Claire McAdams - IR Counsel Wendell Blonigan - President and Chief Executive Officer Jim Moniz - Chief Financial Officer.

Rich Kugele - Needham & Company Brian Alger - ROTH Capital Partners Mark Miller - The Benchmark Company Nehal Chokshi - Maxim Group Ben Klieve - Noble Capital Markets.

Good day, and welcome to Intevac's First Quarter 2017 Financial Results Conference Call. At this time, all participants are in a listen-only mode. Later we will conduct a question-and-answer session, and instructions will be given at that time. [Operator Instructions] Please note that this conference call is being recorded today, May 1, 2017.

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 fiscal quarter of 2017, which ended on April 1. In addition to discussing the company's recent results, we will provide financial guidance for the second quarter of 2017 and our current outlook for the full year.

Joining me on the today's call are Wendell Blonigan, President and Chief Executive Officer; and Jim Moniz, Chief Financial Officer.

Wendell will start with a review of each of our businesses and our outlook going forward, then Jim will review first quarter results and discuss our financial outlook for the second quarter and full year 2017 before turning the call over to Q&A.

I would like to remind everyone that today's conference call contains 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 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 May 1st 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 Wendell..

Thanks, Claire, and good afternoon. Today, we reported Q1 results exceeding guidance with revenues of $30.4 million and $0.08 per share in earnings. Revenues were up 5% over the prior quarter and up 122% over the first quarter of last year as we made significant progress towards our revenue growth and profitability objectives for 2017.

I am also pleased to report that we continue to achieve meaningful milestones in our Thin-film Equipment growth strategy during the first quarter of the year. New orders in Q1 totaled $35 million, up 40% from Q4 with the most significant driver being the largest order Intevac has ever received in our Thin-film Equipment growth initiatives.

We booked 12 system follow-on order in March for ENERGi implant tools, which we expect to ship in the second half of this year. We revenued four Vertex systems and one 200 Lean during the quarter and grew equipment backlog again to a new six year record of $56 million, up 21% from Q4.

Stronger non-system sales in our core hard drive business provided the upside to our revenue guidance for the first quarter. Today, we are raising our revenue guidance for the full year due in part to this upside as well as increasing confidence in the opportunities in our Vertex business in the Display Cover Panel market.

Not included in the improved guidance for the year is any revenue associated with the recently announced 12 system follow-on order for ENERGi ion implant system given the uncertainty and timing of the required customer acceptance.

In our Photonics business, we continued to make good progress towards the development of our next-generation ISIE 19 sensor most notably in the initial government funding received in the quarter along with the approval of the DELTA-I program that efficiently puts our digital night vision sensor on the roadmap for the Coalition Warfare Program.

This program is funded by the Department of Defense, SOCOM and several foreign nation coalition partners thus addressing not only the US military but that of several foreign nations. Now for an update on each of our businesses, starting with Thin-Film Equipment.

In the solar markets, which clearly have been challenging recently, we were pleased to announce the adoption of our ENERGi implant equipment by a major solar cell manufacturer in China who has ordered approximately 1 gigawatt of high efficiency solar cell implant capacity from us.

At the time of our last conference call, we were working with this customer to enhance the performance of the first tools shipped last year. The productivity and yield upgrades we were installing were not yet proven at that time and our customers build out plans had not firmed up.

However, our upgrades proved successful and our ENERGi tools selected as an important enabler for this high efficiency N-type solar cells. We believe that many customers have been reassessing their N-type strategies and some high efficiency N-type capacity has been announced coming offline.

We continue to expect the market for our MATRIX solar products focused on high efficiency N-type cells will be soft over the next year and until overall weakness in the solar module pricing has improved.

In the mean time, quarter-to-date, we recognized revenue on our last MATRIX in backlog which was an ion implant configuration as part of the JDP with a tier-one solar company.

While there are many moving parts in the solar business, we continue to monitor the environment for N-type solar investments and given the nearly $23 million order just received, we are leaving our five year solar revenue outlook unchanged at $175 million.

In the hard disk drive market, the program to upgrade the technical capabilities of our customers’ installed base continues. We shipped one 200 LEAN in Q1 with three still in backlog for 2017.

