Claire McAdams - IRl Wendell Blonigan - President & CEI James Moniz - CFO.

Nehal Chokshi - Maxim Group Peter Peng - B. Riley FBR Mark Miller - Benchmark Co. Ben Klieve - Noble Capital Markets.

Good day and welcome to Intevac's First Quarter 2018 Financial Results Conference Call. At this time, all participants are in a listen-only mode. Later, we'll conduct a question-and-answer session, and instructions will follow at that time. [Operator Instructions] Please note that this conference call is being recorded today, April 30, 2018.

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

Thank you, good afternoon, everyone. Thank you for joining us today to discuss Intevac's financial results for the first quarter of 2018, which ended on March 31. In addition to discussing the Company's recent results, we will provide financial guidance for the second quarter of 2018 and our current outlook for the full-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 a review of each of our businesses and our outlook going forward then Jim will review first quarter results and discuss our financial outlook 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 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 April 30 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..

co-market the capability to their customer base, which is a superset of the base we can currently access. This is a very important development for us as this cover glass manufacturer is an established supplier to the world's largest handset companies, providing access to and validation for additional volume cover glass applications around the globe.

This customer knows our tools and volume production, our oDLC film is in demand and being deployed in the marketplace by a top three handset maker. Our second customer who currently has one system installed, continues to evaluate our films for multiple applications.

The first application for our film at this customer has gone through exhaustive testing including six months of user trials. The evaluation was over a year and completing and a learning experience for both companies.

After oDLC was initially qualified about a year ago, additional requirements were developed and ultimately a final test was devised to simulate two years worth of wear-and-tear for this application.

In March, we had a final review of the project and it was determined they would like to see improved performance for a particular type of scratch that will require a different and thicker under-layer for our oDLC. I'll discuss in a minute how we're addressing this.

Our relationship with this customer and our projects continue and as I've mentioned, this is just one of several applications being looked at for our oDLC at this customer. It is important to note that every application as well as each customer have different requirements, test and adoption criteria.

Some focus on abrasion and lubricity, some more focused on cosmetics and some for functionality and durability. Our growth strategy is based on leveraging core technology into new markets and once we have a foothold to branch into adjacencies within that market.

Under our product development process, we identified the need for durable antireflective coating or AR an unmet need in the cover glass market. Over the past year and half, we have been working on a high durability film stack, the hardware to deposit these films and configurations for the VERTEX for volume production.

We announced in January the upcoming availability of a new deposition source that deposits hard AR films that can also deposit the decorative coatings that we're currently protecting with oDLC. This ability provides us new applications for VERTEX and also makes the tool an integrated solution to deposit these films and protect them with oDLC.

The current implementation requires two separate tools.

An integrated solution provides a significant cost out of the multiple film stack, which is important for cost sensitive applications such as cell phones and the abrasive surface of hard antireflective coatings and decorative films require protective coatings such as our oDLC as the current anti-smudge films cannot protect them well.

As I mentioned earlier, we straightened and evolved our sales and marketing strategy to emphasize creating end customer demand.

During the last two weeks of April, our sales and marketing team has been in Asia meeting with multiple cell phone manufacturers, introducing them to our new upcoming capabilities to integrate additional films including AR decorative coatings protected with oDLC and this capability has been met with very positive response.

In fact, the tool we expect to install soon at the top three cover glass maker will be configured to deposit decorative coatings protected by oDLC in an integrated tool.

In parallel with our efforts in high durability AR, we've been working to improve our oDLC to protect against sharp point impacts as the current formulation is tuned to protect against abrasion and provide extended lifetime of the anti-smudge coatings.

Using the deposition source and films developed in our AR work, we've engineered a new under-layer for our DLC film that greatly improves point impact resistance. We call our oDLC 2.0 and we are optimistic that applications we have not yet captured with our original oDLC will be in reach with the new technology.

Beyond this, we recently filed our provisional patent for a novel ultra-high durability film stack for AR and decorative coatings and have developed a hybrid concept for VERTEX that would enable this novel film stack to be produced at high-volume and low cost.

All this activity coupled with our now patented oDLC deposition source completes our differentiated long-range technology roadmap for the display cover glass market.

