Intevac, Inc.

outlook provided earlier this year. Our revenue outlook for the year has likewise improved by about 14% from our earlier expectations in August of a $44 million revenue year to now our current expectation that we will achieve around $50 million of revenue for 2023. This will equate to year-over-year revenue growth of approximately 40% in our hard drive business during one of the most challenging periods in the HGD industry's history. This growth is indicative of our critical role as a key technology enabler for process technology, and more importantly, sets up the foundation for a sustained base of technology upgrade revenues as we look to the years ahead. Turning to the TRIO, and I'm pleased to say that we are in the qualification process for the initial system with our JDA partner Corning. who is one of the world's leading innovators in glass and glass ceramic materials. I'm very proud of the entire Intervac team on the way they have collaborated together to reach this key milestone and support Intervac's expansion into a new growth market. We began the qualification during Q3 at our Santa Clara headquarters and are progressing through the final steps. The tool has been fully integrated and is producing process samples. As I mentioned, we are now in the final stages of qualification, which includes endurance runs to ensure consistency and runtime. These are starting this quarter, and we are still on track to complete the qualification by year end. Once we achieve qualification, the next step will be to receive an initial order as per the JDA. We continue to expect our first three revenues and cash to occur in the first half of 2024. 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 is increasingly clear that Corning's enthusiasm for the trio is primarily driven by the platform's superior productivity and flexibility. Today, on our IR website, we have added a live action video of our trio running in Santa Clara as it prepares to enter endurance runs, enabling you to view the modular and compact design of this world-class coating machine. This video can be found on our IR homepage along with an updated investor presentation that accompanies today's earnings call. The slides that accompany today's conference call also now include an overview of the longer-term revenue potential for TRIO, which offers a significant market opportunity for Intivac. In our recently completed analysis evaluating each of the potential end market opportunities for the TRIO, we see a roughly $1 billion revenue opportunity for tools. assuming the durable anti-reflective coatings and similar applications become well-proliferated through the high end of each end market. Of course, while our initial focus is on consumer electronics applications, our efforts to ramp up a partner for the automotive market will accelerate in 2024. We look forward to updating you on our market expansion strategies on subsequent earnings calls. In summary, to date in 2023, we're on track to accomplish the objectives of the TRIO joint development program, and we continue to expect to receive initial orders before year-end. As we look to 2024, we believe we will revenue two to three TRIO systems, and we will be building several additional tools and leveraging our investment in inventory ahead of an increased order requirement by year-end 2024. These expectations for initial TRIO revenues and expanded customer opportunities for 2024 are incremental to our solid base of business in the hard drive industry. There is no question that the expected revenue profile of our HDD media business over the next few years has changed significantly over the past year. Our customers have not only de-emphasized and delayed their capacity expansion plans, but have in fact canceled some orders originally slated for capacity enhancements. The steadfast focus at this time is on our technological advancement, and this is an excellent thing for Intervac because we are proving to be a key enabler in advancing our customers' technology roadmaps. As I mentioned, our outlook for 2023 HDD revenues has improved since our last form to now around $50 million for the year. Importantly, as we look to 2024 and beyond, technology-based upgrade revenues for us are sustainable for the foreseeable future. We have a steady pipeline of work to do with our customers to upgrade and optimize their existing install base. We believe that by year end 2023, approximately 10% of the world media install base of 1,200 liens will be capable of producing HAMR media. Furthermore, we believe that all technology upgrade initiatives, either underway or in the planning stages by each leading HDD manufacturer, are on Intervax 200 lien platform. This multi-year visibility provides us with a solid foundation of HCD business, which we estimate to be sustainable for the years to come, in the range of approximately $40 million annually in upgrade sales and field service. Given this, our expectation for Interact revenues in 2024 is approximately $40 million in HCD sales, as well as two to three trio systems. Altogether, we continue to focus revenues in the low to mid $50 million range next year, So a modest growth year compared to 2023. As a reminder, our 2023 sales included one 200 lien system, as well as a refurbished system, which we don't expect to repeat in 2024. The key message of our outlook for 2024 is that after the resizing of our cost structure completed in Q3, at this revenue level, we expect our P&L to be at least cash flow neutral for the full year. We have reduced our quarterly OPEX run rate to the low $7 million level, and we expect the non-cash portion of our cost structure will entirely offset any gap operating losses incurred as we look to next year. I'll summarize with a few additional key takeaways from today's call. First, our TRIO qualification process is nearing its final stages, and we're on track for the first orders before year end. Second, our HDD media business outlook has improved for 2023. And it's in the early stages of the industry's multi-year initiative to progress the industry's technology roadmap. Third, we have a global team of employees that are energized and excited for the future. And finally, we have a strong balance sheet to support what we expect will be several years of growth ahead. Before ending the call over to Kevin, I would like to add that we currently have two processes ongoing and outstanding. One is the strategic process announced in June, which we will comment on at the appropriate time. The other is the search for new CFO, which is progressing, but remains outstanding at this time. In the meantime, our financials reside in the very capable hands of our long-term controller and current interim CFO, Kevin Salisbury. Now over to you, Kevin.

