Intevac Inc (IVAC) 2005 Q3 法說會逐字稿

Ladies and gentlemen, thank you for standing by. Welcome to Intevac's 2005 third quarter results teleconference. (Operator Instructions) Kevin Fairbairn, Intevac's President and Chief Executive Officer, is hosting the call today. I would now like to turn the conference over to Mr. Fairbairn. Please go ahead, sir.

Good afternoon and thank you for joining us today. With me are Charley Eddy, our Chief Financial Officer, Luke Marusiak, our Chief Operating Officer, and Verle W. Aebi, President of our Photonics Technology Division. After Charley reads the Safe Harbor Statement, I will give a progress report on our third quarter activities and then Charley will walk you through third quarter results and talk about our expectations for the fourth quarter. We will then open up the call for questions. Charley?

During the course of this conference call, we will comment upon future events and make projections about the future financial performance of Intevac, including statements related to projected production rates, system shipments, revenue, gross margin, operating expense, other income, profitability, tax rates, earnings per share, cash flow, cash capital expenditures and depreciation. We will discuss the impact of perpendicular recording and flash memory on demand for our equipment. We will discuss our low light imaging products, their projected applications and market size, and when we believe production deliveries will commence.

These forward-looking statements are based on our current expectations, and actual results could differ materially as a result of various risks and uncertainties including, without limitation, the possibility that markets for our products may not be as large or develop as quickly as projected, that we may not be able to deliver and develop new products and technologies as planned, that orders and backlog may be cancelled, delayed or re-scheduled, that we fail to achieve expected financial results, or other risk factors discussed in documents filed by us with the Securities and Exchange Commission, including our Annual Report on Form 10K and quarterly reports on Form 10Q.

The contents of this October 31st call include time sensitive, forward-looking statements that represent our projections as of the date of this call. We undertake no obligation to update the forward-looking statements made during this conference call. Any redistribution of the call without our expressed written consent is strictly prohibited. Kevin?

We are pleased to report excellent third quarter results, which are a record for us in terms of both revenue and profitability. Revenues increased to $43.5 million from $30.4 million in the previous quarter as we delivered systems to four different customers in six different locations. This is a terrific accomplishment by our factory and field operations groups, and resulted in $6.2 million of net income or $0.29 per share. In Equipment, orders for the 200 Lean continued strong. We exited the quarter with $65 million in backlog, including Imaging, unchanged from the prior quarter's ending backlog. We plan to continue production at the rate of about one system per week for the remainder of the year.

In Q3, we demonstrated continuing progress on our product cost reduction activities, which led to higher gross margins and improved financial performance relative to 2004. We have put initiatives in place aimed at further reducing our product cost in 2006, including Asian sourcing and manufacturing, and further improvements to our processes. In Q3, we shipped two MDP-250s for capacity expansions of already qualified products. We expect to ship four more MDP-250s in Q4, which should be the last sell of these legacy systems. We expect all future orders to be for the 200 Lean.

We continue to see increasing demand for hard drives, driven by emerging consumer applications and the proliferation of PCs into markets in Asia and Eastern Europe. Hard drives are without equal when it comes to storing video and large masses of digital data cheaply. We were surprised at the negative effect that the introduction of the new flash-based products by Apple had on the market's perception for the future demand of hard drives. While flash is an important technology that is well-suited for portable audio with limited storage needs, we expect it to be many years before flash can provide the hundreds of gigabytes of data for less than $100 that the market demands. And by that point, high definition video is likely to have raised the need to a terabyte of storage for under $100 and hard drives should still be the right choice. At lower memory capacity points we expect continued competition between flash and small form factor hard disk drives.

Today, this application space represents about 5% of hard drive shipments and a much smaller percentage of media production capacity. In order to maintain their memory capacity cost advantage, our customers are going to have to move to perpendicular media technology. This is positive for Intevac, as this should drive the need for perpendicular capable systems like our 200 Lean.

Our outlook for 2006 continues to be positive. All of our 200 Lean customers have informed us of their plans to add perpendicular capable capacity in 2006. We expect they will buy more systems in aggregate in 2006 than in 2005. The transition to perpendicular technology is expected to be the prime driver for growing our business in 2006.

