Intevac Inc (IVAC) 2006 Q4 法說會逐字稿

Ladies and gentlemen, thank you for standing by. Welcome to Intevac's 2006 fourth quarter and year end results conference call. At this time, all participants are in a listen only mode. Later we will conduct a question and answer session. at that time we will provide instructions for those interested in entering the queue for the Q&A. please note that this conference call is being recorded today, February 6, 2007. 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.

Thank you. Good afternoon, and thank you for joining us today. with me are Charley Eddy, our Chief Financial Officer; Luke Marusiak, our Chief Operating Officer; Joe Peters, Vice President and General Manager of our Imaging Division. After Charley reads the safe harbor statement, I will give a progress report on our fourth quarter activities and then Charley will walk you through fourth quarter results and talk about our expectations for 2007. We'll then open up the call for questions. Charley?

During the course of this conference call, we will comment on planned future events and make projections about the future financial performance of Intevac, including statements related to projected production rates, shipments of our products, revenue, gross margin, operating expense, other income, profitability, tax rate, earnings per share, cash flow, capital expenditures, depreciation and stock based compensation expense.

We will discuss projected demands for disk drive media, media deposition equipment, the impact of upgrading legacy tools, the transition to perpendicular recording, advantages of the 200 Lean and other factors that effect demand for the 200 Lean.

We will discuss projected market size for our new semiconductor equipment product line, and when we expect to deliver beta shipments and commence revenue recognition. We will discuss our plans for military and commercial low light imaging products, projected applications and market sizes for those products; and projected growth rates for our imaging business.

These forward-looking statements are based upon 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 develop and deliver new products and technologies as planned, that orders and backlog may be canceled, delayed or rescheduled, that we fail to achieve the expected cost reductions or financial results, and 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 February 6 call include time sensitive forward-looking statements that represent our projections as of the date of the call. We undertake no obligation to update these forward-looking statements made during this conference call. Any redistribution of this call, without our express written consent, is strictly prohibited. Kevin?

We are pleased to report excellent fourth quarter results, well above our prior guidance on revenue and net income. Revenues totaled $96 million as we delivered 17 200 Leans. Orders for spares of [inaudible] upgrades were strong, and also contributed to the revenue upside. We achieved record GAAP net income of $21 million or $0.97 per diluted share. Stock based compensation expense of $1.3 million, equivalent to $0.05 per share, is included in our results.

2006 was a tremendous year for us, revenues grew 89% and we passed the quarter billion mark in orders and revenue for the first time. This was on top of 97% and 92% revenue increases in 2005 and 2004 respectively. This growth was principally driven by our equipment business.

Gross margins also expanded by 7% in 2006 to 39%. As a result of expanding revenues and margins, GAAP earnings per share grew to $2.13, up 180% from 2005, when stock based compensation was not expensed.

Our outlook continues to be positive for 2007, and we are projecting ongoing growth in our equipment business. Our backlog for the first half of 2007 includes 25 200 Leans. This is 25% higher than the 20 200 Leans we shipped during the first half of 2006, and gives us confidence that 2007 first half revenues will be significantly up from 2006. With our four month lead time on 200 Leans, there is still opportunity to take further orders for the first half.

Our imaging business increased revenues by 43% in 2006, we expect the growth rate to accelerate in 2007 as we begin shipping production volumes of low light imaging products to military and commercial customers.

During the fourth quarter our operations team produced, delivered, and installed 17 200 Leans, a record for us. Sales of upgrades and parts for our 200 Leans also continued to grow and exceeded $50 million in 2006.

Our Singapore manufacturing facility, which became operational in Q3, played a key roll in helping us achieve our record Q4 revenue. We plan to continue increasing production in Singapore and focus our Santa Clara operations team on the introduction of new products.

In addition to expanding our manufacturing operations in Asia, we continue to strengthen our global customer support teams. We now have field offices positioned in Singapore, Malaysia, Korea, and Japan. During 2006 the percentage of our employees based in Asia increased from 14% to 26%.

Our hard drive blade equipment business is principally driven by the year on year growth in hard drives, and to a lesser extent, in migration to [inaudible] magnetic media. Forecasters continue to predict that the world's demand for digital data storage will grow faster than the growth of aerial density. This indicates ongoing growth in hard drives, and hence, a need for more media deposition systems like our 200 Lean.

