Intevac, Inc. Price & Performance (IVAC)

And good afternoon to everyone on today's call. Especially our veterans. Thank you for joining us today to discuss Intevac's financial results for the Q3 of 2024. Which ended on September 28, In addition to discussing the company's recent results, we will discuss our outlook joining me on today's call are Nigel Hunton, President and Chief Executive Officer and Cameron McAuley, 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 Q3 and additional details regarding our guidance. Before turning the call over to Q and 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 Qs as well as comments regarding future events and projections about the future financial performance 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 ks 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.

Our Q3 results demonstrate many positive developments for Intevac business. Including a strengthening of the HDD industry, upside in HDD upgrade demand and strong gross margin performance This resulted in a better bottom line and a strength [indiscernible] as compared to Q2 and a more positive view of the HCE business and its financial performance going forward, In addition, we are pleased to report the resolution of a customer's inventory obligation. Approximately $15,000,000 of the 28 $500,000 of revenue reported For Q3, is related to these inventory obligations. The $15,000,000 inventory related revenue was largely pass through, but did include a small amount of gross to cover our expenses procuring and storing the inventory. With a reported gross margin of 25%, [indiscernible] 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 $0.04 Absent this inventory related revenue, our Q3 revenues indicate continued strong demand 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. Fortunately, less positive development since quarter end. Is the conclusion of the qualification process for our first ever Trio shipment was delivered in April, to a covered glass finisher in Asia.

Over the past several months, the Treo has demonstrated positive results Through ongoing endurance testing in the field, and while the tool showed promise the qualification concluded [indiscernible] [indiscernible] At the end of the day, the Trio as compelling as it was, was unable to decisively demonstrate material advantage to displace the sizable installed capacity of existing coating solutions And as such, we missed the market opportunity this next consumer device product [indiscernible] Given that this has impacted the expected free opportunity, and take into account today the strength of forecast with our HDD customers. Our focus for the Trio has turned to rapidly monetizing our inventory [indiscernible] We believe the most advantageous path forward achieving this objective is to continue supporting evaluations at multiple cross 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 Intevac, 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 We continue to believe in the value residing in our material science [indiscernible] And our efforts in 2025 will be on monetizing the investments we've already made additional growth opportunities for our technology, without requiring further investments by Intevac. 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 also announced [indiscernible] 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 its highest level in recent history, We had the visibility for around $200,000,000 of ATD revenues spanning the full year period between 2022 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 strength of the financial outlook for the HED sector give us confidence in significant additional revenue potential between 20262028 based on the business climate that we currently see. This continued strong revenue momentum reflects not only the sustainable sustainability of record levels of upgrade revenues, but also new 200 lien orders. Which are once again on our radar screen. 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 Q3 led to industry upside in mass capacity nearline 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 6 times and a capital efficiency benefit of approximately 9 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 3 or 4 years ahead, the next vector for H 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 which underpins the continued 200 Lean technology upgrade path through the end of the decade. I This increasing visibility for long term strength for HDHP upgrade business again provides further support to our decision to focus the company's resources on the revenue opportunity supporting the HCD industry. With Intermapped 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 deployed upgrade technology, through at least the end of this decade And at the same time, over the last 5 quarters, we have observed from industry analysts that media capacity utilization has recovered from a low of under 40% to now approximately 70%.

Means that we can also start thinking about planning for new systems being required within the next few years. [indiscernible] outlook for our HDD business, The upside in demand weakness this year has likewise boosted our HDD [indiscernible] Our focus for forecast for total HCD revenues this year has improved once again to the $46,000,000 to $48,000,000 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 to fund our operations in 2025. Further upside towards the $50,000,000 revenue level and above, will be driven by the acceleration of upgrade activities by multiple media manufacturers. We believe $50,000,000 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 HAMR. Importantly for Intevac and the decisions being made today to increase our return on investment with the most assured and immediate business opportunities this strengthening HCE revenue baseline in combination with our restructuring and the corresponding improvements to our cost structure, are enabling a revised P and L forecast is also expected to be cash flow neutral for the year.

