Good day, and welcome to Intevac's Third Quarter 2019 Financial Results Conference Call. At this time, all participants’ lines are in a listen-only mode. After the speakers’ presentation there will be a question-and-answer session. [Operator Instructions] Please note that this conference call is being recorded today, October 28, 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 third quarter of 2019, which ended on September 28th. In addition to discussing the company's recent results, we will provide financial guidance for the remainder of 2019.

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, and then Jim will review third 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 remain 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 October 28th 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 above the high end of guidance. Revenue of $26.3 million were above expectations due primarily to stronger than expected levels of hard drive upgrades during the quarter. Favorable gross margin in photonics helped to drive a smaller net loss than forecast at $0.02 per share.

In the third quarter, we continue to gain momentum driving our strategies for revenue growth and profitability. Last quarter we discussed the multiple critical milestones we achieved in the first half of the year, laying the groundwork for future growth trajectory.

In Photonics, the new record order announced in July drove backlog to an also record level of $76 million at quarter end. We continue to see quarter-on-quarter revenue growth and increasing operating profitability for the Photonics business in 2019.

And our order momentum through the third quarter signals another year of strong growth is expected for photonics in 2020. In our Thin-film Equipment or TFE business in third quarter, in response to our customers request to accelerate their installations, we delivered the remaining five energy systems in backlog.

We successfully completed the installation and qualification of our first Vertex Spectrum evaluation system with a leading display cover glass manufacturer, which signed off and began running demos full time in August.

Additionally, we continue to see cell phone manufacturer pull, driving the agreement finalization for a second VERTEX evaluation system to ensure dual sourcing capacity in the supply chain.

Finally, in the third quarter, we near completion of the build and test of our first Matrix PVD evaluation system for advanced semiconductor packaging, which is on track to be delivered and installed this year.

As we move into the fourth quarter of 2019, we continue to manage a number of moving pieces in our business, particularly in our Thin-film Equipment Group. These pieces can be positively or negatively impacted not only by current industry climate, but by the global trade and macroeconomic environment as well.

Since our last call, however, our confidence levels have strengthened for year-over-year revenue growth in both Photonics and equipment, which raises our expectation for a turn to profitability for fiscal 2019. Looking ahead to 2020 we continue to drive for revenue and profitability growth.

In Photonics, our backlog and or momentum today indicates another significant year of growth. For our equipment business, our visibility for 2020 is limited, and as I mentioned, has many moving pieces at this moment. We continue to assess how the business environments are unfolding and are building our 2020 outlook as we finish up 2019.

We do however see the 2020 revenue profile as with 2018 and now 2019 to be significantly back half loaded. Now for an update of our business segments starting with Photonics.

Our results to-date and expectations for a strong Q4 are driving growth for this fiscal year of over 35%, which -- with operating profitability in line with our long-term model of 10 to 15%. We recorded significant revenues from the IVAS program during Q3 and announced the expansion of the program scope in the associated increasing contract revenue.

This now $31.5 million contract is for the development and delivery of the initial lot of digital night vision cameras for the IVAS system level development and qualifications.

Through the end of 2020, the IVAS camera modules we are delivering will leverage the successful accomplishments of our state-of-the-art digital night vision cameras developed over the past year along with our next generation ISIE-19 sensor development activities.

The major revenue opportunity for us lies in the actual fielding of IVAS systems to the dismounted soldiers after the qualification and selection processes are complete. Until July the IVAS award was the single largest order ever booked in Photonics and continues to represent the largest future revenue opportunity for this business.

If successful, the projected volume digital night vision camera modules beyond the initial development contract to be fielded to the dismounted soldiers would be in the hundreds of thousands of units.

The success of the IVAS program over the next five years is a primary component of our potential to double the level of revenues in the Photonics business compared to the last five years. And beyond 2023 continue to drive the largest revenue opportunity component comprising our $1.4 billion revenue opportunity pipeline.

Also supporting our growth outlook was the latest record booking for Photonics announced last quarter, a $40 million multiyear contract award to supply digital night vision cameras in support of the U.S. government.

Together these two major orders have contributed to our all-time record level of Photonics backlog, building a strong foundation for future growth and increasing our confidence and another year of growth for Photonics in 2020. We have multi-year visibility for our manufacturing options and continued validation of our digital night vision technology.

