervac. It's now been just over 100 days since I started with Intervac, and that has been a very exciting and productive period of time for both me and the company. We have eliminated a layer of top management, consolidated our development efforts, and stopped programs that wouldn't deliver a positive return. I have started to develop the new management team. I've traveled to Singapore, and I've met with our employees, major customers, and suppliers. so a busy and very active start to the year. We've also announced record bookings in our core HDD business and identified how to focus our growth initiatives to expand our business beyond the HDD market areas. I will get into all of these in a moment, but first let me quickly recap on our financial results for the quarter, which came in as expected. We had some upside in HDD upgrade business, resulting in total revenues of $4.4 million. Our non-GAAP results excluded $2.7 million of restructuring-related costs, including severance and disposals of fixed assets, and the resulting non-GAAP loss was 20 cents per share, so better than forecast. The primary highlights of the quarter center on orders and backlog, both of which achieved new 12-year record highs New orders in the quarter totaled $67 million, which enabled us to grow BATLOT to over $87 million as of quarter end. The $87 million of BATLOT includes nearly $60 million of 200-lean systems. One 200-lean will ship in Q4 this year, and the systems ordered at the end of Q1 will ship over multiple quarters beginning in mid-2023. The remaining $27 million in backlog at the end of Q1 consists of HCD upgrades, SPURs, and field service. And given this month's significant new order, we also expect to report a sequential increase in backlog for the end of Q2. In February, we announced a multi-year refurbishment and upgrade agreement with a major data storage company being deployed on the 200 lien platform rather than on the incumbent equipment suppliers platform. Valued at over $20 million, orders released in this program will be added to backlog on a system by system basis over the 2022 to 2024 timeframe. At the end of Q1, less than $5 million of the 20 million agreement was in backlog. Since November of last year, we have now announced four orders and agreements that firmly establish our 200 lean system as a platform of choice for the entire industry's media capacity expansion plans being put into place for the next few years. To recap, November's announcement marked the very beginning of new 200 lean capacity orders. February's announcement highlighted a major agreement with a leading data storage company to add capacity. The $54 million order received at the end of Q1 was the largest 200 lien system order received since early 2010. And finally, our most recent press release includes an additional $11 million of 200 lien system orders. As I mentioned on the last call, I'm happy to confirm we expect HDD revenue in 2022 will be similar to last year at around $35 million. Importantly, We already have the backlog in place in support of a $65 to $70 million year in 2023, giving us confidence for the future. The key in 2023 will be achieving profitability and positive cash flow generation at this revenue level. Which brings me back to our priorities. First, assessing our growth potential in each of our end markets which entails strengthening relationships with each of our key customers, both existing and prospective. I'm pleased to say that during my visit to Singapore, I met with our employees, suppliers, and customers, ensuring that in my first 90 days, as promised, I met with all key existing and prospective customers in the USA and Singapore. A great start to positioning Intervac as a customer-driven organization, and more importantly, understanding the potential future business opportunities. Next, I have worked internally on streamlining the cost structure and to align resources with our revenue growth prospects. In the first quarter of 2022, we made significant progress in support of our new business model with a focus on our core HDD media business and a vastly more targeted approach of pursuing any equipment growth opportunities outside of our core HDD market. As I mentioned earlier, we're also investing in the new management team to leverage the strengths of each person supported by a focused leadership development program that can propel the company forward. We will still maintain an emphasis on cost control and managing our cash while selectively adding capabilities that support future growth. And third, positioning the company for a return to profitability as soon as possible while preserving the strength of the balance sheet. With prudent control of working capital in the quarter, we were able to limit the decline in our cash balance to solely transaction-related costs related to the sale of the photonics business, which were about $4 million. We ended Q1 with a total of $117 million of total cash and investments a great achievement by the management team. We effectively eliminated an entire layer of executive management as we significantly simplified our operating structure. We now have a strong foundation for growth and profitability in our core HDD media business. We redeployed investment into our supply chain and made targeted R&D investments in support of our additional growth initiatives, enabling us to move forward with a customer-focused structure in support of our most significant prospects for revenue growth and profitability. Our sole activities outside of our core HDD media business today are focused on very specific applications where we believe InterVac offers a compelling and differentiated solution at the right price point to disrupt the market in pursuit of what could become large revenue opportunities. We believe these are centered on our unique capability to provide cost-effective, optically clear ballistic coatings. Our new tool approach that addresses these specific market needs is the TRIO, which is a brand new concept and importantly a very cost-effective machine based on recent feedback from our prospective customers. The TRIO also leverages our 200 lean expertise in producing advanced films at high productivity on a small substrate