Before we turn the call over to Cameron, I'm delighted to welcome Ryan Badham Intevac our Board effective today. Ryan is a Principal and Co Founder of Pelogic Value Fund, 1 of our largest investors Ryan brings not only an investor perspective, but extensive corporate strategy operating and financial experience. He also has an background and prior board experience with BSQUARE where he was the Board Chairman sales in 2023. We very much look forward to his contributions to our Board. And with that, I'll turn the call over to Cameron. Thank you, Nigel.

Turning first to the income statement. 3rd quarter revenues totaled $28,500,000 well above our guidance range of $10,500,000 to $12,000,000 Majority of the subside represents $15,000,000 of largely pass through revenue resulted from the required accounting treatment for the resolution of a customer's obligation regard last year. So net revenue component revenues still came in above the high end of the range. Due to incrementally strong HDD technology upgrade demand during Q3. Q3 gross margin was 24.8%, The inventory revenues included a small amount of gross profit to cover the operating expenses associated with procuring and storing inventory related to the order. And the impact of this profit along with certain other inventory adjustments collectively impacted gross margin by approximately 20 percentage points. The strength of upgrade demand in Q3 likewise drove strong gross margin performance for the underlying business approximately 45%. Above the high end Following our recent restructured We expect building OpEx be in the range of $7,000,000 to $7,200,000 the Q1 2025. Net other income and expense was $500,000 more of our cash moved to higher interest rate investments interest income increased to $800,000 in Q3. However, this income was partially offset by unfavorable foreign exchange. Resulting net loss was $0.08 per share The net EPS results for the underlying business were likewise favorable to our earlier expectations.

Moving now to the balance sheet. We ended the quarter with cash and investments, including restricted cash, of $72,100,000 equivalent to $2.67 per share based on 27,000,000 shares at quarter end. The net increase in cash over Q2 nearly $1,700,000 reflecting positive cash flow from operations enabled by our cash flow neutral P and L, as well as strong collection of receivables [indiscernible] We see CapEx of $400,000 non cash expenses for Q3 included $1,000,000 for stock based compensation $500,000 for depreciation and amortization, $800,000 in deferred tax. Now I'll provide further details regarding our For the Q4, are projecting revenues to be in the range of $9,000,000 to $10,500,000 We expect 4th quarter gross margins be in the 30% to 32% range reflecting the expected mix of upgrades and factory absorption levels during the quarter. Q4 operating expenses are expected to be in the range of $8,400,000 to $8,600,000 This range includes approximately $900,000 of cash restructuring costs. In the quarter.

We expect interest income of approximately $700,000 in Q4 and GAAP tax expense of about $400,000 most of which will be non cash. We are projecting our net loss in the range of $0.19 to $0.21 share based on 27,000,000 shares outstanding. As we look ahead to fiscal 2025, our strategic 3 year plan and forecast for the next fiscal year is currently being concluded. We expect our growing base of HDD business to deliver a revenue baseline of $50,000,000 which after the restructuring will support cash flow neutral to cash flow positive results We believe this is achievable through a combination of factors. Gross margins of at least 40%, the reduced OpEx run rate as a result of and the income generated by our investments. This completes the formal part of our presentation. Operator, are ready for questions.

Thank you. Thank you. Our first question is from Peter Wright of Partnercap Securities. Great. Thank you for taking my my question, guys. I've got a couple of questions. So firstly, Nigel, I guess when looking at the 'twenty 2 to 'twenty 5 cycle you some pretty good insight into calling that about $200,000,000 and we're now looking at kind of the next cycle of $26,000,000 to $28,000,000 3 year cycle instead of 4 year cycle. Any Any comfort in kind of guiding what you think this cycle looks like And what the unit count of the 200 Leans would look like in that assumption?

Thank you, Peter, for that first question. I said in the prepared remarks, we feel that this next period has the opportunity to be as strong as that 4 year cycle. Giving you a guidance of similar level of revenues over that 3 year period.

That really is absolutely underpinned by upgrades.

For the upgrade business, is going to stay strong We believe we're playing a key part that industry transformation And as we said, as we see utilization improving, and we see the continued growth of demand over that period, we believe that we will be a couple or a few, I think we said on previous calls, of 200 liens likely in that 2026, 20 27 period. So the majority of that business will still be very much continuing this upgrade cycle that we've seen maintaining the strength Intevac and that will continue into the future.

