Intevac, Inc.

as the TRIO achieved key performance metrics as part of the evaluation process that will enable Intervac to address market opportunities far larger than our existing hard drive business. We see the TRIO as having enormous potential with an estimated $1 billion served market and the achievements in 2023 are key steps forward in our plan to diversify and grow our product portfolio and customer base. Which brings me to a discussion of our perspectives on the future and our strategies to deliver consistent and profitable growth in the years ahead. The important developments unfolded in fiscal 2023 within each of our primary markets have underscored two key attributes of our business. First and foremost is that Intervac plays a critical role in the global electronics manufacturing industry, and that we are uniquely capable of producing equipment that addresses the needs of technologically challenging in-film processes in highly demanding, high-volume manufacturing environments and within industries that require extremely low cost of ownership. This is especially evident during the challenging macroeconomic environment of 2023, a year when our customers faced enormous headwinds financially and operationally, yet never diverted their attention from their strategic manufacturing priorities in close partnership with Intervac. But it's these same headwinds that manifested in the second reality for Intervac's leadership team in 2023, and that is the undue influence that our large customers can exact on our short-term financial results, which is an issue that today we are addressing head-on. As we enter a new year, we are steadfast in taking a long-term focus on improving the underlying financial performance of Intervac. We're always going to be focused on critical aspects of our financial performance, such as revenue volumes and our cash position. At this juncture, however, we have made the determination to temporarily redirect our focus away from short-term metrics, such as quarterly revenue and cash targets, in order to set up a stronger long-term value proposition for our stakeholders, which means we have made the decision to temporarily withdraw near-term financial guidance in order to enable our focus to reside primarily on the long-term and specifically on improving our longer-term growth, profitability, and cash flow profile. This has implications for each of our served markets. First, in our primary HDD market, the revenue ramp we achieved in 2023 demonstrates our operational agility and our ability to execute to meet customer timelines for hammer upgrades. Even more importantly, Intervac has emerged as the enabling technology partner for the adoption of Hammer, and our revenue results in 2023 demonstrate that we are a direct beneficiary of the HDD media technology upgrade initiatives currently underway. We have demonstrated our critical role for the hard disk drive industry at the same time as we've supported the strength of our customers' financial position at the expense of our own. Our cash conversion cycle has slowed to historical lows and collection delays have become pervasive or a quarterly norm. We encountered an unprecedented order cancellation more than eight months ago, but still have yet to resolve the transfer of inventory and material receipts off our balance sheet. For this quarter, we have made the decision to temporarily suspend our fulfillment of HDD orders until that customer fulfills their obligations regarding payables and inventory. We are confident that we can get the business back in alignment with our standard terms, but we are not using Intervac's cash to fund our customers. I know our investors will understand the position we have taken. Next, turning to the actions we are taking in the display market, the recently completed qualification of our TRIO system is testament to the quality of engineering resources resident within Intervac and our ability to meet key performance specifications for a very demanding and exacting customer. Upon achieving qualification and the successful completion of our joint development agreement, we engaged with our JDA partner in negotiations for a commercial agreement for multiple systems. While we were not able to complete such agreement by year end as we had originally had hoped, we expect such negotiations to conclude by the end of the first quarter. As we said before, the supply chain for display cover glass for high-volume consumer device applications is highly complex, to say the least. Meanwhile, conditions in the display market have become more challenging in the face of slowing customer demand, which is manifesting itself in conservative financial planning by our JDA partner in the short term. It is also quite apparent to us there is a significant customer pull coming from the end devices OEMs, to rapidly deploy TRIO systems into volume manufacturing environments that the benefits of our tool can be realized on multiple device types. Whether through the originally contemplated exclusive arrangement with our current partner, which is tied to a minimum purchase of multiple systems estimated at approximately $100 million over a five-year period, or through other customer sales, we will work towards maximizing the long-term potential of TRIO, which means By withdrawing near-term guidance, we'll be firm in our negotiations regarding any commercial terms for the TRIO that have long-range implications. While we work through this process within each of our markets, I will also note there's been no material change in the demand we've indicated when previously providing our preliminary outlook for 2024, which we shared on the last two earnings calls. For purposes of annual revenue guidance, our outlook for the full year is largely unchanged at the $50 million level. Furthermore, we expect to end 2024 with a similar balance of cash and investments as year-end 2023. However, given our decision to halt the deployment of certain of Intervax's resources in the short term in favor of maximizing the company's longer-term potential, We're not providing official guidance ranges for margins or profitability or a specific revenue range for Q1. And with that, I'll turn the call over to Kevin for his Q4 review.