The new configurations of VERTEX that enable oDLC 2.0 and AR and decorative coating deposition, carried the burden of not only the film qualification cycle, but also the requirement of customer acceptance prior to revenue recognition.

We still expect to see orders for VERTEX this year, but given the hold on the two systems forecast for the first half of 2018 and the need for oDLC 2.0 with our second customer's first application, visibility for the 5 to 10 systems order in our previous outlook has clouded and is certainly at the lower end.

That being said, we're just now out-sampling our new offerings, so we need to see how that plays out over the year as new technology becomes available, see end market reaction to our current decorative coating protection project with truly and progress with our new top three covered glass manufacture.

Our February revenue guidance was inclusive of the expectation that five to seven VERTEX systems would revenue in the year. The majority of these systems in our prior guidance have now shifted to new technology and will require new qualification cycle and customer acceptance for revenue recognition.

Therefore, at this time, we're forecasting two VERTEX systems to revenue in our 2018 outlook and we'll add back systems when we are confident that case-by-case, the revenue events can occur in the fiscal year. We will update you on our progress as we announce orders as well as on our quarterly conference calls.

As for the balance of our Thin-film Equipment business, we feel comfortable that our prior expectations of revenue for the HDD segment as well as for our solar products remain on track. Our hard disk drive business has continued to be strong in the first quarter.

Revenues included one 200 lean system and continued strong levels of upgrades, spares and field service. In the overall industry, nearline high-capacity drives hit a new record in Q1 with sequential growth over Q4. This is another positive sign for our HDD business; given the significant numbers of disks in each nearline drive.

The most recent estimates in our industry showed strong growth in exabytes shipped on both HDD and SSDs through 2022 with HDD still representing at least 90% of the total exabytes shipped during that period.

While excess disc manufacturing capacity still exists today, the capacity crossover point is currently forecast to occur in 2020 after which our hard drive customers would need to add more 200 lean systems to meet the growing demand for high-capacity nearline drives.

These forecast change as we all know, but the overall sentiment in the HDD market is as bullish as it's been in many years. In the meantime, our multiyear technology upgrade programs underway have resulted in strong demand for both systems and upgrades.

We have two 200 leans in backlog for 2018 revenue and are forecasting another strong year in our HDD business similar to 2017 with the business more weighted towards upgrades rather than tools.

In our activities in the solar market we're still working with our customer to finalize the delivery schedule for the remaining nine energy ion implant tools out of their 12 tool order last year. Three were shipped in the second half of last year and remain in backlog, awaiting customer installation.

While the schedule and timing are not finalized, at this time we continue to expect three more tools will ship midyear with six in revenue for 2018 and the other six in 2019.

In addition to the implant tool, we continue to make progress in capturing booking opportunities for the MATRIX PVD tool targeted for existing line upgrades with our current solar customer of MATRIX PVD. Last quarter we talked about our launch into the advanced packaging market with our MATRIX PVD platform.

This is a market where our advantages in high productivity Thin-film Processing solutions provide a compelling advantage over current ones. In particular, our solution reduces the cost of the redistribution seed layer by two thirds compared to the existing process technologies.

The MATRIX presents a cost reduction path for the industry OSATs as they move from wafer to panel level processing. As the same MATRIX platform can be configured for today's 300 mm wafers or panels up to 890 mm wide.

Consistent with our product development process, we are currently engaged with Tier 1 OSATs and have an ongoing activity for both wafer level and panel level demonstrations and evaluations. We have participated in a number of industry conferences and completed the majority of our development work on the process modules for this market in 2017.

I look forward to updating you on our progress addressing this new market from Intevac into the coming quarters. At this point, we don't expect any revenue, any MATRIX systems for this market this year and have delayed some development activity, but our objective remains to book the first tool from a foundation OSAT customer before yearend.

In total, for our Thin-film business, our hard drive business remains strong and we still expect to revenue at least half the energy systems in backlog. Due to anticipated delays in revenue recognition timing on new VERTEX orders, we now expect our Thin-film Equipment revenues will be down around 5% to 10% from what we recorded in 2017.

While we will drive to improve the revenue numbers through the year, it's important to understand that in our equipment business, we built the order and lead times and equipment are five to six months for standard product and new systems require customer acceptance can push order to revenue timing to seven or eight months, making it difficult to add big chunks of revenue in short time spans, despite the majority of the cash flow tools being collected at shipments.

