Claire McAdams - Investor Relations Counsel Wendell Blonigan - President and CEO Jim Moniz - Chief Financial Officer.

Brian Alger - Roth Capital Partners Ben Klieve - Noble Capital Markets Nehal Chokshi - Maxim Group Peter Peng - B. Riley Mark Miller - Benchmark.

Good day. And welcome to Intevac’s Third 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, October 30, 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 third quarter of 2017, which ended on September 30th. In addition to discussing the company’s recent results, we will provide financial guidance for the fourth quarter and full year 2017.

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

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

I’d like to remind everyone that today’s conference call contain 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 upon our current expectations and actual results could differ materially as a result of various risks and uncertainties related 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 October 30th 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 Q3 results exceeding guidance with revenues of $27 million and $0.05 per share in earnings.

Year-to-date compared with the first nine months of 2016, revenues have increased 72%, gross profit has nearly doubled and new orders are up 26%, as we continue to make significant progress towards our revenue, growth and profitability objectives for the year.

Growth in our Equipment segment, an execution on our Thin-film Equipment growth strategy has now driven four straight quarters of profitable results for the company. We booked two new 200 Lean systems in the quarter, which equates to 13 200 Lean booked over the last six quarters, despite media overcapacity in the industry.

We also saw a higher than expected leveled upgrades, which were accelerated from Q4 into the third quarter, driving revenues above the high-end of guidance. Backlog and equipment is at a seven-year high, up $59 million. The majority of which is expected to revenue in 2018.

Included in backlog for 2018 are the 12 ENERGi Implant Systems and three of the five 200 Leans currently in backlog. In our Photonics business, new orders increased again to over $8 million. The increase in order activity was driven primarily by the booking of funds for the development of our next-generation night vision sensor the ISIE-19.

We also increased Photonics revenues which were up 12% from Q2 and up 15% from the third quarter of last year. We continue to expect our full year 2017 revenues will be up about 40% from last year with profitable bottomline results. Now for an update on each of our businesses starting with Thin-film Equipment.

In the hard drive market the program to upgrade the technical capabilities of our customers installed base continue. We booked two and shipped two 200 Leans in Q3, with five in the backlog at the quarter end.

We have said that this is an ongoing technology upgrade program, which we see continuing into the foreseeable future, providing us with a solid 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 industry.

In fact, as we discussed earlier, the installed base of media capacity is actually lower today than it has been in over seven years. This has given the permanent retirement of a portion of the industry’s media capacity. We believe media capacity has declined from $300 million this per quarter to just under $265 per quarter -- million per quarter.

The growth segment in an HDD market continues to be in high-capacity nearline drives, which is positive for our business, given a significant number of discs in each nearline drive. The tie ratio or average number of disks per drive has been growing at an annual rate of 13% to a record 2.2 disk per drive in the first half of the year.

If the tie ratio continues to increase at this rate, demand will exceed the installed media capacity in around two years that in a flat HDD unit environment.

Compared to four systems shipments in 2016, we expect to ship six 200 Leans in 2017, along with the non-systems business upside we saw in the first three quarters of the year, hard drive revenues have been stronger than expected, which will deliver meaningful growth over 2016 levels.

A bigger part of our future growth story is our VERTEX product and our progress deploying our protective coatings into the display cover panel market. The VERTEX deposits Optical Grade Diamond-Like Carbon or oDLC as a protective coating for display cover panels.

We believe the largest driver of significant revenue growth potential over the next few years continues to be for the VERTEX. Our revenue guidance of 40% growth for 2017 includes the four VERTEX that were revenued in Q1, along with an additional VERTEX system in Q4.

As of today, we have one VERTEX in finished good inventory, which will allow us to quickly respond to a new order and shipped this additional tool. As we’ve said previously, this order could come from either an existing or new customer.

In 2017 we witness top five cell phone manufacturers making their move to glass back covers to enable wireless charging. This transition has clearly been driving increased interest in oDLC. At this point, we can say that every major player in the industry is aware of what we’re doing to protect glass on mobile phones and that includes back cover.

oDLC sampling and demo activity taking place both at our customer sites and in-house by top five cell phone manufacturers, was exceptionally robust in the third quarter. Helping to drive this activity is growing interest and integrating oDLC as a protective coating with other film stacks.

The integration of oDLC with other film is now a significant driver of current customer evaluation and qualification activity. Over the last several quarters we have been developing a number of variants of our oDLC films back stack, specifically tailored for unique product applications.