With regards to our ongoing technology advancement efforts, we have now completed the initial ISIE-19 sensor design and performance qualifications. We are currently building the ISIE-19 sensors in small quantities in support of several new programs that will be the launch vehicles for the ISIE-19.

Supported by the government, we now have successfully met with design specifications required to take digital night vision to its next level of performance, including enhanced frame rate capability and higher dynamic range.

We will ship our first camera system based on the ISIE-19 in late Q4 and expect to field a significant quantity next year for multiple programs including IVAS. Moving now to our equipment business.

In Thin-film Equipment as I mentioned earlier, we were pleased to report continued progress in our growth initiative outside the HDD market, and in particular our effort to expand our current footprint in the display cover glass industry.

In our TFE growth initiatives we made important progress engaging with handset makers, which provided the customer pull to install our first VERTEX evaluation system with the leading display covered glass manufacturer. This VERTEX was quickly qualified and signed off in August for decorative back cover glass applications.

The tool has been dedicated to running decorative patterning applications and demos have been requested by most major handset makers in China. The interest level for this capability is very encouraging.

This evaluation system provides quick turn regional accessibility to Intevac’s newest technologies and enables new differentiated and fully integrated film stack configurations that expand the freedom and options available for the design of next generation smartphones.

Customer pull with the top five handset maker is also driving the activity to place the second VERTEX evaluation system with another display covered glass manufacturer also in China. At our last call, we were very close to finalizing the agreement with the initial manufacturing partner.

However, during Q3, we and the handset manufacturer together selected an ultimate display covered glass company to work with on this project. Currently, our business team is in China finalizing the new agreement and we continue to plan on the second tool shipping and being operational before the end of the year, and a second display cover glass.

The strategy with both these evaluation agreements is to generate production demand with a major handset maker and enable these tools to convert to revenue in 2020, while driving additional growth and follow on orders.

We also continue to work with both top tier and boutique cover glass manufacturers who are also candidates for additional revenue systems. From my earlier comments, eval tool revenue timing and follow on orders are some of the moving pieces in our equipment forecast.

Regardless, we're driving for year-over-year growth in our TFE business in 2020 and such growth would likely be driven in part by multiple VERTEX systems converting to revenue next year.

Prior to our call today, we issued a press release updating our product line offerings for our VERTEX tool, as well as our latest dynamite carbon protective coating trademarked DiamondClad.

Over the last several quarters I've discussed our internal development programs to push the performance envelope of our protective coating to approach that of Sapphire and also reduce the cost of depositing the coatings on cover glass. DiamondClad is a proprietary multi-step process that improves upon our original single layer film solution oDLC 1.0.

Developed in house utilizing the iron beam source technology released last year, DiamondClad now performs similar to Sapphire and scratch testing at the most eight standard and is far superior to the industry standard glass with anti fingerprint or AF coatings, which scratch at a most five level.

DiamondClad coating outperforms standard cover glass by a factor of four in taper ware testing and by a factor of four to six times in used case AF durability testing with sand, denim and perspiration. We've begun some initial sampling to select customers to-date and are now officially rolling out the product.

We have trademarked the name and we’ll be driving a marketing campaign to raise awareness in early 2020. Beyond the improvements that we've made in our protective films performance, we've also been working to reduce the cost of applying the film.

The adoption of protective coatings for cover glass has shown a clear cost performance trade off and we have been aggressively working both sides of that equation. As we move from a single layer DLC film to a multi layered approach of DiamondClad the film costs on our standard in line VERTEX system went up, which was in the wrong direction.

Today we introduced a new platform architecture for our technology, the VERTEX marathon. This new system utilizes the core source technology we developed and released last year on a high throughput platform optimized for multi-layer coating.

By moving the DiamondClad process to the marathon platform, we have enabled the most advanced oDLC technology at less than half of the cost of oDLC1.0 our first version deposited on previous generations of VERTEX. Our first marathon tool has been built and is moving into our clean room now to prepare for demo activities.

For all the film stacks VERTEX addresses specifically DiamondClad protective coating, as well as anti-reflective, decorative and unique pattern applications. For more information please see our website at www.intevac.com.

We are eager to see how the two eval system projects progress and are excited to introduce DiamondClad and VERTEX marathon into the market. VERTEX remains a key program in the company and I will continue to update you on our VERTEX business activities each quarter. Now I'll talk about progress beyond our efforts in display cover panel.

