Good day, and welcome to Intevac's Fourth Quarter and Full Year 2018 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 follow at that time.

[Operator Instructions] Please note that this conference call is being recorded today, January 30, 2019. 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 fourth quarter and full year 2018, which ended on December 29. In addition to discussing the company's recent results, we will provide financial guidance for the first quarter of 2019 and our outlook looking forward.

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 current outlook, then Jim will review fourth quarter results and discuss our 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 and year, which remain subject to adjustment in connection with the preparation of our Form 10-K, as well as comments regarding future events and projections about the future financial performance of Intevac.

These forward-looking statements are based upon our current expectations and actual results could differ materially as a result of various risks and uncertainties relating to these comments and other risk factors discussed in documents filed by us with the Securities and Exchange Commission, including our annual report on Form 10-K and quarterly reports on Form 10-Q.

The contents of this January 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..

Thanks, Claire, and good afternoon. Today, we reported Q4 earnings that were above the high end of guidance at $0.44 per share on a GAAP basis and $0.08 per share on a non-GAAP basis.

While our non-GAAP earnings exclude the positive impact of the reversal of our deferred tax valuation allowance in Singapore, it should not be overlooked as it is a very positive sign for our business.

The reversal was a result of seven consecutive quarters of profitability in our Singapore operation and our forecast for continued profitability there. Increasing the likelihood that we'll be able to utilize our deferred tax assets, these are now back on the books.

Revenue came in a bit lower than expectation given that we recognized revenue on just three of the 6 ENERGi tools that were in the forecast. The three tools that were scheduled to ship in December ended up shipping in January, along with an additional tool.

As we discussed at our last conference call, the shipment timing was controlled by our customer, and there was risk of these shipments moving out of Q4 and into Q1, which ultimately they did.

Given that the first three tools were formally signed off by our customer in Q4, all four tools shipped this month have already been recognized as revenue in the current quarter.

The shortfall in revenue from the three ENERGi tools was partially offset by additional process module upgrades in our hard drive business, along with upside in our Photonics product revenue. In total, revenue was $31.6 million for the quarter and $95.1 million for the year.

The favorable product mix in the quarter helped drive upside in gross margin compared to our forecast. And with tight control of operating expenses, we were able to deliver profitability above our guidance range. We continued to focus on managing cash and achieved our objective to exit the year with more than $40 million in cash and investments.

This cash level also reflects a modest amount of stock repurchases during the fourth quarter. The most significant news in the fourth quarter was our 50% increase in backlog over Q3 to an 8.5 year high of $109 million. We received multiple significant new bookings in Q4 in both Thin-Film Equipment and Photonics.

On our last call, we talked about the October order of 4 200 Leans, the first HDD order of that magnitude since early 2016, and subsequently, we booked additional upside in HDD process module upgrades. The biggest news in orders last quarter, however, came in Photonics.

First, for the Apache program, which until now has been the largest program in the history of our Photonics business, delivering about $60 million of revenue between 2013 and 2017. After a multi-quarter program pause, in December, we announced the new $7 million order for 144 Apache cameras.

These cameras are destined for new airframe builds and foreign military sales, and we're excited to be ramping up our Apache camera line again. Delivery these - delivery of these cameras will start in the back half of 2019 and continue through mid-2020.

But by far, the most important new order announced at Intevac for some time now was our successful bid and award to develop and provide 2,300 digital night vision camera modules for the U.S. Army's IVAS program worth $29 million over the next two years. IVAS, or integrated visual augmentation system, is the first major program in the U.S.

Army that requires an all-digital night vision solution for the ground soldier.

The success of the IVAS program and the fielding of these cameras to the dismounted soldier represents the single largest future digital night vision opportunity for Intevac Photonics, and as planned, will far exceed the Apache night vision program in size, scope and duration.

Over the last 25 years, Intevac has been driving our founder, Norman Pond's vision of enabling night vision systems with the power of digital technology. Intevac's digital night vision camera systems are currently the solutions of choice for the premier fighting platforms for the U.S.

military, and the IVAS award is the beginning stage of bringing our digital technology to the dismounted ground soldier. It was announced in November that Microsoft was awarded $480 million to be the prime contractor for the IVAS program.

We, however, are in contract with SOSSEC on behalf of NVESD, or the Night Vision Electronic Sensor Directorate, who will be supplying the cameras to Microsoft or their sub directly.