Our internal analysis suggests there will be a continuing significant demand for our systems over the next 3 to 5 years as the end market for hard drives continues to grow and the industry transitions to perpendicular media technology. Our customers continue to be careful in their capital expansions, and we do not see an over-supply of media systems. We expect to see our legacy MDP-250s continue in service for a period of time, as it should take up to five years for perpendicular technology to fully ramp. We expect our business will continue to be seasonally lumpy with peak shipments typically in Q2 and Q3. The initial transition to perpendicular may reduce lumpiness, as customers plan more time for qualification. The majority of capacity buys to date have been configured with 20 available stations, consistent with the needs of perpendicular media technology, but with only enough of those stations populated with the process hardware necessary to support legacy longitudinal media manufacturing.

In 2006, we expect to ship a significant number of systems configured in perpendicular format. Some upgrade business is also expected from the 200 Leans in the field of longitudinal and perpendicular format.

Building the field engineering capabilities to support this large growth in business continues. We expect to have tripled the size of our field engineering staff by the end of this year. We formally open our Shenzhen, China office next week and in the first half of 2006, we will plan to establish a third office in Thailand. We continue to expand our operation in Singapore, which is the hub of our Asian operations.

Positive progress continued on gaining market share through concentration on the large vertically integrated customers and achieving penetration and follow-on orders from them for our 200 Lean systems. We believe that all our customers have now chosen their suppliers for next generation media deposition systems. We believe our market share for the perpendicular media generation will exceed that of the prior longitudinal media generation with our legacy MDP-250 systems. Further market share gains will have to come from our customers taking market share from those customers who have chosen our competitor's systems. When we have won business, it always follows a head-to-head competition with our competitor's system, which we have won on each occasion.

The one remaining D-Star flat panel deposition system that we delivered to an R&D customer in 2003 was finally signed-off by the customer. This system did not contribute materially to gross profit and reduced our Q3 equipment growth margins by 3%. Charley will provide more details later. This system was not included in our guidance for Q3. Work continues on the sale of further D-Star IP licenses, with active negotiations continuing with a second potential licensee.

In imaging, progress continued on developments of next generation low light video cameras for head-mounted night vision systems. This market segment has continued to grow in size with significant recent U.S. Army procurement of legacy and interim night vision products. The estimated size of the U.S. Army night vision business is over $400 million per year for today's legacy night vision goggles, and is representative of the market size to be expected when the transition to video-based night vision is made.

Last quarter, we completed development of a new sensor targeted at the military head-mounted night vision market. Field test results from our military customers confirm the enhanced performance of this new sensor over the previous low light level cameras. In Q3, we delivered sample quantities of cameras incorporating this new sensor to system integrators who are developing next generation digital head-mounted night vision systems. These system integrators are attracted by the unique combination of performance, size, weight and low power offered by the Intevac solution, all of which are critical for battery-operated man portable applications like night vision. Production shipments for camera modules for head-mounted night vision are scheduled to begin in mid-2006.

Our focus in imaging is now shifting from components and camera development to end-user product development. In Q4, we expect to begin work in partnership with a large defense contractor on a complete head-mounted digital night vision system based on our sensor. In this system, Intevac's low light imaging will be fused with imaging from our partner's thermal camera and integrated in front of the soldier's eye. This system development will leverage Intevac's investments in sensor technology, and provide a complete product for the military end-user. We expect a contract to be awarded to fund a significant portion of this activity during the fourth quarter.

Focus on operational excellence will also increase in 2006 as we complete the infrastructure and organization required to support low cost, high volume production of our imaging products. We are leveraging our emerging imaging technology with MOSIR, our first near-infrared camera addressing commercial markets. This camera uses a version of our LIVAR sensor customized to meet the needs of the scientific imaging market. We started field qualification of this camera in early Q4 and expect to complete product and manufacturing regimen testing in Q4. Initial deliveries of the product are expected by year-end. We are actively negotiating distribution agreements with leading value-added retailers for this product. We displayed the MOSIR camera at a recent scientific camera conference and were pleased with the market response. We estimate a 30 million annual market size for MOSIR and its derivative products.