We have said that this is an ongoing technology program and we see this continuing into the foreseeable future providing us with a strengthened base of business in our core HDD market. As a reminder, the systems we are shipping currently are not increasing the installed base of media capacity in the HDD industry.

Fundamentals in the overall hard drive industry were relatively stable. The growth segment in the HDD market continues to be high capacity nearline drives which is a positive for media units given that the number of disks in each nearline drive is significant and is forecast to grow from four to over seven disks per drive by 2020.

This growth is driving us the overall industry tie ratio which has increased to more than two disks per drive on average. Preliminary media units’ shipment estimates indicated a tie ratio exceeding 2.1 disk per drive in the first quarter.

We continue to believe that the installed industry media capacity would be utilized once the overall HDD tie ratio gets to the range of 2.5 to 3 disks per drive as any impact on media demand drives from forecast of the slowly declining HDD unit environment are being offset by the permanent retirement of a portion of the industry’s media capacity.

As we are all aware, there is a large amount of NAND capacity being built up right now, which will support the forecasted growth in solid state drives.

While the reports indicate that the amount of storage delivered on solid state drives is expected to grow on an annual rate of over 25% over the next four years an industry White Paper from IDC published in March called Data Age 2025 includes projections that again forecast that 90% of all data stored in the cloud in 2020 will be on spinning drives.

As we look into the near future, our HDD business is profitable, stable and is forecast to drive $200 million to $300 million in total revenue over the next five years with the high-end dependent on the timing of the return to capacity system orders.

Given the non-systems business upside, we saw in the first quarter, as well as the recently strong level of HDD bookings, we now expect our hard drive business in 2017 will be at least as strong and most likely up from 2016 levels which had grown year-on-year from 2015.

With the backdrop of an improved environment in our solar and HDD businesses, the most exciting driver for significant revenue growth over the next year or two continues to be the VERTEX. The VERTEX deposits are Optical Diamond-Like Carbon or oDLC protected coating on display cover panels.

The production capacity order booked in 2016 was an important milestone for this business and winning a second tier-one customer for VERTEX later in the year was equally significant.

All four of the VERTEX Systems in backlog exiting 2016 were recognized as revenue in Q1, which mean that our expectation to ship and revenue additional VERTEX tools in 2017 depends on additional orders in the coming months. Our first customer Truly is in production and is actively adding customer projects incorporating our coating.

Our second customer is moving deliberately through the evaluation process. Both customers are highly motivated to achieve success using our oDLC coatings and are evaluating our films for multiple applications. Truly, recently introduced the new cellphone back cover product called Magic Glass, which incorporates our oDLC coating.

Their Magic Glass provides endeavors, material rendering effects with rich color choices and offers the best choice to match the technology roadmap for wireless charging and 5G communications. For smartphones, they have communicated three Magic Glass projects that have been put into production and three projects underway for later in the year.

For pure oDLC coatings, Truly has quantified one additional smartphone project and eight projects for wearable applications due to its outstanding performance again in their words, in hardness and abrasion resistance.

Our second customer is a tier-one company and is continuing their evaluation and qualification process of our films and our tools for multiple applications. We continue to be optimistic that we will book, ship and revenue additional VERTEX tools in 2017 which could come from either of our current customers, a new customer or both.

Our in-house coating operation continues to process samples for evaluation for multiple cover panel applications. Beyond display cover glass, we have begun to see the 3D back cover glass for testing and evaluation.

Our oDLC coating is displaying very positive results demonstrating conformal scratch protection around the edges and corners of the substrates. We believe our strategy to market our tools, films through this in-house operation is the key enabler in securing additional new orders for VERTEX.

With a 25% adoption rate in the smartphone and tablet cover glass markets, our five-year revenue opportunity for the VERTEX is approximately $500 million with additional opportunities such as back cover glass on cellphones, wearables, auto infotainment and more incremental to that figure.

To sum up the environment in our Thin-Film equipment business, recent traction in new orders and revenues marks an important milestone in the future growth trajectory of our company.