It's the Army's objective to incorporate head, body and weapon technology on individual soldiers in a single platform that they can use to fight, rehearse and train, providing increased lethality, mobility and situational - and the situational awareness necessary to achieve overmatch against our current and future adversaries.

Digital night vision is a key part of this platform, and this win is the single largest contract award Intevac Photonics has ever received.

Our 2,300 camera modules will leverage the successful development work of our state-of-the-art, low-light level CMOS cameras accomplished over the past year, along with our next-generation ISIE 19 sensor currently under development.

If successful, the project volumes of digital night vision camera modules for the IVAS program will be in the hundreds of thousands of unit range. So it's beginning, digital night vision for the ground soldier.

While the longer-term revenue opportunity is very large, as we previously laid out in our $1.4 billion revenue opportunity pipeline, even in the short term, this contract award supports our confidence in return to revenue growth for Intevac in 2019; and for Photonics, in particular, year-over-year revenue growth in excess of 30%.

Before moving on to discuss our Thin-Film Equipment business, I will add that in addition to these two major orders announced in December, we received an additional $7 million in multiple smaller Photonics bookings, including for the Joint Strike Fighter and LIVAR programs that brought new orders for Photonics to an all-time quarterly record of $43 million.

Our Photonics business also achieved an all-time record of $57 million in orders for the year. Now for an update in our Thin-Film Equipment business. Fourth quarter equipment revenues included one 200 Lean system and 3 ENERGi systems, in addition to our second highest upgrade quarter on record.

For the full year, equipment revenue included 4 200 Leans, 3 ENERGi systems and a new record in upgrade sales. Backlog as we enter 2019 included six 200 Leans and 9 ENERGi tools, plus a continued strong pipeline of upgrades.

As I mentioned earlier, I'm pleased to report the long-awaited shipment of 4 of the 9 ENERGi tools in backlog has occurred and a revenue this month. With the current agreements in place, the remaining 5 ENERGi tools are scheduled for delivery in the second half of the year. These 5 tools are included in our full year outlook.

The first 3 tools that revenued in Q4 passed all factory acceptance criteria and were formally signed off by the customer in December. So like the tools shipped in January, the remaining tools in backlog will revenue at shipment.

Our ENERGi tools have demonstrated the ability to enable higher solar cell efficiencies and competitive equipment installed in the same factory and are being utilized 24/7 at full output capacity.

While there is always a risk for factory delays, as we witnessed in a year long delay that affected the first set of tool deliveries, our successful results and tool performance to date support our view that these planned ENERGi shipments will be a component of the return to growth of our Thin-Film Equipment revenues in 2019.

Turning to our hard drive business, which continued to perform well in the fourth quarter, thanks to strong levels of upgrade, spares and field service revenue. This favorable product mix helped drive the upside in our earnings for the quarter. For the full year, HDD revenues increased more than 10% over 2017.

And in fact, it was our fourth straight year of growth in our HDD business and our strongest HDD year since 2010. Over the course of 2018, we received orders for 7 200 Leans, and as I mentioned, 6 were in backlog at year-end.

During our last conference call, I discussed the significant upward revision in expected HDD media shipments as we progress through 2018. As of our last call, a leading industry research firm, Trend Focus, estimated that an additional 55 million disks would be shipped in 2018 compared to 2017.

Since then, as you may know, Q4 HDD shipments came in modestly below expectations. And while we don't have the media figures yet, it is clear that media units came in below expectations for Q4 as well. Softness in the nearline drive demand in the first half of 2019 has been forecast for several months.

But additional demand weakness exiting the year has caused our hard drive customers to reassess their internal plans. Over the last quarter, we witnessed our customers becoming increasingly more cautious and moderate their capital spend.

As a result, we too, are being cautious with our outlook, specifically around the shipment timing of the 6 200 Leans in backlog. Our current shipment schedule is for a back-half weighted year, and our concern is that a portion of our 200 Lean backlog currently scheduled for the second half could be pushed into 2020.

While both HDD and media units fell short of expectation in the fourth quarter and the industry expects challenging market conditions to persist through the first half of 2019, a second half recovery continues to be expected for the drive industry.

As we continue to talk about, it's the resumption of nearline drive growth that has the biggest impact on media unit growth. While HDD units are in decline, the latest forecast shows that media units will grow year-over-year for the foreseeable future.

The forecasted growth in media units driven by nearline high-capacity drives would require additional media capacity to come online annually. These forecasts change, as we all know, but the fundamental drivers for media unit growth in nearline HDD market continue to be positive.