Charley will now discuss the financial results. Charley?

Thank you, Kevin. As I talk through the highlights of the third quarter, I'll also comment on expected fourth quarter financial results and our expectations for 2006. Consolidated Q3 revenues totaled $43.5 million. Equipment sales of $41.5 million included seven 200 Lean systems, two MDP-250 systems and nine disc lubrication systems. The $41.5 million of equipment sales exceeded our beginning of quarter revenue guidance, primarily as a result of recognizing revenue on the flat panel manufacturing system. This system incurred a high installation and acceptance test cost, and did not contribute materially to gross profit. We do not expect to ship any more flat panel manufacturing systems.

For the fourth quarter, we are projecting consolidated revenues of $48 to $53 million. The estimate assumes we recognize 12-13 systems for revenue. Four of the systems are legacy MDP-250 media manufacturing systems. One of the systems is the remaining high cost 200 Leans that was manufactured in 2004. We have orders in hand for all of the systems. For 2006, we expect revenues in the range of 150 to $170 million. We expect a seasonal decline in revenues from Q4 to Q1, followed by a very busy Q2 and Q3. We currently have three systems in backlog for 2006 delivery. We also have deposits in hand for four more systems that we have not yet reported in our backlog because our customer has not yet specified a delivery date. We have procured long lead parts for these systems, and expect to be able to respond inside of our normal four-month lead time when our customer schedules delivery.

Q2 consolidated gross margin was 31%, which included a 32% gross margin in equipment and a 14% margin in imaging. On a non-GAAP basis, gross margins, after excluding the effect of the discontinued flat panel system, were 33.9% on a consolidated basis and 35% in equipment. We expect consolidated gross margin in the fourth quarter in the range of 34 to 35%. For 2006, we are projecting equipment gross margins in the mid-30s with some quarter-to-quarter fluctuations due to volume and product mix. In imaging, we expect margins to improve relative to 2005 but also with some quarter-to-quarter fluctuations as a result of the timing of partially funded development programs and then later in the year as product shipments become a larger percentage of revenue. Overall, we expect this will lead to consolidated gross margins in the 33 to 35% range.

Third quarter operating expense was $7.6 million and was consistent with our beginning of quarter expectation. We expect Q4 operating expense of approximately 9.3 to $9.7 million. Primary drivers for the increase relative to Q3 are recent increased research and development spending on new products and projected provisions for employee profit-sharing and bonus plans, which are tied directly to our profitability.

We've also been increasing our worldwide field operations staff to support growth in system shipments and customer sites. We're using Singapore as the hub of our Far East field operations and expect to further expand our operations there in 2006 with the addition of some manufacturing and engineering capabilities. In 2006, we expect operating expenses in the range of 36 to $40 million.

All of the guidance I've given you so far for 2006 is on a GAAP basis and it includes the estimated effect of expensing stock options. We estimate that this effect will total approximately $3.5 million in 2006, or about $0.16 per diluted share. About 85% of the $3.5 million will increase operating expense and the balance will increase cost of sales. Our estimate is subject to a number of variables and is likely to change as 2006 unfolds.

Our Q3 net profit of $6.2 million, or $0.29 per share, was at the upper end of our beginning of quarter expectations. The $6.2 million net profit consisted of a $7.2 million operating profit in equipment, a $1.4 million operating loss in imaging, $149,000 operating profit in corporate, $386,000 of other income, plus $158,000 for income taxes. We expect other income to increase to about $450,000 in Q4 as we benefit from increased cash balances and interest rates. For Q4, we are projecting earnings per share in the range of $0.36 to $0.43 per diluted share.

Our Q3 tax rate was 2.5%. The low tax rate is a result of our net operating loss carry forward, which totaled $30 million at the beginning of the year, and is sheltering us from significant income tax expense this year. We are projecting a 2006 tax rate of approximately 5%.

