Claire McAdams - IR Counsel Wendell T. Blonigan - President and CEO James Moniz - CFO, Treasurer, and Secretary.

Nehal Chokshi - Maxim Group David Rold - Needham & Company Mark Jordan - Noble Financial Capital Markets Craig Ellis - B. Riley & Company.

Good day and welcome to Intevac's First Quarter 2015 Financial Results Conference Call. At this time all participants are in a listen-only mode. Later we will host the question-and-answer session and instructions will follow at that time. [Operator Instructions]. Please note that this conference call is being recorded today, May 4, 2015.

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

Thank you and good afternoon everyone. Thank you for joining us today to discuss Intevac's financial results for the first quarter of fiscal 2015, which ended on April 4th. In addition to outlining the company's financial results, we will provide guidance for the second quarter of 2015 and discuss our outlook for the year.

Joining me on today's call are Wendell Blonigan, President and Chief Executive Officer and Jim Moniz, Chief Financial Officer. Wendell will start with an update on our businesses and then Jim will review first quarter results and provide guidance for Q2 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 of Intevac.

These forward-looking statements are based on 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 May 4th 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 over the call over to Wendell..

Thanks Claire and good afternoon. On the call today I will review the progress we have made in our strategic initiatives during the first quarter, provide some commentary on the current environment for our business units, and share our view on the opportunities and challenges ahead.

Today we reported financial results at the high-end of our guidance with revenue of $19.9 million and a net loss of $0.12 per share. Included in equipment revenues were one 200 Lean and our first VERTEX PVD, pilot cover panel coating system.

We had not included the VERTEX system in the Q1 guidance and are pleased to have that as a sign-off criteria within the quarter. We saw some upside for our non-systems hard drive business as our customers made some strategic purchases which increased demand for upgrades in Q1.

The variance in our Q1 revenue guidance range for the first quarter represented the uncertainty in signing time-off of the MATRIX PVD system and backlog. This tool revenues on customer sign-off and is subject to our customers factory status and priorities which are not in our control.

This sign-off did not complete in the first quarter, however, we expect to revenue the tool within the next quarter or two. We will continue to range this tool in our guidance until it signs-off. In total the higher level of hard drive upgrade business and revenue recognized on our cover panel coating tool led to sales near the high end of guidance.

While the revenue for MATRIX PVD moves later into the year. Most importantly we continue to make steady progress with our thin film equipment growth strategy.

Turning now to the current environment for our thin film equipment business, in the hard drive industry PC and hard drive units reported year-to-date have been disappointing and short of expectations which in turn affected media units and overall Exabyte [ph] shipments.

In spite of the industries lack luster results in Q1, recent earnings calls across the storage supply chain continued to provide positive commentary about the forecast demand in near line enterprise and cloud storage and stated optimism for the second half of 2015.

The storage requirements for the cloud is expected to drive at least 35% annual growth in exabyte demand in that segment. Additionally the average number of disks in each of the narrow line drives is forecasted to increase significantly from 3.8 in 2014 to 6.3 by 2019.

Accelerating demand for high capacity multi disk storage will help enable the HDD industry to absorb its excess media manufacturing capacity and then drive demand for our production tools.

The long-term view of exabyte demand remains consistent with what is being forecasted over the last few quarters and our outlook for capacity systems needs through 2018 timeframe has not changed. In 2014 we reported that our customers had tightly constrained their capital budgets even for tool upgrades.

Last quarter we discussed that there could be some opportunity for improvements in our upgrade business in the second half of 2015. We actually saw some of that upside in the calendar first quarter and that business has the potential to further improve depending on our customer’s budget for their 2016 fiscal year.

In the mean time we feel confident in our technology leadership position and our ability to gain incremental market share at the next technology inflection points. Our strategy to drive revenue growth in thin film equipment is to leverage our core capabilities and technology to new thin film deposition applications in the vacuum coating industry.