And do you can you guide on when you think the installed base of 200 Leans will be HAMR upgraded. Is that largely complete in the 26 through 28 cycle? Is that [indiscernible] the underlying assumption No, the timeline for that is probably at least 3 to 4 years which is good. It's going to maintain that strength of multiple upgrades each year over the next 3 to 4 years. I think beyond that, I think there'll be further upgrades think there'll be upgrades beyond that, which is good. Technology and advancements keep continuing.

And on the $7,000,000 to $7,200,000 OpEx guide, that that is a guide for where you think it's going to average out in 2025? Did I did I catch that right?

Yes, that's right. The $8,400,000,000 to $8,600,000,000 this quarter And then once kind of OpEx will level out kind of 7% to 7.2 much from the start of 2025, actually.

And just looking at It's absolutely linked to the this restructure we've announced today and the refocusing and that's a key part of that.

Wonderful. And then so from a cash flow perspective, cash neutrality for you guys suggest mid-50s then on the sales side, is that about right?

At that level?

Roughly, yes, roughly. Perhaps a little bit higher for cash neutrality, but we the actions that we've announced today we think we can be cash neutral to cash positive in 2025. We're are maintaining a solid cash balance this year as well, Peter. We started the year at roughly where we're at right now at $72,000,000 So the cash position is a very solid 1.

And my last question, sitting on the cash that you're sitting on, clearly, more cash than you need to run, HDD what is the use of cash Yes. And I think as you've known all along, 1 of the key things we've done is by maintaining the strong balance sheet in that capital position. As they've given confidence from our HDD customers the business is going to be robust is going to be supported And as we look at moving some of that technology support onto HDD, sort of invest and focus on what as I've said is a more assured business for us going forward. We always look at cash allocation. We'll continue to look at cash allocation. We've talked in the past about strategic process Strategic process is there. It continues to look at all alternatives. But for us, I mean, the difficult decision today, I think if you go back to [indiscernible] when I shut down all of sort of programs except 1, believe at that point there was value to extract from the 1 coating business we kept The consumer device market then needed a horizontal coater. We made the decision to invest in that. We believe that by eliminating the need for tape in the industry, we'd have an opportunity If we thought it was easy, someone else would have done it.

We gave it our best shot. We talked with a glass partner. We talked with a glass finisher. And that's resulted in today's restructuring and tough decision we've taken. What we have throughout this process maintained critical focus on maintaining a strong cash balance and that will continue into the future.

Great. Well, excellent job being a steward of capital. Sometimes it's tougher If it's easy, it's easy, but good job being a good steward of capital. Thank you.

Thank you. Our next question is from Mark Miller with Benchmark. Please proceed with your question. [indiscernible] in terms of the TRIO qualification. You said in that the instrument or the coder could not provide advantages over existing equipment. I'm just just curious, was it yields or throughput or uptime? What cause that situation.

Thank you, Mark. A very good question.

As we said, Peter, if it was easy, someone would have already done We'd have a horizontal coat that can actually eliminate that tape. [indiscernible] We've put a lot of effort in. We worked hard with the glass partner. Than we were with a leading glass finisher. But we couldn't deliver the required yield performance. The yield performance to compete with the vertical coaters had to be 97% particle free At the moment, there is no horizontal technology that can achieve particle free coating. We believe that was not a reason not to have a go at this task and we applied our capabilities to try and create what would have been the only horizontal coat with 0 particles in the market this stage, with us not being able to achieve the particle yield performance, I felt we needed to stop further development costs focus on our core business, which was growing again And I hope you appreciate that it was not an easy decision, but it's the right 1 for Intevac. When I started my role here in 2022, I stated very clearly that we would invest in Trio because of a real market need And that if we was not confident in the success of the product, we would shut it down fast And that is what [indiscernible] I appreciate that added color.

So there's no more no more qualms or anything else, you've just basically put Trio to bed not trying to explore any other customers, is that correct?

We have some active qualifications in the research and development opportunity for low volume equipment for sampling and testing. We believe those can come to fruition in 2025. Anything we can do with that will be upside on the forecast we've given. So therefore, the qualifications that we had that we thought could deliver revenue in the 12 month period, we'll complete those qualifications. So there is still interest in sort of R and D level tool. But not in the high volume high throughput we were hoping in the early stage of this development cycle.