Now I'll move over to Photonics, last quarter we communicated that our objective was to deliver similar revenue levels in 2018 compared to 2017, but that we needed to remain vigilant for possible changes driven by political gridlock or budget shortfalls.

As it turned out, over the past two months, various programs within Photonics have been impacted by several factors, which together will have a negative impact on 2018 revenues. We see that most -- all of the impact in 2018 to be push out and timing and not subtracting from the long-term revenue opportunity pipeline for our Photonics business.

During the last conference calls, we've been discussing the transition of our Photonics business from a primarily product driven one to a funded R&D profile. The funded R&D programs whether coming directly from the government or via a prime contractor can be a complicated slowdown driven by both political and business situations.

The lifting of the continuing resolution and the release of the military budget are on or about March 22, was a significant delay of almost six months into the government's fiscal year. Beyond that it can take 30 to 45 days for the budge to flow down through the bureaucracy and finally get allocated to individual contracts.

In the first quarter, our government-funded programs moved forward, but several will require the next trench of funding in Q2. Given the current pace, we anticipate some breaks in funding to occur, which will push the activity to the right along with the revenue.

While there still remains time to get the funding in place to avoid this scenario, it's completely out of our control and we have forecast breaks in some programs based on current status.

We expect as we move to the government's fiscal year that sweep-up funding will free up the development programs as money in the budget must be allocated or spent or it is lost when we move into fiscal 2019.

Last year we booked around $400,000 of funded development activity for the Striker II program with BAE and in the first quarter, we completed that work, but delays in funding for the next task order caused the program to stop until the next funding release for the program.

The Striker II was a significant program in our pipeline and is the future night vision system for the Eurofighter as well as targeted for several other airframes.

After recent discussions with our customer, we will be resuming the development activity shortly via a funding bridge to keep the project moving until the major contract award is released this summer. This larger award with expanded content and revenue flow was forecast beginning Q1 and is now delayed, pushing the revenue to the right.

Lastly in regards to the Joint Strike Fighter program, we have been impacted by the lack of an awarded contract for LRIP 11 from the government to the F35 prime contractor.

This lack of award has now flowed down to the supply chain and the sub contractor we supply our night vision cameras to has taken monthly unit deliveries down to contractual minimums until they are placed on contract by the prime.

This slowdown in deliveries cuts our JSF forecast in half for the year and is the most significant change in our current Photonics outlook. The JSF program is complicated in negotiations difficult to say the least.

In November 2016, the F35 joint program office forced LRIP 9 contracts on the prime via a UCA or unilateral contract agreement as negotiations drug out.

We would assume given the fact that LRIP 11 aircrafts are being produced under an interim contract awarded in July of last year for about half the LRIP 11 aircraft, that a UCA option is on the table to close the stalemate.

Overall, the funding development work delays and the reduction in JSF night vision camera deliveries have caused our Photonics revenue outlook for the year to be down about 20% from the 2017 levels.

Although three months ago, we do not expect to be down in revenue and the reduction in JSF deliveries were never on the table, it's important to note that nothing has fundamentally changed in our Photonics business besides the timing of revenue. There is still over 225 F35s to be produced through 2020 and 2,000 more after that.

Striker II is coming and expanding beyond the Eurofighter. Our Delta I coalition warfare fuse goggles program is gearing to launch and our goggles for the Australian Army is finalizing this quarter, preparing for evaluations.

Our wireless head mounted displays are finishing completion for field evaluations and projected product quantities requirements are only going up and most importantly, the development of our ISIE-19 next-generation digital night vision sensor continues.

Our ISIE-19 sensor is the core technology for all of our new night vision technology products, including the pursuit of dismounted soldier digital night vision and it is a technology upgrade path for all the current production programs we have and are currently delivering.

Intevac Digital Night Vision systems continue to be the technology of choice for the premier fighting platforms for the United States military. So in summary, Q1 was a wrought quarter for us. There is no getting around that and we now expect 2018 will be a pause in our revenue growth trajectory after three straight years of growth.

As events developed over the quarter, we took strong real-time action in aligning our spending and strategies, while ensuring we did not disable our growth initiatives. Today we now expect total revenues to be down around 10% to 12% in 2018, which will be below breakeven profitability.

