Intevac Inc (IVAC) 2007 Q4 法說會逐字稿

Ladies and gentlemen, thank you for standing by. Welcome to Intevac's fourth quarter and full year 2007 results conference call. Please note this conference call is being recorded today, February 5th, 2008. 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 Jeff Andreson, our Chief Financial Officer, Luke Marusiak, our Chief Operating Officer, and Joe Pietras, our Vice President and General Manager of our Imaging Instrumentation Division.

After Jeff reads the Safe Harbor statement, I will give a progress report on our fourth quarter activities and then Jeff will discuss the fourth quarter results and provide our guidance on the first quarter and fiscal year. We'll then open up the call for questions. Jeff.

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

We will discuss projected demand for hard drives, our 200 Lean system and upgrades. We will discuss the impact of upgrading legacy tools, the transition to perpendicular recording and product development plans. We will discuss our new Lean Etch semiconductor manufacturing product, the status of our product development program, the customer qualification process, its competitive advantages, and why we believe Intevac can successfully enter this market. We will discuss our plans for military and commercial low-light imaging products, the expected market sizes for these products, projected applications and anticipated orders and shipments for these products.

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 way fail to achieve expected cost reductions, tax rates or financial results and other risk factors discussed in documents filed by us with the Securities and Exchange Commission, including our annual report Form 10-K and quarterly reports on Form 10-Q. The contents of this February 5th call include time-sensitive forward-looking statements that represent our projections as of the date of the call.

We undertake no obligation to update the 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 our fourth quarter results. We exceeded both our revenue and earnings guidance. Revenues totaled $17 million with no 200 Lean shipments in the quarter. We experienced a GAAP loss in the quarter of $2.4 million, or $0.11 per diluted share, which was approximately $3 million better than our guidance for the quarter.

Our results for the quarter included a $1.5 million gain on the sale of an investment. Stock option expense of $1.7 million, equivalent of $0.05 per diluted share, is included in our results.

The highlights for 2007 were our operational and product creation achievements, while the low light was the fall-off in our 200 Lean backlog. Operationally we made major progress in both businesses, expanding our gross margin by six percentage points in 2007, despite lower revenues than 2006.

The ramp of our Singapore manufacturing facility was completed on time and contributed to our operational improvements.

In Imaging, we successfully ramped output of our sensors and cameras, which Joe will cover in more detail later.

On the product creation front, we made significant progress in all our business areas. We continue to be very efficient in our new product development relative to products created and dollars spent.

Our 2007 acquisitions of DeltaNu and Creative Display Systems further added to our product portfolio, as well as our ability to create more unique products tailored to solve market needs.

For the year, we generated $43 million in cash from operations, while investing in multiple new products and manufacturing infrastructure in our Santa Clara and Singapore facilities.

In 2008, we will utilize our balance sheet to help our new products gain momentum in their respective markets. Our focus in 2008 will be to turn our new products into growing revenue streams.

In our equipment business, backlog remains low relative to 2006's highs and includes two 200 Leans for delivery within the first quarter. At this time, we continue to expect further system orders during the first quarter, as our customers decide their capacity expansion plans for 2008.

We expect overall system shipments will be down over 2007, due primarily to the upgrade and reuse of legacy systems at our largest customer.

The public hard drive companies have all reported very positive results for the second half of 2007, with disk-based shipments above prior market forecasts. This is very positive for our business, because increasing disk shipments drive the need for systems, like our 200 Lean. The strong growth of laptops with their typical two disks per hard drives versus the lower growth rate of desktops with typically one disk per drive further helps our business.

Another driver for increased disk shipments is the ongoing market growth of high-density flat panel TVs, which spurs the demand for hard-drive-related digital video recorders.

The digitalization of video and photographs, coupled with the economic emergence of the developing nations, further increases the demand for hard drives. Given the current economic climate, we expect our customers to be cautious on their capacity additions, but at the same time be reactive to any positive changes to market needs. We believe that we have the shortest lead time for our customers to add capacity and this will be a competitive advantage in a reactive market.

