Intevac Inc (IVAC) 2017 Q1 法說會逐字稿

Good day, ladies and gentlemen, and welcome to Intevac's First Quarter 2017 Financial Results Conference Call. (Operator Instructions) Please note that this conference call is being recorded today, May 1, 2017.

At this time, I would like to turn the call over to Claire McAdams, Intevac's Investor Relations Counsel. Please go ahead.

Thank you, and good afternoon, everyone. Thank you for joining us today to discuss Intevac's financial results for the first quarter of 2017, which ended on April 1.

In addition to discussing the company's recent results, we will provide financial guidance for the second quarter of 2017 and our current outlook for the full year.

Joining me on today's call are Wendell Blonigan, President and Chief Executive Officer; and Jim Moniz, Chief Financial Officer. Wendell will start with the review of each of our businesses and our outlook going forward, then Jim will review first quarter results and discuss our financial outlook for the second quarter and full year 2017 before turning the call over to Q&A.

I'd like to remind everyone that today's conference call contains forward-looking statements including, but not limited to, statements regarding financial results for the company's most recently completed fiscal quarter, which remains subject to adjustment in connection with the preparation of our Form 10-Q, as well as comments regarding future events and projections about the future financial performance of Intevac. These forward-looking statements are based upon our current expectations, and actual results could differ materially as a result of various risks and uncertainties relating to these comments and other risk factors discussed in documents filed by us with the Securities and Exchange Commission, including our annual report on Form 10-K and quarterly reports on Form 10-Q.

The contents of this May 1 call includes time-sensitive forward-looking statements that represent our projections as of today. We undertake no obligation to update the forward-looking statements made during this conference call.

I'll now turn the call over to Wendell.

Thanks, Claire, and good afternoon. Today, we reported Q1 results exceeding guidance with revenues of $30.4 million and $0.08 per share in earnings. Revenues were up 5% over the prior quarter and up 122% over the first quarter of last year as we made significant progress towards our revenue growth and profitability objectives for 2017.

I'm also pleased to report that we continued to achieve meaningful milestones in our Thin-Film Equipment growth strategy during the first quarter of the year. New orders in Q1 totaled $35 million, up 40% from Q4, with the most significant driver being the largest order Intevac has ever received in our Thin-Film Equipment growth initiatives.

We booked a 12-system follow-on order in March for ENERGi implant tools, which we expect to ship in the second half of this year. We revenued 4 VERTEX systems and 1 200 Lean during the quarter and grew equipment backlog again to a new 6-year record of $56 million, up 21% from Q4.

Stronger nonsystem sales in our core hard drive business provided the upside to our revenue guidance for the first quarter.

Today, we are raising our revenue guidance for the full year due in part to this upside as well as increasing confidence in the opportunities in our VERTEX business in the display cover panel market.

Not included in the improved guidance for the year is any revenue associated with the recently announced 12-system follow-on order for ENERGi ion implanters, given the uncertainty in timing of the required customer acceptances.

In our Photonics business, we continued to make good progress towards the development of our next-generation ISIE 19 sensor, most notably in the initial government funding received in the quarter along with the approval of the DELTA-I program that officially puts our digital night vision sensor on the road map for the Coalition Warfare Program. This program is funded by the Department of Defense, SOCOM and several foreign nation coalition partners, thus addressing not only the U.S. Military, but that of several foreign nations.

Now for an update of each of our businesses, starting with Thin-Film Equipment. In the solar market, which clearly has been challenging recently, we were pleased to announce the adoption of our ENERGi implant equipment by a major solar cell manufacturer in China who has ordered approximately 1 gigawatt of high-efficiency solar cell implant capacity from us. At the time of our last conference call, we were working with this customer to enhance the performance of the first tool shipped last year. The productivity and yield upgrades we were installing were not yet proven at that time, and our customers' buildout plans had not firmed up. However, our upgrades proved successful, and our ENERGi tool was selected as an important enabler for these high-efficiency n-type solar cells.

We believe that many customers have been reassessing their n-type strategies, and some high-efficiency n-type capacity has been announced coming off-line. We continue to expect the market for our MATRIX solar products focused on high-efficiency n-type cells will be soft over the next year and until overall weakness in solar module pricing has improved. In the meantime, quarter-to-date, we recognized revenue on our last MATRIX in backlog, which was an ion implant configuration as part of a JDP with a Tier 1 solar company.

While there are many moving parts in the solar business, we continue to monitor the environment for n-type solar investments, and given the nearly $23 million order just received, we are leaving our 5-year solar revenue outlook unchanged at $175 million.

In the hard disk drive market, the program to upgrade the technical capabilities of our customers' installed base continues. We shipped 1 200 Lean in Q1 with 3 still in backlog for 2017. We have said that this is an ongoing technology program, and we see this continuing into the foreseeable future, providing us with a strengthened base of business in our core HDD market.

As a reminder, the systems we are shipping currently are not increasing the installed base of media capacity in the HDD industry.

Fundamentals in the overall hard drive industry were relatively stable. The gross segment in the HDD market continues to be high-capacity nearline drives, which is a positive for media units, given that the number of disks in each nearline drive is significant and is forecast to grow from 4 to over 7 disks per drive by 2020. This growth is driving up the overall industry tie ratio, which has increased to more than 2 disks per drive on average. Preliminary media unit shipment estimates indicate a tie ratio exceeding 2.1 disks per drive in the first quarter.

We continue to believe that the installed industry media capacity would be utilized once the overall HDD tie ratio gets into the range of 2.5 to 3 disks per drive, as any impact on media demand derived from forecast of a slowly declining HDD unit environment are being offset by the permanent retirement of a portion of the industry's media capacity.