Our capital spending and depreciation for the first nine months of 2005 totaled $2.4 million and $1.6 million, respectively. For the full year of 2005, we are projecting capital spending of 4 to $5 million and depreciation of approximately $2.2 million. Cash and short term investments increased to $45 million from $42 million at the beginning of the quarter. We expect that cash and short term investments will continue to increase in Q4. Accounts receivable totaled $33 million and are turning over in a timely fashion. With this cash level, no debt, good profits and modest capital needs, we remain well capitalized to execute our business plan. Our head count at the end of the quarter totaled 357 employees, up from 318 employees at the beginning of the quarter. 104 of the 357 employees are contractors. The majority of these contractors work in operations as part of our strategy to maintain a flexible workforce that can respond to rapid changes and demands.

This completes the formal part of our presentation. Operator, we're now ready for questions.

(Operator Instructions). Your first question comes from Jesse Pichel with Piper Jaffray.

Hello?

Hi Jesse.

How are you? Great quarter, great guidance. Could we just review a couple of things before I get into the Q&A? Guidance for '06 -- 150 to 170, how many tools is that?

We didn't say the number of tools. That probably gets you into the mid to upper-30s, depending on the number.

And what gives you confidence in that kind of number? You have what-- orders for three and four more pending. So that's seven? Is that right?

This is Kevin here. We-- our customers have shared. in some detail, their plans. They -- everyone's got new factories or new floors that they're proposing to populate, and so it's really a (inaudible) from our customers.

So the total orders right now stand at seven then, out of that mid to upper-30s?

Correct.

Okay. And could you repeat the guidance now for Q4 2005?

We said 48 to $53 million in revenue, 12 to 13 systems.

That's in Q4, right?

Yes.

So you pulled in orders that would have normally gone to '06, is that what's happened, or --?

Yes, I think that might be one or two higher than we talked about last quarter.

Several higher, I believe. Okay. Margins were excellent on equipment. What types of margins are you targeting for '06 on equipment?

We said that throughout the year, they'd be in the mid-30s. They will fluctuate some from quarter to quarter, depending on volume and the mix of what we're shipping.

So the 35% margin this quarter benefited from the disc lubers or, was this a mix issue, or --?

Well it's-- we had the highest volume than we've ever had. That helped. We shipped a certain number of lubers, that helped. We shipped the last of the expensive 2004 systems, so that hurt. So I think we've been-- Luke has been really successful in his cost reduction program, and I think we got a lot of the benefits from that.

And last question. What's the status of your alpha tool there, targeted for the non-HDD industry?

We continue to make good progress and as we've said, that tool -- we have not made the final decision on taking that tool to market and that will be-- If we do, then we expect to ship in the second half of '06.

Thank you very much.

The next question comes from Rich Kugele with Needham.

Thank you. I guess first, as you're looking into 2006, do you expect the bulk of your systems to wind up into glass deployments or are they also fairly evenly split also with aluminum? Do you have a sense on where they're being deployed, where people feel the greatest need?

I'd say it represents the mix of glass and aluminum that you have today. We see them configured in all configurations.

Okay. So they kind of just mirror the market, they're not trying to emphasize the one over the other?

We don't see that at this point.

Okay. And within your backlog of $65 million, can you give us a sense on how many 200 Leans that would be and are there any 250-Bs in there. Other than the four systems, that's it?

Yes, well there's the -- we said there were 12 to 13 systems for this year, for Q4. So four of those are the 250-Bs, and then we said beyond that, there are three more systems for next year. And then there's another four systems that we haven't reported in backlog yet. We have deposits, we have orders, but the customer hasn't given us a delivery date yet. Without a delivery date, we don't count things in backlog.

Okay. And then I guess just lastly, of the existing Leans that you have out there today, how many of those are-- have already been upgraded for perpendicular? Do you have a sense on that?

About 10%.

So the install base-- there's still another 90% that need to be upgraded and then the new systems will ship out perpendicular-ready?

No. The new systems that are going out next year will be a mixture. Some of them are going out for capacity of longitudinal. But obviously customers that want to-- or ideally would like to buy tools that they can readily move to perpendicular in the future. So we might see 50% of the systems next year perpendicular and that could change depending on the market, in terms of perpendicular versus longitudinal configuration.

Rich?

Yes?