In the first quarter, we recognized revenue on VERTEX volume production systems and received follow-on orders for 12 ENERGi implant tools, both of which represent the crossover from pilot to capacity production in both of our new Thin-Film equipment growth markets.

In other words, while we worked for several years to diversify and grow our equipment business beyond the hard drive market, and have delivered multiple pilot tools along the way.

Significant capacity orders and revenues recognized in these new markets is a material demonstration of our success in expanding our Thin-Film equipment revenue opportunity. Now moving to Photonics.

In 2016, we developed demonstrators of our latest digital night vision technology and after successful demonstration with both the army and navy realized significant expansion of our revenue opportunity pipeline. Year-to-date, we continue to make excellent progress in realizing the future revenue opportunity pipeline of well over $1 billion.

In Q1, we continued to deliver results favorable to our long-term business model with 16% operating profitability. As I discussed in the beginning of my remarks, I am also pleased to report an important development, which is the approval of the DELTA-I program for the Department of Defense’s Coalition Warfare Program.

This program is funded by the DoD, SOCOM and several foreign coalition partners. The DELTA-I program includes a $12 million funding commitment to complete the design of our ISIE 19 Sensor, as well as the digitally-fused infrared/night vision goggle incorporating that sensor.

The $25 million funding vehicle that was put in place late in 2015 will be utilized as a mechanism to move funds from this program to us for the continued developments of our next-generation technology.

As a reminder, after getting both the army and navy together on their night vision roadmaps during 2016, we were able to merge the requirements and settling on a single new sensor design to meet everyone’s needs which is the ISIE 19.

At Camp de Souge military base in Bordeaux, France, we recently demonstrated our monocular goggle at the Special Operation Forces Innovation Network Seminar, also known as SOFINS. The goggle was positively evaluated by the Special Forces Operators of numerous NATO nations during the field exercise.

Additionally, the goggles’ performance with measures evaluated by several Europe prime military suppliers for integration this several new programs. We believe these successful evaluations can greatly expand our product footprint among European military in the near future.

Also in Q1, we accomplished significant advancements as we increased our content in a family of weapon sight through surge program for the US Army adding our proprietary hue prism into the wireless head mounted display.

At the same time, as we made this progress, we continue to ship for Apache Joint Strike Fighter and LIVAR on schedule and was favorably used.

Based on all the new program activity, what we are working on with the US and foreign militaries, as well as our programs for dismounted soldier systems, our expanded revenue opportunity pipeline exceeds $1.4 billion over the life of the programs we are engaged with and are pursuing.

Key to expanding this revenue opportunity pipeline was the developments of two new technology demonstrators I mentioned earlier.

The first one is a 2K x 2K high-resolution digital goggle for NAVAIR's EVA, or Enhanced Visual Acuity program and the second is the monocular targeted for the dismounted soldiers fourth generation digital night vision goggle program.

Both demonstrators increased interest in the ISIE 19 and grew the potential of the overall size of the digital night vision programs on which we are engaged in or pursuing.

I would encourage you to review the latest version of our investor presentation which details the opportunities for our digital night vision cameras, integrated night vision and ground force applications. So, in summary for the company overall, our outlook for 2017 has improved since our last conference call.

Last quarter, we guided year-on-year revenue growth of at least 25%, which equated to additional $8 million in new equipment orders booking and converting to revenue in the year on top of the backlog we ended the year with. We continue to be optimistic we will book and ship additional VERTEX tools this year which should revenue at shipment.

As I mentioned earlier, at this time, we are not including any portion of the 12 systems sold production capacity order in our 2017 revenue outlook. We continue to expect 2017 revenues for Photonics will be similar to 2016 and now expect our hard drive business will be at least as strong and most likely up from 2016.

Given our current engagement with both new and existing equipment customers, we are raising our 2017 revenue guidance from 25% to now at least 35% growth over 2016 with profitable bottom-line results. As we move further into the year, we will continue to get better clarity on potential upside to our new outlook and we’ll communicate accordingly.

I will now turn the call over to Jim to discuss our first quarter results, provide guidance for the second quarter and to discuss additional details in the financial outlook for the year.

Jim?.