We continue to see our customers maintain their investment plans with ongoing requests to put in either systems deliveries, and/or start ups. Some customers are extending the life of their legacy tools by using their preferred particular production. However, this reduces the throughput of the legacy tools, and stretches capacity, resulting in the need for more new tools.

The impact to Intevac of these legacy upgrades is additional upgrade revenue in the short term, and a lengthening of the upgrade cycle for new equipment. In aggregate, this leads to more revenue for Intevac as the upgrades cost as much as $1 million per system. Our engineering team is very busy developing new capabilities for the 200 Lean to support future media technology improvements, which cannot be accomplished, even at reduced throughputs, on our legacy systems.

The macro trends continue to be positive for our hard drive related equipment business. Video continues to be a major driver for hard drives in the consumer market. In 2006 sales of digital video recorders surpassed traditional tape-based video recorders. The move to high definition TV will accelerate this trend.

We expect Microsoft's Vista will provide a cap list of PC and mobile [inaudible] sales for the last part of the year, and further boost the market for hard drives, and hence, for our equipment business.

Last quarter we gave some disability to our investors on the opportunity we are pursuing with our new [inaudible] equipment department, and widely believe it to be successful. Since then we've opened a new for customer demo activity and have put this new capability to good use. In addition, we needed additional office space, and more importantly, clean room manufacturing space. Fortune was kind to us, across our parking lot was an unused facility that had been built back during the telecom bubble. Inside we discovered unused manufacturing clean rooms and office space that we are now able to lease at a bargain rate, which minimized our capital outlay.

We are initially [inaudible] of the edge market where the annual capital spending is about $2.3 billion. 2007 is a year of product qualification for us with several customers with revenue generation starting in 2008. We will continue to add applications to our unique system architecture over the next few years to address additional applications where we have proven expertise.

We continue to see very positive feedback on our new systems from the limited customers with whom we have shared information. It was considered a major step forward for [inaudible] equipment. Our progress on developing this new product continues on track, we are targeting our first beta shipment for customer qualification activities to start this quarter. Our team is working round the clock to complete the outstanding [inaudible] to quite insure that this new system is ready for customer use. System maturity, not shipment date, is our priority.

In imaging, our transition from the technology development versus our product [inaudible] business continues on track. We expect to double our retinue over 2006 and to begin shipping internally developed commercial and military product in volume, and ramp production of our new DeltaNu subsidiary.

We have entered into a purchasing agreement with our NATO customers to deliver 32,000 camera modules over seven years, valued in excess of $50 million. we now have export approval to ship initial pre-production camera modules to this camera for field testing. Shipments of these units have begun and will be completed this quarter. Export approval for the remainder of the pre-production and early production shipments, totaling 1,000 units during 2007, will follow successful field testing of our customers' head mounted night vision systems. High volume production is expected for the start of 2008.

Significant progress was made in the U.S. head mounted night vision systems market. This market is currently $600 million per year and is expected to transition, over time, from analog vacuum tubes to digital based solutions. Our joint program with DRS Technology to develop the head mounted night vision goggle for the U.S. Army continues on schedule. This goggle digitally fuses the images from Intevac's low light night vision sensor with DRS' double imaging sensor. We have completed several prototypes and will deliver these to the U.S. Army for field testing this quarter. The next phase of the program will be to deliver prototypes with a crude performance for 2008.

We expect to continue working with DRS Technologies as our partner as we pursue this next phase of business. We expect the first production award will be made in 2010, and represent about $150 million of business over three years.

Last quarter we reported receiving a one year production award valued at $1.6 million from a major defense contractor for our LIVAR 400 camera product. Our customer has requested that the order be modified for our next generation LIVAR 500 camera product. We now expect to receive additional funding to develop and begin deliveries of these new LIVAR 500 camera products during 2007. This program can expand into multiple platforms, and to represent an opportunity in the tens of millions of dollars per year.

We released the [inaudible] spectrometer camera into production into late 2006. We expect shipments to ramp throughout the year and deliver about 50 mosaic cameras in total in 2007.

We recently completed the acquisition of DeltaNu, a company that pioneered developments of miniature Raman spectrometer systems. Historically Raman systems have been large laboratory systems costing several hundred thousand dollars. DeltaNu products are designed to enable as much as a 10X reduction in costs over traditional designs, a large reduction in size, and enabled identification of substances outside of a laboratory. Those of you that watched "Star Trek" in the past might recall the handheld tricorders that Spock and others used to identify unknown substances. DeltaNu's handheld unit is today's early equivalent of that famous 27th century product.