At the end of this year, given our guidance, there ought to be about thirty 200 Leans in the field that are in longitudinal configuration, and it might represent maybe a $10 million upgrade opportunity, give or take.

Okay, that's helpful. And just one other question. On this flat panel system, just so I can get clean numbers, how much revenue was that in the third quarter?

$3.6 million. It's in the last page of the press release.

Oh, okay, alright. Thank you very much.

Your next question comes from Mark Miller with Hoefer.

Congratulations on a good quarter. I'm just wondering -- your revenue estimates for next year, 150 to $170 million, how much would -- could you estimate how much of that would be roughly for upgrades of existing tools?

I'd say a very small portion of that, Mark.

Okay. Second thing is, it appeared, or at least I assumed from what you were saying, that you've managed to penetrate your 200 Lean tool into four customers.

Yes, it's four customers.

Okay and you kind of indicated that you thought that they would (inaudible) stay that way for '06 or do you think you'll have an opportunity to penetrate that further to a fifth customer?

Our revenue assumptions right now just assume four customers. Clearly, we're going to try to get more customers, but right now four customers.

Okay. Any of these existing customers splitting their orders with Anelva or are they all solidly committed to buying all their tools from you?

No, we're not seeing any splitting.

Alright, thank you very much.

Your next question comes from Gaurav Kapoor with Thomas Weisel Partners.

Hi, I'm actually calling on behalf of Kevin Hunt. Just a couple of questions. Why was the gross margin in imaging business so low? And then another question is how many number of 200 Leans are you guys expecting in Q4?

On the imaging margin, we're doing a combination of both pure contract R&D and then in a number of the programs, we've also elected to spend some of our own money. On those programs that we don't get fully funded when we're doing it on our own, we've showed the cost of doing that as part of cost of sales. So that tends to depress our gross margin. If you add our revenue and our loss in imaging, you get about the amount of money we spent in R&D and you'll see that we've still got our customers paying for the majority of the development we're doing there.

On the 200 Lean units, I said there would be 12 to 13 systems in Q4. Four of those are 250s, that's the last of the 250s. So that leaves eight to nine 200 Leans in Q4. If you assume that, you get the nine in Q4, then there's the three more in backlog in Q1, plus then the four we have deposits for.

Thank you.

(Operator Instructions). Your next question comes from Mark Gomez (ph) with Warren Data (ph).

Hello folks, can you hear me?

Yes.

Okay, great. Great quarter, guys. Just wanted to see if you have any feedback with regard to how the perpendicular machines are doing in the field so far, if there have been any beta testing units, what the yields are like and what the performance is like?

Mark, our perpendicular -- Oh by the way, Mark, this is Luke.

Hi, Luke.

We're very pleased with the performance of our perpendicular tools in the field. They were qualified very fast. We're getting reports of very good yields. But as far as specifics, you have to contact our customers for specifics on that. But again, there are major announcements of perpendicular production and product shipping in Q4 of this year and those would be off our tools.

But one of your customers-- I got a report that their yields on perpendicular are actually better than on longitudinal. You guys heard that back?

No, but that's great publicizing. We don't normally comment on our customers' yield numbers.

Okay, great and --

And if we had, the transition to perpendicular would have gone more smoothly than anybody expected.

Okay, no -- that's good color commentary. So I mean, if it goes more smoothly, what we're trying to get at is how fast the advance to perpendicular might be for all vendors. Do you have a sense as to -- relative to the last time we spoke on the call last quarter, does it seem like that transition might accelerate?

Well we've done our own internal analysis because we had a couple of concerns. One was what was the appropriate number of tools to be going into the field in '06, and also what was likely to be the transition to perpendicular and how would that affect our shipments year on year. And so we believe that it will take about five years for perpendicular to be transitioned to 100%. We believe that transition, starting this quarter with one customer who's announced a perpendicular drive. That will gather steam next year as we assume a more linear transition from the beginning -- from the end of this year until 2010. That behavior could change, obviously, if the dynamics in the marketplace or our customers change. If people start taking market share because they have perpendicular, then you can expect other people will rush to catch up.