Thank you, Wendell. Consolidated first quarter revenues totaled $30.4 million, this was above our guidance of $28 million to $29 million. Thin-Film Equipment revenue totaled $21.5 million and included one 200 LEAN and four VERTEX systems for display cover panels, along with upgrades, spares and service.

Photonics revenues of $8.9 million included $6.9 million of product revenues, and $2 million of contracts, research and development revenues. Q1 consolidated gross margin was $13 million or 42.9%, also above our guidance with favorable contributions from both business units.

Q1 R&D and SG&A expenses were $10.9 million, up from Q4 and exceeded our guidance due to increased accruals for variable compensation programs as a result of the improved outlook for revenues and profitability for the year and increased legal expenses, expenses for patent activity and contracts.

Our Q1 net income was $1.8 million or $0.08 per diluted share, better than our guidance driven by better gross profit from both business units. Our backlog was $73 million at quarter end.

Thin-Film Equipment backlog of $56.2 million included three 200 LEAN HDD systems, one pilot MATRIX Solar ion implant system, 14 ENERGi solar ion implant systems, and non-systems HDD backlog.

Two ENERGi tools are installed at our customers’ factories at quarter end and are awaiting customer acceptance, while the MATRIX implant system revenued in April. The backlog at our Photonics business was $16.7 million. Now let me turn to the balance sheet.

We ended the quarter with cash and investments, including restricted cash of $46.3 million, equivalent to approximately $2.16 per share, based on 21.4 million shares at quarter end. Cash flow used by operations was $2 million during Q1. Q1 capital expenditures were $1.4 million, and depreciation and amortization was $1 million for the quarter.

Our quarter end cash balance is in line with our cash objectives of approximately $50 million. Now let me turn to the full year outlook for 2017. We continue to expect our Photonics business will see similar levels of revenues in 2017, compared to $2016 and we now believe we may see an increase in hard drive revenues over 2016.

Based on the strength in outlook for HDD business as well as our continued confidence, that we will see additional revenues in our VERTEX business, today, we are raising our revenue expectation to at least 35% over 2016.

At this revenue level, we would expect gross margins of around 39% with operating expenses of between $38 million to $40 million for the year. Below the operating line, we expect to see income of about $200,000 and net taxes of around $600,000 for the year.

For Q2 specifically, we are projecting consolidated revenue to be between $27 million and $30 million. We expect second quarter gross margin to be between 37% and 38%. Q2 operating expenses are expected to be between $10.5 million and $11 million. We expect interest income of about $50,000 and net taxes of about $100,000 in the quarter.

For Q2, we are projecting earnings per share to be approximately breakeven plus or minus $0.02 a share. We are assuming 23 million diluted shares outstanding. This completes the formal part of our presentation. Andrew, we are ready for questions..

[Operator Instructions] And our first question comes from the line of Rich Kugele with Needham & Company. Your line is now open..

Thank you. Good afternoon. .

Hi, Kugele..

Hi, and a great quarter. I did want to just ask a couple of questions.

In terms of the spares and upgrades, was that something that came in as a surprise to you guys? Or how should we be thinking about modeling that? Is that how you get to a flattish hard drive year versus additional systems?.

We certainly saw it come in, in the first quarter stronger than we had forecast as we left the year.

I think the overall sentiment in hard drive space compared to a year ago this time is certainly much improved and we will see activity-related to next-generation technology that maybe rolling out at the different customers that’s driving some of the spare in upgrade business..

And in terms of the ENERGi Systems, is $2 million a reasonable ASP for each one of those tools?.

We look at that whole deal as a 14 system deal two that we shipped last year and then 12 on orders here and you take that entire deal and blend it the total value divided by the number of systems, it’s just under $2 million, but right about $2 million is about right place to model..

And are there any component constraints on that being able to deliver all those tools?.

We actually had some inventory here that have been written down. I think the longest pole in the tent is the actual main chamber that is the friction stir welded product and we’ve got those secured by this delivery schedule. So, we’ll keep monitoring because the supply chain in equipment is very busy right now.

So, we are actively managing that and making sure that we’ve got our components in time. .

Okay, one last question just, can you just remind us do you have anything left on the buyback that’s available?.

