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spk00: Good day and welcome to Intervex.
spk04: 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.
spk07: 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.
spk00: Thank you. We will now be conducting a question and answer session. If you would like to ask a question, please press star then one on your telephone keypad. A confirmation tone will indicate your line is in the question queue. You may press star and then two if you would like to remove your question from the queue. For participants using speaker equipment, it may be necessary to pick up your handset before pressing the star key. One moment please while we poll for questions. The first question is from Hendrik Susanto of the Burley Fund. Please go ahead.
spk05: Good afternoon, Nigel and Jim. Hi, Hendrik. Nigel, I'm interested in learning more about the probability that $4 million of sales to hard disk drive market may get pushed out to 2024. I'm wondering whether you can hear more colors in terms of how much visibility into that or, in other words, when you will know whether the push-out may take place or not and to what magnitude. And then, secondly, with regard to the push-out, is the push-out primarily related to upgrades?
spk03: Okay, thank you for the question.
spk04: As I said in the prepared remarks, we have a very close relationship with all of our customers in the HCD sector. And I meet with them every quarter and we look at demand and we look at what they require for each quarter and then through the balance of the air. So we have a very good relationship and sharing of data and good visibility of what they're thinking as well. As part of that, and you've seen and you've heard the sort of push outs both of data centers and some of that slow down and some of that underutilization, which again is all pretty public data. On the back of that, we are working with them to confirm a clear plan for this quarter, which we've put into the announcement there for the revenues. And then we'll work through them through the rest of the year. So every time we meet them each quarter, we'll go through each of those detailed demand plans And I think being prudent to the moment, it's sensible to take out a percentage of the demand for this year. And I think some of that demand will be some of the more towards the sort of planned sort of schedule upgrades and some of the systems going out to this year. As you know, we have one system in this year, but I think that will stay within this year and the rest will be some of those upgrades moving out and really phasing that from our customers.
spk03: Does that help answer the question?
spk05: Yes, I think that is helpful. And then second question is for Jim. So Jim, you mentioned that use of cash for the remainder of 2023 is 5 to 10 million. You indicated that inventories will grow higher. So is there some insight into how much more increase in inventory we should expect throughout the remainder of the year?
spk07: I think the increase in inventory, as Nigel alluded to, some of that will be conditioned upon the shipments from backlog that our largest customer in the hard drive wants the rest of this year. And the other portion will be we are continuing to invest in the manufacturability in the TRIO inventory to be able to support multiple tools in the field in 2024. And we still have some supply chain constraints, so we're bringing some of that inventory. And most of that growth, as I said in my prepared remarks, the $5 to $10 million of potential additional use of cash will be really growth in inventory.
spk05: And Nigel, do you have any update on HAMR? and whether the timing of hammer adoption by customers may get delayed or everything is still on track.
spk04: I think if you listen to some of the key earnings calls of some of the hard disk drive industries, it's been announced that the hammer drives have been manufactured and are in the market for evaluation. that the ramp is in starting in 2024. So the schedule for Hammer, as far as I can tell from our customer feedback, is absolutely on track with evaluations this year and then into start of some volumes in 2024. I think that's the message I'm getting from our customers. I think everything around Hammer has been good and you've seen us over the last three quarters build that capability and support them. And in fact, we played a critical part in enabling their technology. So we're pretty confident that's coming through.
spk05: I see. And then, Nigel, would you remind us again what kind of technical milestone do you need in order to be able to recognize the first three of system revenue that is currently running sample production at your customer?
