Intevac, Inc.

Good day and welcome to INTOVAC's second quarter 2022 financial results conference call. At this time, all participants are in a listen-only mode. A question and answer session will follow the formal presentation. If anyone should require operator assistance during the conference, please press star zero on your telephone keypad. Please note that this conference call is being recorded today, August 3rd, 2022. At this time, I would like to turn the call over to Claire McAdams, Investor Relations for Intervac. Please go ahead.

Thank you, Sherry, and good afternoon, everyone. Thank you for joining us today to discuss Intervac's financial results for the second quarter of 2022, which ended on August 3rd. Shortly after the close, sorry, July 3rd. Shortly after the close of market today, we posted our Q2 earnings release and an updated investor presentation to our IR website. 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 review of the second quarter and our outlook looking forward. 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 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 Intivax. 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 our 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 August 3rd 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 would like to welcome everyone and thank you for joining us for our second quarter 2022 results conference call and hearing more about the new InterVAC. It has now been over six months since I joined Intervac, and I feel we have made tremendous progress building the foundation for growth and increased stockholder value. Since last quarter, I have met with existing and potential new customers in Singapore, Japan, and in the USA. In addition, I've had the opportunity to meet with many new investors who are eager to understand the growth ahead in our HDD business, as well as our strategy with regard to the new TRIO platform. We're very pleased to see all the new interest coming from the investment community, and the first half of 2022 has been a very exciting and productive period of time for both me and the company. Today, I'll provide an update on our HDD forecast and TRIO strategy, after first sharing the highlights of the second quarter. For our second quarter, Revenues of $9.3 million exceeded our forecast due to strong execution toward our 2022 revenue forecast of $35 million. The increased mix of high margin upgrades resulted in gross margin exceeding our expectations at over 48%. As expected, we managed operating expenses under $7 million, which reduced our operating loss and resulted in a smaller net loss continued operations of $0.10 per share, so once again, better than forecast. We continued to prioritize the strength of our balance sheet, and as expected, we received the forecasted customer deposits in Q3, which has replenished our cash balance and provides us with even greater confidence that we will end 2022 with a similar strong level of cash and investments as where we ended 2021. We also had another strong bookings quarter for our core HDD business with an additional $22 million of new orders roughly split between systems and upgrades, which together resulted in increased backlog to over $100 million at quarter end. This record level of backlog and customer discussions provides us with confidence in and long-term visibility on our hard drive revenue forecast. and supports our expectation for at least $200 million of HCD revenue through 2025. While this expectation is consistent from our last call, much has changed since May as it relates to our expectation of the timing of shipments and our customers' plans to increase their media capacity. One quarter ago, our industry was experiencing unabated demand and continued upside in both HDD units and media units, due primarily to exceptionally strong data center spending, as well as a relatively robust PC market. To support our customers' future demand requirements, we worked with our customers to support an aggressive delivery schedule and focused on our ability to ship as many systems as possible within the timeframes they requested, which certainly presented an execution challenge given the supply chain challenges that have been pervasive in the global electronics food chain over the past several quarters. As we discussed last quarter, our $65 to $70 million forecast for 2023 reflected the amount of systems and upgrades we expected could revenue next year, but the value of shipments was expected to be even higher than that. Since then, our customers' aggressive delivery requirements have moderated. While a digital transformation and data center expansions continue to be an area of relative strength ahead of a looming economic slowdown and concerns surrounding global recession. The consumer-driven market softened and both PCs and HDD units fell sharply in the second quarter. This has allowed our customers to now spread their media capacity expansion plans more evenly over the next three years as they continue to exercise supply discipline. This is actually a good thing for our business planning as instead of a spike in 2023 revenues, followed by fewer new system sales, we are now forecasting continued year-over-year growth for our HDD business each year for the next three years. Our supply chain strategy, supported by the customer deposits, is robust, and we will also be able to respond quickly to any changes. As a reminder, our $100 million of backlog includes approximately $70 million of 200 lean systems, We continue to expect the first 200 LEA will be delivered in Q4 this year, but the delivery timing for all other systems in backlog is now more equally spread across 2023, 2024, and 2025. At the same time, our forecast for technology upgrades, as well as a multi-year refurbishment agreement with a leading data storage company, continues to support year-over-year revenue growth over this timeframe. It is worth noting that the industry is finally beginning to embark on heat and energy-assisted media technologies, which will be the first major technological change in the HD industry since the transition from planar to perpendicular media began nearly 