There was – I think about 1.5 million that was left out of the 30 that was set aside to do that, but we have not been actively in the market at this point..

Okay. All right, thanks very much..

All right. Thanks, Rich..

And our next question comes from the line of Brian Alger with ROTH Capital Partners. Your line is now open..

Good afternoon guys and congratulations on the quarter..

Hi, Brian..

Looking at the increased guidance here versus the backlog, it would at least appear that you guys have a pretty high degree of confidence in getting some VERTEX orders even though we don’t have them in the backlog as of yet.

Can you maybe help us understand where the confidence is coming from?.

Well, I think in general it’s we are looking at where we are at in the process with different customers, we are looking at I would say, we are looking at the timing and momentum and things like that and as we move through the first quarter, we had confidence going into the year.

If you recall, I think with two or three that we had put into 25 – up 25% guidance and we still feel confident about those and again, as soon as these tools are evaluated and the end-customers are lined up, they can move pretty quickly.

And I think I talked about it last conference call from a lead time perspective we were normally around five months.

We’ve been taking action to bring that - our goal is to bring that under four and closer to three and now we’ve got perfunctory sign-offs on the VERTEX tools and their base configurations we expect that anything that we ship is going to show up as revenue at shipment, not like it has been where you have to wait for the customer sign-off to happen..

That’s good.

You described a couple of different projects that Truly is engaged in and I know you are talking in a bit more detail which really goes number one, they’ve been named in two, they’ve been a customer a little bit longer, but do you have a sense for how much of your capacity that you’ve delivered to them thus far is being absorbed by the projects they’ve announced to date with the three different handsets working on the backside and working on these different wearables.

Are they getting to the point where they need to order additional tools in order to facilitate new projects?.

I think certainly with the current projects that they were discussing publicly that I quoted off of their Investor Day they probably have additional capacity available.

But on the flip side of that we also know a lot of the different programs they are working that aren’t necessarily committed depending on which one of those going at what pace, that would be what would drive additional tools there..

Okay, great. .

But they don’t necessarily share their utilization with us, but we were on site so we have some feel about how those tools are being utilized..

Okay, and just in the realm of possibilities here, clearly, we are more confident on the VERTEX side versus MATRIX, but, to be fair, I didn’t expect you to get a 12 system order on the ENERGi systems either.

Where are we with the customers evaluating MATRIX for increasing our efficiency, because that seems to be what drove the ENERGi tools in terms of their order.

Is there any remote possibility that we should be looking at for MATRIX coming in and surprising us in a similar way ENERGi did?.

That’s always a possibility, we are certainly not getting up. We are still out there actively in the market. We certainly know the two initial programs that we launched the MATRIX on. One of them did not continue their build out and the other one is now on hold. So, there is other activity with MATRIX beyond solar as well. So, we are actively driving it.

12 systems with the MATRIX that would be surprise to me too given where we are at and just where the customers are at realistically. .

Right, right, well, fair enough. 35 plus percent growth without those systems coming into the revenue mix is pretty good so far. So keep it up. Thanks a lot..

Thank you, Brian..

Thank you, Brian..

And our next question comes from the line of Mark Miller with The Benchmark Company. Your line is now open..

Congratulations on your implant orders.

Just wondering, basically you mentioned two customers, Truly being the first, but you were in quantifications or evaluations at other vendors for the VERTEX tool, can you give us any update how, and it’s been a while, any update how those qualifications are going, are you receiving positive feedback or you have things to work on?.

Yes, again, I can’t talk a lot about that, but what I can probably refer you to is, as we look at raising our outlook, as we move through the year here, we don’t have those orders booked yet, but we are certainly moving our forecasted outlook to the streets based on success in that particular product line.

So, - so what that means is means is I’m happy with the progress we are making and Jim is as well, that we have that confidence to go out and raise..

You are expecting somewhat higher HDD revenues, I assume that’s from additional replacement systems on just where the old MDP-250 sputters is my assumption, which I used to use all the way when I worked in the industry there still around, I am just wondering how far down the line are you in terms of this replacement opportunity? Are you 25% to 30% of what’s out there?.

We’ve been a little bit vague as to the foreseeable future. So, I would say, realistically when we started it, I’d say we’re better than half way done.

