Intevac, Inc.

and welcome to Intivac's third quarter 2022 financial results conference call. 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, November 2nd, 2022. At this time, I'd like to turn the call over to Claire McAdams, Investor Relations for Intivac. Please go ahead.

Thank you, Michelle, and good afternoon, everyone. Thank you for joining us today to discuss Interval FAC's financial results for the third quarter of 2022, which ended on October 1st. Shortly after the close of market today, we posted our Q3 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 third 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 remain subject to adjustment in connection with the preparation of Reform 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 2nd 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 third quarter 2022 results conference call and hearing more about the new Intervac. Now approaching the end of my first full year at Intervac, I feel we have made tremendous progress building the foundation for growth and increased stockholder value. Today I will provide an update on our progress with securing a partner for the TRIO. as well as discussing how we see our HDD business shaping up over the near and medium term, given all the changes in the industry since our last call. First, however, I'd briefly recap our third quarter results. Revenues were $10.8 million above the high end of our guidance. As our customers elected to accelerate their technology upgrade plans, during this period of reduced hard drive production volumes. This more favorable bulwark of revenues also drove upside in gross margin, which reduced our operating loss and resulted in a smaller net loss from continued operations of 13 cents per share. So once again, better than forecast. We had another very strong bookings quarter with new orders of $21 million As a result, 2022 is shaping up to be a record-setting bookings year, with new orders of over $110 million a year to date, driving another sequential increase in backlog, which has also exceeded $110 million at quarter end. The new order activity in Q3 was primarily focused around strategic technology upgrade initiatives, which we believe will position our HDD customers for their next generation of mass capacity drives for the cloud. We also had a strong quarter of cash flow generation, primarily as a result of our advanced customer deposits received in support of the record level backlog. And we ended Q3 with total cash and investments of $125 million. As I'll discuss in more detail in the fourth quarter, we'll be investing a portion of our cash in long lead time inventory in order to meet the planned delivery schedule, both for the TRIO forecast and for HDD upgrades. And given these investments, our forecast for total cash at year end is now in the 105 to $110 million range. As a reminder, the customer deposits received in Q3, which resulted in our $125 million cash balance, are typical of our customer engagement to fund necessary inventory purchases And you should expect that with the sequential decline in cash during Q4, you'll also see a commensurate increase in inventory levels. In my customer and investor-facing activities since our last call, I made another trip to Asia to meet with existing and potential new customers in both Singapore and Malaysia, and to ensure our high-volume manufacturing center in Singapore is positioned to rapidly ramp tool and process module production in the coming month. We also reviewed our technology roadmaps with our customers in both Asia and the USA to ensure we are fully aligned with their needs. In addition, I've met with many new and prospective investors who are eager to understand our strategy and future prospects with a new TRIO platform, the changing HDD demand environment, and our plans related to our very healthy cash position. We are very pleased to see all the new interest coming from the investment community and today I'll provide an update on our TRIO strategy, news about which I know you've been patiently awaiting all year. We are pleased to report today that we have executed a non-binding term sheet with Corning Incorporated. The objective of our partnership is the development and deployment of the TRIO platform to apply coatings to glass and glass ceramic materials as Corning is a leading player in the use of these materials in consumer electronic applications. We are advancing to a definitive agreement with Corning and expect to have it signed by year end. Our confidence in the collaboration is such that we're starting to invest in long lead capital items to support the program, which in turn will have a modest impact on our cash forecast for year end 2022. Our objective has been to announce our partnership once the definitive agreement was signed. However, we are disclosing the status of our relationship with Corning today because of the substantial size of the opportunities being pursued across multiple applications, and because the funding of some of the inventory purchases required to meet targeted deployment timelines is impacting our year-round cash guidance, which we've been very consistently communicating through 2022. Speaking of our cash balance, I will add here that the strength of our balance sheet has been highly valued into that asset It has been vitally important in establishing our ability to grow and scale. This is commensurate with a partner with leading global market share. I look forward to updating