Thank you, Nigel. Turning to our results, Q4 revenues totaled $12.9 million, which exceeded the midpoint of guidance by $2.7 million due to the acceleration of hammer upgrades during the quarter. For the full year, revenues grew to $52.7 million, up 47% from 2022 sales of $35.8 million. 2023 sales included a record level of HDV upgrades, as well as one new 200 lien and one refurbished 200 lien system. Q4 gross margin benefited from favorable mix and exceeded our forecast at 46%. For the full year, gross margin was 38.4%. Q4 operating expenses were $7.8 million, down both sequentially and year over year, reflecting the restructuring of our business and leaner operating structure. As a result, we were able to reduce our operating and net loss, both for Q4 and the full year, compared to the year-ago periods. Turning to the balance sheet. We ended the quarter with cash and investments, including restricted cash of $72.2 million, equivalent to $2.74 per share, based on 26.4 million shares at quarter end. As Nigel mentioned, we would have ended the year with total cash in the range of $75 to $80 million, if not for the persistent delay in collections from one large customer. Cash flow from operations was a positive $5.9 million during the quarter. Q4 capital expenditures were $500,000. And our non-cash costs for the quarter included $1 million of stock-based compensation and $400,000 of depreciation and amortization. This completes the formal part of our presentation. Operator, we are ready for questions.

Thank you. If you would like to ask a question, please press star 1 on your telephone keypad. The confirmation tone will indicate your line is in the question queue. You may press star 2 if you would like to remove your question from the queue. And for participants using speaker equipment, it may be necessary to pick up your handset before pressing the star keys. Our first question is from Mark Miller with the Benchmark Company. Please proceed.

You mentioned that the trio negotiations, you expect them to be complete this quarter. I'm just wondering, could you provide any more color on what's being discussed?

If you take the JDA agreement we have, the plan for that was to go from the JDA agreement and then negotiate a commercial agreement for ongoing supply. So we're in the middle of negotiating a sales and purchase agreement for the future. So that's what's been involved in the negotiations.

So we're still looking at roughly $100 million at least in sales for TRIO?

We're looking to conclude that negotiation in this quarter. And the outcome of that negotiation we'll cover on the next earnings call.

Any thoughts about the trio that was just qualified in terms of being revenued?

The JDA, once it's qualification, then moves to a negotiation on the commercial agreement. And at this time, we want to get the best outcome that's the best interest for shareholders. Just probably not best to discuss specific outcomes of that item.

Western Digital, during its recent conference call, indicated that they were going to wait until 4 terabytes per platter to phase in Hammer. Do you have any feeling when that would be? Will that be later this year or 2025?

I think Western Digital's announcement was very positive for us. I think, as you see, the industry move towards Hammer was particularly focused really around one customer. I think now you're seeing the industry following. And I think on prior calls, we've sort of said that WD might be a year behind. I think we'll see towards the end of this year, into 2025, I think it's a very positive thing for the company. Thank you.

Our next question is from Hendi Sistanto with Gabelli Sons. Please proceed.

Good afternoon, Nigel and Kevin.

Good afternoon.

Well, Nigel, I would like to ask your perspective, the latest forecast of 2024 hard disk drive market, and then the outlook for hammer upgrade. And then second, I'm wondering whether you can share some color on what kind of timing or cyclicality of hammer upgrades. Does it tend to be lumpy, or can it be somewhat linear and incremental?