So we also aren’t really saying that that tool – it’s really technology upgrades is what we are talking about and we certainly see technical roadmaps that will continue to drive additional NSO technology upgrades in the equipment as well..

And your tax guidance for this quarter was $100,000, is that correct?.

Yes, it was. We do have quite a bit of NOLs and also got credits, but we don’t have an alternative – profitable with nominal amount of tax that we do report. .

Thank you. .

All right. Thanks, Mark..

Thanks, Mark..

And our next question comes from the line of Nehal Chokshi with Maxim Group. Your line is now open..

Thank you, and congratulations on a nice quarter and great to see the increased confidence that’s driving race on the calendar 2017. Before I get to that, I am sorry, Jim, I didn’t quite get what your revenue guidance for the second quarter.

Can you just repeat that real quickly?.

Yes, we said the revenue guidance for Q2 was between $27 million and $30 million..

Okay, all right.

Given that Q2 guidance, revenue which is quite high relative to the – compared to where we are, could you just parse through what are – what’s going - is that $27 million to $30 million as far as equipment orders versus spares, versus Photonics?.

So, if you remember in Wendell’s conversations, he said that we currently expect Photonics had a similar year, 2017 versus 2016. We have one 200 LEAN in that for Q2. We have additional, what we call NSOs which are Non-Systems Order in the hard drive business and we saw some stronger orders in Q1 which will result in revenue to Q2.

We also have the $9 million in implant tools, one was the joint development tool and then the other two ENERGi implant tools..

Okay, so would you expect non-system orders to be Q-over-Q?.

Yes, I would..

Okay, all right. Now for the $8 million raise there, you attributed that to both increased confidence for VERTEX orders and forthcoming hard drive strength.

Can you parse out that $8 million between those two factors there? Is it 50-50 about?.

That, there was a lot of specifics, other than to say that, we do believe that the hard drive business will be – has an opportunity to be up over 2017 and we still continue have increased confidence that we will book and ship VERTEX orders. .

Okay..

And I think from, just to kind of complete that, there is a lot of moving parts and a lot of mixing and matching of different pieces of equipment that equal up to that number. So, you will be able to see it basically when we announce bookings..

All right. And I’ll see the force now..

Thanks, Nehal..

Thanks..

And our next question comes from the line of Craig Ellis with B. Riley Financial. Your line is now open. .

Hi this is [Indiscernible] calling for Craig Ellis. Thanks for taking the questions.

First question I had is just kind of your C17 parameters, the growth margins and OpEx, does that includes the 12 ENERGi systems?.

No, that’s not, and as you remember as Wendell said, there are no ENERGi systems in our guidance at this moment..

Okay, and then just kind of speaking into the second quarter guide.

Does that kind of imply that Photonics is going to be down quarter-over-quarter?.

We haven’t really given that level of guidance and I think it’s going to be similar plus or minus a few $100,000. .

Okay, and then, the ENERGi tools, is that’s something that’s going to be REVREC potentially in the first half of 2018? Or is it something more back half?.

Yes, so I wanted to clarify a couple of things. So we had two of the ENERGi tools that were out in the field last year that reference goes in my prepared remarks. We did some upgrades to them. Those two systems are in our 2017 revenue plan in Q2.

The other 12 – and because we had to do a number of upgrades on those tools, they don’t make the criteria of a perfunctory sign-off that would allow us to take revenue and shipments.

So we actually have to go to that process again with the first two tools that we shipped and given just the variability of timing and customer readiness, it puts the first one very, very close to moving out of the fit this calendar, the second one for sure. So we don’t anticipate we get the two sign-off in time to take revenue.

Once we get the second one, then everything that’s shipped comes in revenue all at once. .

Okay, and then, - okay, just kind of going back to the upgrades in software, if I am doing my math correctly, it seems like, it’s clocking around $5 million to $6 million per quarter and historically, that number kind of fluctuates on a quarter-by-quarter basis.

Do you kind of see any seasonal factors playing in the second half or you kind of expect this stable revenue?.