[inaudible] spectroscopy systems work by illuminating the material with a laser and then measuring characteristic bands of light scattered in the material. The process is well suited for real time, non-destructive identification of solids. Application markets include hazmat, forensics, homeland security, geology, gemology, medical, pharmaceutical, and quality assurance. TSA screeners could tend to use a DeltaNu unit to determine real time what suspect solids or liquids a passenger might have. Was it cocaine or was it sugar? Water or peroxide?

Now Raman spectrometers typically use lasers as a [inaudible] which can lead to excessive background noise or florescence of some materials, as well as potential eye safety issues if the laser power is too high. These limitations can be eliminated by using [neopered] lasers [inaudible] such as used in our spectrometer cameras. By incorporated our neopered sensors with the DeltaNu product line, we expect to create a whole new path of high performance, low cost Raman spectrometers. Charley Eddy will now discuss the financial results. Charley?

Thank you Kevin. Consolidated Q4 revenues totaled $96 million and included 17 200 Leans. This was above our beginning of the quarter guidance as a result of the shipment of one more 200 Lean than expected, and continuing strong sales of upgrades and spare parts. The upside was primarily driven by one customer who asked us to accelerate delivery and installation schedules.

Imaging sales of $3.1 million consisted of $2.7 million of contract research and development, $331,000 of product shipments. Full year 2006 revenues totaled $260 million, up from $137 million in 2005. Equipment revenues of $248 million grew by 92% and included 46 200 Leans. Imaging revenues of $11 million increased 38% and included $1.7 million of product revenues, up 89% from 2005.

Fourth quarter consolidated gross margin of 41% was above our beginning of quarter guidance. Equipment gross margins increased to 41% from 36% in the year ago period. Our cost reduction programs, increased volume and product mix, all contributed to higher gross margins in equipment.

In imaging, gross margins grew to 38% from 10% in the year ago period. The imaging gross margins benefited from $379,000 of favorable adjustments related to the completion of our 2003 government rate audit. Imaging margins also benefited from a reduced level of cost-share development contracts.

Fourth quarter operating expense of $17 million equaled 18% of revenues, vs. $8.7 million or 17% of revenues in the year-ago period. The increase in operating expense is mainly due to increased spending for new products and market development and equipment, increased provisions for employee incentive plans and the inclusion of stock-based compensation expense in 2006 results.

We closed the year with an effective tax rate of 12%. Excluded from this rate was a $1.1 million credit to fourth quarter income tax expense. This credit was related to deductions covered by our tax valuation allowance that we expect to be able to use in 2007. After taking the $1.1 million credit, we have $2.8 million remaining in our tax valuation allowance, which relates to items we expect to use in 2008 and beyond.

Net income for the fourth quarter totaled $21.3 million, or $0.97 per share. Included is $1.3 million of stock-based compensation expense, equivalent to $0.05 per share. Net income for the full year totaled $46.7 million, or $2.13 per diluted share, a 180% year-over-year increase in EPS. Net income included $3.4 million of stock-based compensation expense, equivalent to $0.13 a share.

Our order backlog totals $125 million at year-end and includes orders for 24 200 Lean systems. Since year-end, we have received orders for two more systems, bringing our total backlog of systems, as of today's call, to 25 systems. All these 25 systems are scheduled for delivery during the first half of 2007. We're projecting consolidated revenue of $70 million to $77 million in the first quarter, which includes 12 to 13 200 Leans.

We expect first quarter gross margin of 40% to 41%, operating expense of $18.5 million to $19.5 million and other income of approximately $1.2 million.

For 2007, we are projecting an effective tax rate of 32%. The 32% does not assume any benefit from the remaining $2.8 million of tax valuation allowance. In Q1, we're projecting earnings of between $0.33 and $0.40 per diluted share, which includes an estimated $1.4 million of stock-based compensation expense, equivalent to $0.04 a share.

For the full year, we expect to ship 40 to 50 200 Leans for revenue. We also expect to ship a number of our new semiconductor manufacturing systems, but are not assuming any revenue recognition until 2008. We expect that Imaging revenue will roughly double year-over-year and that Imaging will achieve profitable operations in the second half of 2007. On a consolidated basis, we're projecting revenue in the $260 million to $300 million range. We expect full year gross margins of 42% to 43%, a bit lower in the first half and a bit higher in the second half.

