Nigel Hunton - President, Chief Executive Officer Jim Moniz - Chief Financial Officer Claire McAdams - Investor Relations for Intevac.

Good day, and welcome to Intevac's Fourth Quarter 2021 Financial Results Conference Call. At this time all participants are in a listen-only mode. A question-and-answer session will follow the formal presentation. [Operator Instructions]. And please note that this conference call is being recorded today, February 9, 2022.

At this time, I would like to turn the call over to Claire McAdams, Investor Relations for Intevac. Please go ahead..

Thank you, John, and good afternoon everyone. Thank you for joining us today to discuss Intevac's financial results for the fourth quarter and full year 2021, which ended on January 1, 2022. 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 Jim Moniz, Chief Financial Officer. Nigel will begin with his prepared remarks, then Jim will review our financial results 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 year, which remains subject to adjustment in connection with the preparation of our Form 10-K, as well as comments regarding future events and projections about the future financial performance of Intevac.

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 February 9 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. I'm very excited to be joining Intevac and leveraging my expertise in the semiconductor capital equipment and other high tech industries to execute on the company's objective to create long term stockholder value.

Most recently, I was CEO of Photon Control, a Critical Component Company serving a leading process equipment companies in the Wafer Fab Equipment. I joined the company in mid-2019 and two years later I had grown revenues by 250% and completed the sale of the company to MKS Instruments for over $300 million U.S. dollars.

I have a long history in the industry and in fact was the CEO of one of Intevac’s key supplies in years past and I am fully committed to building on this company's strong legacy of leadership in thin-film processing technology in order to drive value for our stockholders.

Since joining three weeks ago, I've been able to talk to several customers and Intevac employees working in both Santa Clara and Singapore, to ensure that they fully understand my commitment to building strong relationships and creating a successful business.

I've been very impressed by the depth of talent in the business and especially the expertise in thin-film processing in ultra-high volume, small substrate applications. My initial areas of focus were based around the key mandates and priorities outlined in our recent press release.

First, assessing on growth potential in each of our end markets which entails meeting each of our key customers, both existing and prospective. Next, I'm working internally to fully understand the organization.

Aligning resources with our revenue growth prospects and streamlining the cost structure, given that we are now a standalone capital equipment company without the added complexity of also running a wholly different Photonics business.

And third, positioning the company for a return to profitability as soon as possible, while preserving the strength of the balance sheet. I've met multiple times with the leadership group and we are quickly developing our near term targets and priorities.

We have a customer centric culture and an experienced team that is highly attuned to our customers’ needs and challenges for each of our end markets. I expect to meet with every key customer within my first 90 days as CEO.

The objective of these customer meetings is to understand their commitment to Intevac’s thin-film processing solutions in the future technology road map, and to both identify and size our revenue growth opportunities. Next, as it relates to streamlining operations.

As we build a forecast, customer-by-customer, gaining a clear understanding of their tool purchase and technology upgrade plans for the next two to three years; we will begin optimizing our company's resources with our growth prospects. We are also identifying costs that can be reduced with our newly simplified structure.

Number three, Prudent fiscal management, including positioning the company for profitability and preserving the strong balance sheet, including our significant cash reserves. We are continuing our strategic review work with Greenhill in concert with my immediate efforts to size our revenue growth and streamline operations.

My objective is to provide you with a near term forecast, as well as the longer term objectives on the next earnings call in early May. So for today’s call I'll be deferring an official look for 2022 financials, until I can personally meet with all of our key customers and make that assessment.

That being said, at this time I believe it's prudent to assume that the HDD business will be pretty similar to 2021, given the timing of the first new HDD system to be delivered later in the year. In the meantime, we are laser focused on minimizing our use of cash as we streamline Intevac.

Before turning the call over to Jim, I'll make a few more comments about the results published in our Q4 press release today. The fiscal 2021 and Q4 in particular, for the most part our results were in line with what the company had guided a quarter ago for the thin-film equipment business.