Yes, I don’t really see the seasonal high and I think if you wanted to quart the non-systems business, I think we have multiple times said that, the spares and the field service what we run around $10 million a year and then if the upgrades that are the ones that are episodic from one quarter to the next quarter..

Okay, that’s all the questions I had and thanks, congratulations on a strong quarter..

Thanks, Craig. That wasn’t Craig. That was for Craig. Sorry..

And our next question comes from the line of Ben Klieve with Noble Capital Markets. Your line is now open..

Hi, thank you. So, I just have a couple of questions. So you’ve spoken now with – conference regarding VERTEX orders forthcoming in later this year and revenues by year end. Your HDD commentary regarding – your growth year-over-year has been bit more heighted.

So I guess, I am kind of wondering, somewhere your – another question regarding the VERTEX market, where do you get that real confidence regarding HDD growth year-over-year and is it safe to say that those – that the timeline on that’s going to be – is going to be pushed up a little bit more than the VERTEX orders, i.e.

are you going to have those orders within the next month or two as opposed to kind of early in the fall for your VERTEX orders?.

Well, it depends on what, if it’s an upgrade or a system. So we are carrying three 200 LEANs in backlog right now for this year. We carried three coming in. We revenued one this quarter or last quarter.

My overall confidence in that business being stronger is based on the order flow and with the visibility we have into what we think is coming towards to the end of the year and certainly the overall environment seems to be like – much more positive than it was a year ago at this time, as far as stability in the industry.

So that’s what drives the confidence that is going to be at least the strong and most likely up. Now we’ll have to go through the process and get those orders booked, but unless something unforeseen happens in the marketplace, that’s what we feel right now..

Okay, and then your commentary regarding the – as we get the Magic Glass with True, did you say that that will be the casing on the back or that do you say that would be the camera on the back of the smartphone?.

They were particularly referencing the three dimensional back covered glass for the phones..

And then, so that’s – I guess, where do you see that trend? I mean, is that something that you see really picking up pretty significantly as one of the drivers of your VERTEX growth or is that still – is that back is still kind of in its early stage?.

I would say it’s in the early stages. Certainly, we are starting to see, as I mentioned, some sampling coming in, just to see how well we can cover these three dimensional objects versus just the flat piece of glass that’s on a pallet.

We’ve been very pleased with how our sourced technology addresses that and the test that we do, particularly sand operation, just very nice performance. But I think as far as the back cover glass, I think it’s lot of people talking about and lot of people have it on roadmap, but it’s certainly got ways to go yet..

Okay, probably interesting to see going forward. Yes, that’s all for me. Thanks for taking the questions..

Thanks..

Thank you, Ben..

And our next question comes from the line of John Gruber with Intevac. Your line is now open..

Hi, John, welcome to Intevac..

Certainly, I just joined yesterday. A question, in your release you talk about $12 million government funding or something for the Photonics and $1 billion future revenue opportunity which doesn’t join with flat revenue in 2017 versus 2016.

So, maybe you could explain that?.

Yes, first of all the question on the $!2 million, that’s the funding from DELTA-I that’s going to come, that we’ve been planning on getting in our forecasting for the developments of ISIE 19 sensor, as well as the digitally-fused goggle, that’s part of that DELTA-I program as well.

As far as our pipeline, when we look at the military business, you look at, say a platform, say Apache is a Joint Strike Fighter, those aircraft platforms are going to be around through 2050, 2060 and we look at the lifetime of the products – the projects that we are on including the initial installation of our technology, the technology upgrades of those sockets going forward, will also in this pipeline of opportunity we have the ground force application which is the generation four night vision for the ground forces.

That doesn’t field until I think 2022 and that goes off. So, I think, we look at the – the Photonics is a not a quarter-over-quarter, year-over-year type of a business.

These are long-term programs that we have to look at in a different life to see what’s the real opportunity is, just initially getting in on the programs but then servicing those programs as we move Photonics.

That explains a little better?.

Yes, it does. Second question, the – in fact you are not going to ship only the ENERGi systems with solar things, those are the big orders this year as you are going to ship, is that – will they all be shipped early next year and that will be a big increment for next year, so. .

Yes, how that’s going to work is, the shipments are actually going to occur at the second half of 2017. The revenue events will occur after the first two systems gets installed and technically signed off.