I mean, I think we've said on the prior call, we've got in store base around 140 systems with over 10% of them upgraded towards Hammer. We see that continuing through the next three to four years. So we see the Hammer opportunity as being significantly large. And as Mark Miller commented there, we're actually seeing now a level of interest from WD coming in as well. The key for us really is making sure we are ready to support the hammer ramp, making sure we're able to actually support that business. We've been a key enabler. The technology has helped prove the establishment of that as a step change in technology. The critical thing for now is to make sure we make the right decisions for the business. And therefore, that's focusing on getting one of our key customers back into standard terms. getting our cash position back to where it should be is a key focus at the moment. And then once we get that done and resolved, then we'll look to continuing further shipments. Hence, we've postponed guidance this quarter while we resolve that, because we do believe fundamentally Hammer has got a great future.

And may I verify for Hammer upgrade, can it be lumpy from one quarter to another?

I think as you've seen, it will depend on the uptake and demand and how fast the take-off of that product is. So I think it'll be, over the next couple of years, it'll be, and we've talked about, you know, roughly 35 to 40 million a year, but that quarter to quarter, a level of lumpiness depending on what upgrades are pulled in and the timing of those investments.

And then in order to position Interfect to support the Hammer RAM, any advice on how we should be thinking about the inventories?

A key thing for us is to, one, resolve the inventories around the system cancellation. That's a key aspect of our focus. And as we look at actually building the business, we've got to actually make sure we actually minimize inventory, look at the best use of our cash, and ensure we can deploy that industry against those key hammer shipments as we get orders for them moving forward. I think our inventory is sort of split roughly a third, a third, a third of the month between HDD, systems, and the cancellations. So we've got a lot to do on inventory to reduce inventory, make sure we actually turn that return inventory to our customer for the cancellations, and then deploy our inventory to maximize our business moving forward.

Can you use the cancellation inventories for Hammer upgrade?

One of the key things that happened last quarter, which we talked about in the prepared marks, was to actually successfully negotiate and exchange two of the systems into Hammer upgrades. And by using the relevant parts of those systems, we can actually then move them into Hammer upgrades pretty successfully. That's one of the things why it was a successful renegotiation. to transfer those two systems into HAMR upgrades. And actually, as you rightly point out, we can leverage and actually transfer a significant part of that into HAMR.

OK. And then I don't know whether you can answer these questions. Can you indicate how many installed base units that received the HAMR upgrades in Q3? And then I'm also wondering when it affects that like record sales of HAMR upgrades, whether you can quantify what the magnitude of the hammer upgrade in dollar terms?

Eric, what we said on prior calls is, you know, 2023 saw us complete around 15 or 16 hammer upgrades. And that was the amount we did through the year. And that's sort of the number we're giving for 2023. And as we've said on many occasions, the hammer upgrades, the value of those depend on the upgrade of the system. Some systems need additional process modules, if it's going from a five process module to a seven process module, and then the addition of the cooling and heating stations and other key upgrade systems. Or some have already got seven process modules, and it's just some of the key upgrades around heating and cooling. So the range of upgrades can be between $1 million to $2 million. So it changes depending on the mix of the system that we're upgrading, which again adds to some of the lumpiness caused by water.

Nigel, one last question for me. When it comes to negotiation for system sales, any background on the likelihood of the customers buying one, two, or three? In other words, what will drive customers to buy two instead of one or three instead of two? I think in the past you mentioned that customers have multiple locations, but besides location, are there other factors that drive the decisions in terms of the number of systems that they want to purchase?

I think the key message at the moment was the original JDA we completed, the TRIO system was qualified, and the critical next step is to finalize a formal agreement for TRIO tool shipments. And I said we had hoped to conclude that for the end of December. However, they are in negotiations are ongoing now. And we really can't send any more at this stage, other than to confirm we expect to ship multiple systems in 2024. Okay.

Thank you, Nigel. Thank you, Kevin.

Thank you.

Our next question is from Peter Wright with Partner Cap Securities. Please proceed.

Great. Good afternoon, guys, and thank you for taking my questions. I have three questions. The first one is on your shift to a long-term focus on the financial model, and I think that makes sense, just on number of customers, and it's easy to understand. But what I'm hoping you can do is kind of reflect on this comment. If I look at your backlog, helping to guide kind of services and call that about $40 million, and across a four- or five-year cycle, you're looking at about 10 hard disk drive tools and about 20 tools on the contract with your existing one customer there, it averages about $30 million a year. It's going to be lumpy and it's tough to figure that out. But that's about a $70 million average cross-cycle revenue run rate. Given kind of where your expenses are now, that's suggesting to me about a $4 or $5 million free cash flow yield on an annualized basis, kind of on a cross-cycle. Is there anything I'm missing there for you know, at a high level of what your long term guidance and picture would look like.