Thank you, Nigel. Turning to the third quarter results. Revenues totaled $17.9 million, well above our guidance of $12 to $13 million, and consisted of HDD upgrades fares, and service. We achieved more than $5 million of revenue upside, primarily due to our operational agility and our ability to respond to the increase in technology upgrade order activity within the quarter. Q3 gross margin was aligned with our expectations at 39.1%. Total operating expenses were $8.4 million, slightly below our guidance of $8.5 million, And as expected, we recorded nearly $2 million of charges associated with our restructuring plan announced last quarter. As a result, our GAAP operating loss was $1.4 million, and non-GAAP operating income was a positive $0.5 million. We recorded a GAAP loss of six cents per share and achieved break-even results for non-GAAP EPS. Turning to the balance sheet, we ended the quarter with cash and investments, including restricted cash, of just over $66 million, equivalent to $2.51 per share, based on 26.4 million shares at quarter end. During the quarter, total cash declined just shy of $8 million, solely due to the roughly $8 million increase in accounts receivable in the quarter as a result of delayed payments from our largest customer. We have already added $13 million of cash through the collection of receivables quarter to date and continue to expect to end the year with total cash in the $75 to $80 million range. Cash flow used by operations was $7.5 million during the quarter. Q3 capital expenditures were $600,000 and depreciation and amortization were $400,000 for the quarter. Now moving to guidance for the fourth quarter. we are projecting revenues in the range of $9.5 to $11 million, which at the midpoint equates to full year revenues of $50 million. We expect fourth quarter gross margin to be between 39% and 41%. Q4 operating expenses are expected to be around $7.25 million, which reflects the new lower quarterly run rate that you should expect for the coming year. We expect interest income of about $600,000 and GAAP tax expense of about $500,000 in the quarter. Most of the tax expense will be non-cash. We are projecting a net loss for Q4 in the range of 10 to 13 cents per share based on 26.4 million shares outstanding. As we look ahead to fiscal 2024, we expect this lower OpEx run rate will enable our P&L results to be cash flow neutral for the full year, given our revenue expectations in the low to mid $50 million range, gross margins of approximately 38 to 40%, 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 program, completed in Q3, is enabling INNOVAC to eliminate any further use of our cash balance to fund our operations in fiscal 2024. This completes the formal part of our presentation. Operator, we are ready for questions.

Thank you. We will now be conducting a question and answer session. If you would like to ask a question, please press star and then 1 on your telephone keypad. The 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 speak equipment, it may be necessary to pick up your handset before pressing the star keys. The first question we have is from Peter Wright of Interact.

Please go ahead. Great. Congratulations on a wonderful quarter and thank you for taking my question.

I have two questions for you. The first one is looking at the Hammer upgrade cycle. I missed one number that you referred to as what number was upgraded in 23. If you can help me put this in context of the installed base, what I'm trying to understand is how many systems need to go through upgrade and what portion of the available installed base does that represent to have steady state

service spares and upgrade revenue in 24 okay Peter thank you for that question yes if you look at the hammer upgrades so I think we've shared with people that around you know over the sort of history of the 200 lean has been over 182 system shipped we believe there are up and running around today in the sort of 140 plus level up towards 150 as some of those upgrades are completed. And we've said around 10% of those will be hammer-ready by the end of the year. So pretty simple. That's around 15 units will be upgraded to be hammer-ready.

Wonderful. And so that's the assumption. How do you see that trending in 24? Is the opportunity set bigger or smaller if you can have that? And then I've got a follow-up as well.

