Intevac, Inc.

Good afternoon, everyone. Thank you for joining us today to discuss Intervax financial results for the second quarter of 2023, which ended on July 1st. 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 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 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 August 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'll now turn the call over to Nigel.

Thanks Claire and good afternoon. I'm pleased to have this opportunity today to update you on our year-to-date activities progress on the qualification of our first trio, and discuss the business environment in our primary serve market, the hard disk drive industry. First, though, I will review our Q2 financial results. In Q2, we achieved revenues above the high end of our expectations, including one new 200 lien system delivery and one refurbished 200 lien. Our revenue performance in Q2 puts us well on track to delivering a strong growth year for our HDD business in 2023. As Jim will detail shortly, our gross margin was impacted by nearly $1 million of incremental costs above forecast, which were one-offs in nature. However, with close control of operating expenses, our operating loss was aligned with our prior outlook and the net loss of 19 cents per share was favorable to forecast due to higher interest income and lower taxes. As planned, we continued to bring in material receipts for both the trio and our hard drive customers during the quarter, and our balance of total cash and investments at quarter end was at $74 million. Of the roughly $11 million declined from Q1, About one half was attributed to cash-based losses from the P&L, with the other half comprised of continued working capital investment. This will reverse in the second half of 2023, in large part due to our expectation that we will collect the majority of our receivables from our largest customer. Our collection of receivables in the second half is the foundation of our confidence that we will exit 2023 with an increase in total cash and investments compared to the $74 million balance at Q2's end. Turning to the TRIO and the exciting news reported today that in August, we will begin the qualification process for the initial system with our JDA partner, who is one of the world's leading innovators in glass and glass ceramic materials. This move into qualification is an important validation of the technology and capabilities of this game-changing platform. This will mark a tremendous milestone for our company, demonstrating our JDA partners' continued excitement in the potential of the TRIO to be a significant new manufacturing platform for glass and glass ceramic displays for consumer electronics applications. Over the last few earnings calls, we've discussed what sets the trio apart from other manufacturing options. In our joint development process to date, it's increasingly clear that our JDA partners' enthusiasm and pull in demand for the trio is primarily driven by the platform's superior productivity and flexibility. I'll provide a couple of specific examples of how our trio is capable of providing leaps in advancement on both fronts. compared to available coating options. First, productivity. The reason why we're able to provide significant and very material advances in productivity is due to our unique linear transport system enabling patent-protected high-power parallel processing to take place concurrently in multiple chambers, each of which can be depositing different combinations of chemistries and materials. A drum coater can only deposit one recipe at a time and at a lower deposition power. Furthermore, drum coaters are batch systems that must be completely shut down for loading and unloading, which decreases a tool's uptime, whereas the TRIO's novel linear transport system enables simultaneous loading and unloading of the displays at the same time as process modules are depositing materials. The other unique advantage is flexibility. TRIO can coat glass covers and displays in a broad array of shapes and sizes from very small camera lenses and an array of wearable devices to the wide variety of smartphone form factors available today or anticipated in the near future to much larger displays such as tablets and IT devices. Our TRIO platform is the only manufacturing platform that can be deployed to coat all of these various sizes and shapes with the advantage of high productivity processing thus providing a level of flexibility that is non-existent in the market today. The same advantages could later be put in place for additional end markets not currently addressed by our JDA, such as for automotive displays. In summary, we're extremely excited about the progress made today and we can easily expect to receive initial orders in 2023. As we look toward next year, we believe we will revenue two to three systems, and we'll be building several additional tools ahead of an increased order requirement for our JDA partners to maintain exclusivity by year end 2024. We will also continue to pursue additional customer partnerships for TRIO in end markets outside of consumer electronic devices. Now turning to the hard disk drive market. Since mid-2022, we've been reporting on the softening of demand across all HCDN markets, which has included the continued secular decline of legacy markets and a slowing growth rate in the mass capacity market after several years of strong growth. Near the end of May, we witnessed an unprecedented event for Intervac, which was the cancellation of a very large tool order. This order cancellation primarily affected our revenue forecast for the medium term, As in fact, our near-term forecast for our HDD business is stronger today than it was a quarter ago. Since announcing the cancellation, we've been very clearly communicating that the material receipts for these systems, which a quarter end represented less than one third of our total inventory balance, are the responsibility of our customers. As we look at the HDD market environment today, there is no question the growth trajectory for HDD media is changing. and difficult to forecast. However, it is still a growth market given the dominance of mass capacity drives fueling the majority of customer demands. While the expected timeline for capacity additions has shifted multiple times, first from the original expectations of late this year to the 2024, then to the 2026 timeframe, and now potentially to the tail end of that period, In the near term, our HCD business is bolstered by strong demand for technology upgrades. We are playing a critical role in the industry's advancement towards achieving its goal of significantly higher overall density media for the mass capacity market, resulting in stronger demand for technology upgrades. Last quarter, I expressed concern that the softer HCD forecasts could result in as much as 10% risk to our original $40 million revenue forecast for 2023. While our customers are in the very early stages of their fiscal 2024 capital investment planning, we expect continued movement and quarterly shifts within our HD forecast over the next several quarters. However, this time, we're expecting our HDD revenues in 2023 to be approximately $44 million. As we look ahead to 2024, we currently expect a similarly strong level of HDD upgrades and field service as 2023. At this time, the expected timing of delivery of the remaining two 200 liens in backlog is being reviewed by our customer. Given this, our expectation at revenues next year will consist of at least $40 million in HDD sales, as well as two to three systems for TRIO. Altogether, we expect revenues in the low to mid $50 million range for fiscal 2024. Importantly, at this range of revenues and with the resizing of our cost structure currently underway, we expect our P&L to be cash neutral for the full year of 2024. This is because our actions announced today will result in a significant decrease in our ongoing cost structure, equivalent to at least $4 million of annualized manufacturing and operating We expect our quarterly OPEX run rate to drop to a low $7 million level beginning in Q4. This streamlined cost structure will enable us to be cash neutral at the expected revenue level for next year, given that the non-cash portion of our cost structure is expected to entirely offset our gap operating at loss. Therefore, this restructuring effort is enabling InterVac to eliminate any further use of our cash balance for operations next year. which does not include capex or investments in working capital. We will manage both of these very closely in 2024 to ensure they are aligned with our growth prospects for 2025. Before turning the call over to Jim, I would like to express my sincere appreciation for everything he has done with our finance organization over the past eight years. We announced last month that Jim would be retiring at long last and trusting the financial organisation in the very capable hands of our long-term controller Kevin Norton while we conduct our search for a permanent CFO. Jim initially came out of retirement to be an Interfax CFO for just a few years and yet graciously agreed to postpone his return to retirement not just once but twice. First during the 2020 Strategic Review and again in early 2022 to support the CEO transition. The entire board and I acknowledge his steadfast dedication to the company for much longer than he initially intended. After supporting us through today's earnings call, we all wish him the very best as he enjoys some well-deserved time off this summer. Congratulations on your retirement, Jim. Now over to you.

