Intevac, Inc.

Greetings and welcome to Intodac's third quarter 2024 financial results conference call. At this time, all participants are in a listen-only mode. A question and answer session will follow a formal presentation. If anyone should require operator assistance, please press star zero on your telephone keypad. Please note that this conference is being recorded today, November 11th, 2024. At this time, I would like to turn the call over to Claire McAdams, Investor Relations for Intodac. Please go ahead.

Thank you, operator, and good afternoon to everyone on today's call, especially our veterans. Thank you for joining us today to discuss Intivac's financial results for the third quarter of 2024, which ended on September 28th. 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 Cameron McCauley, Chief Financial Officer. Nigel will begin with an overview of our business and outlook, followed by Cameron's review of our financial results for the third quarter and additional details regarding our guidance 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 to VINTAVAC. 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 November 11th 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 will now turn the call over to Nigel.

Thanks, Claire, and good afternoon to all of you on today's call. Our Q3 results demonstrate many positive developments for Intervax business, including a strengthening of the HDD industry, upside in HDD upgrade demand, and strong gross margin performance for the underlying business. This resulted in a better bottom line and a strengthening of our cash position as compared to Q2 and a more positive view of the HDD business and its financial performance going forward. In addition, we are pleased to report the resolution of a customer's inventory obligation. Approximately $15 million of the $28.5 million of revenue reported for Q3 is related to these inventory obligations. The $15 million of inventory-related revenue was largely passed through, but did include a small amount of gross profits to cover our expenses procuring and storing the inventory. With a reported gross margin of 25%, this profit, along with certain other inventory adjustments, negatively impacted our gross margin by approximately 20 percentage points, while a positive impact on earnings per share was 4 cents. Absent this inventory-related revenue, Our Q3 revenues indicate continued strong demand for HDD technology upgrades, which exceeded the high end of our forecast. We believe cloud data center demand trends are continuing to drive growing demand for our underlying core HDD business. Unfortunately, a less positive development since call to end is the conclusion of the qualification process for our first ever TRIO shipment, which was delivered in April to a cover glass finisher in Asia. Over the past several months, the TRIO has demonstrated positive results through ongoing endurance testing in the field. And while the tool showed promise, the qualification concluded without the expected . At the end of the day, the TRIO, as compelling as it was, was unable to decisively demonstrate material advantages to displace the sizable installed capacity of existing coding solutions. And as such, we missed the market opportunity, this next consumer device product cycle. Given that this has impacted the expected TRIO opportunity, and taking into account today the strength of forecast with our HDD customers, our focus for the TRIO has turned to rapidly monetizing our inventory investments. We believe the most advantageous path forward to achieving this objective is to continue supporting evaluations at multiple prospects for R&D work, as well as polymer applications. However, to be very clear, we are no longer going to allocate any material resources to support evaluations with revenue potential that extends beyond the next 12 months. The improving HDD industry dynamics support an increasingly strong financial forecast for Intervac, and our critical resources will be allocated entirely to our opportunities in the HDD sector, thus providing the most immediate and assured return on our investment. We have therefore ceased further development of the TRIO platform, and this will increase bottom line profitability through reduced TRIO engineering costs. We will retain a small technology group to pursue partnerships that can leverage our compelling glass coating IP and patent portfolio into additional applications such as advanced panel level semiconductor packaging. While the trio efforts of recent months have concluded in a disappointing fashion, we continue to believe in the value residing in our material science expertise and IP And our efforts in 2025 will be on monetizing the investments we've already made while assessing partnerships and collaborations that can enable additional growth opportunities for our technology without requiring further investments by Intervac. This is because we are firmly committed to maintaining the strength of the balance sheet and preserving our strong cash position. As we assess the immediate opportunities ahead of us, we have likewise evaluated our cost structure and have made the appropriate decisions to align our resources with the strongest areas of potential growth. Which is why we're also announcing today the restructuring of the company, including a 19% headcount reduction worldwide and consolidating our resources to our growing HDD business. Our core HDD business remains strong. and the outlook continues to improve. In August of 2022, when our backlog was at its highest level in recent history, we had the visibility for around $200 million of HDD revenues spanning the four-year period between 2022 and 2025. In spite of the subsequent system cancellations, today we are firmly on track to achieve its original target through our technology-enabling upgrade business. Even more importantly, the further strengthening of the financial outlook for the HUD sector gives us confidence in significant additional revenue potential between 2026 and 2028, based on the business climate that we currently see. This continued strong revenue momentum reflects not only the sustainability of record levels of upgrade revenues, but also new 200 lien orders, which are once again on our radar screens. not necessarily for 2025, but certainly under consideration for 2026 or 2027. This positive outlook for our HCD business has numerous fundamental drivers. Recently, an initial recovery in traditional server demand led to additional upside with an overall strengthening environment in hard drive and media demand. The most significant growth driver remains continued strong cloud demand strength, which we believe is driven in part by the rapidly growing AI industry, which for the third quarter led to industry upside in mass capacity near line drives within an increasingly favorable pricing and supply landscape. HDDs continue to demonstrate significant advantages in data centers. The cost per bit advantage of about six times and a capital efficiency benefit of approximately nine times compared to enterprise class SSDs. The aerial density improvements being achieved at this time are the most significant advancements in over a decade. And these have been enabled by our tool upgrades, specifically HAMR. While the HAMR upgrade cycle remains in its early stages, with another three or four years ahead, the next vector for HCD upgrades is driven by additional performance enhancements, advancements that will enable increasingly higher capacity drives. We're already engaged with our customers in supporting these additional future advancements, which underpins the continued 200 lean technology upgrade path through the end of the decade. This increasing visibility for long-term strength for our HDD upgrade business again provides further support to our decision to focus the company's resources on the revenue opportunity supporting the HDD industry, with Intermat playing a critical role within the HDD technology roadmap as it proceeds to develop increasingly higher capacity drives. With the HDD technology roadmap requiring close partnership with our customers in deploying upgrade technology through at least the end of this decade, and at the same time, over the last five quarters, we've observed from industry analysts that media capacity utilization has recovered from a low of under 40%, now approximately 70%, which means that we can also start thinking about planning for new systems being required within the next few years. Returning to the near-term outlook for our HDD business, the upside in demand witnessed this year has likely boosted our HDD expectations for both 2024 and 2025. Our forecast for total HDD revenues this year has improved once again to the $46 to $48 million range. This is excluding the inventory pass-through. This forecast has improved incrementally every quarter of the year and importantly provides us also with a strong base of business fund our operations in 2025. Further upside towards the $50 million revenue level and above will be driven by the acceleration of upgrade activities by multiple media manufacturers. We believe $50 million is the HDD revenue baseline ahead for 2025 as we expect to play an integral role in every major upgrade initiative we're already seeing increased demand and accelerated timelines from additional HDD customers upgrading to Hammer. Importantly for IndiVac and the decisions being made today to increase our return on investment with the most assured and immediate business opportunities, the strengthening HDD revenue baseline in combination with our restructuring and the corresponding improvements to our cost structure are enabling a revised P&L forecast also expected to be cash flow neutral for the year. Before we turn the call over to Cameron, I'm delighted to welcome Ryan Faderman to our board perspective today. Ryan is a principal and co-founder of Pelogic Value Fund and one of our largest investors. Ryan brings not only an investor perspective but extensive corporate strategy, operating and financial experience. He also has an engineering background and prior board experience with B-Square, where he was the board chairman in 2023. We very much look forward to his contributions to our board. And with that, I'll turn the call over to Cameron.