There is opportunity for business upside, if our customers get aggressive in pushing the envelope on aerial density in order to be more competitive. Recent results from public hard drive companies have shown that superior memory capacity can impact their businesses. There continues to be a question of whether legacy systems are capable of producing the most competitive media. While we continue to get requests to engineer solutions for our legacy 250B systems to enable these systems to manufacture the most competitive media, there continues to be a significant gap between what customers are willing to pay for these re-engineered systems and what it will actually cost them. We expect a significant number of legacy systems will continue to be underutilized in some of our customers' facilities.

In order to maintain our competitive position in the market, we have developed a second generation of magnetic media deposition systems which we call 200 Lean Gen II We will ship the first system this quarter and expect to ship at least two Gen II systems by mid-year. The Gen II system features a 25% improvement in throughput to 1,000 disks per hour, with improved up times and reduced particulates contamination, compared to the original 200 Lean.

Our Gen II retrofit package will be available for upgrades to the install base of 200 Lean systems, which stood at 110 at year end. We believe these upgrades will be popular with customers, as they will be able to expand capacity with reduced lead times without building new facilities. Once qualified, we expect Gen II upgrades to reduce the cycle time for additional capacity by up to five weeks, as compared to adding new systems. We expect that customers will be in a reactive mode in 2008 when dealing with upturns in demand from their customers and will welcome the shorter cycle time. The selling price for an upgrade is expected to be around $1 million.

With that as the summary of our 200 Lean efforts, I will now turn to our Lean Etch program. We have and continue to be very busy on our Lean Etch program, optimizing process recipes for customers' advance applications. We continue to do extensive demos with the goal of getting systems into our targeted customers and qualified in 2008. When we first launched the Lean Etch product we believed that the prime advantage of this system was its 30% lower cost of ownership for the bulk of dielectric etch applications. This advantage was well received by the economic decision makers of major memory companies, who in turn initiate the process qualification through their process development teams.

During the time we have engaged the process engineers for qualification through demos, the focus has shifted away from costs, instead taking advantage of the inherent technological advantages of the system's process chambers to solve the most pressing technical needs on their most advanced and difficult applications. Success of these difficult applications will prove that the Lean Etch system is inherently capable of covering all dielectric market applications.

Our market focus is memory, where we believe there is the greatest opportunity for us. The current DRAM and flash markets are characterized by sharply declining prices, while manufacturers are challenged to decrease costs. This cost challenge is our opportunity. We see the current depressed forecasts for the semiconductor equipment markets in 2008 as an opportunity. Customers are pushing to lower their costs so they can be profitable and we are finding them to be increasingly receptive to products, such as Lean Etch, that can help them lower their capital costs.

Our goal continues to be to get our system qualified in 2008 with follow-on orders and revenues commencing in 2009.

Joe Pietras will now give you an update on our Imaging Instrumentation business. Joe.

Thank you, Kevin. I am pleased to report that our imaging instrumentation business was profitable in Q4, achieving our goal of profitability in the second half of 2007. We increased our operating profit by over $3 million in the second half of 2007, compared to the first half of the year. During Q4, we also achieved record level revenue of $1.9 million from product shipments, nearly one-third of our $6 million revenue for Q4, as we continued to transition our imaging business from primarily contract R&D to one driven primarily by products.

During 2008, we expect over 50% of our revenue to come from product sales. We continue to provide production deliveries of our digital night vision camera modules at levels exceeding 100 units per quarter. An exportable version continues to be supplied to Sagem, our NATO customer, and a growing number of units are now being supplied for domestic U.S. military applications.

During Q4, we completed delivery of a small manufacturing pilot quantity of digital night vision camera modules for a U.S. military rapid deployment order, which we received in late Q3. We expect to receive a follow-on order for this application during the first half of this year.

In 2008, we expect to deliver camera modules in excess of 1,000 units to Sagem and various U.S. military customers.

We also expect to introduce a next generation sensor with enhanced performance during 2008 that is being funded by the U.S. military.

We continue to work with our partner, DRS Technologies, to develop an advanced design of our digital- enhanced night-vision goggle, known as DENVG. In Q4, we successfully completed a design review with the U.S. Army and are on track for delivering prototypes of the advanced design in the second half of 2008. We still expect the U.S. Army to award DENVG pre-production in 2009, followed by an initial three years of production beginning in 2011, valued at over $150 million of business.