Last week we introduced our MATRIX and VERTEX platforms as well as our thin film solutions at the society of vacuum coaters technical conference here in Santa Clara. We were well represented with presentations and post recessions and a well attended booth showcasing our products and technology.

This was an important event in the evolution of our equipment business outside the hard drive media space. In my recap of the first quarter results I highlighted that we continue to make progress in the key initiatives for growing our thin film equipment business.

These three initiatives are protective coating for display cover panels and PVD metallization and implant for doping for solar cell manufacturing. In display cover panel our first pilot VERTEX PVD tool that was installed in the third quarter of 2014, met its sign-off specifications and was accepted in Q1.

The tools is currently running low rate production at a Tier 1 customer in Asia. As I have discussed previously this is a new feature for display cover panel manufacturing and market demand for the protective function of our carbon film specifically from the end user needs to be developed.

We continue to drive this initiative with our initial customer defining panel performance specifications with the end users and optimizing our films properties to establish the protective coatings value proposition. Driving this effort is the key objective for us this year.

Because we leverage our thin film coating technology from HDD products, we can recover our invested capital for the cover panel opportunity by achieving success with our first customer. This is a new end market application which if adopted could be a large growth driver and we continue to engage with multiple customers.

As I indicated previously if half the projected incremental market growth in cell phone and tablet cover panels would adopt this coating, over the next five years the time for deposition tools could exceed $300 million.

For PVD metallization for advanced solar cells, our first MATRIX PVD system is currently running 24x7 production with a leading Tier 1 customer.

As of first of a kind tool running a new solar cell design in a pilot line, we continue to work together with our customer optimizing the performance and design of our tool to support the ramp of output, yield, and device efficiency.

Our objective for this year is to complete the sign-off and continue to support our customer’s activity to validate their device and production line performance. Provided our customer is successful, their plan is to build out significant capacity with our tools.

This would be a sizeable project and would allow us to recover the total investment in the MATRIX the platform. In the last quarter, we also made good progress in the qualification of our MATRIX PVD tool and film stacks with an additional Tier 1 solar customer.

We estimate our stamp for equipment in this application to be over $100 million over the next five years.

In implant doping of advanced solar cells, the joint development program with our Tier 1 customer to implement our technical solutions into their next generation solar cell manufacturing flow, successfully passed its second milestone, which was the key technical feasibility gate.

We have now moved into the next phase of the program which is the productization of the technology and integration on to our MATRIX platform.

If successful, we estimate the stamp for this application at this customer to be around $50 million over the next several years with a complete payback of our ongoing investment in this initiative in the first planned factory build.

As a final comment on our thin film equipment growth initiatives, we believe that already in 2015, we have demonstrated excellent progress towards growing these opportunities to a point where they can bear fruit in 2016 and beyond.

Our opportunity to offset the cyclical environment of hard drive media equipment lays in the continued execution of our growth strategy and our customers’ success in driving the adoption of their technologies that utilize our equipment.

Successful achievement of our objectives in 2015 in these adjacent businesses will well position our overall thin film equipment business going forward. Turning now to Photonics, after a record year in 2014 as expected our Photonics revenues moderated in the first quarter.

Sales were $9.3 million off of our peak levels but well ahead of the same period last year with operating profitability moving toward the model coming in at 16%. As we move into the second quarter, there are several dynamics that will impact our Photonics business in the near-term.

First, as we look at the mix of revenue between top products and funded R&D, in the first quarter 2015 product revenues represented a record 81% of Photonics revenue.

Gross margin came in better than expected due to excellent manufacturing execution on the remainder of the second lot of Apache Helicopter night vision cameras which were all delivered in Q1. We are now delivering the third lot for Apache and the contractual pricing with the governments steps down in the margin profile moved toward the model.

Given the fact that revenue mix in Photonics continues to be more production versus funded R&D and we are in full volume production with the Apache camera program, we have modified our rate structures to most accurately reflect our production costs. These cost structures will be used to price our products on our upcoming contracts.