Despite the short-term setback, our growth story remains very much intact and we are steadfast in our focus to return to growth and profitability in 2019 as we continue to gain traction in our growth initiatives this year. I'll now turn the call over to Jim to discuss our Q1 results, our Q2 forecast and some additional commentary on 2018.

Jim?.

Thank you, Wendell. Consolidated first quarter revenues totaled $18 million at the high end of our guidance range as filed in our HDD business more than offset the decline in Photonics. Thin-film Equipment revenue totaled $12.8 million and included one 200 lean system along with upgrades in spares and service.

Photonics revenues of $5.2 million included $2.7 million of product revenues and $2.5 million of contract, research and development revenues. Q1 consolidated gross margin was $4.9 million or 27.1% and lower than our guidance of 29% to 31%, driven by a significant decline in Photonics gross margin on the lower revenue volume.

Q1 R&D and SG&A expenses were $10 million up from Q4 due to normal seasonal increases, but below our guidance due to tight control of development spending in response to the revenue forecast. This resulted in a net loss of $5.1 million or $0.23 per share within our guidance range. Our backlog was $66.9 million at quarter end.

Thin-film equipment backlog of $55.6 million included two 200 lean hard drive systems, 12 energy solar ion implant systems and non-systems HDD backlog, three energy tools are awaiting installation at our customer's factories at quarter end and are awaiting customer acceptance. The backlog in our Photonics business was $11.3 million.

We ended the quarter with cash and investments including restricted cash of $40.7 million, equivalent to approximately $1.82 per share, based on 22.4 million shares at quarter end. Cash flow used by operations was $4 million during the first quarter.

Q1 capital expenditures were $592,000 and depreciation and amortization was $1 million for the quarter. Now turning to the full year outlook for 2018.

Given the factors Wendell discussed related to VERTEX revenue recognition in Photonics program funding delays, we now expect our Thin-film Equipment revenues will be down about 5% to 10% from 2017 and Photonics revenues will be down around 20% from 2017. This will reduce overall revenues by around 10% to 12% from the 2017 levels.

At this overall revenue level and given the mixed impact, we would expect gross margins of around 33%. Last quarter we were forecasting operating expenses of between $40 million to $41 million for the year. With the reduction of forecasted revenue, we took actions to reduce our operating expense to below $38 million.

We also reevaluated a couple of projects and will incur small write-offs this quarter that are expected to bring our total operating expenses to between $38 million and $39 million for the year. Below the operating line, we expect to see interest income of about $400,000 and net taxes of about $900,000 for the full year.

For Q2 specifically, we are projecting consolidated Q2 revenues to be between $24 million and $26 million. We expect second quarter gross margins to increase from the first quarter and to be between 30% and 32%. Q2 operating expenses are expected to be between $10 million and $10.5 million inclusive of the write-offs mentioned earlier.

We expect interest income of about $100,000 and net taxes of about $300,000 in the quarter. For Q2, we are projecting a net loss in the range of $0.11 to $0.13 per share on an estimate of 22.5 million shares. This completes the formal part of our presentation. Valerie, we are ready for question..

Thank you. [Operator Instructions] Your first question comes from Nehal Chokshi of Maxim Group. Your line is open..

Thank you.

So how long have you guys been working on this oDL 2.0, oDLC 2.0?.

Well, Nehal this is Wendell and thanks for the question.

As I said in this script, we've been actually working on a high durability anti-reflective coating that was a complete separate project from the DLC and as we moved through the different processes with different customers and had solidified some of the films that we were putting down for AR, we identified that that could be -- those -- that activity could be translated on to the 2.0 version that has a thicker under layer and provides better protection for sharp point impact.

So it's been -- the actual activity and the source development has been going on for well over a year, but that was specifically related to antireflective coating development versus DLC and we transition that over to the DLC program around the end of last year and start some development there..

Okay.

And when you, to put that into context of you've been working on the AR for about a year which you brought into the oDLC program, the 2.0 program, I guess when you originally developed oDLC, how long did that take?.

The original oDLC was probably done over about a three year time span, which includes the source development in the platform..

Right.