Given the current environment and cautious approach to capital spending of our customers, we're including 4 of the 6 200 Leans in backlog in our revenue outlook for 2019.

We have a continued strong pipeline of process module upgrades in the forecast, but if we're slightly lower in upgrades in 2019 after a record 2018, our total HDD revenue this year could be similar or slightly down from last year. Clearly, if we ship all 6 tools in backlog as scheduled, HDD revenues would be up.

So there is upside potential on our current forecast as we progress through 2019. Moving to the VERTEX. The biggest growth opportunity for our equipment business continues to be in our VERTEX tool and the deposition of protective, decorative and antireflective coatings on display and backside cell cover glass.

For the last couple of quarters, I've detailed our strategy to accelerate and improve the capture rate for applications for VERTEX, specifically offering seed assets at key cover glass manufacturers to minimize risk of capital and marketing directly to major handset makers for the multifunctional and unique capabilities of the VERTEX tool and the features that it can be incorporated into their designs, depositing oDLC, decorative films and transition and pattern colors.

In the third quarter of last year, it became evident that each cover glass maker wants to get handset maker pull for the VERTEX prior to finalizing agreements for seed units. And an integrated, multifunction tool is most desired given the intense cost pressures in the business.

In the fourth quarter, we continued to make progress running samples with multiple top 5 handset makers. Most far along are our efforts with a leading handset maker in China, where we are currently working together on their third design iteration for decorative backside cover glass coatings.

This potential VERTEX customer typically does multiple handset releases each year, providing us with multiple potential entry points for our tools as we look at the full year. We are also actively marketing and running samples for additional leading handset makers.

Our marketing efforts positioning the VERTEX as a multifunctional tool with oDLC decorative coatings and our unique capability of virtually limitless patterning designs has generated significant interest.

Our demo labs continued to be very busy in Q4, depositing customer-specified designs and patterns as they evaluate the VERTEX's capability to give them differentiated features on the back's cover glass. In addition to the ongoing new demo activity, our first VERTEX customer truly continues to apply oDLC for multiple applications.

With our second customer, our visibility continues to be limited. This customer operates in secret and doesn't share with us specific activity on the tool. However, we do know that the tool is in operation. We'll update you on our progress with this customer at such time when we have gained greater visibility on their activities and plans.

From the business perspective for VERTEX, our new deposition sources that enable oDLC 2.0 in decorative coatings have been qualified and we can quickly respond to systems orders or seed placements given a tool and inventory ready to go.

At this point in our 2019 forecast, we are conservatively planning on 2 VERTEX in revenue this year, and we will update you each quarter with any upside to the forecast.

The conservative revenue forecast for 2019 is driven by the fact that the current development in demo activity that has been progressing in our labs and the systems required to support those would be a new multi-application configuration of the VERTEX.

This configuration, which would be the first of its kind, will require full installation and customer acceptance prior to the revenue recognition event. Upside in this forecast would be additional application adoption with existing VERTEX customers utilizing existing VERTEX configurations.

We believe future customer evaluations and wins for the VERTEX will be enhanced by providing a completely unique multi-application vacuum process and solution that enables differentiated appearance and improved durability at reduced price points for next-generation handsets.

We remain confident that the VERTEX continues to be a significant opportunity for us, diversified from the hard drive business, and the fourth quarter was an exciting one for us in terms of the progress we have made with industry-leading companies. And finally, turning to the MATRIX.

Earlier this year, we talked about our launch into advanced packaging market with the PVD MATRIX 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 deposition by two thirds compared to existing technologies. Consistent with our product development process, we're engaged with Tier 1 OSATs and have ongoing activity in both wafer-level and panel-level demonstrations.

We continued during the fourth quarter to work on system configurations and specification requirements with targeted customers. Our demonstration tool is scheduled to be installed in our clean room this quarter to validate operational particle performance, a key metric and hurdle for adoption.

At this point, we continue to witness delays in panel of factory plans, and we are positioning to be ready to compete for this business when the transition from wafer-level to panel level packaging occurs. Activity on our MATRIX PVD system for high-efficiency solar cell manufacturing continues with our current customer.

We've been working together on upgrades and modifications to the tool that they currently own, and given current plans, we could see renewed activity for this product configuration in 2020. So in summary, as we look back on 2018, we entered the year optimistically and endured some setbacks in the first quarter.

Then we gained momentum each quarter thereafter, cumulating in an outstanding fourth quarter and exiting the year with backlog at an 8.5-year high. Now as we move into 2019, we're excited to see multiple drivers for year-over-year growth and return to profitability.