Jim will give you some detail on this during his prepared remarks. We are currently in negotiation with the next slots of Apache and Joint Strike Fighter which coincides with our rate changes. The sequestration of the military budget is having an effect on our funded R&D revenue stream for 2015.

Last call I discussed a pause in government funding in our digitally fused goggles which we are currently funding internally from the profits of the business. Last quarter we saw a few government funded programs forecasted for 2015 delayed to 2016 because lack of budget and/or reallocation of existing funds.

While our production products remain unaffected, we see continued headwinds in available government funding for new military development projects and are keeping a close watch on activities in Washington related to the 2016 budget.

Now as we look out to the future of our night vision technology and align with military’s long range plans to replace analog night vision with digital, we have made the decision to begin development of our next generation sensor. Our current sensor has been successfully deployed in high value air borne applications.

The next evolution of our proprietary technology is driving performance and price points for ground soldier deployment, utilizing the most advanced silicon technology available.

Initially, we will be investing some of the profits from Photonics business to fund the concept and feasibility efforts for our next generation sensor, and deploying capital through our internal gate and milestone process.

As with the production proven ISIE11 Sensor we will be looking to offset our development in CAPEX cost with significant funding from the government and we are in active discussions for their support today.

This is a long range program and we must begin now to meet the militaries road map for deploying digital night vision to ground forces which will be the largest opportunity for our technology.

We are extremely pleased with our execution of the Apache program with on time inspect deliveries and our ability to come up to yield curves faster than forecast. This $75 million program has been a touchdown for our Photonics business and ongoing success.

The F-35 Joint Strike Fighter cameras are in limited production and ramping with the overall aircraft rollout. Over the next five years we see this as a 20 million opportunity with over 120 million worth of business over the Joint Strike Fighter build out.

We are continuing with our digitally fused goggles activity, incorporating the key feedback we received during last year’s user evaluations into the design. Additionally our externally funded program for night vision goggles for avionics remains on track for prototype delivery at the end of the year.

There is no change in our differentiated positioning and we continue to be recognized as a critical soul source provider of digital night vision technology with an opportunity pipeline of over $350 million over the life of the programs in which we are currently engaged.

So to sum up our business environment, only time will reveal the slope of HDD media growth that drives the 200 Lean systems business. 2015 will be another challenging year as industry over capacity is yet to be absorbed by demand.

We saw some upside in our non-systems HDD business in Q1 which leaves us to have a slightly improved outlook for upside throughout the year. We are closely monitoring the performance of the industry versus the forecast and managing the business accordingly.

In adjacent thin film equipment markets, we achieved meaningful progress in the first quarter and are on plan with our strategy to penetrate new applications. We are encouraged by the first revenues recognized in the display cover panel protective coatings area and are also pleased to have passed the key technical validation gate for solar implant.

In our photonics business, we continue to leverage our success on the Apache Program into additional military applications and we are deploying capital to ensure our ability to support the militaries road map for the ground application, the largest opportunity in digital night vision.

Last quarter we provided outlook for similar revenues for the full year 2015, as compared to 2014 with a potential for upside in the second half depending on our HDD customer's fiscal 2016 budgeting as well as government funding levels.

As we are now into the second quarter of 2015, based on our customer’s activity in Q1 we currently believe there is around 5% upside to our revenue outlook for the year. We continue to be committed to reducing operating losses and we will move -- as we move through 2015 and closely managing our cash.

All of the efforts we have discussed today are focused on driving revenue growth, positioning the company for a return to profitability, and deploying capital in the best long-term interest of our stockholders. In the first quarter we completed $3 million of stock repurchases and we will continue to be opportunistic.

With that I will now turn the call over to Jim to discuss our first quarter results and provide guidance for the second quarter. .