So the obvious question then becomes is was the -- this seems like a compressed timeline for bringing oDLC to market faster than original oDLC and what's the confidence around being able to do that?.

Well, I think one way to look at it is fundamental platform VERTEX is already present. We have to make some modifications at how it operates, but realistically that's more software motion profiling and things like this.

The sources have been worked on for well over a year in the AR program and the actual DLC process, which is the carbon process is the same as DLC 1.0 it's the under layer between nut and the glass, which is being changed in 2.0.

We wanted to keep all of the functionality that we had with the current DLC and provide that along with a better protection against point scratching and that required a thicker layer. And maybe that's too complicated as an answer, but we believe that the 2.0 implementation is not a three year implementation..

Right. Okay. Just to be clear, the original oDLC did have an under-layer or it did not and now you're implementing an under-layer and then you come back and realize what we need a thicker under-layer in order to be able to withstand the short point contacts..

Yes the original oDLC has an under-layer but it's very thin. It's made very think for its optical characteristics..

I see. Okay. Got it. Understood. And then as a result, essentially there is no new chemistry that you need to develop for source technology it's really just tweaking the thickness of the various layers..

The answer to that question is yes, we have a core set of films that we developed for AR, bit we are also working on some different ones and it's really about controlling a refractive index versus the hardness of the film and without making it too complicated, when you put these hard films down on thickly on a piece of glass, the hard films tend to have higher refractive index.

So you really need an antireflective function on that under-layer in order to eliminate that and that's how we were able to port our AR work over to DLC..

I see. Okay. All right. And then two years ago when Truly had accepted their first system from your guys earlier than expected, it sound like you guys had a pretty high degree of confidence that this was going to get adopted, but this is still early in this cycle right.

You hadn’t secured that second customer yet and I guess is this sort of where we are with the oDLC 2.0 in terms of level of confidence and you hope that will grow as you get further into your program or you think we're further along in terms of the confidence level there was?.

Well we can certainly see that we have now -- we are now able to retain all of the DLC characteristics and improvements point. At some point, there was a compromise that needed to be made either in how well it protects against abrasion versus how well it protects against a point contact.

We think we're by that now and we certainly at the array of testing that we do on these films, whether that SAN Shaker or Taper [ph] or these two-year simulated usage testing, we can certainly see margin improvement in some of these characteristics without losing the original functionality.

Now a number of the applications don't require that and you can put down a less-expensive film with oDLC 1.0 because it's only using a very thin layer under-layer and that's completely adequate for some applications including the application we talked to about the top three handset makers, that's oDLC 1.0 and that passes all of the tests that the -- that particular customer wants to have it passed..

Okay. Very good. I'll seize the floor for now..

Okay. Thanks Nehal..

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

Hi this is actually Peter Peng calling in for Craig Ellis and thanks for taking our question..

Hi Peter..

Hi. Just on the first quarter gross margins variability, it seems like photonics was down, but software went up significantly.

So can you just help reconcile the gross margin different? It seems like the net, net that would cancel each other out?.

Yeah what happened in Photonics is we actually have some cost growth in one of the programs and on lower revenue, it gives you a much higher percentage of revenue and so that really the most significant development in Q1 was we had some challenges of the cost and we had to take a forward loss provision and the revenue only being $5 million had a higher impact which is why the gross margin at around 6%..

Okay. And then on the systems and upgrades I would like to kind of take your equipment backlog and just kind of take out all the equipment tools. It seems like the upgrades went up significantly.

It looks like at the high end single-digit kind of millions, given that why aren’t you more positive on that part of the business?.

We are positive on it. We are very positive, which is why we had said that we would expect to see a similar level of hard drive revenue, which was very strong last year I think in the mid $50 million, but on less system.

So we have more upgrades and we saw a lot of that those orders happen in Q1, we don't expect that same level of high orders every quarter, but that gives us a lot of backlog going into the next three quarters. So we are feeling very comfortable about that..

Yeah and I think Peter also, this is Wendell that when we look at the latest forecast that are out there and we highlighted in the script as well that we're now seeing a company like Trendfocus forecasting a growth rate that will extinguish the excess capacity out there in a reasonable timeframe to 2020 is where there current forecast shows that crossover point, which is not where we were at a year or two ago.