18 years ago. This will require a very significant new initiative to upgrade the majority of more than 180 200 lean systems that Intervac has shipped since 2004. We expect this next technology transition to drive significant new upgrade initiatives and revenue growth beginning in 2024. It's also worth emphasizing again this quarter that 100% of all media capacity expansion plans taking place over the next few years are on our lean 200 platform. And we believe that the next technology transition will provide yet another opportunity for InterVac to gain an increased share of the world's hard drive media install base. So following my recent customer meetings, we now expect modest growth for HDD business in 2023, roughly in the low double-digit percentage range, followed by significantly higher revenue ramps in both 2024 and 2025. Additional upside above the $200 million revenue forecast over that timeframe will be driven by the speed of the ramp to transition to heat or energy-assisted media technology. We are well positioned with deep customer relationships to help them execute on their technology roadmaps that enable this transition. While this new forecast is encouraging as it relates to our longer-term growth trajectory, it certainly presents a challenge to our near-term objectives for profitability. Which brings us to our focused initiative to drive significant growth beyond the HGD market, which is the TRIO platform. As we discussed last quarter, We've discontinued the myriad of projects addressing various markets and applications and narrowed our focus solely to the very specific applications where we believe InterVac offers a compelling and differentiated solution for a customer need at the right price point to disrupt this market in pursuit of what could become large revenue opportunities. TRIO will ensure we expand our serve markets and overall customer footprint. These applications are centered on our unique capability to provide cost-effective, ultra-hard, protective, anti-reflective coatings for display covering glass. Our expertise and world-leading knowledge in material science and providing both durable and high-precision coatings for over 30 years of HDD developments underpins this new innovation. We believe the TRIO technology solves the consumer pull for improved scratch resistance and provide enhanced durability for multiple applications due to superior hardness, strength, surface adhesion, and thin film properties when compared to existing technologies and with improved optical transmission, which means not only are our coatings optically clear, but they actually enhance the optical transmission characteristics of the displays, thus enabling anti-reflective coatings that can actually reduce power consumption and improve battery life. Companies in multiple markets, including cell phone manufacturers, automotive screen products, and medical equipment manufacturers, among others, have been looking for a cost-effective solution to this issue for some time without any readily available options. We believe the TRIO provides a cost-effective solution. In other words, we're not just offering an add-on feature of simply better protection against crashes. Rather, we are working with potential partners and customers to create a completely new value proposition that improves the overall performance of the next generation of handsets and other display applications. Through meeting with many new investors over the last few months, it is very clear that the legacy of the company's prior unsuccessful growth projects outside of HCD continues to affect investor confidence that we can achieve success in our TRIO initiative. On today's call, I wish to reinforce our commitment to you that we will drive this new initiative aggressively in 2022 in order to obtain a commitment with a strategic partner or customer before year end. We believe this commitment could be recognized in multiple different forms, but the key is that we must have buy-in for our solution from a major player in order to continue our investment beyond this year. We are pursuing strategic partnerships from several companies that I've approached since I began as CEO in order to validate this growth opportunity for Intermac, and we look forward to providing you with evidence on our progress as we move from Q3 to Q4. Finally, we continue to work on streamlining the cost structure to align resources with our revenue growth prospects while we prioritize the strength of the balance sheet. As I discussed last quarter, While we eliminated a significant portion of our cost structure earlier in the year, we're also investing in the new management team and selectively adding capabilities in support of the TRIO business. When I joined, we launched a company-wide leadership development program. Overall, I'm pleased and excited to see how everyone at Intervac has come together as a team to support our customers for both HDD and the new TRIO platform. Our culture is changing as we build a customer-centric focus throughout the organization. Investment in and development of our people is key to creating a high-performing organization which will position Interac for the future. We are redeploying investments into our supply chain and making targeted R&D investments in support of our growth initiatives, enabling us to move forward with a customer-focused structure in support of our most significant prospects for revenue growth and profitability. We will still maintain an emphasis on cost control and managing our cash. And as I mentioned at the beginning of my prepared remarks, we have increased confidence that our year-end 2022 balance of cash and investments will be similarly strong as last year's cash position, or at least $115 million. In summary, we are well positioned to benefit from the long-term industry trends for HDD, blue-chip customers aligned, and the industry's next major technology transformations and have encouraging feedback on the TRIO platform. Lastly, I look forward to continuing to work 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 prepared remarks. And with that, I will now turn the call over to Jim. Thank you, Nigel.