Thank you Wendell. Consolidated first quarter revenues totaled $19.9 million above the midpoint of our guidance range. Equipment revenue totaled $10.6 million including one 200 Lean system and the sign-off of the first VERTEX PVD pilot cover panel tool as Wendell discussed.

Photonics revenue of $9.3 million included $7.5 million of product revenue and $1.8 million of contract, research, and development revenues. Q1 consolidated gross margin was $6.9 million or 34.8%.

Photonics gross margin was 42.1%, slightly lower than last quarter, significantly up from the first quarter of last year and also above our long-term model for this business. The high gross margin in Q1 was due to continued favorable mix of product revenue versus lower margin, contract, research, and development revenue.

As we have been communicating over the last several quarters, these margins will start to normalize to the longer-term profit model. Equipment gross margin was 28.5%, up from both the fourth quarter and the first quarter of last year.

The improvements in margins was primarily due to lower access and obsolete inventory charges and higher factory absorption. Q1 R&D and SG&A expenses was $9.9 million, just outside of our guidance range driven by slightly higher engineering cost for our new thin film equipment initiative programs.

Our Q1 net loss on a GAAP basis was $2.9 million or $0.12 per share at the favorable end of our guidance range. Q1 net loss on a non-GAAP basis excludes the acquisition accounting related charge and certain restructuring expenses, and was $2.8 million or $0.12 per share. Our backlog was $39.2 million at quarter end.

Equipment backlog of $16.2 million includes one MATRIX PVD system, and one energy solar implant tool. Backlog in our Photonics business was $23 million. We ended the quarter with cash and investments including restricted cash of $63.3 million, equivalent to approximately $2.75 per share based on 23.1 million shares at quarter end.

During the first quarter we brought back 443,000 shares for $3 million, at an average price of $6.71 per share, bringing total share repurchases for $13 million, total since inception out of a total plan of up to $30 million. Since the end of Q1, we have purchased an additional 223,000 shares for $1.2 million at an average price of $5.48 per share.

Q1 capital expenditures were $918,000 and depreciation and amortization was $1.2 million for the quarter. Turning to guidance for the second quarter of 2015, we are projecting consolidated Q2 revenues to be between $18 million and $22 million.

We continue to range the MATRIX PVD tool until we get customer sign off and as Wendell mentioned, we expect this tool to revenue in the next quarter or two. We expect second quarter gross margin to be between 30% and 32%, lower than what we achieved in Q1.

Gross margins will trend lower as we see Photonics margins trending closer to our long-term model for this business. Existing Photonics programs have contractual step downs in unit prices and we saw some of that in Q1 and will see more as the year progresses.

Additionally, as we are now in volume production with the both Apache and Joint Strike Fighter programs, starting in Q2 we have modified our cost structures and have moved the expenses related to our sensor manufacturing out of R&D and into cost of cost of goods sold. This has two effects.

It most accurately reflects our product costs that will be used to price our products on our upcoming contracts and in the overall Photonics P&L, the cost moved from below the line out of OPEX to above into cost of sales as a wash. With current contracts in place based on the previous cost structure will be impacted on the gross margin line.

Operating expenses are expected to be between $8 million and $8.3 million which is below the normalized operating expenses for our current cost structure and driven in Q2 by the benefit we expect from customer funded development in our equipment business as well as some movement of costs in Photonics from OPEX to cost of sales as a result of our modified cost structure.

We expect no tax benefit and minimal tax expenses. For Q2 we are projecting a net loss in the range of $0.08 to $0.12 per share based on an estimate of 23 million shares. The outlook for the full year 2015 now has about 5% upside to the 2014 revenue level. The first half is already coming in a little better than expected.

Continued upside in the second half will be dependent on the adoption speed of our equipment growth initiatives and HDD manufactures fiscal 2016 budgets.

At this revenue level and with our new Photonics margin structure, we would expect total gross margins for the year in the range of 32% to 34% with operating expenses between $36 million to $37 million for the year.