Yeah, I think what we are looking at, and we've said we're going to run the similar level of upgrades over the next three to four years. That really, though, depends heavily on the success of the Hammer products into the market. And I think if you've seen some of the public announcements, Hammer is starting to get some great traction. People are now putting out forecasts for 2024. And therefore, I think for me, the positive move of Hammer finally coming to fruition and starting to actually be seen and being evaluated and getting some successful revenue for our customer has been key to us seeing some of that additional revenue this year. But as we've said, we see a similar level of revenues for the Hammer upgrades next year and for the subsequent year.

And is there any capacity constraints on your side if that was to get pulled into next year? Last part of the hammer, and then I'll ask one other follow-up question. And I'll come back to you. In the TRIO billion-dollar PAM that you have on slide 11 of your deck, your joint development agreement does that represent the first three pieces so does that cover smartphone wearables and tablet and then it does not include automotive is that a good way to think about that and then is it too early to say who your partners are going to be on that do you think it's going to be an exclusive or do you think there could be several people that you're working with on the auto side yeah i mean just um if we take the the hammer

serviceable available market of a billion dollars first let's take that question first um and it's as as committed on the last wall we've we put that slide in following i think one of your requests so i hope you appreciate the level of detail we're going to ensure in the size of the available market we think it is very significant um the agreement and partnership with corning is focusing on the consumer devices so consumer devices are the smartphones wearables tablets and laptops and we see that partnership being key getting momentum and success into that sector the office display is outside of that partnership and we are it's early days we're talking to people but it's early days and i think 2024 will see some progress around the auto sector but our focus as i keep saying on these calls is very much around qualification of trio entering into consumer devices and building this partnership so it's So hopefully that slide gives you a mix of both the current focus and then the future potential. And we've also tried to explain into the detail there how we've actually positioned this around the high-priced smartphones first, similarly the touchscreen laptops and high-end tablets. And therefore, as we see over the next three, four, five years, the market adoption expanding, then we believe there's a significant upside beyond that as well.

Wonderful. I'll come back to you.

Thank you so much.

The next question we have is from Hendy Susanto of Gabelli Funds. Please go ahead.

Good evening, Nigel and Kevin.

Good evening. Good evening.

Nigel and Kevin, I wanted to understand more about the pull-ins. Were the pull-ins coming from Q4 or from early 2024 or both?

Okay, and just to follow on from one of Peter's questions, I mean, we have a very agile workforce that's actually able to flex up demand and that enables to handle the pull-ins very effectively in the quarter. And that capability and agility of the organization is a key strength of Intervac. Some of those pull-ins were from Q4, which is why you see Q4 down on the Q3. And I think part of this is as they understand their needs and they're actually ramping to ensure they meet the 2024 demand for the product line to have that capacity in place and ready. But we believe, based on the feedback from customer meetings, that we can get a similar level in 2024. But some of those pull-ins were clearly out of Q4 into Q3.

I see. And then, Angel, I think you indicated earlier that the upgrades depend on the success of Hammer in the market. What kind of timeframe to see the outcome of how successful Hammer is in the market? Like how many more months should we have any indication?

I think if you look at the public messaging and the public announcements around Hammer, if you look at our customers and what they've been saying, the successful evaluations, the amount of customers now who are trying the products, and the plans to ramp in the first half of 2024 are clear indications that Hammer is successful and Hammer is now coming through into the market with some adoption. So we are very positive and I think our customers are positive and you see that in some of their announcements and guidance as well.

And then, Nigel, I would like to ask about the expectation that you will sell two or three of your systems in 2024. The slide indicated that first revenues are expected in the first half of 2024. How should we see that first revenue? Will it be just like one trio system first, or it could be like top two or three, first of all?

I think we've been very clear. The initial system will go through a qualification. That qualification will then trigger the shipment of the first system. So one system will go out ahead of everything. We've said there will be orders for more than one system by the end of December. So a second system will follow that first system at some point in the first half of next year. So I would assume potentially two in the first half and sort of one later in the second half. It's a rough timing, but recognize that you have to have some level of flexibility around that. It wouldn't surprise me if it's one in the first half and then two in the second half. But as we get this first product into the field, We're pretty excited about getting that into a customer, producing products, and driving the future success.

And then, Nigel, any estimate how long the qualification may be? Like, will it bring us to, like, 2025?