And some applications color transparency are the most critical criteria, in others its impact resistance and in some others it’s a coefficient of friction. Each of these variant films are then tested and modified depending on results.

This activity of turning these films for specific applications is a major factor in the extended evaluation cycles that we have see. Our first customer truly is in production and is actively adding customer projects incorporating our coating.

They are also making good progress engaging top five cell phone manufacturers on the incorporation of our oDLC. Our second customer -- continues to move deliberately through the evaluation and qualification process for multiple applications.

The extensive evaluation and qualification process is in which we are engaged continues and has taken longer than we initially anticipated. The important aspect is the work is not having and our customers continue to invest significant time and resources to bring our technology in market.

Now an update in our activity in solar equipment, our backlog currently includes 12 ENERGi implant systems for high efficiency solar cell manufacturing. Our purchase contract calls for our customer to take delivery of all 12 tools before year end, but delays in their factory build has resulted in them delaying the delivery schedule for the systems.

We shipped the first three in the third quarter with the scheduling of the remaining tools still being determined. As a result we no longer expect all 12 tools will revenue in a single quarter, previously presumed to take place in early 2018.

With our current visibility, the first three tools should revenue in the first half with the revenue timing for the next nine tools dependent on the revised shipment schedule. Now moving onto Photonics.

In the third quarter revenues rebounded by over $1 million to a total of $9.5 million with gross and operating margins also normalizing within our target model range for the business.

Importantly, orders increased to over 8 million driven by our success in booking the funded development contracts we’ve been pursuing over the first three quarters of the year. Highlighting the order increase was $2.3 million contract for the development of our next-generation sensor the ISIE-19 through the design and initial prototype stage.

We also booked several additional development programs, including funding for integrating our night vision sensor and free-form prism into a helmet for explosive ordnance removal funding for the integration of our free form prisms into future augmented reality day night soldiers systems and ManTech Funding to mature our proprietary see through free form prisms manufacturing process.

We are also continuing on contract for the development of the initial prototype deliveries of our wireless head-mounted displays for the family of weapon sight crew serve and M2 weapon sight programs.

Progress was made in camera systems sales as we replaced our contract for delivery of the integrated night vision camera on the Striker II helmet for the typhoon aircraft in Europe and received new international orders from France, the U.K. and Israel for our digital night vision.

On previous calls, I have discussed the excitement that we have around the DELTA-I Coalition Warfare Program. In the first week of October we had a key milestone for this program. Together with the U.S. government as sponsors of the DELTA-I Program we hosted an Industry Survey Day at AUSA in Springfield, Virginia.

DELTA-I Program will deliver 24 night vision goggles to the four nations and six entities funding the development or evaluation by operators in the field. This binoculars night vision goggle will incorporate two of our next-generation sensors the ISIE-19 and a high-definition long wave infrared sensor providing fused imagery.

The award of the DELTA-I contract is expected during the second quarter of 2018. So looking now the big picture for our Photonics business, we have made excellent progress in positioning ourselves in the development programs needed to address our revenue opportunity pipeline.

We delivered our final cameras for the Apache fleet in Q3 and are now underway working with the Apache Program Office to begin not only the development of the second camera for that platform with the specification and concepts for replacing the current night vision cameras with our ISIE-19 based ones, all of this consistent with our Photonics growth strategy.

Our opportunity pipeline spends a long period of time as military development programs are initiated well ahead of production plan to ensure readiness to support our military.

Inside our pipeline are several development programs that will eventually drive waive of new product revenue similar to what we have experienced in the Apache program over the last several years.

With all of the new development programs we just talked about and the completion of the initial phase of the Apache program, our Photonics revenue profile is now moving from a product driven one to a funded R&D revenue profile.

This means that our Photonics results will now trending to the lower end of our profitability target range for this business which is 12% to 15%. So, in summary, for the company overall, our outlook for 2017 remained strong, with revenue growth of approximately 40% over 2016 expanding gross margins and profitable bottomline results.

And while it’s premature to provide guidance for 2018, given the activity levels in both our core and new business initiatives, we believe we are on a path to continue to grow revenues and earnings next year. I will now turn the call over to Jim to discuss our third quarter results and provide guidance for the remainder of 2017.

Jim?.

Thank you, Wendell. Consolidated third quarter revenues totaled $26.7 million. This was above our guidance of $25 million to $26 million. Thin-film Equipment revenue totaled $17.2 million and included two 200 Lean systems, along with upgrades, spares and service.