We made steady progress in the building tests of our first MATRIX PVD evaluation system for advanced semiconductor packaging, which is scheduled for a Q4 delivery to a leading OSAT or outsourced semiconductor assembly and test provider.

The MATRIX PVD system will go into evaluation and qualification at their R&D facility and is designed to lower the cost of advanced semiconductor packaging architectures. These architectures enable smaller package footprints for mobile devices as well as improved thermal and electrical performance as compared to conventional packages.

As for the energy platform, in our solar cell ion implant business, we continue to have content in the future potential for the energy product line. Last quarter, our customer accelerated their delivery schedule for the five tools remaining in backlog, which have shipped and are reflected in our third quarter revenues.

We continue to discuss additional tools for 2020 in support of a multi gigawatt capacity expansion in China, which would utilize iron ingots [ph] as well. Just as in other areas of our equipment business. These additional tools are also moving pieces, and we will need the new expansion in China to launch in order to regrow our energy backlog.

We believe however, we do have the potential to see another good year of energy revenue in 2020 based on current discussions with our customers. And finally an update on our HDD business.

Recent HDD channel information indicates hard drive units came in a bit better than expected in the third quarter, even after adjusting for the inconsistency amongst suppliers of 14 versus 13-week quarters. Expectations for strong near line drive demand in the second half continue to drive the majority of growth for media as we exit 2019.

Capacity utilization rates by our customers are currently very high and even with the two 200 Lean shipping in Q4 and two more in 2020. We continue to believe the hard drive industry could exhaust its media capacity by the end of 2020.

Beyond that long-term forecast currently model media demand growth of 8% annually through 2023 in support of the 25% growth rate expected for Exabytes shipped on hard drives.

Meanwhile, after tempering our expectation for HDD upgrades in the second half, due to very high tool utilization rates and the associated lack of tool availability for upgrades. Our customers continue to push forward with strategic technology upgrades regardless.

The result for Q3 with some upside in our HDD upgrade revenues and for the full year of revenue forecast has improved modestly since our last call, with an even stronger upgrade quarter forecasts for Q4. As far as what we're seeing for our HDD business in 2020, at this point, it's too early to say.

Our plan to upgrade activity is very strong for the year end our visibility for the level of upgrades in 2020 whether they're similar, higher or lower than this year is quite limited. We also have little visibility for additional 200 Lean orders beyond the two in backlog.

But as the demand picture starts to solidify for the media required in the second half of 2020, our customer would likely start making those plans thin. Just like other parts of our equipment business the HDD media business can be lumpy quarter-to-quarter and year-to-year.

Of note over the last few years are HDD customers have started each calendar year with relatively conservative views of capital investment, and yet we have exited each year with a stronger and more profitable HDD business than we had expected in January The overall take away from the long-term outlook of hard drive media is that our HDD business is reasonably stable at current levels and given the need for capacity additions to support the forecast demand of hard drive storage for the cloud.

We continue to expect the business to contribute at least as much revenue over the next five years as it has over the past five, with modest upside depending on media capacity needs to support near line drive growth.

So in summary, we've achieved critical milestones for the primary objectives of our 2019 corporate growth initiatives and with the introduction of our VERTEX marathon system, and DiamondClad protective coatings, we're very excited about our future business opportunities.

And while it's premature to provide our outlook for 2020 on today's call, I've explained some of the drivers and moving pieces that surround our push for another year of growth. First, in Photonics and military digital night vision, we have the backlog and a multi-year visibility to forecast strong growth ahead for 2020.

Second, in hard drive media, which we expect to continue to be stable and profitable, we're working to gain visibility on the upgrades and tool orders required to drive growth next year. Third, in display cover panel, we're driving for growth in 2020.

We're excited about our new DiamondClad protective coatings and in the coming months, we look forward to achieving market adoption of the higher performance and lower cost coating enabled by the VERTEX marathon platform. Fourth, in solar, we're encouraged by discussions with our customers so far, that 2020 could be another good year of shipments.

And fifth, the newest market for us was the advanced semiconductor packaging could begin to contribute to revenue in 2020, but it's certainly a market we feel could be a meaningful contributor in the years to come.