spk04: So as we said in the last call, the system goes through completing builds the first month, which we've done. We then go through actually having achieved that build through running the process and running all the modules together. So we added into the presentations that's on the website a sort of schematic of the tool that shows the various stages of the processing chambers of that tool. So we're now going through running that tool in an internal qualification around getting that process up and running. And that's the critical next milestone, which we said we'll do this quarter. We then hand that over and we go through further customer qualifications on that tool, which will take us, you know, let's say another quarter plus. And then that I'll move to a fully qualified and adopted tool. And we're looking at revenues once we're through that qualification in 2024. So, I mean, for me, As we said in the last call, this will take a couple of quarters. We still believe we are going to deliver an exceptional product into the market. Our partner is excited about the technology. We are working on executing on that. And we'll keep everyone updated on each further call. So we'll keep explaining where we are on each step of that timeline as we move to revenues in 2024. And the key achievement is to pass the qualification.
spk05: Jim, for the increase in working capital, I assume that the majority will be preparing the next three systems. What I'm wondering is for the next three systems, will it be for production?
spk07: Yes. that we are putting into place for TRIO will be for saleable inventory. Inventory that once qualified is available to sell to the customer through our, initially potentially through our JDA agreement. But yeah, those inventory that we will purchase will be for sale, absolutely. Got it. And the majority of the inventory growth will be TRIO from here to the end of the year. I see, yeah.
spk05: Thank you, Nigel. Thank you, Jim.
spk02: Thank you.
spk01: The next question is from Mark Miller of the Benchmark Company.
spk00: Please go ahead.
spk06: Good afternoon. I was just wondering, do you have an estimate for what the capacity utilization is that's your hard drive customers?
spk04: I think we've said sort of I think we believe that utilization in the market now is in the sort of 40, 50 percent level.
spk06: Okay. You mentioned you're doing some long-leave items. Has there been any improvements in pricing or in the component supply chain you've noticed recently?
spk04: There's always interesting challenges in the supply chain. I think overall we're starting to see some improvements. I mean, there's certain specific items. Some companies had some specific issues in the last couple of quarters which impacted their ability to supply. But I think overall, the level of supply is starting to improve, would be my observation.
spk06: And what about pricing? Is pricing starting to stabilize?
spk04: I think overall, I mean, one of the things we're looking at is always around pricing around long-term agreements. I'd say pricing is relatively stable. You remember last year we saw some spikes and some of those prices have stayed higher, but I think overall the pricing is stable.
spk06: Your tax situation, you're getting hit for about $400,000 per quarter. Does that change in 2024 when you start revenue in some of these tools?
spk07: The majority of the tax that we see now is really from the hard drive business, which the income runs through Asia. So it's really the tax that we make on the hard drive business. That could change depending on how much of the TRIO revenue we take with profit in 2024. But keep in mind, we have fairly large net operating losses in the U.S. So we'll be able to shelter that income for a couple of years. Thank you.
spk01: The next question is from Peter Wright of PartnerCap Securities.
spk00: Please go ahead.
spk08: Peter Wright Great. Good evening, guys, and thank you for taking my questions. Hello. Nigel, I've actually got three questions for each of you. Nigel, my three questions for you are really around TRIO. The first one is around trying to understand the capacity potential of this marketplace. If I look at kind of your installed base for hard disk drive at about 180 units, it's a roughly billion dollar market with a 50 million annual kind of service opportunity. When you look at kind of the ballistic coding market, just specific to CE today, how do you think that market compares? Is there anything we can think of from kind of a sizing perspective to try and understand kind of what the TAM is? The second part to the question is, you know, technology has a big spectrum on how significant the equipment vendor is to the equation. You know, process diagnostic tools have higher gross margins because they're a much bigger piece of process and design technology. Hard disk drive is maybe at the lower end, gross margins at 40. Where do you think, because this is a technology you brought to market as opposed to you servicing an existing market, How do you think that's going to affect kind of the gross margin equation, you know, as this product ramps? And then the third one, if I can throw it out at you, is the timing around non-consumer electronic markets. Is there any discussions going on yet, or from a time perspective, when do you think that's going to happen?