Photonics revenue of $9.5 million included $7.3 of product revenues and $2.2 million of contract, research and development revenues. Q3 consolidated gross margin was $11.3 million or 42.3% and above our guidance. The higher revenues and guidance contributed to the higher gross profit dollars.

Q3 R&D and SG&A expenses were $10.3 million, up from Q2, but lower than our guidance primarily due to reduced expenses for R&D. Given revenue above the high end of the range, along with reduced operating expenses, our Q3 net income exceeded guidance and was $1.2 million or $0.05 per diluted share. Our backlog was $72.8 million at quarter end.

Thin-film Equipment backlog of $59.4 million included five 200 Lean HDD systems, 12 ENERGi solar implant systems and non-systems hard drive backlog. The backlog in our Photonics business was $13.5 million.

We ended the quarter with cash and investments including restricted cash of $44.8 million, equivalent to approximately $2.06 per share based on 21.8 million shares at quarter end. Cash flow generated by operations was $2.3 million during Q3. Q3 capital expenditures were $1 million, and depreciation and amortization was $900,000 for the quarter.

Turning to guidance for the fourth quarter. We are projecting consolidated Q4 revenues to be between $24 million and $25 million. Within this range we expect fourth quarter gross margins to be between 35% and 36%. Q4 operating expenses are expected to be around $10 million.

We expect interest income of about $100,000 and net taxes of about $200,000 in the quarter. For Q4 we’re positioned in a loss of between $0.06 and $0.07 based on 22 million basic shares outstanding. Given our guidance for Q4 we expect full year revenues will be in the range of $112 million to $113 million.

Consisting with our previous guidance net revenues would be up around 40% from 2016. We expect gross margins to be between 39% and 40% for the year, with operating expenses of approximately $41 million for the year. Below the operating line we expect to see interest income of about $400,000 and net taxes of about $1 million for the full year.

This completes the formal part of our presentation. Charlotte will raise the questions..

[Operator Instructions] Our first question comes from the line of Brian Alger from Roth Capital Partners. Your line is now open..

Great. Thank you. Good afternoon, guys, and congrats on a good quarter guys.

I want to dig into the timing of the ENERGi systems, obviously, that’s been on the backlog here for a little bit and to best of our knowledge at least here Roth, appears that the customer has received a lot of the funding at least for most of their CapEx build out, curious as to what you know at this point for the additional nine systems.

Is that something we see going into the field here early in the next calendar year or is it just the wide-open?.

We are in discussions with them. We began those discussions. We have got the next four tools that are -- we’ll be completing here shortly. So we anticipate to have some better clarity. But I know that their factory itself has been delayed. I think it’s -- as we know right now they haven’t moved tools in.

So that’s kind of what we are saying those first three tools given where we are at and they don’t have them installed yet.

It was probably at least a quarter delay for those first three, so that would be some time probably at the beginning of Q2 assuming they get move in again and then we will have a better clarity on where the rest of those tools land by the end of the year for sure..

Okay. Great. I appreciate that additional color. The Photonics business was little bit better than expected in the quarter. I am curious it sounds as though going for that, because we don’t have a lot in the way of the product sales at least in backlog right now that you expect to see a drop in revenues.

Can you maybe quantify that a little bit for us, I mean, gross margin decline that you are talking is pretty substantial?.

Yeah. The -- so couple of things. Thank you, Brian. Absolutely, as Wendell said, the production business itself for Apache we saw the majority all of that ship in Q3. So as we go into Q4 and into next year as we’ve been kind of positioning the Photonics business.

It’s going to see a higher element of the funded R&D and that higher element of the funded R&D essentially by its nature just have the lower gross margin, we are still working to target our gross margins for Photonics to be at around 35%.

We will see a little bit lower in Q1 just based on the mix of the business that we have in the fourth, I am sorry, in Q4, just based on the mix of the business we have remaining in the year and we should see the revenues actually go down a little bit, make it down as much as $2 million in Q4 versus what we saw in Q3 and that’s one of the things that is both driving the guidance the $24 million to $25 million and also having an impact on the overall gross margin in Q4..

All right. Okay. Got it. And then, in terms of these other projects, obviously, you guys got a lot of different projects your are chasing, whether it’s upgrading the systems for the Apache or some the next-generation land fighter stuff.

When do we see the product side of it or the production side of revenues start ticking back, is that second half of ‘18 or is that further out?.