We completed the acquisition of Creative Display Systems and have begun integrating them within our imaging business. Creative Display Systems' expertise in high-performance, low-powered micro displays for near eye viewing of video strengthens our ability to provide integrated sensor display systems. We expect to utilize these capabilities beginning in 2008 to grow our defense business in the area of value- added goggle and micro viewer system products that incorporate military night vision and thermal vision sensors.

We also expect to grow our micro viewer systems business in commercial markets, which currently include medical and veterinarian applications.

Progress is also being made toward productizing our new long-range laser-illuminated viewing camera, called LIVAR, for defense applications. During Q4, we successfully completed a critical design review with our customer and are on track for delivering initial prototypes for our land-based applications during Q1.

We also expect additional funding this year from another customer to develop an aerial application. With the potential of expanding our LIVAR camera to multiple platforms, this business opportunity could grow to a level of $10 million per year.

In our commercial business, we continue to see growth in product orders of our MOSIR scientific cameras and our DeltaNu Raman instruments, which totaled 20% of our orders in Q4. We introduced two new products in Q4. We launched a new line of DeltaNu instruments for florescent spectroscopy. These incorporate our MOSIR scientific cameras and expands our DeltaNu products beyond Raman spectroscopy instruments.

We also launched the MicroVista camera, the first CMOS camera that benefits from Intevac's unique capabilities in back-thinning CMOS wafers to produce a high-sensitivity, cost-effective camera for inspection, surveillance and scientific markets.

In Q4 we also finalized a license agreement with a major medical products company for the use of selected DeltaNu intellectual property in a medical diagnostics application. This opportunity -- or this business agreement -- also provides the basis for a significant opportunity for the sale of DeltaNu's Raman instrumentation in this market, estimated at $40 million to $50 million over the next several years.

I will now turn it over to Jeff to discuss our financial results for the fourth quarter.

Thank you, Joe. Consolidated fourth quarter revenues totaled $16.8 million and included no shipments of 200 Lean systems. Imaging sales of $6 million consisted of $4.1 million of contract research and development and, as Joe said, a record level of $1.9 million in product shipments.

Fourth quarter consolidated gross margins of 47% was well above our beginning-of-quarter guidance. Equipment gross margins decreased slightly to 47% from 49% in the third quarter, due to decreased sales volume, but increased from 41% in the year ago period. Product mix and cost reduction programs contributed to the improvement.

In imaging, gross margins grew to 47% from 45% in the third quarter and 38% in the year ago period. Imaging gross margins benefited from the higher margins on R&D contracts and the increased mix of products.

Fourth quarter operating expense of $14.9 million was 10% lower than the prior quarter, as we continue to tightly manage our expenses in response to the current business environment.

Our 2007 tax rate of 23% was slightly lower than our previous guidance of 24%.

Our loss for the fourth quarter totaled $2.4 million, or $0.11 per diluted share, and that loss was smaller than our guidance, due to better than expected gross margins, lower operating expenses, a lower final tax rate, as well as the one-time gain of $1.5 million on the sale of a real estate investment.

The net loss also included $1.7 million of stock-based compensation expense, equivalent to $0.05 per share.

Creative Display Systems' revenue and operating loss for the last two months of 2007 was not material to our 2007 results.

Our backlog totaled $34.2 million at quarter end, up from $31.2 million in the prior quarter, and includes two 200 Lean systems. We continue to experience strong orders for spares and technology upgrades and equipment during the quarter.

Now, I will discuss the balance sheet. Cash and investments decreased to $140 million, or approximately $6.50 per share, from $147 million at the beginning of the quarter, primarily as a result of our Q4 operating loss.

For the year, we generated $43 million of cash from operations. Our receivables are current and in good shape from a collections perspective.

Capital spending totaled $1.4 million in the fourth quarter and $5.7 million for the full year 2007.

Depreciation and amortization, including DeltaNu and CDS purchase accounting amortization, totaled $1 million in the fourth quarter and $4.2 million for the year.