The main difference on the P&L other than the Photonics business moving to discontinued operations, is that we took additional reserves against some of our inventory in non-HDD markets. I've taken a conservative viewpoint on our ability to turnover some inventory to revenue.

For example, two of the three VERTEX tools we built were intended for decorative back cover glass coatings and will require significant modifications for the applications we’ve be working on more recently.

We also feel it's prudent to reserve the inventory associated with our energy product line for solar implant, which has continued to get pushed out of the forecast for the last two years. Absent these additional inventory reserves taken in Q4, our results for the year came in pretty much as expected.

I look forward to meeting with and working with our investors, our customers, our board, the management team and the entire Intevac organization as we take the company forward. That concludes my prepared remarks, and with that I will now turn the call over to Jim. .

Thank you, Nigel. Our earnings release reflects the Q4, 2021 and full year 2021 financial results per GAAP accounting, which reports the Photonics business as discontinued operations.

My remarks here will close out Q4 2021 as compared to what was forecast for the equipment business and which drove our prior guidance for revenue, gross margin, OpEx and profit or loss. Fourth quarter revenues were $15.9 million and total revenues for the year were $38.5 million.

This was slightly above our forecast for the equipment business, given a pull-in of HDD upgrades from Q1 into Q4. For the full year revenues included one MATRIX, plus HDD upgrades, spares and service. Q4 gross margin was 4%, below our forecast for the equipment business as we took additional inventory reserves of $8.4 million as Nigel described.

Without those reserves our gross margin would have been 57% above forecast, driven by favorable mix of higher margin HDD upgrades. Full year gross margin was 18.3% and excluding the inventory reserves taken in Q4 would have been 40%.

Q4 operating expenses were $7.3 million and included a $1 million litigation settlement cost that is excluded from our non-GAAP results. The net operating expenses of $6.3 million was below forecasts due to less spending on our R&D efforts and the absence of operating expenses from the Photonics business.

The Q4 net loss from continuing operations was $7.3 million or a loss of $0.30 per share for the quarter. Excluding the impact of the inventory reserves, which were equivalent to $0.34 per share, as well as the litigation settlement, we would have reported net income from continuing operations of $0.07 per share.

GAAP net income for the quarter was $43.5 million or $1.77 per share as a result of the gain recorded on the sale of our Photonics business, which contributed a net profit of $2.10 per share for Q4. For the full year GAAP net income was $1.09 per share.

Driven by our strongest bookings quarter for equipment in the last three years, our backlog grew to $24.7 million at year end and includes one 200 Lean system, as well as HDD upgrades and service business.

We ended the year with cash and investments, including restricted cash of $121.1 million, equivalent to approximately $4.93 per share based on $24.6 million shares at year end. The increase in cash year-over-year, less the $70 million of gross proceeds from the sale of Photonics was about $1 million.

We incurred about $3 million of transaction costs associated with the Photonic sale, and these were paid in Q1. So these costs will be reflected in the balance sheet and investments at the end of this quarter. The litigation settlement payment will be made in Q2.

Cash flow generated by operations was $318,000 during the quarter and $278,000 for the year. Q4 capital expenditures were $425,000 and depreciation and amortization was $888,000 for the quarter. For the full year CapEx was $1.2 million and depreciation and amortization was $3.5 million. Now moving to Q1, 2022 guidance.

We are projecting revenues to be around $4 million. The Q1 projection includes HDD upgrades, spares and fuel service revenue and no thin-film equipment systems. As a reminder, we did see a pool-in of upgrades from Q1 into Q4.

The fourth quarter is typically our largest quarter for upgrades and the first quarter is typically our lowest quarter for upgrades. Given the lower revenue volumes in Q1 which will affect factory utilization, we expect first quarter gross margin to be around 25%.