Well, this is Wendell. I think, don’t forget we do have a product business we are shipping cameras for Joint Strike Fighter. It’s really the Apache program that it played out. Certainly, I think, when we look at the programs that we are in development with that.

I would say that the Family of Weapon Sights wireless head-mounted display is probably the furthest along in its development to schedule so to speak as they are taking prototypes, start doing some limited ones of those in ‘18..

Okay. Great. And one last one if I can, on the oDLC front..

Yeah..

You say you have a tool and finished goods inventory, is there something that you are expecting to come over the transformer, is that just prudent planning just in case?.

This is -- we have talk pretty much all year about how we are going to managing that inventory and watching lead times. And it’s really in one particular scenario we believe that there would be a need for something very quick to basically bring up another supplier. So we wanted to make sure we had that tool available to make that happen..

Okay..

And then we manage the bit of our inventory as well. We have got some long ten-folds so to speak as far as some of the partial components that we have -- these are placed on order to at least got in the queue, but nothing crazy..

Okay. Yeah. Great. Wendell, thank you..

All right. Thanks, Brian..

Thank you. Our next question comes from the line of Ben Klieve from Noble Capital Markets. Your line is now open..

Hi. Thank you. A couple of questions, first on the HDD market, you discussed that capacity fell just here below 265 million units in Q3 and my question is that last quarter you said it fell from kind of 380 million units down to 265 million units, and then, so a pretty sizable jump and then just down here in Q3.

I wonder if you can describe kind of what you see as having driven that and if you think that 265 million units is kind of a stable base, if you kind of how you look at that capacity over the next couple quarters?.

Okay. Sure. So, Ben, I think, we have -- we gave the same number quarter 265 million units is where we have gone through the installed base, basically counting machines.

And what occurred is you had specifically on our equipment where there as another metal layer or another step was being added to the media process which required what we call process modules or and that falls into our non-systems business.

And we started working on that that particular program, I want to say, that’s in late 2015, beginning 2016 and then that project got halted because they were -- they actually took machines that were currently part of the overall capacity and they disassemble the model and then use those modules to put on the other tools.

So we know that there’s machines that have basically been retired. We know that when one particular customer shutdown their operations in Singapore we were aware that some of those machines never came back up when they were in storage. Now those could come back but we will have to wait and see.

So that’s kind of what we’ve seen occur over the ‘16 and -- in the ‘16 timeframe is why we see those machines coming offline..

Got you. Thank you. And one other question for me kind of two part here regarding the evaluation process around your VERTEX product. First, I am wondering if you could kind of describe a bit the evaluation process for truly versus your second customer.

And then also as you step back after the kind of long -- with this long process with the second customer as you play Monday morning quarterback, I guess, is there, do you see anything that that maybe you can definitely be kind of more proactive with the kind of accelerate this evaluation process for your future customers or is this just something that you are basically going to have to -- just have to deal with if you are?.

Well, I can answer that the second Monday morning quarterback question first. We are doing everything we can. But specifically when you’re working with some of the larger end customers that are really driving the specifications and criteria, there is a very limited amount of pushing you can do.

We want to be sure that we are very responsive and return demos the way we need to return them.

They have the machine and we just got to keep moving forward, and as I’ve said in my remarks, we have also been working on different variations of the film depending on what exactly the application is whether that be for a wearable, for a front or back cover, for tablet, whatever that application may be and we are keep doing that.

And I would say to your first question about truly in the second customer. One thing I -- you should see truly and I -- and us we went in as partners on this and it was really truly strategy that they would go in and they wanted to be the very first company out in the market to have this capability.

And what we are seeing now in the third quarter specifically around some back cover activity that was very smart, because they are seeing customers they may not install previously or without that capability, so they have been very proactive doing that.

The -- when I look at the second customer, their process is more driven not from the cover glass operation but by who their end customers are and what they are telling them to do, so in those particular -- in that situation they are not out necessarily promoting it, but they have got the machine, they have got it hooked up and know how to run it and when it’s time they had capacity they will be ready to do that but they won’t do that ahead of time necessarily.

Kind of long winded response, I hope you got your question answered..

Oh! No. Very much. I appreciate color and that’s all it for me guys. I will jump back in queue. Thank you..

All right. Thanks, Ben..

Thanks, Ben..

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

Yeah. Thank you. Good quarter. I guess, first, I will start off with the, truly last quarter you gave a rundown of opportunities that truly was pursuing.

I was wondering if you had -- if you can provide any incremental customer wins that truly has progress with in order to gauge how they are dealing with the [inaudible] (28:32) tool?.