Thank you.

Thank you. Our next question is from Hendi Susanto with Gabelli Funds. Please proceed with your question. Good evening, Nigel, Cameron and Yes, my first question excluding the customers' inventory obligation what was the pro form a gross margin in Q3?

We have mid-40s margin, just over mid-40s margin excluding the pass through and other inventory adjustments.

Okay. Yes. And then Nigel, maybe you can give us some color on what kinds of up or down seasonality, cyclicality of the hard disk drive business? That is typical in Q4, Q1, Q2, Q3, maybe you can remind us. I know that this may not represent a normal cycle yet, but in terms of expectation and colors, any guideposts think if you look through this year and the sort of upgrade cycle, is we've really been in 12 months of an upgrade cycle and we'll see most of that going through 2025. So yes, there's always going to be some minor levels of cyclicality between quarters especially as some of our customers [indiscernible] different year end to us and therefore timing of some of their investments can change and be modified through a calendar year. But overall for the year, we see this year that's sort of just under the $50,000,000 and next year about the same level. And therefore keeping that relatively smooth throughout the whole financial year. So overall, we've seen the upgrades flow through each quarter. And we expect that to continue through 2025. So it's not like it's got big system [indiscernible] New systems this year or into 2025.

It's all about upgrades and a relatively [indiscernible] And Nigel, like when it comes to upgrade, What kind of timing does customer usually pursue Whether it's more coming in waves, whether it's more like a step up upgrades and then followed by Let's say, some inactive upgrade activities, So what kind of upgrade patterns in terms of the [indiscernible] The customers, please?

Yes. I mean, I think as you know, typically, we get we have a very, very good relationships with our customers. And all of our customers give us good forecasting and longer term visibility. And we typically run with a lead times in the 9 to 12 month period. So if you look at our order backlog in the sort of $45,000,000 level, we get good visibility that gives us confidence [indiscernible] through 2025. I think the biggest driver as you go beyond 25 into the future will be the industry adoption of HAMO, which if you listen to some of the [indiscernible] [indiscernible] everyone is talking about the opportunities not just for Hammer, but increased terabytes for hard disk drives, And as those keep increasing and there is adoption of the latest technology, that could see some pull in or some acceleration. At the moment, we've got good visibility out for the next 12 months, which is a good position to be in.

And then 1 question on Thrio. Now that Trio is putting on Putting us like you put aside Threo is there any risk of inventory write off of components in your inventories I think the key thing there is, as I said on the the demand, we've got Good opportunities to conclude on evaluations R and D tools glass substrate, We've got an opportunity with some polymer substrates Even though the efforts of recent months have concluded in what is a clear disappointing fashion, We continue to believe in the value residing in our material science and expertise. And our efforts through 2025 will be on turning that inventory into revenues, So at this point, we're not taking any additional inventory reserves as we believe we have opportunities to actually turn that inventory into revenue for R and D units.

And any information how much Clio related inventory in the balance sheet?

The balance of inventory pertaining to Tree was just over $60,000,000 60,000,000 1.6, my apologies.

Oh, 16, okay, 16. [indiscernible] So let's say, will debt let's say, if the R and D turn into something more meaningful, you believe that it can consume that $16,000,000 in 2025? That is our hope, which is why there's been no inventory reserve taken.

Okay. Okay. Yes. And that's all. Thank you so much, Nigel. Camilla and Claire.

Thank you, Hendi. Appreciate the questions and your support.

Thank you. There are no further questions at this time. I'd like to hand the floor back over to Nigel Hunton for any closing comments.

Thank you.

And thank you for all your questions. And I also want to wish to thank all of our employees as well as their counterparts with our industry partners All the hard work and efforts and then grieving a very strong quarterly performance. Also, I'd wish our investors for ongoing support We're also welcoming a new IR firm, KCSA, if you want to reach out to Cameron in the short term for any follow ups as they transition into their new role, And I also look forward to updating you on our progress on our Q4 call in early February. So thank you for joining me today.

This concludes today's conference. You may disconnect your lines at this time. You for your participation.