Cash burn for the full year is expected to be approximately $5 million to $6 million excluding any cash used for the company stock repurchase program. This completes the formal part of our presentation. Operator, we are ready for questions..

[Operator Instructions]. Your first question comes from the line of Nehal Chokshi of Maxim Group. Your line is open. Please go ahead. .

Thank you and congratulations on getting transfer [ph] and sign-off from the cover of last fall, few questions around that.

So, what was the driver of that first of all?.

The driver for our sign-off is based on the performance of our tool as well as the performance to specification of our film. So we transferred that process from our site here into Asia, duplicated the testing methodologies and setups, and proved that system met its specification so that drove the sign-off. .

Okay, great.

Can you discuss -- give us some color as far as run rate or utilization that you are seeing with this tool and give it the flavor as far as timing the potential follow on orders?.

Sure, so what’s going on with that tool right now is our customer has a high informed customer that they are selling very small quantities to right now. It’s kind of on one flagship phone. Most of the activity on that tool right now is working on getting our next customers for that tool and developing the value proposition between us.

Our film performance because our customer and their customer and we’ve been spending a lot of time using different test methodologies for the film performance. As an example, nominal specifications are for taper testing or steel wall test that are derivatives from military spec testing for coatings on glass.

As we move into this process of defining the requirements in the cell phone space particularly one of the test that we been working on is we put the covered glass in a container that’s full of rocks and sand and car keys and other objects and that gives put in a washing machine and goes 40 minutes in the washing machine and the goal there is to be able to survive that test multiple times.

So we been working on our as I said in the prepared material is variations and different performance of our film in order to meet some of these additional test. And that’s what we are working on right now.

And I think as far as the engagement with that customer, they are engaged with multiple customers but they really want to get the most value they can out of coating and going through some of these severe testing is allowing them to have a different value proposition to their customer.

They have multiple customers they are talking to and we are also engaged with other customers for our equipment as well. So that’s kind of the progress and the status there. .

Just to be clear, these customer results are going to other customers.

The results of other customers are already going through a qualification process or they are just simply still trying to be proved of the market value of the solution?.

Well, I think we have got multiple requirements from multiple customers but there is a common set that we are working on between a number of customers. And we are working to get that particular order done. And as far as tool timing, we have got to get the end customer engaged but it could turn very quickly with one large order.

But we just have to work the process and be diligent and patient with it. .

Okay, I’ll take one more question and get back in the queue. But just a clerical question, can you give us a split between the equipment revenue and the upgrades and etc.

for the thin film equipment business?.

Yes, I don’t know if we’ve given the split between the tools and the actual upgrades of the equipment. I don’t have that off of the top of my head but I don’t think that’s something we have given in the past. I do know... .

We don’t split those out but the Photonics versus the thin film equipment business is….

We certainly gave you that material..

Okay, alright. Thank you. .

Thank you. Your next question comes from the line of David Rold of Needham & Company. Your line is open. Please go ahead. .

Hi there, thank you.

First want to check in on where you guys see the HDD industry, ten at the moment or side capacities?.

It really varies quarter-to-quarter but if we look what Q1 was, where Q2 forecasted the original coming into the year forecast for the back half of the year we show that in mid 70s..

Mid 170s, okay. .

In terms of average, yes. .

Okay, thank you.

Can you talk a little bit more about the -- or could you put a dollar around on the revenue or the GAAP pushed out in Photonics, can anybody do that?.

It’s really what I talked about as far as the military budget was, bookings that were to happen. There wasn’t additional funds. I think we’ll talk more about the total photonics stories as we get to the end of the year on what those numbers look like.

But again in our overall guidance where talking about 5% outside of what we had discussed on our last call. .

Okay and then I guess just related to the last question on the cover glass, what realistically given all those customer qualifications going on, what’s the earliest we can relatively expect kind of meaningful revenue from that category, ball park?.

Well I think one way to look at it is lead times on that particular piece of equipment is about five months. So that would be the inside window.