So we are in the procurement stage right now on those tools and we expect to start shipping them in the – I think, right around August to start going out and the customer would like them as fast as we can get them and our plan is to have them all out here by December.

But this is one of those situations where there is a disconnect between the actual shipment event and the revenue event. .

I think the big revenue event is 2018 and that’s the whole thing, correct?.

Correct..

Okay. Thank you..

Of those, that order for 12, there is two of them out there now that we expect is revenued..

Okay. Thank you..

And our next question comes from the line of Mark Miller with the Benchmark. Your line is now open. .

Just wanted to touch base on a couple of things. It looks like your Photonics margins sequentially declined by almost 300 basis points, that’s typically one part driven by yields.

I am just wondering why that was down sequentially?.

Some of that really just had nothing more to do with. In fact that the specific programs we have in the $2 million, but in R&D it was just a smaller percentage. And then, last quarter if you remember, we also have higher revenues, because we were shipping some JFS replacements to the ISIE 10 with an ISIE 11.

And as answer to John, one of the things that we do is once we are on the platform when we come up with a next generation sensors, we will go back and upgrade those platforms. And so we had that benefit in the December quarter that we didn’t had in the March quarter. But still very good gross margins even in this March quarter. .

Okay, then in terms of your guidance, the OpEx came in about 10% or more than 10% above where expected, what’s the driver for that higher sales?.

There were two things, that was the combination of the fact that we are forecasting better revenue and more broadly a higher amount of possibility for the year. So there is a variable cost element to that. And then, we had some higher legal expenses where we did some additional patent filings in Q1.

So we would expect a similar legal cost to come back down. But that’s really the two things that drove that was, higher variable cost and then some higher legal cost in Q1. .

Thank you. .

Thanks, Mark..

Our next question comes from the line of Nehal Chokshi with Maxim Group. Your line is now open..

Thanks. I just want to follow on, on that OpEx question there. So, for the June quarter you’ve guided for $10.5 million to $11 million.

So it’s really only in the back half that you would expect this – come down and is that correct?.

Even in Q2, there is a mix with less legal and then some other things with regards to R&D going up. And again, as we look through the rest of the year, as Wendell said, we gave guidance, at this moment at least 35% up.

And so based on the success we see in the next couple quarters with orders, we would expect the legal cost to go down in the second half, absolutely correct. .

Okay. And then, I want to come back to the VERTEX optimism here which I share by the way. But you cited three potential sources, Truly, your second customer or new sources.

Could you what – what you feel as the probability of these three potential sources that’s coming through?.

I would say that, given the fact that we have customers that currently have the tools, most likely will come from the current customer. But we are certainly not ruling out activity with new potentials as well..

Okay.

And as far as between the two customers, kind of with the same probabilities between the two?.

I’ll just – we’ll just leave it at that, if that’s okay..

Okay.

And then, does the magnitude of opportunities across these three sources vary significantly?.

It certainly could. We are – again, when we talk about Truly, they’ve got a number of programs. But they are still working on big volumes. So, wherever that larger volumes comes, that’s where we would see numbers. .

Got it. Thank you very much..

Okay, thanks..

Thanks, Nehal..

Your next question comes from the line of Brian Alger with ROTH Capital Partners. Your line is now open..

Hi guys, just one quick follow-up. On the OpEx guidance, $38 million to $40 million on the full year obviously imply to reduction at least on the quarterly number share.

Is that more from the R&D side? Or is that all going to be coming out of SG&A between the growth and the legal?.

I would say the majority is going to come out of the SG&A..

So we are going to – we should be keeping the R&D levels relatively high and we will be able to trim it in the, kind of ongoing operations?.

That’s the current plan, yes..

Okay, great. Thanks guys..

All right. Thanks, Brian..

And I am showing no further questions at this time. I will now turn the call back over to Mr. Blonigan..

Thank you. So before I sign off, I’d like to thank the hard working and dedicated employees of Intevac all around the world for their tremendous effort and successful work over the past several quarters building our backlog significantly. I also want to thank our customers for their continued business and appreciated partnerships.

I thank all of you 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..