We expect operating expenses for the year to be $65 million to $75 million. We expect other income, primarily interest income on our cash, of $5 million to $6 million. Our goal is to manage the business to achieve at least a 20% pre-tax profit for the full year.

In 2007, we expect between $1.40 and $1.80 of GAAP earnings per share, which includes an estimated $7 million of stock-based compensation expense, equivalent to $0.21 per share. Cash and investments increase to $103 million from $90 million at the beginning of the quarter. We expect to continue to generate cash in 2007 without needing to resort to debt or equity financing.

2007 capital spending and depreciation totaled $9 million and $3 million respectively. For 2007, we're projecting capital spending of approximately $14 million and depreciation of approximately $6 million.

Our headcount at the end of the quarter totaled 540 employees, up from 474 at the beginning of the quarter and 362 employees at the beginning of the year. 26% of our employees are now based in Asia. 23% of our employees are contractors, who primarily work in operations.

Last week, we completed the acquisition of DeltaNu, a small manufacturer of Raman Spectrometers. DeltaNu was purchased for $2 million in cash and the assumption of notes and will be operated as an Intevac subsidiary. We expect DeltaNu to add roughly $3 million in revenue in 2007 and to be accretive in the second half.

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

[OPERATOR INSTRUCTIONS]

Your first question comes from David Bailey with Goldman Sachs.

Yes, great, thank you; a question on the 200 Lean business. Could you talk a little bit about your 10% customers in the quarter and how you're looking for the trends by these companies to go as we go throughout 2007?

Can you repeat that first part?

Yes, could you talk about who your 10% customers were in the quarter and what you're looking for, for those customers as we go through '07?

David, we have three primary customers in the 200 Lean; Seagate, Hitachi and Fuji Electric. And we shipped multiple systems to all those customers in the quarter.

If you kind of characterize this year's shipments, I'd say the biggest customer was Seagate. If you characterize next year's shipments, I'd say that probably Hitachi and Fuji will be larger components of revenue.

Okay. And then, on the semiconductor equipment, how many betas are you planning on doing in '07? And, when will the other betas be rolling out? I know the first one is this quarter.

We'll be very happy if we have three successful customer evaluations in '07, which would lead to revenue in '08. You know, we could do more qualifications and [inaudible], but three would be considered a success but we could do as much as six.

Great; thank you.

Your next question comes from Mark Miller, with Brean Murray.

Congratulations on your quarter. I just want to understand about the contract with NATO. Did I understand it right that you've got expert approval for some field tests and then after the successful completion that you'll seek export approval for the production units?

Yes. We have export approval for an initial order of pre-production units and then those will be going to field tests in order to show that the customer's system does meet the export limits that have been set. And then, we expect to receive export approval for a remaining set of pre-production units and production units beyond that.

So, revenues still look like - first significant revenues are in '08. Is that correct?

No.

No? Okay. You were estimating, what, $7 million or $8 million from this contract, over seven years? Why don't you [guide] me here?

That's - you're talking about in the production level. I mean, in very large volumes, which are in the out years, it'll be on the order of about $50 million over seven years.

Right.

But of course, that'll be an initial ramp. In this coming year, in '07, we expect to be able to ship about 1,000 units, assuming the export approvals. And, you know, that'll be in the several million dollar, low million dollar ranges.

Just one final question. On the refurbishment tools, I'm just wondering, you know, if you can give us any feeling how much that contributed that raised margins in this quarter overall? And, what did that contribute to your Imaging - I'm sorry; to your equipment revenues? And, do you have more than one customer? Or are you just doing the retrofits for one customer?

We're just doing the retrofits for one customer as other customers have elected to bring in new tools to get the best media capability.

Mark, on the - what we call our non systems business, kind of all the sales we get from things other than just selling brand new systems, that's probably, last year, in aggregate, that was a little north of $50 million, over the year. And we would expect that to grow somewhat in 2007.

Okay and then just a question on the refurb, did that help margins or hurt margins, the refurbishment tools? Overall [inaudible]?

I think it was typical margins for non-systems business.

Okay, thank you.