And in conclusion, to sum up our final outlook for fiscal 2019, we expect strong year-over-year growth in Photonics exceeding 35% and modest growth for the equipment business. With this improved revenue and operational outlook, we can now guide with increasing confidence for a return to profitability for the full year.

I'll now turn the call over Jim to discuss the details of our recent financial results Q4 and our full year outlook.

Jim?.

Thank you, Wendell. Consolidated third quarter revenues total $26.3 million, about 3% above the high end of the guidance range. In film equipment revenues totaled $17.1 million and included five energy systems along with upgrades, spares and service.

Photonics revenue of $9.2 million included $4 million of product revenue, and $5.2 million of contract research and development revenues. Q3 consolidated gross margin was $8.8 million or 33.4% and slightly above guidance of 32% to 33%, but down from Q2 due to the mix of five lower margin energy tools in the quarter, and no 200 Leans in Q3.

Q3 operating expenses were $9.2 million, down slightly from Q2 and at the midpoint of our guidance, primarily due to a more focused emphasis on selected programs in R&D. This resulted in a net loss of $480,000 or $0.02 per share a smaller loss than our guidance. Our backlog was $115.4 million at quarter end.

Thin-film Equipment backlog of $39.3 million included four 200 Lean HDD systems and non-systems HDD backlog. The backlog in our Photonics business was $76.1 million. We ended the quarter with cash and investments including restricted cash of $37.1 million equivalent to approximately $1.60 per share based on 23. 2 million shares at quarter end.

Cash came in below our $40 million objective due to delays in customer payments. We ended the quarter with an accounts receivable balance of $24.9 million, which was higher than we expected.

Customers delayed payments that were due end of quarter until the first week of the current quarter, we received almost $8.5 million in collections in the first week of Q4 alone. Cash flow used by operations was $2.1 million during Q3. Q3 capital expenditures were $1.9 million, and depreciation and amortization were $858,000 for the quarter.

The company continues to manage cash very closely to maintain a minimum balance of approximately $40 million. As a result, stock buybacks during the quarter were limited. We purchased 14,737 shares of common stock for a total of $69,000 during the third quarter.

As of October 28, 2019, the company has repurchased 5 million shares for $29.2 million out of the $40 million plan. For Q4, we are projecting consolidated revenues to be between $34 million and $35 million.

We expect fourth quarter gross margin to be between 42% and 44%, up from Q3 as mix improves with two 200 Leans and a higher amount of HDD upgrades in the Q4 revenue forecasts. Q4 operating expenses are expected to be between $9.2 and $9.4 million.

We expect interest income of about $100,000 and GAAP income tax expense of about $1 million in the quarter. As I had mentioned previously, our cash taxes will be lower. For Q4 we are projecting net income in the range of $0.18 to $0.22 per share assuming approximately 23.4 million shares.

Given our Q4 guidance, we expect full year revenues to grow 13% to 14% over 2018 to about $108 million. At this revenue level and expected product mix, we expect gross margins to be approximately 36% with operating expenses of around $37 million for the year.

We expect interest income of about $500,000 and GAAP income tax expense of about $2.1 million for the year, of which than half will be non-cash. At the midpoint of our Q4 guidance ranges for the year, we are projecting full year profitability of around $0.02 to $0.03 per share.

We are also projecting to end the year with a total balance of cash and investments over $40 million and report a net increase compared to the end of fiscal 2018. This completes the formal part of our presentation. Operator, we are ready for questions..

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

Yes, thanks for taking the question and congratulations on returning to profitability. Jim, I just wanted to follow up to start with a clarification on the gross margin guidance for the fourth quarter.

Nice to see the 42% to 44% range, Is that all driven by the mix that’s occurring in the thin-film side of the business, are you seeing margin improvement in Photonics as well?.

I think that percentage wise it’s going to be driven mostly by the Thin-film Equipment mix. Although if you listen to Wendell part of the conversation, we believe that the Photonics business could grow at least 35%.

And so if it does, then the revenue in Q4 of Photonics will also increase, which will contribute more margin dollars in Q4 than it did in Q3. But the percentage is going to be heavily weighted towards not having the five energy tools and having two 200 Leans in Q4 in the equipment business..

Got it. And then moving on to a couple questions for Wendell, Wendell you start the fourth quarter with a very strong backlog position in Photonics.