Our headcount at the end of the quarter totaled 480 employees. The increase from Q3 is primarily due to the acquisition of Creative Display Systems. Thirty percent of our employees are based in Asia, 8% of our employees are contractors, who primarily work in operations.

I will now provide our guidance for fiscal year 2008's first quarter and the year. We are projecting consolidated Q1 revenues of 30 to $33 million, which includes two 200 Lean shipments. We expect first quarter gross margins of 42 to 44%, operating expenses of 15.5 to $16.5 million and other income of approximately $1.5 million.

For Q1 we are projecting a profit of $0.02 to a loss of $0.05 per share, which includes an estimated $1.7 million of stock-based compensation expense, equivalent to $0.06 per share.

For the full year, we are forecasting to ship 12 to 15 200 Lean systems. We also expect to ship our first Lean Etch evaluation tools in the first half of fiscal year 2008, but are not assuming revenue recognition until 2009.

We expect imaging revenue to be in the range of 30 to $40 million for 2008.

For the full year, we are projecting consolidated revenues of 120 to $150 million.

We expect gross margins to average 41 to 44% for the full year.

We expect operating expenses of 63 to $68 million.

We expect other income, primarily interest income from our cash, of approximately 4 to $5 million, reflecting the lower interest rates we are now experiencing.

In 2008, we expect a profit of $0.15 to a loss of $0.25 per share, which includes an estimated $7.1 million of stock-based compensation expense equivalent to $0.24 per share.

This completes the formal part of our presentation. Operator, we are ready for questions.

(OPERATOR INSTRUCTIONS) And your first question comes from Hongyu Cai with Goldman Sachs.

Oh, hi. Thank you. A couple questions, please. Firstly, although imaging business only accounts for 9% of your total revenue in 2007, its gross margin has been improving, particularly in the past quarter. Could you please elaborate more about the high margin product opportunities in that segment and its growth potential in 2008?

Yes, we- - as we move more towards an increased product mix in imaging, our goal is to have long- term gross margins in excess of 50% and operating profits in excess of 20%. And year-over-year we'll move towards that. Particular products in the commercial sectors allow us to move towards those types of margins.

Thanks. Very helpful. And secondly, do you have any improved visibility now for your 2008 orders? Now you provide some shipment guidance already. And have you seen any leading indicators signaling any potential pickup of the orders for 200 Lean?

I'm not sure I understand the question. We just provided our guidance. In addition to that, what --?

Do you see any other leading indicators signaling any potential pickup of the order?

Well, as I mentioned- - this is Kevin here- - in my presentation, the major public hard drive companies have all reported very positive second halves of 2007. Then it becomes a question of what's going to be the projection in terms of growth through to the second half of 2008. So certainly in terms of the drivers for more use of hard drives, they're all there. But I think our customers have just been a little cautious, because of all the talk about recession in the U.S. We expect as the quarter moves on to get much better clarification as to, you know, what their plans are.

Okay. And lastly, with regard to Lean Etch, you've just postponed a revenue recognition to 2009. I wonder if you could please specify any outstanding qualification issues and the timeline for the booking and the shipment.

There's, well, there's no issues, other than that we have to ship systems and then they have to be accepted. So, that's SAB 101, and acceptance can take anywhere from 6 months to 12 months. So, that's why we're being cautious and saying no revenue in 2008.

Okay. Thank you very much.

Your next question comes from Rich Kugele with Needham.

Thank you. Good afternoon, gentlemen. Just a few questions. I guess first, in terms of the upgrade business, always- - it's always difficult to forecast that from our end. Can you talk about where you're seeing among your customers the greatest amount of upgrades? And have we seen perhaps kind of the last bit of surge from some of the older equipment and now there's going to be maybe a little bit of a lull before they start buying your new system? And then how should we think about the progression of upgrades through '08?

Yes, we expect upgrades to remain- - by the way, Rich, this is Luke.

Hi, Luke.

We expect upgrades to remain strong in 2008. And upgrades includes both service as well as the traditional upgrade business that we talked about in the call. But we would expect to have a significant amount of our revenue in 2008 being upgrades.

Okay. And then, from a competitive standpoint, you know, traditionally it's been what- - or at least in recent years, it's been just basically you and [Anelva]. But we've been hearing some noise out of, you know, a European competitor. If you can talk about what, if any, effect that's been on the pricing environment?