Okay. And I've heard that the yields for perpendicular are somewhere around 3.2 or so million discs per machine. If that's accurate, over the next five years based on (inaudible), we're dealing with demand for 300 of these machines over the next five years. Is that accurate? And if so, what would you do to be able to ship that many units over the course of five years, given your capacity seems to be closer to 50 a year than 60?

We don't see any problems keeping up with demand. We're currently building one a week. If we need to, we'll just up that to two a week.

Okay. So there's no constraint that would preclude you from getting out 60 units per year for the next few years?

No.

Okay, final question. Can you give me a sense as to what the total industry installed base is of sputtering systems and how many of them are perpendicular at this point?

Mark, we'll have-- As of the end of this year we'll have 33 perpendicular capable systems.

Okay.

Not all upgraded to perpendicular, but ready to go.

What are the costs to upgrade to perpendicular?

Well basically, upgrading to perpendicular is just more fully populating the system. So it depends on the configuration they have that they're using. Typically it's going to be upgrading anywhere from three to six of the process chambers.

Yes.

And that might be 300 to $600,000. It's roughly $100,000 per process chamber.

Okay, so let's call it (inaudible). So roughly about $450,000 per machine.

Yes, it all depends on the configuration and what the customer bought in the first round.

Right. But your base configuration that would require such an upgrade, what is the cost for those machines?

Well, last year we were shipping systems that were pretty much purely longitudinal and they were on the order of three and a half million.

Yes.

Our ASP this year has been closer to four million.

So like the total, all-in cost for a fully upgraded to perpendicular machine would be somewhere around $4.4 million?

It's probably somewhere a little north of $4 million. It all depends on what they bought, and are they replacing, are they using some things in longitudinal, maybe that they're not changing things out for perpendicular.

Right. Okay. So getting back to the installed base, so what is -- so you have 33 machines in the field on perpendicular, what's the total number and what is the full number for the industry as a whole?

Well, there's about 110 of our older style systems.

Okay. So you've got 110 older, 33 of the newer, and then what would you say the total installed base--

Well, we have the older style -- we were about 60% of the installed base of units. The newer style, I think that we're shipping at a much quicker rate than our competitor has, so I'd say their number is quite a bit smaller than ours in the new style.

Okay. So that sounds like we're probably talking around 220 total units out there in the field worldwide?

Well, that would be a rough estimate.

Rough estimate. Great, great. And regarding -- last question, regarding Anelva's recent acquisition by Canon. Do you have any comment with regard to what could be expected to happen to that competitor, given that Canon is more of a company that's focused on thin business rather than sputtering business?

We don't know what their intentions are.

Great. Okay, thanks guys. Great quarter.

Thanks.

You have a follow-up question from Jesse Pichel with Piper Jaffray.

Yes, how many of the 30 some-odd machines next year will be used to actually produce perpendicular media in production?

We think about a third.

One third. And that's one customer, essentially?

I would-- Yes, I think customers are still deciding the exact point to which they're going to run perpendicular on some of these tools. So you might be better off saying it's between a third and half, and it could be between one and three customers.

And what is your take of the media processing capacity utilization at your four customers today?

Stretched.

And if you layer on top of that the 30 some-odd tools for '06, what kind of media growth assumption is that? And where will utilization be at the end of next year, based on that assumption?

When we did our analysis, we took two factors. One was the overall growth in hard drive shipment and we discounted a small form factor in our analysis. And then we took some assumptions, which I mentioned earlier in terms of this transition from longitudinal to perpendicular, and the numbers that we came up with were in line with what we're seeing customers ordering. So some capacity tools and then perpendicular ready tools.

Great. Thank you very much.

Your next question comes from JD Abouchar with Pacific Edge Investment.

Hi guys, great quarter. I thought I'd give you an imaging question since all the focus is on the hard drives right now. You've given pretty detailed guidance and I really appreciate that. Can you give us any sense on the imaging side-- linearity or non-linearity in the second half, should we be looking at most of the revenue coming in the back half and how margins kind of play out, to the best you can talk about that?