spk04: Okay, I might answer these in reverse order, just to spice it up a bit. The timing of other markets, I mean, there is an incredible amount of interest in this technology. So the meetings we've had in the last quarter have been not just with the current partner, but with other partners, other potentials. And if you think about, again, your initial question about the size of this market and market opportunity, and you look at the trends, what's going on in the world at the moment, if you take the auto sector in particular, with hyper screens and screens which are the width of a car, all glass, all curves, all now moving into that spectrum of having to be coated and as people moving into coated glass, thin glass for car dashboards and thinking about how you make them user friendly and you've got passengers having one section they're using and the driver a different section and it's all cut screen. And those touches are creating scratches and sponges and marks, and you've got to have a. R. so our technology absolutely fits the market requirements into the office sector. Um, and that's clearly an area where we've had some good discussion so far and potential opportunities in the future. That's business. I've worked in that business and work with the order sector for many years. Take you often take some a discussion and a concept to a new card as I can take multiple years. So I think there's a huge opportunity. into that sector, it may take time, but the initial discussions we're having, and initial opportunities, initial thoughts, say to me there's a great opportunity there. So we're not just sitting back and going, it's all about consumer devices and stuff, because we know that's a huge market opportunity, and therefore that's why we've got the exclusivity, and why we've got a strong partner to help us develop that market. Beyond that as well, we're talking to other glass suppliers and coding suppliers looking at both life sciences, some small optical equipment, and to other areas of other sort of exciting new technologies which might come through in the next five to ten year horizon. So we're not sitting back and saying we're going to put it all into one opportunity. And certainly the meetings I've had over the last quarter and will continue to have with my team, that's why we strengthened the team with Eva Valencia and Mark Popovich to come on board. It's showing we've got opportunities, but it's probably three years out. but there are timing and opportunities out there way beyond the consumer devices. So for me, I'm pretty excited that we've got the right technology for a much broader play. I think I sort of covered that in my sector. What does that mean around technology? I think the technology we're moving into is a very competitive environment. Yes, we've got unique technology. We've got technology that enhances throughput We have a technology that enables through the unique ChaCha mechanism, which is where we actually take in the key parts in and out of one processing chamber. Enables it to be probably one of the smallest footprints, but it's a very competitive market. So as we said on the last call, I think for the moment around modeling, we should keep the sort of gross margins that are similar to 200 lean. But it clearly for us is about how do we maximize that value? And also, as I look out three, five years, there's an opportunity potentially to even look at coding in a different business model. So for me, the opportunities this gives us to be game-changing for Intervac is immense. And therefore, we'll position that technology to maximize value for the company. Size of the market, it is much, much larger than the HDD business. We are still in the process of trying to quantify and give you some better numbers and better scope around that. But if I think about whether it's in the sort of smartphone sector, into tablets, and sort of the broader consumer devices, and then you think about the AR and opportunities for augmented reality, and then you look at the automotive, then you look at life sciences and so on, I just don't think this opportunity is significantly larger than HDD. So does that help answer those questions? Maybe in reverse order, but hopefully gives you a bit of an answer on each of those three questions.
spk08: That's wonderful. I appreciate that. And Jim, I have three for you too. Unfortunately, not as consistent. They're a bit all over. So my first question there is the TRIO build number. Can you share with us how many TRIOs you expect to build in 2023? The second question is there was a little pickup in PP&E as well. Can you share with us what the invested capital has been in TRIO to date and kind of how you think of, you know, really the return on investment in that business versus your legacy hard disk drive, if we can think back 20 years ago? And then my third question is a follow up to one of the earlier questions. He was asking if the tools were going to be production tools next year. For you guys, I understand you're going to revenue them, but are they actually going to be production-worthy for the client, or are they going to be R&D tools next year?