platform. We are pursuing strategic partnerships from several companies that I have approached since I began as CEO in order to validate this growth opportunity for Intervac and we look forward to providing you with updates on our progress each quarter. This customer focused approach is enabling the company to move forward with a clear vision and we have stopped the initiatives that no longer fit with our revamped strategy. We believe the combination of Intervax Ballistic Coating and the TRIO technology provides scratch resistant protection and enhanced durability for multiple applications due to its superior hardness, strength, surface adhesion and thin film properties when compared to existing technologies and with improved optical transmission. Before turning the call to Jim, I'll provide a few more comments around what we see in our core HDD media market. The headlines are rife with debate over signs of near-term pockets of softening demand, the trajectory of mass capacity-derived growth for data centres, the impact of supply chain challenges, and much more. These are bound to result in increased volatility and speculation around the particular dynamics of the HDD market. There are a few trends in the industry, however. which drive Intervac's HDD media business that are worth highlighting. First, while overall HDD units are in decline, HDD media returned to being a growth industry in 2020 and is expected to remain a growth industry for the foreseeable future. Second, media unit growth is being driven by near-line demand for mass capacity drives, which contain as many as eight to 10 disks each. This growth in data center storage needs which is estimated at upwards of 35% annually, cannot be fully served by the solid state drive market, and in fact, expectations for exabytes shipped on SSDs over the next five years are still a small fraction of those being shipped on hard drives. The seven to one cost advantage of HDDs in terms of price per bit has not narrowed, and is not expected to narrow meaningfully in the coming years. Third, The industry is effectively maxed out with its current media capacity, and the leading drive manufacturers are working with Intervac to add capacity solely on the 200 lead platform. So while near-term fluctuations, supply chain challenges, and volatility of the hard drive market are certainly making headlines, the growth foundation for our core media business is firmly established, and the visibility and backlog we have today provide the confidence for future revenues And in combination with our restructuring program, plus all the security volume shipments, we're on track for a return to profitability by mid-2023. Lastly, I look forward to continue working with our customers, our suppliers, our stockholders, our board, the management team, and the entire organization as we build a new InterVac. That completes my preferred remarks. And with that, I will now turn the call over to Jim.

Thank you, Nigel. Turning to the first quarter results, consolidated first quarter revenues totaled $4.4 million, above our guidance of $4 million, and consisted of HDD upgrades, spares, and service. Q1 gross margin was 16.3%, below our guidance of 25%, due to inventory reserves of $755,000, mainly attributed to reserving our engineering solar inventory and older generations of our display cover panel inventory where we will no longer focus our efforts. Without these reserves, gross margin would have been 32% above guidance. Q1 R&D and SG&A expenses were $8.4 million, which included $1.5 million charge to dispose of certain lab equipment as well as $1.2 million in severance, which was largely offset by stock grant forfeitures in the quarter. Net of these adjustments, operating expenses would have been just below our guidance of $7 million. The Q1 net loss was $7.9 million or 32 cents per share. The non-GAAP net loss was $5 million or 20 cents per share and excludes the impact of restructuring charges and discontinued operations from the photonics division. Our backlog was $87 million at quarter end, reflecting the $67 million of new orders booked in the quarter. Post-quarter close, we announced an additional $11 million of systems orders, which builds backlog for the current quarter. We ended the quarter with cash and investments, including restricted cash, of $117 million, equivalent to $4.71 per share, based on 24.9 million shares at quarter end. The net decrease in cash from year end 2021 was limited to the transaction costs related to the sale of the photonics business, as cash flow used by operations was $4.1 million during the quarter. Q1 capital expenditures were $618,000, and depreciation and amortization were $445,000 for the quarter. Now moving to Q2 2022 guidance. We are projecting consolidated revenues to be in the range of $8 million to $8.5 million, reflecting a higher level of HDD upgrades, spares, and field service revenue than we reported in Q1. For the first half of 2022, This represents about a 20% increase in the HDD business versus what we reported in the first half of 2021. Given the higher Q2 revenues and favorable mix of upgrades, we expect second quarter gross margins to be around 45%. Q2 operating expenses are expected to be around $6.7 to $7 million. We expect interest income of around $20,000 and gap tax expense of around $500,000 in the quarter. Most of the tax expense will be non-cash. We are projecting a net loss in the range of 13 to 15 cents per share based on 25 million shares outstanding. For the full year, as Nigel mentioned, we continue to expect hard drive revenues will be similar to last year at around $35 million. This includes one 200 lien system and therefore a slightly lower mix of upgrades. Given the timing of deliveries during the year, we expect over 60% of 2022 revenue will be recognized in the second half. At this revenue level and expected mix, we anticipate gross margins for the year will be in the high 30s. We expect ongoing cash-based operating expenses will decrease compared to last year. We expect to end fiscal 2022 with a total balance of cash, cash equivalents and investments of at least $115 million. That completes the formal part of our presentation. Devon, we are ready for questions.