Mark, I'd like to follow up on the question you had on Imaging. Getting this export approval is a major event. This is the first time the technology would've gone out of the U.S. Now, that we've got this interim approval, once they get the feedback on the field performance, we expect to get, you know, release of the export approvals for the remainder of the units.

This one NATO contract is just for one country. We would then expect to be able to sell a similar product into all the other NATO countries.

Well, I'm sorry; I was going to end, but I'm just - leading onto that, if - is it typical, and you can tell me not, that when you get the contracts for these Imaging devices, unless, of course, there's a war or something, is it typical to see the revenues spread over so many years? I mean--?

Yes, it is. Typically, they will give you a multi-year contract.

Thank you.

Your next question comes from Rich Kugele, with Needham and Company.

Thank you; a few questions. Just to help us on the semi-cap equipment side, do you typically go and get orders that are for the whole build out of a facility? So it's basically, you know, if you get a design win for that facility, then, you know, you're not going to get displaced? And so, really, just getting the customer and that facility, vs., you know, a one off order? Or, does it literally go just one at a time? How does it normally work, in the ordering pattern?

Neither of the two scenarios you've described. In a typical fab, you know, I'm talking 100,000 wafer [inaudible] fab, there might be anywhere from 250 to 350 Etch [inaudible], if you take that as an example of an application. Typically, the customers split the business, you know, two or three ways. And they typically don't give it just to one supplier.

And, if you do get orders, you don't just get one order. You get, you know, quite a few because, for any application, there's always multiple tools so that they have redundancy. And, you know, they try to keep them common for a particular sub-application.

And, do you anticipate there being a typical revenue recognition timeframe that we have with the 200 Lean?

Yes. We'll be subject to [SNB 101]. So that's why in 2007 [inaudible] qualification so that [inaudible passage] being successful and we get follow on orders, those follow on orders in 2008 will be revenue upon shipment because we would've already qualified the product in 2007.

Okay, and then, in terms of your drive business, can you give us a sense in your understanding of how many floors this new facility will have, mainly to understand at what point they would have fully deployed the older equipment and start buying new again?

It's our understanding that there are three floors in the new facility and they plan to populate the first floor, you know, starting with the old equipment and probably even a little bit more new equipment. And after that, would be all new equipment. Again, this plant is subject to their success in going forward with [inaudible] particular product.

So, how long do you think it would take before they would start ordering new for that facility?

Well, this is based on our estimates, not on our customers' input.

Sure.

But, we believe they would need additional new tools by the end of this year, if they're going to maintain, you know, market share. And, if the industry's going to grow [inaudible passage] 15%, which some people are predicting.

Okay, thank you very much.

Your next question comes from Jesse Pichel, with Piper Jaffray.

Hi Kevin, Charley, Luke; how're you? Starting with Etch, pretty big category; can you give us a little more granularity there, of what segment within Etch you're targeting?

The larger segment there, which is dielectric

And you know there're some pretty big gorillas in that space. Given the backgrounds of you, Kevin, and Mr. Barnes, how are you positioned competitively?

Well as you know, customers always want better process results, low cost of ownership and a high level of support, and if you can provide that, then you'll find success. As you are aware, some of the people at Intevac created the products some of those other large companies sell today. And we believe our product [inaudible] by this architectural process performance, is superior to what's out there today.

We are getting a lot of pull from customers to be successful, and we believe there's a good opportunity for us.

And how many beta customers do you have thus far, within this one product category?

We haven't shipped any beta systems yet. As we explained earlier, our goal is to get a minimum of three customers for evaluation and qualification this year; we could do four, probably as much as six.

And just so I'm clear, but you did make a comment in the prepared remarks about having a beta tool in this quarter?

Our goal is to ship a tool this quarter, subject to it being ready for customer use.

And can you discuss when you might have product offerings outside of that, in other categories of semi-cap?

Our progress is really going to be dictated by the growth in our business. We decided to run the business with the goal of 20% [inaudible] and so as our business is more successful, we can pull in other applications. We do have one other application pretty close to being ready to go, but we're just holding back on that.

And for Charley, can you review the DeltaNu transaction in terms of how it will affect the model for 2007 in terms of share count or other income and revenues?

Well it had no effect on share count. We spent $2 million in cash, there's some non-interest bearing notes we also assumed, so they have no effect on other income. And after some initial acquisition related purchase accounting in the first half, we think that they should be accretive in the second half. It's a good bump for imaging in the grand scheme of things for Intevac. It's probably not a huge impact on the numbers this year.