Q1 operating expenses are expected to be around $7 million with some typical seasonal increases. We are working to reduce our quarterly OpEx and will have more to report on our next earnings call. We expect interest income of about $40,000 and GAAP tax expense of about $100,000 in the quarter.

We are projecting a net loss of around $0.24 per share based on 25 million shares outstanding. This completes the formal part of our presentation. John, we are ready for questions. .

Thank you. [Operator Instructions]. Our first question comes from the line of Peter Wright with Intro-act. You may proceed with your question. .

Great! Thank you guys for taking my question and Nigel, congratulations on the new position and role. .

Thank you. .

My first question is – I've got two questions.

My first question is, if I was to look at the equipment business and start with the assumption, normalized sales are around $60 million annualized, I'm hoping you can comment kind of your thoughts around that, if that's a good number to think about as kind of a base line that you're looking at when looking to right size the business, that's the first question.

And then the second question is kind of your frame of reference. So you noted in your commentary two salient points are kind of your expertise and past experience, which is growing a company, organically 250% and then selling it.

I guess my second question is, is the strategic review of the business still ongoing or now with Photonics being sold off is that complete, and if you can comment in light of that, how do you think of the equipment business? Do you think that there is more opportunity in growing it as a standalone, and of course if fitting into something else, what are your thoughts more generally around that?.

Okay, thank you for those questions. What I’ll try and do is cover them in multiple ways. Clearly, where we're at the moment is going through a pretty through review of the business.

And I suppose the next 90 days is about really understanding it, not just the core business, but understanding its opportunities that have been locked at over the last couple of years, so that's part of this process.

So if I looked at the equipment business and annualized sales, as I said in my opening remarks, 2022 will be pretty flat against 2021 and therefore doesn't get the business to a level of profitability.

But this year is very much about streamlining the operations, getting this business back to a base HDD platform and then bolting on any initiatives beyond that.

But overall having some, in my first I suppose 30 days of analysis so far, we do believe a business in this mid-60s can get to a level of beyond breakeven; it’s time to a look at profitability. But that does need in 2023, a need for not just delivering on cost reduction and right sizing the company, it needs a return to revenue as well.

And my initial discussions with sort of the leading customers’ shows the 2023 will have increased sales as they need capacity in that year.

So with this year being flat, it’s a great opportunity for me to look at streamlining and getting focused into the business, making sure we keep a razor sharp focus on the cash, but ensure we actually get the business in shape, so we hit 2023 with a very different structure, but very focused and a good base organization to take the company forward into profitability as we go through 2023.

So I think a $60 million analyze, that’s a good baseline, so I'm sort of okay with that as you think about the equipment business. In terms of reference, the rest of the terms of this I’ve touched on in my opening remarks, is to look at the business, look at right sizing it, look at what the growth opportunities are.

So really it's too early to say what the final conclusion of that is, but over the first 90 days we’ll go through that and as part of that, you know I don't want to shut down any strategic review of the business.

As I conclude on what restructuring we need, as I conclude the revenue forecast out certainly as I look beyond one to two years, then we’ll feed that and we’ll talk, what does that mean to strategic process.

So it is still, I will talk to Greenhill as I develop the plans, but the more – my terms of reference is just to make sure the company returns to profitability as fast as possible, is right sized for the new shape and therefore that we can build a business that is standalone and delivers returns for our stockholders. So a lot to do, but I'm excited.

We are getting a lot of focus; you'll see a lot of change coming through. But the important thing is we are going to get and build a company for the future and that's where my passion and drive is and that's my commitment..

Thank you. If I could add one more follow-up, if you look at the $60 million, can you help us understand what that would look like. Without a time frame necessarily around it, how much of that is systems versus upgrades and if we look at the systems, it's a little different in the next cycle than backwards looking.

How do you envision that, you know maybe from a number of systems perspective in each category?.

I mean I think overall I would say we're looking at sort of similar level of upgrades, but system business that could be delivering at least $50 million next year. So I think we've talked on prior calls about whether it was $200 million over three years.