First, in Photonics, our record bookings in both the fourth quarter and for the 2018 fiscal year position us for growth in excess of 30% in 2019 and continue the Photonics growth trajectory from there.

In hard drive, where our customers are being incrementally more cautious in their capital spend, we expect a similar to possibly slightly lower revenue year after the best year we've had since 2010. Upside to this forecast is currently in backlog, and our visibility will become clearer on this as we move throughout the year.

In our thin-film growth initiatives, at this point in time, we expect revenue growth to be driven from 9 ENERGi tools in the forecast, 4 of which have already revenued this quarter, and the 2 VERTEX tools we spoke of earlier.

VERTEX shipments in 2019 will be a function of current demo engagement process and rollout plan and existing customer adoption, which can provide upside to the outlook. This forecast yields consolidated year-over-year revenue growth of at least 20% for 2019.

As has been the case in 2 of the last 3 years, we expect revenues to be weighted to the back half of the year and continued lumpiness in quarter-to-quarter revenues as historically has been the case. Given the expected gross margin mix and OpEx forecast, at those revenue levels, we expect to be profitable and cash flow positive for the year.

As I just outlined, we see upside potential in this initial forecast.

But given current industry climates and global macroeconomic environment such as slowing in nearline drive capacity expansions, weakness in smartphone sales and memory pricing, coupled with the backdrop of uncertain trade relations and a slowing economy in China, we will monitor how things unfold this year and provide you with updates to our forecast accordingly.

I'll now turn the call over to Jim to discuss the details of our recent financial results and outlook.

Jim?.

Thank you, Wendell. Turning to the fourth quarter results. Consolidated fourth quarter revenues totaled $31.6 million. This was below our guidance of $34 million to $35 million, which had included 6 ENERGi systems.

While we ended up shipping 3 of those in Q1, as Wendell had mentioned, part of the shortfall was made up with upside in both hard drive upgrades and Photonics product revenues. Thin-Film Equipment revenue totaled $23.6 million and included one 200 Lean and 3 ENERGi systems, along with upgrades, spares and service.

Photonics revenue of $8 million included $5.8 million of product revenues and $2.2 million of contract, research and development revenue. Q4 consolidated gross margin was 33.5%, above guidance of 31% to 32% as a result of positive contributions from both businesses.

Thin-Film Equipment gross margin was 30.6%, down from the fourth quarter of last year and the third quarter of this year due to lower-margin ENERGi systems but still better than forecast given the higher mix of upgrades relative to ENERGi tools. Photonics gross margin was 42.1%, up from last quarter and up from the fourth quarter of last year.

The improvement was primarily driven by higher revenue and favorable product mix. Q4 R&D and SG&A expenses were $8.8 million, higher than Q3 but below our guidance due to the continued control on expenses and timing of engineering material purchases. GAAP operating expenses include a small benefit due to a favorable adjustment in royalty commitments.

Q4 net income was $10 million and included the reversal of the valuation allowance recorded against the deferred tax assets in Singapore. This reversal resulted in the recognition of a noncash income tax benefit in the fourth quarter of 2018 of $7.9 million or $0.34 per diluted share.

Non-GAAP net income was $1.9 million or $0.08 per diluted share, better than our guidance driven by better gross profit from both businesses and lower than forecast operating expenses. Our backlog was $108.5 million at year-end, the highest level since mid-2010.

Thin-Film Equipment backlog of $64.8 million included 6 200 Lean HDD systems and 9 ENERGi solar ion implant systems. The backlog in our Photonics business was $43.7 million, the highest in 5 years.

We ended the year with cash and investments, including restricted cash, of $40.3 million, equivalent to approximately $1.78 per share based on 22.7 million shares at year-end. The net increase we had expected in our year-end cash balance will occur instead in Q1 given the timing of customer payments.

During the fourth quarter, we bought back 120,000 shares for $558,000 at an average price of $4.63 per share, bringing total share repurchases to $29.1 million, total since inception out of the total plan of up to $40 million. Cash flow used by operations was $3.8 million during the quarter and $1.7 million for the year.

Q4 capital expenditures were $1 million, and depreciation and amortization were $1 million for the quarter. Now turning to the full year outlook for 2019. Given the strong bookings and backlog in Photonics, it's our objective to grow Photonics revenue levels in 2019 in excess of 30% compared to 2018.