So there's really been a lot of positive sentiment inside the HDD and some good projected growth rates of Exabyte shipments on hard drives..

Okay. And then kind of just taking your the growth rate for the thin-film and if I kind of back out the expected two more VERTEX in the second half, it seems like you're going to -- you're expecting two more lean shipments in the second half.

Is that right two to three lean systems in the second half?.

We actually in our guidance for Q2 there's actually two leans in Q2 and we're expecting the third one after that. So really three more, one in the second half and two in the second quarter is what's in our current forecast..

Okay. Great. All right. And then on the -- question on the VERTEX, it seems like with $24 million capacity truly and then if we add in two more back and adding about six more $8 million.

So if the customer wants to adopt for say 20%, 30% of the Smartphone, would you have the ability to ramp up?.

Well, we're having to put another tool in the field as we talked about, that would be the next tool.

We would be able to build out one additional, I think we as a management team want to keep one in finished goods, so we can react quickly and then we do have some long lead parts that still remain on order or are in-house actually, so we can react within a three to four month timeframe on the next couple of two to three tools from there.

But we'll certainly be monitoring what the capacity is being consumed in the VERTEX and how the programs look coming in, how the acceptance of this decorative coating protection that Truly is doing now, how customer capture is going with this third Tier 1 cover glass maker as well as how Truly is doing with their program.

So we feel comfortable we can react..

Okay.

And one more question before I hop back into the queue, the 2.0 these ASP is going to be much higher or are they relatively similar with the 1.0?.

That's a great question. So in the -- for the 2.0 version it's a similar, similar price. We have done some cost reduction on that platform already. It's just the source technology is a bit more expensive than the current under-layer source and then if we move to an integrated tool that does the decorative coating, now that has multiple sources.

That will be more expensive tool, but it also is doing the function of two separate tools and in our latest sales and marketing work over the last few weeks in Asia, there's a lot of interest in being able to combine those tools and taking out the handling of the substrates between those tools, that's a big cost reduction and like we said on the script, the tool we plan on having out here and installing with this new cover glass maker, they want it to be configured with the decorative coating..

Okay. Thank you, guys..

Thanks Peter..

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

Good afternoon. I just wanted to clarify something on the decorative coatings. Is there a unique decorative coating or are you also combining what you call decorative coating with the anti-reflection coating.

Is that what you're terming the decorative coating or is that something separate?.

Well that's a great question Mark because it's the same source and it's the same type of films, but when you're doing, so you were doing a front cover with oDLC on it. You would want that to be an anti-reflective type coating, but on the back covers, what you're really looking for is a reflect coating.

So you use those same types of layers, but you terminate with a different refractive index. So you're actually reflecting certain colors or transition of colors. So it's the same hardware, fundamentally the same type of films in both applications, just done in a different way to get a different effect..

Just wondered if you can kind of address the situation sabre rattling about the tariffs between United States and China.

What impact if any is it having on the solar market and also if you can talk about the n-type cell market and what's happening there, has that continued to slow down from previous expectations in terms of opportunities?.

Okay. So from a tariff perspective, we're not actually seeing any impact to the business that we're looking at. Certainly we're waiting to see where these exemptions come out because I know there is some US-based companies that are affected that are petitioning to be excluded from that. That could have some impact.

I know that there was one particular company that was talking about a certain amount of manufacturing capacity in the U.S. space being impacted if those weren't lifted. There has been dialogue with customers in China. There is some concern about what ultimately happens, but it hasn’t been impacting any deals or moving anything forward there.

And could you restate the second part of your question again?.

What's going along with the ramp of n-type cells?.

Okay. So n-type, we're seeing well one of our, the tools that we have out there right now that are waiting for installation is an n-type ramp, so we're seeing that come back to life. We're seeing some tools installed there and we anticipate getting it installed, the first tools in a reasonable period once they move in some other equipment.

So we see that moving.

Certainly we're not hearing anything formal from the premier n-type guys as far as additional new capacities, they're are usually pretty good about announcing that in their supplementary materials on their conference calls, but we have been in discussions for some cost reduction activities where we do some replacement and upgrades of existing lines to make them more cost-effective.