Can you just talk a little bit more about what you're seeing there? And is that backlog position something that we should think the company will sustain? Or as the company drives growth in revenue will we be seeing that backlog position come down as you work through successful orders that have already been achieved?.

Well, we think just looking over the next -- the duration of IVAS program, we think those revenue levels are pretty much at their run rates. And then of course, we also announced a larger program the $40 million booking that we had. That's all in backlog that goes over several years.

But what I can say is that we certainly have a pipeline of programs that we are engaged with, particularly ones that are going to launch the ISIE-19 sensor into the market that are still on our plate to go get. So there's -- we're not out of opportunities to build Photonics backlog at this point..

Good. And then a couple on the thin-film side.

First the Matrix PVT tool that's got advanced packaging potential, it sounds like that's going into R&D one is that so? Two, can you talk about the potential to drive that into other customers? And then thirdly, if this tool were to go into production, can you give us a sense for what the opportunity would be if you transition from R&D into production?.

Yes, okay. So we have to be very careful because the customer, very much does not want us to disclose what they're doing. But it is going into the factory that will initially start out R&D, but then would convert to volume manufacturing.

We expect that to occur in the 2020 depending on how quickly they progress in their qualification of the entire suite of tools for their line. In this one, when that would occur, we would do an upgrade of that tool that would put what I would call the material handling.

Right now it's mostly manual, and then we put the foots and other things on the tool once they did that conversion, and we think there's an opportunity, just in that particular line for at least two more systems beyond the upgrade on the eval. As far as additional customers, I think this was really important for us because we were in a position.

Yes, we delivered where the customer say yes, we love the tool we know it works in so and so industry, but we want to see proof that it's working in volume production in the advanced packaging industry. And we'll have that data as we get towards the end of the year, which will make the doors open easier for us in other opportunities. .

Thanks for that. And then lastly, for me before I hop back in the queue. It sounds like there's two VERTEX that could rev rec in the fourth quarter if I have that right and then a couple more next year, hopefully I'm not getting the tools mixed up.

But can you just walk through the engagement activity and some of the rev rec activity on the VERTEX side?.

Yes, as I said in my we've got one tool out there that's installed sign off and running demos, we expect to get the next one out of here within a month, we just got to final up finalize up some of the legal terms in the eval contract. So that when we expect as well to get out but they would be evals running into the 2020 timeframe.

One of those tools turns the worst case scenario it turns on 12 months of use the other one is configured at once it gets ex-amount of production through it then that triggers the purchase. But our goal here is to get adoption and get some volume production through those tools.

So it would make sense to go ahead and rev rec those and get those in for production and the goal here is to get enough production that'll drive follow-ons in 2020.

Most all of those tools need to go through their full cycle, especially if they're on the marathon platform that will need to go through a full acceptance cycle before we can rev rec it shipment..

Thank you. .

Thanks..

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

Thank you for the question.

How many people are you in discussion with in terms of your decorator coating tool? It seems like at least two, but are there others you're in discussions with?.

I didn't quite understand the question mark?.

Who are you talking to, how many cover glass manufacturers are you engaged with for the VERTEX decorative tool?.

Well, in my remarks -- let me say it this way, where everybody has, all the major handset makers have seen our one 1.0 diamond-like carbon the DiamondClad we've just last week started selectively showing some people of what we've got and we'll go across the hand makers with all the top hand makers to get that in front of them.

On the decorative back coatings as I mentioned that we get demo requests from most of the major Chinese handset makers today on the tool that’s running. And then I would say there's one particular handset maker that I referenced is really driving the second tool in the field so there's dual sourcing for their product.

So we're making good progress there and we'll continue our visibility on the DiamondClad starting now. .

Do you expect to get the DiamondClad tools revenue next year?.

That would be the expectation and we’ll make that happen next year. We just got out of the field this weekend and we have a targeted tool that we're going to upgrade in the field with the DiamondClad sources, and we expect to have that done before the end of the year. .

In terms of your Photonics backlog, how does that compare in terms of margins compared to -- will that be an uplift in margins compared to previous Photonics backlog, same margins?.

I think it's going to be similar to the margins you've been seen. With a higher volume, we have a higher amount of efficiency. And last quarter we did 43% that was a little bit higher than we expected. But I think you're going to see a high 30s maybe even low 40 as we will look at the backlog that's currently there..

Thank you..

Thanks, Mark. .