We expect growth in our Thin-Film Equipment business to be about 15% above 2018 levels, and as Wendell had discussed, this includes similar to slightly lower hard drive revenue, plus revenue for 9 ENERGi systems and 2 VERTEX systems.

Taken together, our current outlook for total revenues -- our total outlook is for -- our outlook is for total revenues to grow at least 20% in 2019 while returning back to profitability for the year.

At this revenue level and expected product mix, we expect gross margins in the range of 34% to 35% with operating expenses of between $37 million to $38 million for the year. We expect interest income of about $700,000 and GAAP income tax expense of around $2 million for the year, of which more than half will be non-cash.

For Q1 specifically, we are projecting consolidated revenues to be between $23 million and $24 million. The Q1 projection includes one 200 Lean and the 4 ENERGi systems that have already shipped.

Given the lower Q1 revenues, which will impact factory utilization and the change in revenue mix in Photonics, we expect first quarter gross margin to be between 27% and 28%.

Q1 operating expenses are expected to be between $9.7 million and $10 million, higher than our expected run rate for the full year due to the timing of investments in research and development, along with some typical seasonal increases. We expect interest income of about $200,000 and GAAP tax expense of about $500,000 in the quarter.

As I mentioned previously, our cash taxes will be lower. For Q1, we are projecting a net loss in the range of $0.15 to $0.17 per share based on 23 million shares outstanding. This completes the formal part of our presentation. Operator, we are ready for questions..

Thank you. [Operator Instructions] And our first question comes from the line of Craig Ellis with B. Riley FBR. Your line is now open..

Yes. Thanks for taking the question and Wendell and Jim, congratulations on very substantial orders in the Photonics business for 2018. Where I wanted to start with questions was understanding a little bit more about the linearity through the year.

I think you were clear about the back-half weighted nature of ENERGi beyond what you've already [indiscernible] But can you provide us some further insight on VERTEX? Is that expected to be something that would hit more in the first half of the year given the handset release payments that made your OEM stop? Or is that something that you expected, too, in the back half of the year?.

I think - this is Wendell. I think the tools that we talked about there in our current forecast, and like I said, it was - we're going conservative as we move into the year, those are unique configurations that are targeted at this pattern backside cover glass decorative coatings. So those will require full installation sign-ups.

So those would be in the back half of the year. Any VERTEX in the front half would be based on current configurations that have already been signed off. So - and again, we're - that's upside to our plan at this point, but we have tools out there. As I have mentioned, we have a customer that is -- that runs relatively stealth.

So when they move, we won't have a lot of learning on that, but those type of tools would revenue as soon as they ship. So we'll just have to go through the quarter and see how that plays off. But clearly, the 2 that we've identified in the initial guidance for the year would be back half revenue..

Correct. And then, Craig, let me just add a little bit of color to that. So our revenue guidance in the first quarter of $23 million to $24 million, so if you average that, $23.5 million. We actually expect, if revenue grows by 20%, that's going to calculate around $114 million.

And we expect about 40% of the revenue to be in the first half and then about 60%, including the 2 VERTEX that Wendell had talked about and including the remaining 5 ENERGi systems, to be in the second half of the year..

Jim, that's helpful color. So thanks for that.

Do you have, at this point, visibility on how that second half would break out? And if not, when do you think you'll get that so that -- not only from an expense management standpoint as you look at having the right revenue coverage over your expenses but a fast generation standpoint through the year, when do you think you'll have greater confidence as to how that second half might shake out? And the question is really third quarter versus fourth quarter and degree to which it's a more balanced back half for you versus something that's much more fourth quarter weighted?.

I think it's going to be - so first of all, let me give a little bit of color on the 2 product lines. So as you mentioned, and thank you for that, we had some very strong bookings in Photonics. And specifically, we had this IVAS program and we had the Apache order that we announced. The IVAS program will split between 2 years. It was $28 million.

It will go half in 2019, half in 2020. The Apache program, which was $6.9 million, there will be only about $1 million to $2 million in '19 and the rest will be in 2020.

But if I was to look at Q3 versus Q4, and you are correct, and as Wendell cautioned about our customers being cautious about what's in the backlog to ship, I would think Q3 and Q4 are going to be similar with maybe a little bit more weighting in Q4 because we have those 2 VERTEX.

And depending on exactly when they buy ENERGi tools, do they go in September, do they go in October. So this could be a little bit linear but a little bit more back-end weighted to Q4..

That's helpful.

And then I may have missed it in your prepared remarks, but can you address where you'd expect the cash balance to be exiting the year? And is there anything notable between here and year-end in terms of either positive or negative moves with the balance?.