JD, I'd say that imaging is probably on the order of 12 to $15 million in revenue next year and probably there's an upwards tilt in margin. As we get toward the end of the year, there ought to be more and more products in there. The other thing is the couple of programs where we're doing cost-sharing, we're sharing the cost of development with our partners and so those-- when we have a lot of volume from those, that tends to depress margins in that particular quarter. So it jumps around a little bit based on what we're working on.

The 14% margin this quarter is sort of an okay base or is it going to sort of jump around even at that level?

Well 14% is never okay, but -- so we'd like to work up from that next year. But you might be, in any given quarter, you might be either side of that.

Okay, great. Thank you very much.

Your next question comes from Mark Miller with Hoefer.

Actually I have two. Just wanted to make clear. If I recall, the throughput of these tools, if you were making the same longitudinal discs in the MDP-250 versus the Lean tool, is it around-- is it 25% more discs per hour? I'm just trying to remember, I know you gave us that number before.

Yes, the throughput on the 200 Lean is 800 discs per hour.

And the MDP was?

550.

550, okay.

Some customers run into slightly more, some less. But that was an average number.

Alright, so you're getting more discs out per hour with the MDP. Second question was --

No --

Well you're getting with the Lean, I'm sorry. 550 versus 800. Second question is for what looks like the current perpendicular media, will it still be around 800 or will it be less with the Lean tools?

We think that initially it may be less as customers come up the learning curve, but think that eventually everyone will run them at 800 discs per hour.

Okay. So basically to cover the tools in the field, you would need one for one MDP-- well of course, there's growth going too. But I just wanted to make that point clear to myself.

Second question is both FEI and Ricoh (ph) reported some weakening of orders from data storage customers. Are you seeing any recalcitrance or any push-outs or any hints that as Ricoh and FEI reported, that data storage customers might be closing in (inaudible) over the next quarter or two. There is a concern about pricing in the industry, drive pricing, and certainly Ricoh and FEI made some notes about that. Do you see any expression from your customers that -- orders might be a little harder to come by, at least temporarily?

No, we've seen no tightening or slowdown, and remember those two companies, FEI and Ricoh, are in the heads business, where the business model is different. You don't need a lot of equipment to make the wafers (ph) and get a good head, as you know. Where as media is very much tied to the number of tools you have.

Thank you.

Your next question comes from Jon Lopez (ph) with OTA Asset Management (ph).

Thank you. Actually I have two questions. The first one is, if you could just step through the progression of last quarter's ending backlog to get us to this quarter's ending backlog because if I recall, the 65.4 you recorded at the end of June excluded six tools that I believe you guys had received orders for by the time the call took place. So I'm just trying to reconcile 65 for the six tools and then winding up again at 65.4 with only three in backlog.

There will be three in backlog will be at the end of Q4 after we've shipped our guidance. That assumes that we ship 13 systems in Q4 --

I'm sorry, so what happens to the six -- I'm just trying to reconcile the flat backlog with the six tools that weren't recognized in the backlog reading in the prior quarter.

Well the ones that weren't recognized in the first 65.4 were part of the bookings we received during Q3 and since the backlog didn't change, you can assume that our bookings were equal to our revenue. We've got 43 million bookings.

Okay. But the 43 includes the one flat panel tool, is that correct?

No, that was already in backlog.

I see. Okay, great. Second question is on the March outlook for next year, can you give some level of variability around which the average will swing-- so what's kind of an average quarterly revenue level that will give you mid-30s and what can get you above, what can get you below?

In terms of volume?

Correct.

Well, it's certainly achievable at the volume we had in the current quarter and it's probably achievable at the volumes we had last quarter, which were low 30s - I want to think about it, before I say it is achievable to a lower revenue number --

Okay.

I think it's achievable at the kind of volumes we're guiding to next year.

Okay the -- but in the June quarter, 30 million equated to about a 031.8 gross margin. Is that the right number?

Well I'm not looking at the numbers now. If you'd like to talk to it after the call, I'll be glad to go through it with you --

Okay. I'll take it offline, that sounds great.

Okay.

Thank you.

Gentlemen, there are no further questions at this time. Do you have any closing remarks?

Well, thank you for joining us today and we look forward to updating you next quarter on our Q4 results. Goodbye. Thank you.

Thank you for participating in today's conference call. You may now disconnect.