spk07: All right, I'll try to answer them in the order that you did it. So the trio quantity of build, I don't think we're prepared to give you the absolute number at this point in time. Other than to be consistent, it's going to be multiple tools that we will build. And the... The PP&E or the capital, one of the things that you saw and you'll see tomorrow when we file the Q, and you can see it on the balance sheet from the press release or the earnings releases, we added about $4 million in capital in Q1. And the majority of that was a tool, a TRIO tool that we're capitalizing to have the capability to own that and to do multiple codings. for multiple potential customers beyond just the customer who we have a JDA agreement with. And as Nigel said, that could be automotive, it could be virtual reality, it could be a number of areas where we think there's tremendous value in using some of our balance sheet to own a tool where we have control over who we talk to and the codings and be able to do some improvements in our coding capabilities. So it's going to be multiple, Certainly it's going to be more than two, could be two to four, but I'm not going to give you a specific number, but that's the number for the TRIO builds this year. And you can see when we talked about inventory going up 14 million, then the majority of that was TRIO. That's a portion of those inventories that we're building. As far as the, and that's kind of the number of tools, the invested capital, I don't have a good number for you on the 200 lien. I can tell you that we spent, you can look in our R&D last year, a majority of the R&D last year was spent on TRIO and the majority of the R&D that we'll spend this year will also be investments in TRIO to launch that technology and improve that capability. And then your third question again, can you repeat that? I thought I wrote it down.
spk04: You want me to take the third? The third question was really about whether those tools go into valuation or to making real products or whatever. One of the reasons we're spectating it, and clearly we've talked about some of that market push and market decline. And one of the reasons we actually are going through a process of getting qualification and customer qualification here is to actually make sure that we actually put the time and use this opportunity, but the market's sort of slowing down a bit, to really make sure that tool is fully evaluation, fully qualified by our partner. One of the key benefits of doing that is then you get that tool into the field, and once it's in the field, you can go from delivery, installation, and into revenue for the customer faster. So the tool we're doing with the joint venture partner in particular is going to extensive, and we'll probably use this opportunity to make that slightly longer, evaluation testing and sign off here before that is deployed in the field you know no one wants to have capital in a field that's not actually making revenue for customers so i think it'll be those things once tools hit the field will start to produce parts as fast as they possibly can agreed that's helpful um one one follow-up i'm sorry jim uh very last question is on invested capital is there is there
spk08: Is there a number that you have kind of to help me think about how much has been invested in the TRIO?
spk07: I would say now you have a combination of R&D. And keep in mind the R&D and the TRIO benefit was all of the tens and hundreds of millions we've invested in the hard drive business. We've been able to capitalize on that capability as well as some of the prior tools to TRIO. I think in the last couple of years, the R&D is going to be somewhere between $15 and $20 million invested in R&D. And then part of the other investment is going to be the inventory that we've invested to date, as well as we'll continue to invest the rest of this year. And that investment won't stop at the end of 2023 because there are going to be applications and there are going to be additional TRIO platforms that could be used for automotive, which may take different sizes than the current one. I don't know if you want to add on to that, Liza.
spk04: That's a good point. I think as we, you know, deliver success here and actually look at sort of broader applications, then I think there will be iterations as well. So we will continue to invest for growth, but we will be investing for long-term profitable growth.
spk07: Correct. And the majority of our reinvestments will really be in the TRIO because that's the platform that gives us that, as Nigel said, that growth in the future.
spk08: It's exciting. It's clearly a much better use of capital than acquiring something. So that's tremendous. So thank you for sharing that.
spk02: Thank you, Peter. Thank you.
spk01: There are no further questions at this time.
spk00: I will now turn the call back over to Nigel Hunt for his closing remarks. Please go ahead, sir.
spk03: Thank you.
spk04: First, I want to thank all of our employees, as well as their counterparts with our industry partners, for their hard work and dedication as we progress with our partnerships with the new FRIO platform, as well as our partnerships for the HDD's industry transition to Hammer. I think it's been an incredible performance from everyone. I also wish to thank our investors for their ongoing support. Clearly, we need their support while these near-term macroeconomic challenges are adversely affecting demand. in each of our markets. So I'd like to thank the investors for their support in that remit. And also I'd like to say that if you want to reach out to Claire directly, if you want to follow up with us, and we look forward to updating you on our Q2 call early in August. And with that, I will conclude today's call. Thank you.
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