Okay. So it is our expectation to grow cash. One of the things we have to manage is as we sell VERTEX, will those customers continue to give us down payment at the time of order or will they go to their normal practice, which is to not. So given where we think we're going to get these 2 VERTEX tools that are in revenue, we believe we will grow cash.

And I expect to actually see, because of the larger AR that we ended December 2018, a little bit more cash growth in Q1 and then a little bit of that invest in kind of the revenue that's going to happen in the next 3 quarters.

But at this point, I would just say our expectation is to see a growth in cash above the $40 million that we ended 2018 with..

Thanks, guys..

You’re welcome..

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

Yes. Thank you and congratulations on the huge IVAS win..

Thanks..

So you mentioned that you did buy back stock in the quarter.

Could you detail actually how much and at what price?.

Yes. In my prepared script, I think we said we bought back about 120,000 shares at about $558,000, so it's an average price of $4.63..

Okay. Great. And then given all the detail, calendar year '19 guidance drivers, I come out with you guys are expecting hard drive upgrade activity around $30 million.

Is that right?.

On the upgrade business, one of the things we said was that we had a record upgrade year in 2018, and we don't expect that same level.

So I think it's going to be a little bit under the number that you just mentioned, but it's - we still believe it will be a strong year relative to what we've seen over the last couple of years, just not as strong as we're looking today as it was in 2018..

Yes. In fact, I might add a little bit to that. I think there's -- this is Wendell, there's a bit of variability in the upgrade business. We've seen that the customer has to pull that in or push that out depending on how busy their factories are because when we do the upgrades, we have to take tools down and off-line.

So depending on the market dynamics as we move through the year, there may be a window where they want to do more, they want to pull some stuff in or they want to put all the tools completely into the manufacturing line and not do the upgrades for a month or so.

So we're kind of normalizing in, in our forecast right now and it looks to be slightly lower than what we did in 2018. But as we go through the year, those dynamics can change..

Okay. Great. Two more questions. One is that I think, maybe it was April or May of last year, you did a press release about a top 5 smartphone OEM has now put your decorative coating into the wild. And I think you alluded to that same OEM is now under third generation.

A, is that correct? B, if we are now looking at the third generation, what was new about the second generation relative to the first generation? And then finally, any insights on what the demand is on that decorative coating?.

Yes. So it's not on our third generation. So that was not where we're at. So where we put the decorative coatings on the outside of the glass, protected with oDLC, that run -- it was one particular SKU on one product line. They haven't been very forthcoming of what the outcome of that was, what their sales were in different units.

And that's kind of typical for the cellphone guys. They don't really share downstream of what their business is looking like. We're not aware at this point that they've gone to the next model yet.

And in that particular instance, in that particular customer, we're seeing and engaged in more activity on being able to do more patterns and decorative-type coatings rather than the outside and CPM. So there's a lot of work going on.

But PET plastics that go on the inside of the cover glass to have different patterning on them, that makes up with patterning that's on the cover glass as well. So we're still engaged in those programs, but it's in a little bit different capacity at the moment..

I see, okay. Well, I forgot my fourth question, so I remember, I’ll get back in the queue. Thank you..

All right. Thanks, Nehal..

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

In terms of the 2 VERTEX orders you anticipate shipping second half of the year, do you still have it to go through qualification processes? Or is the customer satisfied with the performance of the tools?.

As far as qualification, you mean the tool qualification or the end product qualification?.

I would think both would be important, so....

Okay. So we definitely need to go through the tool qualification, but I think the important thing there is that these are all -- the VERTEX itself is a non-production improvement tool that we're really talking about running the new sources through their phases in the production environment, not so much the tool architecture itself.

So there will be a qualification process, but we expect it to be short and leveraging off already production-proven hardware.

In regards to the product qualifications, these type of qualifications are much, much shorter in the decorative side than it is in the protective side because if it's deposited on the inside of the glass, you don't have to worry about all the wear and tear and sand shaker testing and sandpaper testing and all that kind of work.

So we expect those qualifications to move quicker than any of the DLC in the protective coating applications..

Thank you..

Thank you. There are no further questions at this time. I will now turn the call back over to Mr. Blonigan..

Okay. Thank you. So before I sign off, I'd like to thank the 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 appreciate the partnerships.

And finally, I'd like to thank our stockholders for their continued support. Thank all of you for joining us today, and we look forward to updating you again during our Q1 call in April. Until then, so long..

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