To date, that's had no impact on the pricing environment. Yes, it is our understanding that it is other common strategy to give away free evaluation systems. And to our knowledge one system has actually been delivered to a customer. But we believe the 200 Lean, especially with all these Gen II improvements and you couple that with a large install base, puts us in a very strong competitive position. But on the other hand, our customers always want to make sure they understand what capability is out there.

Okay. And then just lastly, if we wanted to go and figure out how much you've invested in the semi-cap product to date, is there a way of- - I mean, how much of your R&D has that represented? Or if you have a- - know- - a rough sense of how much you've invested total so far?

Yes, Rich. We've invested probably between 40 and $50 million. And I think we've said it's around half of our OpEx for the last two years.

And are you still- - even though we won't see revenue until, necessarily until 2009, has the market opportunity in your mind changed at all, either up or down?

In the short term, if you- - if we had a fully qualified product in '08, then the market is down this year, because DRAM customers are cutting back, but that business goes in cycles. So, we expect that business to pick back up in '09. And that's what- - that's the wave we want to catch.

And you would have enough capabilities from a manufacturing standpoint in '09 to support both a resurgence in drive orders on the sputtering tools, as well as the semi-cap? If they both hit at the same time?

We see no problem. The Lean Etch tool is a much simpler tool to manufacture, compared with the 200 Lean. And, yes, I have every confidence our operations team would have no problems meeting the market demands.

Okay. That's helpful. Thank you very much.

Your next question comes from Mark Moskowitz with J. P. Morgan.

Yes, good afternoon. Thank you. A few questions. I'd like to get back to the commentary around 2008 in terms of 12 to 15 200 Lean shipments. I guess it's fair to say that it's pretty back end loaded. But can you also give us a little color in terms of the quality? Is it primarily with existing customers? Or are there new customers potentially in the mix?

Those numbers assume existing customers. There is opportunity there for new customers, which would be upside.

So, that would be upside. And then, if you could maybe just give us a little more read on just the environment? Obviously, Hitachi is- - finally crossed over into profitability for the first time with the assets of IBM under the umbrella. But just want to get a sense in terms of, you know, where are you seeing most of the capacity going right now? Is it primarily going to recording heads or cost improvements in the first half and then folks are going to see how much they're able to squeeze out in terms of upside benefits to maybe put into media in the second half? And if the macro gets more difficult, then I guess the whole scenario could get wiped away.

Yes, we typically don't pay too much attention to the overall CapEx spending by our customers, because, as you said, some of that goes into head-related activities. And that's not an area in which we participate. We tend to look at media, which is very much driven by capacity. And we see people trying to manage their capacity quite carefully so as not to create excesses. And so, what I said, we see people being cautious, I think people are trying to see is 2008 going to be as good a growth year from 2007 to 2008 as 2006 was to 2007, which turned out to be a much better growth than people were expecting. So, certainly if we see that level of growth again, we would see upside to numbers that we've, you know, these 12 to 15 [systems].

Okay. And then moving to the imaging piece, can you just talk more about the funnel in terms of what underpins the 30 to $40 million in revenue expectation for 2008? Is it really back end loaded as well? Or is it going to be pretty even throughout the year?

It has a ramp, but it's not very heavily back end loaded. And it really comes from a mix of our product revenue increases, which go through night vision sensors into LIVAR products and micro viewers on the Creative Display side. And on the commercial side a continue of products that we're introducing into the market for commercial applications, including scientific instrumentation and industrial and medical areas.

And then just lastly on CapEx, Jeff, how should we think about CapEx for this year? Kind of piggy backing on Rich's previous question just in terms of getting ready for 2009, if you do see that two-stage effect in terms of the- - a resurgence in disk equipment orders, but also potentially volume shipment of your Lean Etch. How much more would you need to spend to really put everything in place?

And you're talking CapEx for 2009 from our customers. I mean, essentially, your question was how much capacity do we have to invest?

Yes, from a capacity perspective.