Yeah.

I think, from the prepared remarks, certainly, the third quarter and this is kind of post announcement of the iPhone 8, you have seen that the glass back cover application, specifically with maybe some of the players that we are going to wait to see what happened in that announcement, start the sampling activities, so that certainly has come around and as far as their engagement with the top guys, their strategy to have the Diamond-Like Carbon in some other key equipment has paid off pretty well for that.

They are in -- what I would call beyond the sampling set for some projects, they are actually more in the proof that you can manufacture this thing with some volume, so initial engineering volume run units to go forward. So some work to do but good progress..

Okay. And then, you said that, you have a VERTEX and some finished goods and that’s to be able to provide a customer indicates that the new on a relatively short lead time. If I recall correctly the number of let say smart phone cover glasses that can produce in a year, I think, it’s like in the 5 million or 6 million per year range.

And so, I would be under impression that, if one of your end customers are going to move forward the production are going to need multiple systems fast.

And so, help me bridge to understanding between, getting one system ready to go versus possibly needing multiple systems ready to go?.

Yeah. Well, we are not going to be able to build a bunch of finished goods inventory, so I wanted to get in shape where we broadening and our lead times down from around six months to around under four where we want to go to.

But then on top of that, as I discussed, I think, in a previous answer, there was a scenario that one particular end customer that we would like to capture that they have requirements for us how many suppliers and what the maturity of those suppliers need to be so they can make a commitment to move with basically as I talked in the script, the -- a new -- some new functionality with some additional films that incorporate that.

We wanted to be in position where we can deliver that and get that that obstacle out of the way as quickly as possible..

I see. Okay. Understood. Just two more questions, backlog, that was up $4 million Q-o-Q on a same unit backlog and it’s actually same composition.

So is that backlog is up due to Photonics or Thin-film Equipment spares?.

It’s up due to Thin-film Equipment and a lot of that is non-systems related, which is why the breakout we gave at system really hasn’t changed, because we book to and ship to on the hard drive and the ENERGi is still in backlog and it’s really based on a fact that we saw some strong bookings in the non-systems for the Thin-film Equipment but not to be lost and I probably should have expand little bit on Brian’s question.

We had over $8 million in bookings in the Photonics area with $9.5 million of revenue and the majority of that $8 million was in funded R&D and if you look at the Q3 results in Photonics of $2.2 million of funded R&D, that’s the most we have had in almost three years and it kind of positions as we have been saying as we move forward with some of the production like Apache volume coming down we are going to be more focused on funded R&D and we saw some good success with the bookings and ramping up the revenues and we continue to see that revenue ramping up again in Q4..

Okay. Understood. And my last question is, so in hard drive world there has been the introduction of microwave-assisted magnetic recording by Western Digital.

Could you discussed if that means anything for Intevac in terms of total needs and just discuss that general dynamics?.

Yeah. I think, from what we know of it and we don’t know a ton about it, but we certainly echo that was announced went out the big -- understand what requirements would be.

We see from a systems perspective from Intevac tools the similar kind of upgrades that would be needed to do if you are transition that to have and that is mostly around higher temperature deposition of the material. So we say HARM and this is now -- there is some microwaves is kind of a wash for us..

Okay..

But it is interesting that this higher density -- areal density technologies are certainly scudding to the right which at some levels good because we would like to sell systems rather than upgrades..

Right.

Just speak further, my impression is that MAMR is the same materials the SPMR, but different recording had technology, whereas HARM are completely different materials that, and therefore, I guess, one would think that with a completely different materials that completely new tools would be needed in order to accommodate HARM, whereas with MAMR it -- would going to be possible to utilize existing legacy installed base accommodate MAMR?.

We see both for HARM media is also system upgrades, mostly around the operating temperature. We have already put some of those in the field already for the development..

Got it. Okay. Thank you..

I think you are right. There is some -- something going on between materials itself but I have not been able to at this point get anybody and tell me exactly what’s going on there on the materials side there..

Thank you..

Okay..

Thank you. Our next question comes from the line of Craig Ellis from B. Riley. Your line is now open..

This is actually Peter Peng calling for Craig Ellis and thanks for taking the question.

First question is, just on the Q4 guide, it seems like equipment could grow or be flat, what are kind of gives and takes and the effects?.

I would say, as I have said in a couple of the answer before, probably, the biggest difference will be the fact that Photonics revenue will be down.

