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.