I think for the HDD business, I think if you look over just two years from now, I think my initial visibility says we can sort of do $100 million over two years and the majority of that has to become systems, revenue sales in 2023. .

Thank you very much. .

Thank you, Peter. .

Our next question comes from the line of Mark Miller with Benchmark Company. You may proceed with your question. .

Through the years you've attempted to broaden yourself at least in the equipment business in terms of solar, also in terms of coatings for mobile devices. Now you took an inventory charge onto the VERTEX tool and the solar tool, which you did complete a matrix evaluation.

I'm just wondering, any thoughts you have about future broadening of your market. .

Yeah, I mean, not to repeat things again, I mean I’m very early into the review of the business. It's key to me, not just to understand internally what the focuses are, but to understand the customers.

You know Intevac has to become a customer driven business that understands the customer requirements and understands what the key things are that we can add value to solving their problems. So as I look to that market, I don't see a future within the soul of the company, hence we’ve made those decisions.

If I look at coatings, I see – I'm pretty excited about some of those opportunities, but we've got to really meet with the key customers, we’ve got to meet with the right partners and really get to understand what the opportunities are there. So for me it's early days understanding what the coatings are for mobile.

I think there’s some excitement there, but for me it’s not just about having the technology; it’s making sure there’s a customer that has the pull and has processing or other challenges that require our technology.

So I'd say over the first 90 days I'm going to be meeting and talking to the customers involved in that sector, and then feeding that into our strategy and feeding that into our sort of renewed focus for the business. So I’d say it's too early to make a final comment on that and maybe on the next call I can add a lot more color to that. .

We should expect a follow-on orders from this matrix evaluation and if so when?.

The matrix evaluation that was on advanced packaging I’m assuming you’re talking about, I think that could be a couple of years away for a follow-on order. So it's still in evaluation stage, but it is some way off and therefore that will be part of my strategic review as well. .

It's not an evaluation. You know we sold a unit, sold for $4 million. It’s in the engineering, so it's not considered you know just an evaluation unit, but the question is when are they going to bring it into production. .

Okay. I just wanted to clarify. You said without – for Photonic sale of the inventory adjustment and the litigation charge, you would have reported a net income of $0.07 per share.

Is that correct or did I add something in or miss something?.

That is correct for the quarter, yes. .

Thank you. .

Thank you, Mark. .

Our next question comes from the line of Joseph Vidich with Manalapan Oracle. You may proceed with your question..

Yeah, thanks for taking my call. I guess, I don't know, a little – last year you guys forecasted gross in the HDD for the next three years. That’s basically 40% over the last three years and I was just wondering if you're reviewing that or if you feel that's still a reasonable expectation. .

Yeah, I recognize that into my – I’m still in my first 30 days. The initial feedback I have had from my discussions with customers, say that probably the $200 million maybe over four years, not three. I think there is clearly HDD market that’s got a long future. We will require capacity additions over the next three to five years.

So the long term, there is still growth in that market and that will drive our system sales in the future. Where I'm sat today, I think as I touched on in my prepared remarks, this year is looking that it’s going to be flat on 2021 and looking into 2023, it could be the 65, 70, that sort of level.

So I think I'm pretty clear and firm about $100 million over two years. What it doesn't give you is a 40% growth in 2022 and I think I've been pretty clear on that.

But the HDD business is still alive, will need investments, will need CapEx, but I probably won't have a clear vision on the two, three, four year outlook until I've met with all the customers and actually spend a bit more time on that and therefore that’s a key priority throughout my first 90 days. .

Okay, great. I appreciate it. Thanks very much. That's all I have..

Thank you. Thank you, Joe..

At this time there are no further questions. And ladies and gentlemen, this does conclude today's teleconference. Thank you very much for your participation. You may disconnect your lines at this time.

Thank you very much and have a great day!.

Thank you..