We don’t normally give that kind of guidance but it could be down as much as $2 million from the $9.5 million, and so that’s one of the things that’s driving the revenue down, with equipment relatively similar level between Q3 and Q4, and then because of a slightly different mix in equipment and then a higher amount of funded R&D for Photonics in Q4 and even an unusual mix of that funded R&D being lower than our normal target margins, that’s what suppressing the margin down to the 35% to 36% in Q4..

Okay. And the upgrade strength, it seems like it’s been strong for -- we included December quarter, it’s three quarters of $8 million to $9 million run rate.

How sustainable is this and is this a lot pulling in from 2018?.

I don’t think, it’s so much pulling in the 2018, we think that 2017 we were hoping was going to be stronger than ‘16 and it’s turning out to be that way. In Q3 we pretty much pull some from Q4 which is why we didn’t raise the guidance to growth of over 40%.

But we are seeing the ‘17 activity necessary pull from the ‘18 and we hope and we expect to have ‘18 be a strong as ‘17 as long as the plans we are discussing with our customers don’t change materially..

Thanks for that.

And Photonics, so it seems like it’s a meaningful step down in Q4, is that going to normalize in the first half 2018 or is this kind of the new run rate that we should expect?.

We are not guiding ‘18 at this point, but I will let Jim comment on what we can..

Yeah. I would say it’s a little bit lower in Q4 than we would hope the normalize run rate would be and as we have been saying in 2017 we expected the revenues for Photonics to be similar to what they were in ‘16.

We are not guiding to ‘18 yet, but based on the activity that we are working on with various customers and then some of the success we was on the bookings in Q3 for the funded R&D, we would expect to see kind of an acceleration, but most of that coming from funded R&D as we get into 2018..

Okay. And one last question and I will hop back into the queue.

Your inventory kind of spike seem like $6 million quarter-over-quarter beyond that one VERTEX, so what else is kind of causing that spike?.

The biggest issue there is if you remember we received a large over $22 million order from -- for 12 ENERGi tools, with our customer and our contract required us to ship all those by the end of the year.

So we purchased the majority of that inventory and we are on a path to build and ship the majority of those and we did ship three of those in Q3, but then the customer wants to look at their bill plans of their factory having moved out, so they’re trying to work with us to determine when we should ship the remaining nine tool.

But the majority of that growth, as you said, there was some with that one VERTEX finished good, but it’s really in the ENERGi tools..

Great. Thank you, guys..

Thanks, Peter..

Thank you. Our next question comes from the line of Mark Miller from Benchmark. Your line is now open..

I just want to return to the discussion of the MAMR and HAMR which Western Digital is now projecting is start coming all in 2019. Do you still expect the continued growth in terms of the number of disc because both these technologies will represent a significant increase in areal density to have them a quarter leap..

Defense effect comes true or not, I think, even with some of the different, you are not going to come out and put one day shift all of the tools over to HAMR or you do it, there will be a specific product or product line that you introduce there and it would be a gradual adoption.

But I think right now we have got an upgrade path there and I think we just going to have to wait and see how mature these technologies are and when they are ready to roll out, because they have been sliding a bit to the right..

Your lower margin guidance this quarter rise revenues a lower, but is there any impact with mix specifically do you see less spares and upgrades in the current quarter?.

We do see slightly less spears and upgrade, some of that was because we pull some of those in the Q3..

Customer pull..

Customer requested that they go into Q3. And then as I have said a couple of times as the answers, we do expect less revenue overall in Photonics and higher mix of that lower revenue if you will to come from the lower margin funded R&D for Photonics..

Finally, the taxes jump up this quarter can you explain that?.

Yeah.

Some of that is due to the strong hard drive revenue, most of our hard drive business goes through Singapore and so there is a required tax or even though we have $60 million of NOLs and over $13 million of tax R&D credit there is a statutory tax that we do and also have to pay and most of that’s driven by the strong hard drive business that’s coming out of Singapore.

It’s not very material. It’s not a lot of money. But that’s been driven by..

Thank you..

You’re welcome..

Thanks, Mark..

Thank you. And at this time I am not showing any further questions. I would like to turn the call back over to Mr. Blonigan..

Thank you. So before I signoff I’d like to thank the dedicated employees of Intevac all around the world for their tremendous effort and successful outcomes in this very dynamic environment. I also want to thank our customers for their continued business and appreciated partnerships.

Thank all of you for joining us today and we look forward to updating you again during our Q4 call in January until then so long..

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