Yeah, I mean, I think for me, it's critical that we focus our time at the moment, ensuring we actually optimize the long term and get the right deals and the right negotiation and get the right forecast for the future. So I don't really want to comment on the detail within the agreements we're actually in the middle of negotiating. But if you take the base from prior announcements, I think that's probably a logical analysis of what we've announced on prior earnings calls. I don't know whether, Kevin, you want to add anything to that?

No, I would agree that that's consistent with what we've said the last couple of quarters. Yeah.

Okay. Fantastic. And if I look at the one comment you made on end market pull, can you give us a little more color of what it is that some of these end market customers are looking at and what they specifically like about your glass.

There's a couple of key points there. One, the capability of the TRIO and the qualification being completed has proven that we have a machine that has great capability. The ability to deliver hard scratch resistant and anti-reflective coatings on substrates. It's critical and that has been proven. And if you look at the market opportunities, whether that be in the consumer device market, it's very apparent the need for those sort of coatings and those sorts of applications. As we sort of look beyond that and start to talk to some key automotive customers and some of the coating people in that sector, In a similar way, the deployment of glass across the auto sector, whether it be touchscreens in cars, whether it be looking at applications externally, whether you have accurate and anti-chip coatings on some of those substrates around the cameras on the externals of cars, LIDAR, et cetera, et cetera, are proving that the opportunities in auto are going to come through and come through over the next three to five year period. pretty strongly as well. So we see sort of multiple applications now for the TRIO platform. We see it being able to be expanded beyond consumer devices into multiple other sectors. And the ability of the tool to put specialized coatings with the key attributes that we've proven onto multiple materials is also going to prove benefits long term. So I think we've proven a phenomenal tool. It's taken us over 18 months of development time and focus. But having got that tool to a point where it's now fully qualified, it's absolutely the right time to think about the long-term opportunities for that. And the feedback we've been getting about this quality of the coatings gives you more and more confidence on the future.

I could infer from your last press release and the naming of your partner in it that clearly they see your value in this equation. Can you help us understand in these negotiations, is there a certain element that you're more excited about or has changed over the course of last year, whether it be from consumer electronics to consumer electronics plus? whether it be, you know, an evolution of the business model from equipment to equipment plus, or are the negotiations at this point on the TRIO side primarily about numbers?

I think we've proven that we have great technology. And the work we've done around the material science, the work we've done developing the TRIO platform to meet the key market needs has shown me that we've got a capability to not just deliver high quality coatings into consumer devices, but into other sectors. So as we looked in the negotiation, I do not want to get into the details of that today, because clearly it's a very key time in the negotiation. It's about making sure we do the right for the company, the right decisions, end up with the right agreement for the long term that's going to maximize value for Intervac. And that's my key focus, is how do we actually ensure that we have an agreement that enables us to take InterVac forward on a much stronger growth trajectory and with key partners. So I'm pretty excited about the opportunities with existing partners, but I'm also equally excited about the opportunities we're seeing outside of that.

Fantastic. My last question is, it just seems that no matter what you do, you know, the market is not giving you credit for your cash. What are the best uses of your cash when you look forward here? Is it organic, inorganic? You know, when you look at the balance sheet, even though it might be down a little bit on the collections, it's still an extremely large number on the balance sheet. What is the uses in 24 that you'll be sharing with us that you're most excited about?

I think the opportunity to continue to protect this business and continue to protect the balance sheets is a key focus for me. We've done that pretty successfully through 2023. There are some mine uses. We need to expand some of our capabilities around inspection and test equipment. I think one of the things that we've got to absolutely be expert at is as we do world-class coatings is have the capability in-house to do key testing and key understandings the materials whether that be into the optics into the hardness into the material science so there will be some use of that cash but not significant around enhancing our capability for in-house metrology as we look at other feedback in our customers see the strength of our balance sheet as a key asset and therefore a company our size is maintaining that strong balance sheet is critical to protect the company moving forward um We've got to look at how we actually grow the company, and as we actually think through what the key strategic moves we have to do to take the company forward, then we'll think about how we actually optimize that cash and use it effectively. But the first focus at the moment is absolutely protecting the balance sheet and protecting that cash position.