What's the revenue for DeltaNu?

They should add about $3 million or so this year to the imaging business.

And housekeeping, on the stock comp this quarter, how much was R&D, how much was SG&A?

All I can tell you is that the bulk of the stock comp was up in operating expense, and the total was $1.3 million.

Okay, and lastly, your model there in '06 reflects a lot of R&D costs on the new tools, and no revenues. Could you tell us what are the new tool expenses there that we're seeing within the 2006 model, and then what are you seeing for 2007? Because I think you mentioned that 2007 also doesn't include upside from any type of tool recognition.

I'd say a good rule of thumb is half our op ex.

For 2006 and 2007?

Yes, it's probably a bit more in '07, but I think half is kind of a good rule of thumb.

Okay, great, I'll let someone else ask a question. Great quarter.

[OPERATOR INSTRUCTIONS]

Your next question comes from Chris Cook with Zazove.

Hi, thanks for taking my question. Can you go over, it sounds like you no longer have any, or really any significant tax shield so that your cash tax rate and your GAAP tax rate are going to be low 30% in 2007 and beyond.

Yes, there's about a little less than 3 million of reserves we have left over that we haven't brought home.

Okay.

We may be able to bring them back later in the year, but we're not ready to do that yet.

Okay. I think that answers all my questions, thanks.

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

Hi, I think I missed it, how many systems do you have in backlog for 2007, and are all these systems configured for vertical recording?

We have, as of this date, 25 systems in backlog and they're all perpendicular configured.

Okay, and can you also tell me, what is the install base for the sputtering equipment worldwide, and how many of those systems are yet to be upgraded for perpendicular recording?

We shipped about 80 200 Leans to date, Luke do you know how many are still running?

I think they're down to less than 20% are still longitudinal and those are being upgraded rapidly.

Okay. And then Charley, one question for you. How should we be thinking about R&D and SG&A going forward, especially for 2007? Should it be turning up if you guys are spending more on R&D?

Well I said that op ex would be $65 million to $75 million for the whole year; probably R&D is a larger percentage of that than SG&A.

Okay, thanks.

Your next question comes from Rich Kugele with Needham and Company.

Thanks, just one follow up. if we were going to go and take an initial crack here at 2008 revenues, if we assume that your handful of initial qualifications on your semi comp equipment product translate into orders, what would be a reasonable starting point for revenue opportunities for the fully calendar year of '08.

Our goal is $100 million in revenue in '08 from new products.

Okay, and then if all the indications continue for drive growth of like 12% to 15%, would you assume a similar equipment order flow as well?

When we've been doing our modeling we've always felt that '07 and '08 would be similar for the hard drive equipment and that maybe the kind of peak years, although '09 and '10 don't drop off sharply.

Okay, thank you very much.

Your next question comes from Sean Boyd with Westcliffe Capital Management.

Hi, thanks for taking the question. I just wanted to talk about the gorses margins for a second as we start shipping this tool and then recognizing revenues in '08. Should we be thinking about the first few tools are very low margin tools, or will they be higher out of the box because you will have had the expenses in '07 but then recognizing revenue in '08?

For new products we always try and target about 50% gross margin, but the first few that you make dip beyond those levels because you've got a lot of one time costs. We're trying to manage that, but I don't think it's going to be -- it's not going to be in the 20s, it's not going to be like the 200 Lean when we introduced that.

Got you, that's helpful. So you're targeting 50% once you do smooth that out.

Right, but the first couple of tools would be lower than that.

Sure.

Your next question comes from Mark Miller with Brean Murray.

I know it's hard to look this far forward, I'm just concerned that you don't see a drop off in terms of orders, especially going into '08. I think you estimated, when this whole cycle began, there was about 200 tools on the available market. I did a rough calculation with the 200 tools and your disk throughput, also added in what your competitors should be adding. I counted, with those 200 tools and equating 35% to 40% share to Innova, you're looking at 1.4 billion discs with that capacity. Now you've got 80 tools, roughly, shipped through this year, another 40 or 50, 1.4 billion capacity your trend focus was only projecting 1.16 billion I think, by 2010. And I just don't understand why we should keep on ordering. Plus the growth rate from '08 to 2010 on media ships is going to slow from 20-some% to 10% according to trend focus. I just don't understand how you can say we won't see a drop off from the level of 40 or 50 tools. Because it seems like just with 200 tools you have enough capacity to go into 2011.