Now, just to clarify, because I think some people got slightly confused on the last call, the qualification by our partner the trio is on the first system that is running here in Santa Clara so that qualification that is the sign-off with that customer and a key part of that agreement is on the system here so that's the real key qualification of the technology clearly once that goes into the field will be you know our partner we're working with their customers running products onto the machine And really that's very much confidential and between our partner and their customers, how they run, what they're running on the machine. But from our perspective, the key qualification is the qualification in Santa Clara on that first tool.

I see. And then this is a question for Kevin. Kevin, I think Jim indicated that Interfect is willing to build inventory ahead of, excels of trio system if it if it's successful any any further clarity on how much inventory bills and the timing or the timing of when in the fact will decide to put working capital to build trio systems if I can answer that first before Kevin before Kevin jumps in so yes as we said on multiple calls we have made a significant investment in

in inventory to enable us to do fast deployment of tools in 2024. That gives us the opportunity to not just build two to three systems, but enables us to build maybe three to five systems next year to use that inventory and to ensure we can actually respond quickly to future demand. So the first objective is to make sure we actually leverage that inventory we have and utilize that CapEx to be able to respond fast to any additional demand we see in 24 or 25. I don't know whether, Kevin, you want to add anything to that?

Yes, we're building the first tool that will be shipped once we finish qualification and receive orders, and then we have plans in 2024 to build additional tools for next year's revenue and to satisfy demand beyond.

Yep. And then, Michael, any any additional color on the strategic alternatives, how long it may take, and what kind of framework or options?

As I said in my prepared remarks, we will explain that at the appropriate time. All I can say at this stage is the process is ongoing. Okay. Thank you. Thank you, Andy.

Thank you.

Ladies and gentlemen, just a reminder, if you would like to ask a question, You're welcome to press star and then one.

We will pause it for a moment to assemble the queue.

The next question we have is a follow-up question from Peter Wright of Interact. Please go ahead.

Great. Thank you. Just looking at the TRIO model, how flexible is the system when you start moving into new markets, specifically the auto industry? Is the inventory that you're building for maybe three to five systems something flexible that could go into that industry, or would that be a different tool configuration when you're looking at that? And then my last question is, if you look at kind of the business model just for TRIO, how should we think of the service, you know, the spares, the upgrades, the systems? I know upgrades not for a while, obviously, is a new system. How should that mix look? So when we look at your hard drive business in comparison, it's maybe a 40-15 split, but you've got an installed base of 180 systems out there. So how should we think of this TRIO contract? So if we roll forward five years, 20 tools out there, just with your first customer, what would the service component look like on that contract a couple of years from now?

Okay, a crystal ball question. First of all, to talk to the trio. I mean, one of the really exciting things about the trio concept and design is the modularity of it. So the system, we took some of the real learnings from the 200 lean and built into the design a modular build. So as you look on the video, as you look on the enhanced investor slide that we put out this time, you can see how that modular structure enables you to add to a common chamber multiple types of process chambers. So I could actually put on an iron beam etch stage. I could put on other bits of technology and actually expand or shrink that tool to optimize it for other materials, whether that be for an auto sector or whether that be for running a polymer through the machine. So the machine is incredibly versatile. As we look at the auto sector, the auto sector For us, it's early days to get a real understanding of the key target applications for us. But within that auto sector, you have, as you can think about, the inside of a car, screens that are very similar to a tablet or a laptop. And therefore, those would actually fit very nicely into the common structure of the machine today. If you look beyond that into large hyper screens that go panel to panel, it probably would be a new machine. But our focus initially We're about leveraging the capability, leveraging the R&D we've put into getting the tool to where it is today and utilizing that initially to get some inroads into the auto sector. So I see that the whole design concept being a brilliant bit of engineering expertise from the team to enable that flexibility. I hope that answers that question. As I look out five, 10 years, I mean, clearly service is going to be a key part of our strategy. I think one of the things we actually, if I look back 20 years, I had a very different strategy around the 200 lean to build a much stronger service capability. I think it is too early to give you a mix today, but as we actually build the market presence, we start putting tools into the market. A key part of our thinking is around building a strong service capability in a service business. But also, as you've seen with the concept of the design, as we've seen over the 200 lean over 20 years, you can take a module out, put a different enhanced type of technology different type of sputtering component onto the machine so i do see that the whole design concept of upgrades being possible but i think it's for the first couple of years it's about getting the standard school out of that market building some real learning building a business around the spurs and service and then actually coming back to you probably in a you know probably 12 to 18 months to give you a bit more granularity around the service but certainly it's a part we want to actually build on as part of a focus strategy

If I could have one little follow-up into your crystal ball there. If you think of upgrades just alone on this business, how does this technology evolve over time? Is it chemistry? Is it thickness? I get productivity and throughput, and that's more of a tool generation, but upgrading existing tools, like Hammer as an example, a different architecture, or density or whatever kind of the migration is, what is the metric that is going to be kind of how these systems get better over time?