Beyond that, I don't have any current information on the resumption of the China frontrunner on the n-type, but we're expecting that I think relatively short waiting to hear about that coming back into interplay where as if last year most of that money got shifted to PERT cell manufacturing capacity installations..

And finally any expanding opportunities you see coming out of the new Trump budget for you guys?.

The new Trump budget I think what we see is of course everybody, the sentiment is better. There is money there. The continuing resolution is lifted, so there's the ability now to create new program starts. There is concern that as soon as we get into October, they’ll put a new continuing resolution in place.

If they can't get a budget to be agreed upon prior to the end of the fiscal year. Most of the plus-up in the military budget that came at the end, a lot of it was significantly around platform.

Some of those platforms which we are involved with including Apache and the joint strike fighter; however on a near-term basis those platforms won't be built for several years. I don't think we've seen a plus-up at this point in LRIP 11. I think that's staying right around 200.

I forget the exact number 275% or something like that units, but it's certainly positive, but it doesn't equate for us to any kind of a short-term move in the supply chain for the night vision systems for those platforms..

Thank you..

Yeah there was a little bit of military sales in that budget that we've quoted on as well. That's possible..

Four military sales, but we don’t expect that order till late in '18 and they will revenue in '19..

Thank you..

Thanks Mark..

Our next question comes from Ben Klieve from Noble Capital. Your line is open..

Thank you. A quick follow-up question here on LRIP 11, my understanding was that, while there is delays in LRIP 11, but there is still a lot of pressure being put on the supply chain to ramp up capacity in advance of kind of 12, 13.

What are your customers saying about volume production beyond LRIP 11, beyond the near-term delays that they're seeing from the one, from that one lot?.

We have been quoting on LRIP 12 and 13 correct Jim?.

Yeah, we quoted 12 to 14 actually last year..

So the overall units are in line with the projected number of aircraft to be built. I have that chart, but I didn't bring it with me on 12 and 13, but we don’t see that slowing down, but we have to get past this impasse with LRIP 11 and get the full amount of LRIP 11 aircraft on order, which is not today.

Did that answer your question?.

So the, yeah, yeah it does and so basically the sentiment from your customers is essentially that just they have to work their way through 11, but once they think they have visibility, once we can transition to 12 to 14 here to really ramp that business back up again, it's just over the next few quarters, it's challenges are going to continue due to delays in LRIP 11, is that right?.

Yeah, maybe a better way for me to answer the question is that we in our normal cadence of business would be expecting to be quoting on LRIP 12 and LRIP 13 right now which we are. So we're not seeing that process being delayed by the LRIP 11 deal..

Okay. Very good. Thank you. That does it for me. I'll jump back in queue..

All right. Thanks Ben..

Thank you. [Operator Instructions] Our next question comes from Nehal Chokshi of Maxim. Your line is open..

Thanks. So there has been about a month of top three Smartphone really went GA with your coating.

Can you just provide some clarity on that? Was it on just one or two or I think there was five colors overall offered or was it on all of the colors?.

It certainly was not on all the colors. They don’t necessarily tell us everything, but certainly there was one particular color that they were using as a test case and then beyond that, we don't have a lot of visibility, but I don't have clearance to actually say, which one of those colors it is..

Okay.

Understood and I guess, you probably don't have an answer to this question then, but do you have any visibility into what's been the demand response for the colors that are utilizing the ODLC?.

It's a little bit early, but our understanding is there is one color that's not too popular and it's definitely not that one that we're on. So I think there's been a reasonable response to most of those colors and I think one of the colors that I believe does the transition, I don't think is available quite yet.

So they don’t have any feedback on that..

The one that has the transition, is that the one that possibly has the ODLC on it or definitely not?.

That I don’t know..

Okay. All right. Thank you..

Thanks Nehal..

Thank you. I am showing no further questions at this time. I'd like to turn the call back over to Mr. Blonigan for any closing remarks..

Okay. Thank you. Before I sign off, I would like to thank our dedicated employees of Intevac all around the world for their tremendous effort and outcomes in this dynamic environment. Also I want to thank our customers for their continued business and appreciated partnerships.

And finally, I'd like to thank our stockholders for their continued support of Intevac during this pause in our growth trajectory. I thank all of you for joining us today and we look forward to updating you again during our Q2 call in July. Until then, so long..

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