Thank you, Nigel. It's been a real pleasure to serve as the Intervax CFO for the past eight years. a certainly much longer time than I originally intended. And I know I'm leaving the company in good hands. Now turning to the second quarter results. Second quarter revenue totaled $10.3 million, above our guidance of $8 to $9 million, and consisted of one HDD 200 lien system, one refurbished HDD 200 lien system, plus HDD upgrade as it served. Q2 gross margin was 24.9%. We mentioned on the last call we expected margins to be down to the mid-30s due to less favorable mix and increased under-absorption. But in Q2, we witnessed nearly $1 million of incremental increase in cost of sale. About half of these incremental costs were the result of higher overhead and other indirect costs, while about one-third was the result of higher direct labor costs and the remainder was increased material costs. We do not expect these incremental charges to continue beyond Q2. Q2 operating expenses were $8 million, below our guidance of $8.5 million, as we aggressively managed our costs in advance of the restructuring announced today. With lower OPEX, we were able to offset the one-time impacts to grow and the resulting operating loss was aligned to our forecast at $5.5 million. With some upside in interest and tax, the Q2 net loss was favorable to forecast at $4.9 million, or 19 cents per diluted share. Our backlog was $58.2 million at quarter end, reflecting the de-booking of the $54 million order cancellation that occurred in May. We ended the quarter with cash and investments, including restricted cash of $73.9 million, equivalent to $2.83 per share, based on 26.1 million shares at quarter end. Cash decreased by $10.9 million in the second quarter. Cash flow used by operations was $9.8 million during the quarter, driven primarily by the operating loss, an increase in TRIO inventory, as well as reductions in liabilities for accounts payable, contract advances, and other liabilities. We ended the quarter with a slightly lower AR balance of $20 million, the majority of which we expect to be collected in the second half. Q2 capital expenditures were $330,000, and depreciation and amortization were $371,000 for the quarter. Now let me move to the guidance for the second half of 2023. Today we also announced our 2023 cost restructuring plan, which took effect in late July and which reduced our worldwide headcount by approximately 25%. There will be about $1.8 million in severance costs in Q3 associated with this action, which we expect will result in over $4 million in annualized labor and labor-related savings. Our Q3 guidance reflects the added severance costs, while our four-year guidance assumes that our Q4 results will reflect the lower ongoing OpEx run rate. For Q3 financials specifically, we are projecting revenue to be in the range of $12 to $13 million. We expect third quarter gross margin to be between 38 and 40 percent. Q3 operating expenses are expected to be around $8.5 million, which includes severance as mentioned earlier. We expect interest income of about $400,000 and gap tax expense of about $300,000 in the quarter. Most of the tax expense will be non-cash. We are projecting a net loss for Q3 in the range of 13 to 15 cents per share, based on 26 million shares outstanding. For the full year, as Nigel mentioned, we expect our revenues to be approximately $44 million, up 23% from last year. This includes the 1-200 lien system recognized in Q2 and a higher level of upgrades compared to 2022. Given this revenue profile and expected mix, we anticipate gross margins for the year will be in the 35% to 37% range. We expect the ongoing operating expense run rate will be in the range of $7 million to $7.25 million per quarter beginning in Q4. We continue to expect interest income and taxes to roughly offset one another with both in the range of one to $2 million for the full year. Finally, it is still our expectation that we will generate cash in the second half of 2023 and we'll end the year with a cash balance of between 75 and $80 million. As we look ahead to fiscal 2024, we expect our results will be cashflow neutral for the full year, given our revenue expectation in the low to mid $50 million range, gross margins of approximately 38 to 40 percent, the Q4 OPEX level continuing through next year, and that the non-cash portion of our cost structure will total $7 to $8 million for the full year. Therefore, our 2023 cost restructuring plan is enabling INIVAC to eliminate any future use any further use of our cash balance to fund our operations in fiscal 2024. This completes the formal part of our presentation. Maria, we are ready for questions.