Intevac, Inc.

Good day and welcome to Intervex.

Levels of consumer weakness that are just beginning to be understood and development timelines elongating. Many OEMs have signaled that the industry's sharpest slowdown in more than a decade is lasting longer than expected. As such, we're responding to the evolving market conditions and customer qualification timelines and are still forecasting that initial trio orders will be paced around year-end 2023 with first revenues now in 2024. As we sit today, we have an incredibly strong team that can execute and deliver world-class products to the forefront of the markets we are operating in and pursuing and with great partners. Our objective on this call today is to ensure that our investors, analysts, employees, suppliers, customers, and all stakeholders recognize the important achievements over the last 15 months and our confidence and commitment in our strategy to deliver strong growth and financial performance for years to come. Underscoring our competence and commitment to delivering the strong performance are the unique attributes of the TRIO. And before turning over the call to Jim today, I will highlight some key features about the technology and platform we are developing with our strategic partner. Biotechnology leverages the 200 liens flexible and modular design that enable coating of glass discs, TRIO was able to coat fast glass faster than any other manufacturing processes, resulting in higher throughput. TRIO was also more flexible than other manufacturing designs, and it does have capability for all form factors, including 2D and 3D shapes. And TRIO's unique operating concept enables a compact footprint. We continue to believe that over time the TRIO platform will be developed for multiple applications and make a significant contribution to our growth plans. Despite the uncertain operating environment, our significant technology expertise, deep customer relationships, and strong fundamentals provide a solid foundation for us to execute on our business strategy. This includes expanding our served markets, diversifying our customer base, expanding market research, establishing a leaner and more diverse team of operational leaders, and continuing to deliver differentiated technology and manufacturing solutions to our partners and customers. In summary, we have launched into 2023 with continued progress following the transformative 2022 for Intervac. We are very excited about the future and our new partnership and development agreement for the TRIO platform. 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. We made the decision to utilize our strong cash balance to make strategic investments in our future, and these investments will absolutely convert back to cash as we revenue multiple tool deployments in the coming years. As we grow the business and transform Intervac into a consistently growing and profitable cash generating company, with a leading position in each of its key markets. Our goal is to emerge from these challenging market conditions as a stronger, more agile company with a return to profitable growth and leveraging our technology leadership. That completes my prepared remarks, and with that, I want to turn the call over to Jim.

Thank you, Nigel. First quarter revenues totaled $11.5 million and consisted of HDD upgrades, spares, and service. Revenues were at the high end of our guidance range of $10.5 to $11.5 million due to the acceleration and pull-in of technology upgrades in the first quarter. Q1 gross margin was 40.9%, roughly at the midpoint of our guidance of 40 to 42%. Q1 R&D and SG&A expenses were $9.2 million, just below the midpoint of our guidance of $9 to $9.5 million. The Q1 net loss was $3.9 million, or 15 cents per diluted share. The non-GAAP net loss was $4.2 million, or 16 cents per diluted share, which is equal to our net loss from continuing operations and excludes the impact of discontinued operations from the photonics division. Our backlog was $120.7 million at quarter end, reflecting the $10.5 million of new orders booked in the quarter. We ended the quarter with cash and investments, including restricted cash, of $85 million, equivalent to $3.27 per share, based on 25.9 million shares at quarter end. This equated to a net use of cash of $28 million in the first quarter. The most significant change in the composition of our working capital during the quarter was the roughly $14 million increase in inventory. As we discussed in our last earnings call, we have been making targeted strategic investments in TRIO-related inventory in support of the growth ahead. These investments, which begin in earnest in Q4 and which drove the majority of the increase in inventory during Q1, support the build of multiple TRIO systems over the next several quarters. To a lesser extent, a portion of the increase in inventory was in our hard drive business and reflects a number of long lead time components that we had ordered over a year ago when our customers were on an aggressive delivery schedule and the supply chain was highly constrained. However, it's important to note that this inventory was already funded by advanced customer deposits received late last year. On our last call, we shared our outlook that we expect inventory to continue to go up as we go through the year, and that when you see a decline in cash, there will normally be a corresponding increase in inventory to support customer requirements. That being said, Our cash declined more than we expected in Q1, and that is largely attributable to the $6 million increase in receivables year to date. This increase is directly related to the current very challenging business environment in the hard drive industry and the extended payment terms we currently have in place with our largest customer. The cash portion of the P&L loss was about $2 million, after adjusting $1.6 million of stock compensation and about $400,000 of depreciation and amortization. Total cash flow used by operations was $24 million during the quarter, and the remaining use of cash in Q1 was from capital expenditures of $4 million, driven primarily from the TRIO tool being capitalized. We absolutely acknowledge and appreciate that the use of cash exceeded our expectations going into the quarter. We expect the increase in receivables will convert the cash within 2023, and the increase in inventory will take a bit longer to convert, but it absolutely will. Further, the additional HDD inventory is more than funded by advanced customer deposits. When these HDD systems orders were placed, We were on very aggressive shipment schedules with a highly constrained supply environment. And as such, we made certain commitments to purchase critical components and delivery of these non-cancellable orders will continue throughout 2023. Now, let me move to the current quarter Q2 2023 guidance. We are projecting revenue to be in the range of $8 to $9 million. This would bring first half revenues to 19 to $20 million, which is about 40% higher than the first half of 2022. We expect second quarter gross margin to be in the mid 30% due to the increased under absorption and a somewhat less favorable mix of higher margin upgrades due to operating expenses are expected to be around $8.5 million. We expect interest income of about $400,000 and gap tax expense also of about $400,000 in the quarter. Most of the tax expense will be non-cash. We are projecting a net loss in the range of 21 to 23 cents per share based on 26 million shares outstanding. For the full year, as Nigel mentioned, For the last few quarters, we have been consistent with our expectation that hard drive revenues will be around $40 million this year. But with our visibility today, we believe as much as 10% of that forecast is at risk of pushing out to next year. This forecast continues to include one 200 lean system and a similar level of upgrades to 2022. And at this time, our full year revenue forecast does not include revenue from TRIO. Given this revenue profile and expected mix, we now anticipate gross margins for the year will be in the 35 to 38% range. We expect ongoing operating expenses will be below the $8.5 million forecasted for Q2. And as a result, full year OPEX is now expected to be approximately $34 million. We expect both interest income and taxes to be in the range of to $2 million in 2023. Finally, our current expectation is that our use of cash for the remainder of 2023 will be in the range of $5 to $10 million, which is largely comprised of planned material receipts in support of future growth. This completes the formal part of our presentation. Operator, we are ready for questions.