Fantastic. Thank you for the call.

Thanks, Peter.

Thank you.

Our next question is from Dan Weston with West Capital Management. Please proceed.

Yeah, I thank you very much for taking the questions, most of which have been answered. Just some clarity relating to the receivables that you discussed. In that collection process, is there any dispute with your customer on what the receivable number is?

There is absolute clarity on what the number is. Yeah. And we have a long-term relationship. This was something that we worked through with them. They've been a key partner of ours. We've helped enable a successful evolution to Hammer. There's no dispute on the receivables.

Okay, so this is what you would classify as more of a timing issue as opposed to a dispute of the number? Correct. Fine. I appreciate that. Also, Nigel, just to get some additional clarity, not to belabor the point, but I think you mentioned on your last call that the successful completion of the evaluation would then trigger the shipment of the first system. So I assume that did not trigger the shipment of the first system. Maybe you can just add a little color for us in terms of what took place. In other words, weren't the terms already outlined in the JDA that would define exactly what the numbers were once the qualification was completed?

The original JDA, the way that was written and that was completed successfully by the end of december the next step within the jda is once successful completion of the jda was done the next step is to then complete a formal agreement for trio tool shipments we had hoped to conclude that as well but before the end of december however those negotiations are still ongoing probably I cannot say any more at this stage, other than to confirm that we expect to still ship multiple trios in 2024. But the process goes from JDA, there's qualification, JDA completion, then we go into a formal agreement for sales and purchase. So that's the key steps.

okay okay fine and then uh back to uh your hdd business just to make sure i'm very clear here since there's no uh guidance that you're offering for the quarter did i hear you right in that uh your company will not be providing any upgrades until the receivables are collected just some clarity on that please correct so we will not be um supplying any materials

until we've actually got resolution on the receivables.

Okay.

Got it.

And I guess, I mean, is there a way that you can predict what the timing would be to resolve that receivable issue?

I think it's best if we actually leave that for me to resolve the receivable issue without putting a timeline against that.

Okay. Okay. Fair enough. And I appreciate your care and best of luck.

Thank you. Thank you.

Our next question is a follow-up from Hendy Sestanto with Gabelli Funds. Please proceed.

Hi again, Nigel. So, Nigel, when let's say the negotiation of TRIO system has been concluded and you have the agreement, how soon can the sales of TRIO system take place? And then I'm also wondering upon the completion of the negotiation, whether or not Interfect will file like an SEC filing?

I think if you, as you say, we are in the middle of those negotiations. We're confident those negotiations will get concluded. We're pretty clear that as we move forward, we have timings to do updates on revenues and performance on a quarterly basis. And therefore, the next earnings call hopefully we can share a lot more progress we've made. We have a very clear policy when it comes to orders and system orders. When we get system orders, normally we would actually do press releases against orders when received in the company. And that is our basic customary policy that we've been following for many years. So I don't see any change to that. happening. So my aim is to conclude negotiations, secure orders for this company, drive InterVac forward profitably and into the future. And as we get orders, to announce them under the sort of existing practice we have as a company, as we did with all the 200 lien orders. So I don't see any change to that as a practice.

Thank you, Nigel. Thank you.

Thank you. With no further questions at this time, I will like to turn the call back over to Nigel Henson for closing remarks.

Thank you, and thank you for all the questions. I wish to thank all of our employees, as well as their counterparts with our industry partners, for all the hard work and dedication as we proceeded through a critical milestone in 2023. which was achieving qualification for the TRIO. While at the same time achieving a significant growth year as a key technology enabler in the HDD industry's transition to Hammer. So overall, an amazing achievement. I also wish to thank our investors for their ongoing support. And as always, please reach out to Claire directly if you would like to follow up with us. And look forward to updating you all on our Q1 call in early May. With that, I will conclude today's call.

Thank you. This does conclude today's conference. You may now disconnect.