And I think my opinion is that we’ve got a much better value proposition than we did a quarter ago by going through these additional tests and have a better story for the end customer and we got a better coating as well. So I think out odds get better as we as -- the film gets better and better. .

Do you have a sense of how many competitors you going up against, for those wins how many other people they are looking at..

We are only aware of one very small equipment provider in Asia and it’s our understanding that it didn’t work. So we think at this point we’re first to market. .

Okay and your specific advantage versus that smaller competitor is what?.

Film quality, I think our ability to take that film and our knowledge and core capability out to hard drive for the carbon overcoat. There they got us into a good position very quickly. .

Okay, great. Thank you. .

Thanks David..

[Operator Instructions]. Our next question comes from the line of Mark Jordan of Nobel Financial. Your line is open. Please go ahead. .

Yes, good afternoon gentlemen.

A question relative to the Photonics backlog, could you give a little color as to the breakdown of that funded our R&D versus sensors and you said you are delivering on lot free do you know when you would expect a release of lot four?.

Let's see, so let me start with your last question. As I said in my material we are in negotiations right now for the next lot on Apache and lot three delivers out across two years I think. So that’s where the status of that is.

Also in my prepared remarks I think we said that about 80% in Q1 was programs versus funded R&D in Photonics and that’s similar. .

Okay, thank you very much. .

Thanks Mark. .

Thank you. Your next question comes from the line of Craig Ellis of B. Riley. Your line is open. Please go ahead. .

Yes, thanks for taking the question guys.

Can you go into more detail on what’s driving the non-systems strength and thin income business and if you saw that in the first quarter, what’s the potential for that to emerge more consistently as you go through the rest of the year?.

As I said we saw some strategic purchases and across the customer base we saw some business that was I believe, they don’t share exact details with us but is part of some incremental aerial density improvement on perpendicular media. We had orders that came in on reliability and particle control, some of our catalog of upgrades that we have.

And it also could be a function of utilization rates, so they have tools available to upgrade and fully utilizing in their factory.

And we are optimistic about as we go through the year in this part of the business but I think we really after the numbers came out over the last couple of weeks and what Q2 was being forecasted at just as far as hard drive units, we want to see those 16 budgets and that stuff allocated before we get too optimistic on that. .

That makes sense.

And then switching gears to the cash commentary, if I hear you correctly that the objective is to mitigate cash burn to $5 million to $7 million excluding repurchase, so to the extent that you continue to be active in the repurchase program, there would be greater cash burn in that?.

That is correct and we said $5 million to $6 million on the whole. .

Okay, thank you guys. .

Okay. .

Thank you. Your next question is a follow-up from the line of Nehal Chokshi of Maxim Group. Your line is open. Please go ahead. .

Yes, just wanted to look a little bit further into the Photonics and what are you indicating as far as ongoing contract negotiations and the sequestration I think is what you are talking about but Photonics backlog is down quarter-over-quarter and year-over-year.

I presume it is due to the ongoing negotiations, but can you just reiterate if they do have confidence level on a lower guidance [ph], I know you said 5% upside but just reiterate that the low-end is indeed 65 million?.

I can confirm that is what we are seeing right now. .

Okay, and that does imply then that the Photonics does pick back up from where we are?.

We are not really going to guide out there. We will see what the results are in Q2. I think this is just a lot of different moving pieces when we look at risks and opportunities on both sides of the business. As we went through our financial forecasting we see about 5% upside to the company. .

Okay, thanks. .

Thanks Nehal..

Thank you. And there are no further questions at this time. I will now turn the call back over to Mr. Blonigan for any closing remarks. .

Okay, thank you. Before I sign-off I would like to take this opportunity to thank our employees for their hard work and dedication as we navigate the current environment. And also thank our customers for their continued partnerships and business. Thank you all for joining us today and we look forward to updating you again during our Q2 call in August.

Until then so long. .

This concludes today's teleconference. You may now disconnect..