you again once the definitive agreement is finalized. But clearly, 2022 has been a very exciting and productive period of time for both me and the company. As we are investing in the organization in order to be well positioned to execute on the growth ahead, I was very pleased to announce the recent appointments of John Dickinson as our VP of Operations and Mark Popovich as our VP of Business Development, and they are already making an impact, given the announcement of our partnership with Corning today. Now I'll turn to the current demand environment in the hard disk industry, which has changed considerably since I joined Intervac earlier this year. In talking with our customers and other industry experts, The most recent revisions to forecasts and build plans are the result of a number of factors which together have impacted both the supply chain and demand levels for hard drives. In the short term, this multitude of factors, which include inconsistent components availability, excessive inventory bills, higher costs overseas against a strengthening dollar, a rapid contraction in drive demand for both the client and cloud customers, and an overall slowdown in discretionary spending are resulting in an HDD production forecast for the fourth calendar quarter of 2022 that has been nearly halved compared to the levels expected just six months ago. As a result, whereas prior industry expectations were for media capacity utilization to be completely exhausted by year end, instead our customers are currently running media production at less than 60% of capacity. This is expected to be a temporary cut to production levels, with steadily increasing levels anticipated as we move through 2023. There has been no change in the long-term importance of the hard drive industry. In the cloud, the need for capacity is insatiable. Workloads continue to grow in complexity, and to quote from a recent keynote, hard drives are still the king of big data. Given the continued robust demand profile for mass capacity HDDs for the cloud over the next several years, our customers are continuing to execute on their multi-year plans for capital investments, both in capacity additions and technology upgrades. Our longer-term revenue forecast for our HDD business is essentially unchanged since our last earnings call. What has been adjusted by our customers, however, is the balance of the demand between systems, or you call it new capacity, and technology upgrades. The steep reduction in production has afforded them a unique opportunity to take advantage of idle capacity and upgrade these systems in support of next generation media. New tool installations, however, have been de-emphasized while upgrades are being pulled in. Part of the $21 million in new orders received during Q3 were for accelerated deployment of upgrades in the current court as well as early 2023. in support of the next generation of heat-assisted magnetic media. This prioritization of upgrades in Q4 has effectively replaced the anticipated 200 lean tool shipment previously planned for Q4 revenue, and our revenue forecast for 22 of approximately $34.5 million is relatively consistent with our prior guidance. We also continue to expect that our HDD revenues in 2023 will show modest growth over 2022 in the low double-digit percentages, as we said last quarter, to approximately $40 million. The recent order announcement for $12 million of hammer upgrades supports our forecast for 2023 revenues. The 200 lien system that has been scheduled for the current quarter has been rescheduled for July of 2023, which drives the incremental revenue growth next year. We expect revenues from HDD upgrades and field service will be similar next year compared to this year, and the installations of new 200 lean capacity will now begin in earnest beginning in 2024 and 2025. Our close collaboration with our customers on their future plans, along with solid backlog of $110 million and growing, provides us with continued competence in our longer-term hard drive revenue forecast, and supports our expectation for at least $200 million of HDD revenues through 2025. Incremental to this unchanged forecast for growth in our HDD business is that we now see an extended investment cycle in both capacity and technology upgrades. This is beginning to give us visibility for at least $300 million of HDD revenues through 2026, with upside being driven by the installed base of over 150 systems that will need to be upgraded to seven process modules to be hammered It's also worth emphasizing again this quarter that 100% of investments of our customers in both technology and capacity are currently being made on our 200 lean 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 store base. In summary, 2022 has been a transformative year for InterVac. We are very excited about the year ahead and our new partnership with Corning for our groundbreaking TRIO platform. Over the next quarter, we'll be finalizing our strategic plan and starting to develop a forecast for 2023 that reflects the expected HCD revenue profile along with the initial TRIO tool shifts. We look forward to providing you with a clearer picture of 2023 when we meet again on the Q4 earnings call. In the meantime, I will take this moment to emphasize just how committed we are as a company to increasing stockholder value and protecting the strength of the balance sheet. That completes my prepared remarks. And with that, I will now turn the call over to Jim.