Well first of all Mark, when we did our original projection we said 350 tools, not 200 tools, and I think the throughputs we used for those tools were consistent with what we've seen customers achieve. So I'm not quite -- it's obviously difficult, not looking at the same piece of paper with the calculations to understand that we have differences.

What I said was that when we did our analysis we thought '07 and '08 would be the peak years, and there would be a drop off in '09 and 2010, but that drop off wouldn't be [inaudible] the levels would go back to 2006 type levels.

Well again refresh my memory, I thought at one time you were stating around 700 discs per hour for these tools, am I off base there for your tool at least? I think the Innova was 1,100.

Yes but there are other factors other than throughput.

No I realize yields, 90% yields, up times and stuff like that, and I did that with 90% yields and 90% up times and that's how I got 1.4 billion.

Okay well I think actually the first part of the assumption was incorrect, I don't think there's anybody can achieve 90% up time because they've got scheduled down time plus they have factors relating to loading the line. I think that's essentially just maybe too high by maybe 30 points.

Oh they're only up 60% of the time?

No, it's not just up it's more so other factors in there, parts; you have to modify tool availability by system equalization and that's what usually pulls it down. Utilization depends on other things happening on the line, not necessarily the core.

Thank you.

Your next question comes from Michael Needleman with Ridgecrest.

Good afternoon gentlemen. I apologize if some of these questions have been answered. I believe you said you have currently 25 systems in your backlog and you assumed, I guess, for the year, 40 to 50 to be shipped, is that correct?

Correct.

Okay, that's number one. Number two, the NATO I think had been approved, is that correct, and you're going to start to ship sometime this year? Is that correct?

We have already shipped.

Okay, all right. And what about the vision system as far as timing, anything change there or is that still the same timeframe?

The same timeframe. You're talking about the head mounted night vision I assume?

Correct.

We're on schedule and as we said it's 2010 for production. Before that will be a succession of bigger and bigger contracts which would lead up to production.

Okay, and I guess the last question was, in regards to what I thought you said, and again I know you've said this three or four times. You gave a range of between 140 and 180, is that what I heard you say as far as '07 is concerned?

We said between $1.40 and $1.80 for GAAP EPS.

GAAP EPS, okay. And I guess because you said, you were talking about "Star Trek", should we either beam me up or just put our cloaking device on?

We'll find you anyway.

Guys, good quarter.

Your next question comes from Jesse Pichel with Piper Jaffray.

Could you talk a little bit about, Charley, the lumpiness of your equipment gross margin? You know we had a huge quarter there of tools, but gross margin for equipment went down, I believe. And then your guidance there for '07 of 42% to 43% seems quite high, and I'm wondering how you get there.

Well the margins can jump around from quarter to quarter based on, for one, how much of the sales are based on systems and how much of it are based on the non-systems business, which tends to be a little higher margin than the systems. That factor would explain some of the Q3 to Q4 changes. It also depends on which customer we're selling to or what we're selling. Are they upgrades that have a lot of OEM parts in it? Are they upgrades that have a lot of Intevac IT in them? The margins are quite a bit different on that. It's a little bit of volume; it's a little bit of how much production is in the U.S. versus elsewhere.

But we're seeing an average of 42 to 43 for the year, probably a little lower in the beginning, a little higher in the tail end. It's just a combination of all those factors.

And is it roughly, will imaging stay at this level of profitability and then we can kind of use equipment there to back into your number?

Well imaging lost $4.5 million or $5 million.

No, but on the gross margin line it was 38'ish percent in Q4.

I think imaging will be in the 30s this year as they shift to more and more product content their margins keep going up.

So what specific programs do you have in effect there that's going to allow your equipment margin to have these kinds of 40% - 44% margins?

Well that's a couple of points higher than we achieved, one or two points higher than we achieved in Q3 of last year, so I don't see that as a huge step up.

Okay, fair enough. Thanks a lot.

At this time there are no further questions. Mr. Fairbairn, are there any closing remarks?

Well thank you for joining us today, and we look forward to updating you in our next call on our Q1 results and the outlook for the balance of 2007. Goodbye.

Thank you. This concludes the Intevac's 2006 fourth quarter and year end results conference call. You may now disconnect.