Our capacity- - our ability to ramp in the capacity is in a quarter similar, if you look at 2006, plus we've invested in additional infrastructure for semi, we- - I think we have the capacity to ramp to any level that we can foresee in 2009. So, the investments that we'll make in the next year will be focused around probably clean room application type- -

Okay.

- - things and imaging. Joe's business is growing as well. We might have to invest there. But to similar levels that you've seen in this year we're trying to manage to.

Okay. So, nothing surprising.

No.

Thank you.

Your next question comes from Bill Ong with American Technology..

Yes, hi. Have you received any Lean orders year-to-date? And given it's early February, when do you need to see another order in order to have revenue shipment for the second quarter?

Yes, we haven't received any new orders to date. We have about a four-month book to ship time, so we've still got a few weeks to be able to receive revenue in Q2.

Yes, and for the- - and, Bill, for the upgrades, they're much shorter lead times, so we could still get orders in June for upgrades and deliver those in time for people to get more capacity in Q3.

And what type of lead times for the retrofits? It sounds like just a few weeks, two or three weeks.

Maybe eight weeks, eight to nine weeks - -

Let me- -

- - shorter as the year goes on.

Okay. On the real estate sale that you made, was that a closing a manufacturing or sales office? I may have missed it if you made the comment in the morning- - in the early statement.

Bill, back in 1995, Intevac invested in an LLC. You can see it in our annual reports. We had a preferred share that- - and that LLC was dissolved and the assets sold. So they paid the preferred share back to us and it generated a $1.5 million one-time gain, but not related to any facility we occupy.

Got it. Thank you very much.

Your next question comes from Chris Cook with Zazove.

Hi. Thanks for taking my question. The 2008 CapEx expectation, I may have missed that or you may not- - never have given us a number.

Internal CapEx for next year?

Yes. You- - what you guys will spend on CapEx.

Yes, we didn't give any guidance, but it will be approximately in the same range as we spent this year.

Okay. So, five - - five to six or something like that. And then, has the cash hit from the California street sale or the real estate sale?

Yes, it did.

Okay. And working capital needs in 2008?

They will grow somewhat towards the- - in the year. We're also going to use some of our cash on the balance sheet to support some of our new products as they go out. Obviously, we'll be, with eval tools that go out for the semi tool, that's a fairly significant investment that we hold in working capital until you spin them out. So, it will grow from Q4 levels.

Are we talking about, you know, 5, $10 million, or 30, 40, $50 million?

No, I would say more in the 5 to say $15 million or so.

Five to 15, okay. Okay, great. Thanks.

Your next question comes from Jesse Pichel with Piper Jaffray.

Hi. Thanks for the question. Following up to Rich's question, how many upgrades are you factoring into your guidance at this point?

On overall revenue guidance, well, let's just start- - last year, in 2007, I mean, you can figure it out. It's probably in the neighborhood of 70. We're guiding lower than that this year. It's probably in the range of, I would say, 30 to 40 in our guidance range.

And that's all in service, is that correct?

Well, it's all in non-system orders- - upgrades, our services, our spares. It's the non-systems. I mean, you can kind of back into it from the 12 to 15.

And does an upgraded Lean have the same performance, cost to performance ratio as the new Gen II Lean?

It depends on how you do the metric count. The customers look at is their factory output and the fact that they are doing- - using existing factory and using other pieces of equipment they already have. So, that's a big payback for them, that $1 million per tool. If they bought a new Gen II- - it would be slightly less capital relative to the output.

And, you know, I'm looking at the imaging business. How much of that 30 to $40 million is from the recent acquisitions of Creative and, I guess, Delta?

Well, we're not giving specific guidance down to the product line, but I would say that it's somewhere in the 10 plus, 20%, depending on the time of the year and ramp.

Ten- - ten to 20% of that 30 to $40 million is from the acquisitions?

Acquisition, yes.

And could you just segment the rest of the 80 to 90% of that revenue of the 30 to $40 million into some buckets, so we can just understand that a little bit? You went over that information pretty quickly, so.

I can give you a general guidance. It's on the order of about 40% commercial and 60% government defense.

And how will that change in 2009? It will be mostly government?

No. We expect to grow both lines. I mean, we're- - we want to continue to expand into new commercial markets, as I was mentioning, including industrial areas and medical products areas.