Thanks, Mark..

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

Yes, thank you. Hey. So does VERTEX Marathon seems to -- especially the DiamondClad seems to be a significant upgrade.

DiamondClad is only available on VERTEX Marathon, is that correct?.

No, it can be done on the Spectra tools that are out there today. And it's just a matter of how much output that you can get off of that tool versus the Marathon. And just the throughput is slower. So it can run at least through engineering and development work and run on Spectra no problem.

But I think in large volume production, it needs to go to the Marathon platform, and we have the ability to take the source, lots of the components off of it, and install VERTEX Spectra and those built right onto the marathon platform. So there's an upgrade path there to get to the higher volume production..

Okay.

Are you disclosing the ASP on the Marathon?.

Not at this time..

Okay. .

We're really looking at the overall cost of getting the films down and they are more complicated film with more layers. And we were able to deliver that multi-layer half the cost of the 1.0 on VERTEX. So….

I see, okay. .

That's what we're driving at. .

Right, right. Now the evaluation systems at least two to cover glass OEMs.

Are they Spectra or are they Marathon at this point?.

Spectra, they would be candidates to convert to the new platform later..

Okay. Okay. All right. About one and half years ago, you guys were talking about smartphone out in the wild, relatively high volume SKU with the oDLC coating.

Has there been additional smartphone SKUs that have hit the market since then with the oDLCs?.

Through our work with truly, they have some cover glass that's going on some phones in the China market only. But it's what we want to take and really address the market for the protective coatings with the DiamondClad where we could not perform at sapphire level until now. So we'll be going back out to show that we've got there..

I understood. And then on the hard drive side, I know you addressed this in your prepared remarks.

So I apologize, but can you just review was the expectation on a timing for four Lean 200 systems in backlog right now?.

Yes. We’ve clearly said that two of those would go in Q4. And at the moment, the other two are scheduled, the customer has requested that they go into his fiscal year 2021, which would be our 2020, which would be like July.

But we're continuing to work with the customer, that's one of the reasons Wendell also pointed out that, as we look at 2020 it is definitely back end loaded and those two 200 Leans certainly contributed to that being back end loaded. But of those four two go in this current quarter, Q4 2019. And the other two will go next year.

Currently the customers talking about putting them in the back half of our 2020 calendar year. So that it gets into his -- beginning of his 2021 fiscal year..

Okay. And I think you guys also discussed the expectation that order activity for new Lean 200s could also come through within the next four months or within 2020 as well.

Is that correct?.

I think we're right now trying to figure out how we end the 2019, calendar 2019 it’s going to play out looks like Q3 was a little bit better. But just seasonally, the front half of the calendar years tend to be light and that's when we typically see those type of plans formulating.

So we probably won't have ability, clear visibility on our calendar 2020 plans until partway through the calendar year..

Okay, thank you..

Thanks, Nehal..

Operator:.

.:.

Yes. Thanks for taking the follow up. I think we ultimately got there with some of your commentary and response to last question, Wendell. But I wanted to go back to the comment that 2020 would be a back end loaded year, similar to what we saw in 2018, and 2019. And I think mathematically, 2018 was a little bit more backend loaded of the two.

But acknowledging the fact that there's a lot of potential business that may not solidify until the first half of next year, can you provide any further color around how the linearity would compared to 2018 and 2019 do you expected to be somewhere in that range or would it be even more back end loaded than what we've seen in the two recover years 2018 and 2019? Thank you..

Hey, Craig, this is Jim. I think from what we're looking at currently today, it's going to be more backend loaded than either '18 or '19.

It won't be as backend loaded for Photonics because of their high backlog, but if you look at the backlog in Thin-film Equipment, and you look at a lot of our initiatives that we're out promoting, whether it be VERTEX or whether it be the following order of ENERGi, or whether it be the MATRIX evaluation tool, there's a lot of progress being made.

But if you look at the timing of when those will convert to revenue, they're going to be focused on the back half. So it's going to be more back half loaded than 2018 or 2019..

And then how do you feel about maintaining a $40 million cash position to the first half of next year and into that back half, Jim?.

I'm going to say at the moment, I still feel really good about it. I think some of the drivers that could influence that is we get success with the VERTEX tools we have in the five that we've sold, then successful in getting down payments.