I think if you think about material science, I think one of the things we've done with the last, I suppose, 10 years within the HGD business is leveraging our material science and making sure we keep absolutely aligned with our customers' roadmaps. In a similar way, we want to make sure we stay aligned with our customers' roadmaps and consumer devices and auto. So I think, you know, I'm not sure what will happen, but I know that the technology will keep shifting. The importance of thin glass in automobiles will keep expanding. And therefore, you know, for me over time, I think there will be more and more opportunities coming through. And it will be driven by material science and nothing else. Wonderful.

Congratulations again on the great quarter.

Thank you. Thank you.

Ladies and gentlemen, just a final reminder, if you would like to ask a question, you're welcome to press start and then one. So the next question we have is a follow-up from Henry Susanto of Gdeli Funds. Please go ahead.

Hi, Nigel. I look at slide 11 that has estimate of how many 3L tools across different markets. My thoughts are... I think it depends on the area, the yield, and then the initial market penetration. Maybe you can give us some insight into how you calculate the number of 302s there. And then my second question is, in the wearable section, it is said that it can be replacement of Sapphire.

is it more of let's say if a glass display coated with the trio system it can be stronger than sapphire i would like to verify my understanding there thank you okay if i run through at a high level a model for um the smartphones so literally you if you look at the smartphone market opportunity you look at the total market size you can actually break that down into high-end models, premium sector. You can break that down into sort of medium and then the lower end. And so, therefore, by taking a percentage of the market opportunity and really focusing that on the higher-end percentage gave a sort of reduced market size opportunity. So we took the TAM down to a lower SAM. And then I've taken an average throughput per year of the tool and converted that into number of tools. So it has gone through quite a thorough bit of analysis as you walk your way through the total smartphone market, through the high-end market, through an average size of phone that can go into a machine, average number of those phones that can be coded per year, and that gives you a total number of trio tools. And that's why we've said initially that we believe that number will be for the sort of higher price model market opportunity. Similarly, in the wearables, we've said some of those wearables that are sapphire glass today, we've assumed will not move to a new technology in the short term. But as our technology and the capability and the market acceptance of having a hard, scratch-resistant, anti-reflective coating phone into the wearable market becomes more accepted, then you'll see that being considered for complete replacement, I think, of sapphire glass in the future. In a similar way, as we've gone to tablets, I've taken the tablets. I've said there's a premium level of high-end tablets, which I think we'll get looked at first for these coatings. We've taken them by, again, assumed a certain number of tablets per panel to go through the machine. That gives us a smaller number than smartphones a year, but gives us a number of tools per year And that then goes into the number of tools we require. And in a similar way for laptops, I've taken the touchscreen laptops, not all laptops. So out of the world market size of laptops, I've taken only the touchscreen element of it. So we've tried to make this a very clear serviceable addressable market rather than go for the much bigger TAM to give you some initial views on the size of this market opportunity. So hopefully that helps. give you some of the detail and the granularity behind our thinking around these numbers of tools.

Thank you, Nigel.

Thank you, Leonor, for the questions at this time. I will now turn the call back over to Nigel Hunton for his closing remarks.

Thank you, Arlene. First, I wish to thank all of our employees as well as their counterparts with our industry partners for their hard work and dedication as we proceed to the qualification phase for the TRIO. And during the same time, we've actually managed to ramp our largest revenue quarter in nearly three years, thanks to our role as a key technology enabler in the HDD industry's transition to Hammer. Just really, we have a great team here in Santa Clara and we have a great team in Singapore driving our HDD business. I also wish to thank our investors for ongoing support. And as always, the investors can reach out to Claire directly if they want to follow up with us, either in November or at the New York Summit in December. And I look forward to updating you all on our Q4 call in early February. With that, I will conclude today's call. Thank you.

This concludes today's conference. Thank you for joining us. You may now disconnect your lines.