And last for Kevin. Kevin, you mentioned the greater cost performance of your Etch versus incumbent solutions. And I was wondering if you can quantify that for us.

In terms of cost, a simple- - you'll get, for the dollars you pay per wafer per hour output, you'll pay 30% of- - 30% less.

And, and- - what will that, you know, what does that equate to in terms of dollars and cents?

Oh, have to get the calculator out. But I think the typical ASP for 300 millimeter is, for a three-chamber tool, is about $3.5 million. And so, for one of our six-chamber tools, which have twice the throughput, you'd probably put them at 5.5, something like that.

Yes, and I think that ASP might be low on the cluster tools.

Great. Thanks very much.

Your next question comes from Mark Miller with Brean Murray.

Wondering if you could provide tax rate, tax rate guidance for '08? Is it 25%, 23%?

Well, I would say the, at the high end of our guidance, it will be near zero, Mark. We can utilize some of our, you know, R&D tax credits and whatnot. And that will drive actually a negative rate of probably between 25 and 35%, the low end of our guidance.

You mentioned improved up time on the Gen II Lean. Can you give us a quantification? I know you were, you know, in the low 60s I thought originally. And I was just wondering, you know, how much improvement you've seen in your uptime with the next generation.

Well, I think the main improvements come from the time it takes to gets to get down to base vacuum. When people move to perpendicular, it just took them longer to get to base pressure. So, we've put a lot of work into improving the pumping speed of our pumps and also the amount of moisture that gets actually gets created in our systems. So, that's the principal benefit.

Okay. And finally, I guess I'm a little- - I thought the gross margins would be a little higher, especially with more products shipped in the imaging. Is it because we don't see as many upgrades which have been higher margin for you? Or, I'm just- - I'm just off base here in terms of your gross margin for --.

No, I think, Mark, I think that's - - I mean, essentially in Imaging, their margins are slightly adversely effected by the acquisition of CDS, because those are kind of newer products and we'll have to ramp them up. But that's insignificant versus the lower mix of our technology upgrades and lower sales volume. We have some factory utilization that we still are expensing in the year.

Do you have anything more to gain in Asia, what you've been doing in Asia, or is that pretty much scaled up? More to gain in Asia, supply chain problems?

There is some more to gain and by the way -- so Mark - - the moment we get a little bit of volume to exercise that further,we do expect to see some more benefit out of Asia.

Thank you.

Your next question comes from Ben [Ping] with [Karas] and Company. Mr. Ping? Please go ahead. That question has been withdrawn. (OPERATOR INSTRUCTIONS) You do have a follow-up question from Bill Ong with American Technology.

Yes, just another follow up. When you ship a tool to a disk drive maker, how long does it take for that tool to get qualified by the customer for production and when do they start generating revenue?

It can be as short as six weeks, if they're motivated.

Okay. Thank you.

Your next question comes from Lee Levy with Pacific Edge Investment.

Hi, I'm sorry to make you reiterate this. Can you repeat what Q1 revenue guidance was?

Q1 revenue guidance was 30 to $33 million.

30 to $33 million. Okay. Thank you.

Your last question comes from Douglas Smith, individual investor.

Hello. I was wondering if you could comment quickly on your strategy of diversifying into imaging versus sticking with purely semi-conductor and hard disk equipment. Is there some synergy in the engineering process that there's some transfer of knowledge between the two groups? Or is it more for a revenue smoothing?

Okay. So, no, there is- - the two businesses are run quite separately and we can- - we would not have been able to create the unique sensors that we have today if we hadn't also been an equipment company and were able to apply some of that process knowledge in that area. But, as the imaging business grows bigger, when it gets to a critical mass, then we would look very seriously at spinning it off as its own separate company.

Okay. So, it just looked like a good opportunity to help grow that particular business?

Yes, we were historically- - when Intevac was formed imaging was actually the bigger portion of the company back in the early '90s.

Okay. Excellent. Thank you very much for answering my question.

Okay.

At this time there are no further questions. Do you have any closing remarks?

I'd just like to thank everybody for joining us today and we look forward to updating you in our next call on our Q1 results. Good 'bye.

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