We don't know if those will continue as we move forward and that's one of the reasons for keeping the cash is so that we can fund the growth of inventory for those six months or so between the time we buy it and convert it to cash.

So I feel very comfortable absent of any major business change happening, but if there is a more severe business change being no down payments. We have the cash to be able to fund that and quickly turn that inventory into cash. So I feel really good about that..

Got it, thank you..

Thank you and you have a question from Dan Weston with Westcap Management. Your line is now open..

Yes. Hi, good afternoon. Thank you for taking the questions. Most have been answered by now.

But Jim on the -- or Wendell, the $40 million contract you guys announced in Photonics last quarter last quarter, was there any revenue contribution from that particular contract in Q3?.

No, there wasn't we would expect that -- we wouldn't see revenue on that contract till the very end of Q4, I think..

Okay, got it. That's helpful.

Go ahead, Jim?.

That’s a multiyear contract I think as we’ve said..

Got it. Yes, so -- and once that starts to contribute end of Q4, and maybe in more earnest in Q1 next year.

Do you anticipate that revenue to be kind of linear over the life of the contract or is there any spikes that you're estimating?.

I think the customer has not allowed us to tell anybody exactly what that program is. However, we expect from a -- it's a manufacturing volume manufacturing contract.

So we expect that to be pretty stable, but we do see it initially ramp from some smaller numbers as far as units per month to a little bit more, but that ramp will be through, I guess maybe the first quarter of next year, and then it'll be very, very predictable and flat..

Got it. Okay, that's helpful.

And then finally, as that starts to kind of layer on to the Photonics revenue stream, do you anticipate that there could be even more operating margin expansion in Photonics than we've already seen?.

Yes, I'm going to say no, our model is the mid-30s and one of the questions earlier I said it could be the high-30s, I would say as we're looking into 2020, absent of any favorable news we see an yields or efficiency that's going to probably be mid-to-high-30s throughout the year, may fluctuate a little bit quarter-over-quarter depending on what's going on with the funded R&D in any given quarter..

Yes, no fair enough, Jim, I was more interested in the operating margin?.

In the operating margin, given your question again, I'm sorry, I was focused more on the gross margin. .

No, no, that's quite all right. Yeah, that's why I asked it because I know there'll be some fluctuations on the gross margin line. But you've done an admirable job of getting the operating margins into a level, I didn't think you could get that quickly.

With the layering-on of the additional revenues from the additional program, do you think that operating margin has a chance to increase from here as well?.

I think it's going to be similar to our model. We talked about our model and I think, Wendell, have given the model around 15%, it may fluctuate in any given quarter. Not a lot, we’d hope, but I think it'll stay around 15%, maybe a little bit above that as we go through next year. I don't expect it to get more higher..

Yes, there's a limit to how much the government allows us to make in that business. .

Okay, maybe I'm going to a little mistaking sorry.

Weren't you considerably higher than that in Q3? I think you're over 20% in Q3, aren’t you?.

I think we might have been 22%, but I think in that particular quarter, we were fortunate to have some manufacturing variances that hit which kind of reset some things, but I don't expect that level necessarily to go quarter-over-quarter. So, we do see some programs that maybe have short duration, slightly higher margins.

Some ability to understand in the OpEx, because we're spending it on the revenue. But we can't delay some of the funded -- some of the internally funded R&D programs. So there's a combination of a number of things. But don't expect 22% to be the new normal and it's going to be like that going forward. .

Okay, okay. That's really helpful, Jim. And then finally, Wendell, can you comment on to belabor this last $40 million contract. The -- you indicated that your ISIE-19 will be kind of ready at the end of this year.

Remind us was that order specific to the 11 or will that morph into the 19?.

That order is based on the ISIE-11. But every ISIE-11, we ship out is a candidate to replace with ISIE-19 at some point..

Very good. Guys, thanks very much for taking the questions. Congratulations. .

All right. Great..

Thank you. And I'll turn the call back over to Mr. Blonigan..

Thank you. Before I sign off, I'd like to thank the dedicated employees of in Intevac, all around the world for their tremendous efforts and outcomes in this very dynamic environment. I also want to thank our customers for their continued business and appreciated partnership.

And finally, I'd like to thank our stockholders for their continued support of Intevac. Thank all of you for joining us today. And I look forward to updating you again during our Q4 call in January. Until then, stay along..

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