As we are all aware, there's a large amount of NAND capacity being built out right now, which will support the forecasted growth in solid-state drives. While reports indicate that the amount of storage delivered on solid-state drives is expected to grow on an annual rate of over 25% over the next 4 years, an industry white paper from IDC published in March called Data Age 2025 includes projections that again forecast that 90% of all data stored in the cloud in 2020 will be on spinning drives.

As we look into the near future, our HDD business is profitable, stable and is forecast to drive $200 million to $300 million in total revenue over the next 5 years, with the high end dependent on the timing of a return to capacity system orders.

Given the nonsystems business upside we saw in the first quarter as well as the recently strong level of HDD bookings, we now expect our hard drive business in 2017 will be at least as strong and most likely up from 2016 levels, which had grown year-on-year from 2015.

With the backdrop of an improved environment in our solar and HDD businesses, the most exciting driver for significant revenue growth over the next year or 2 continues to be the VERTEX. The VERTEX deposits are optical diamond-like carbon, or oDLC, protective coating, on display cover panels. The production capacity order book in 2016 was an important milestone for this business, and winning a second Tier 1 customer for VERTEX later in the year was equally significant.

All 4 of the VERTEX systems in backlog exiting 2016 were recognized as revenue in Q1, which means that our expectation to ship and revenue additional VERTEX tools in 2017 depends on additional orders in the coming months. Our first customer, Truly, is in production and is actively adding customer projects incorporating our coating.

Our second customer is moving deliberately through the evaluation process. Both customers are highly motivated to achieve success using our oDLC coating and are evaluating our films for multiple applications.

Truly recently introduced a new cell phone back cover product called Magic Glass, which incorporates our oDLC coating. Their Magic Glass provides, in their words, "Material rendering effects with rich color choices and offers the best choice to match the technology road map for wireless charging and 5G communications."

For smartphones, they have communicated 3 Magic Glass projects that have been put into production and 3 projects underway for later in the year. For pure oDLC coatings, Truly has quantified 1 additional smartphone project and 8 projects for wearable applications due to its outstanding performance, again in their words, "In hardness and abrasion resistance."

Our second customer is a Tier 1 company and is continuing their evaluation and qualification process of our films and our tool for multiple applications. We continue to be optimistic that we will book, ship and revenue additional VERTEX tools in 2017, which could come from either of our current customers, a new customer or both.

Our in-house coating operation continues to process samples for evaluation for multiple-cover panel applications. Beyond display cover glass, we have begun to see 3D back cover glass for testing and evaluation. Our oDLC coating is displaying very positive results, demonstrating conformal scratch protection around the edges and corners of the substrates. We believe our strategy to market our tool's films through this in-house operation is a key enabler in securing additional new orders for VERTEX.

With the 25% adoption rate in the smartphone and tablet cover glass market, our 5-year revenue opportunity for the VERTEX is approximately $500 million, with additional opportunities such as back cover glass on cell phones, wearables, auto infotainment and more incremental to that figure.

To sum up the environment in our Thin-Film Equipment business, recent traction in new orders and revenues marks an important milestone in the future growth trajectory of our company. In the first quarter, we recognized revenue on VERTEX volume production systems and received follow-on orders for 12 ENERGi implant tools, both of which represent the crossover from pilot to capacity production in both of our new Thin-Film Equipment growth markets. In other words, while we've worked for several years to diversify and grow our equipment business beyond the hard drive market and have delivered multiple pilot tools along the way, significant capacity orders and revenues recognized in these new markets is a material demonstration of our success in expanding our Thin-Film Equipment revenue opportunity.

Now moving to Photonics. In 2016, we developed demonstrators of our latest digital night vision technology, and after successful demonstrations with both the Army and Navy, realized significant expansion of our revenue opportunity pipeline. Year-to-date, we continue to make excellent progress in realizing the future revenue opportunity pipeline of well over $1 billion. In Q1, we continue to deliver results favorable to our long-term business model with 16% operating profitability.

As I discussed in the beginning of my remarks, I'm also pleased to report an important development, which is the approval of the DELTA-I program for the Department of Defense's Coalition Warfare Program. This program is funded by the DoD, SOCOM and several foreign correlation partners. The DELTA-I program includes a $12 million funding commitment to complete the design of our ISIE 19 sensor as well as the digitally fused infrared night vision goggle incorporating that sensor. The $25 million funding vehicle that was put in place late in 2015 will be utilized as a mechanism to move funds from this program to us for the continued development of our next-generation technology.

As a reminder, after getting both the Army and Navy together on their night vision road maps during 2016, we were able to merge their requirements and settle in on a single new sensor design to meet everyone's needs, which is the ISIE 19.

At Camp de Souge Military Base in Bordeaux, France, we recently demonstrated our monocular goggle at the Special Operation Forces Innovation Network Seminar, also known as SOFINS. The goggle was positively evaluated by the special forces operators of numerous NATO nations during field exercises.

Additionally, the goggles' performance was measured and evaluated by several European prime military suppliers for integration [with] several new programs. We believe these successful evaluations can greatly expand our product footprint among European militaries in the near future.

Also in Q1, we accomplished significant advancements as we increased our content in the Family of Weapons Sights-Crew Served program for the U.S. Army, adding our proprietary Free Form Prism into the wireless head mounted display. At the same time, as we've made this progress, we continued to ship for Apache Joint Strike Fighter and LIVAR on schedule and with favorable yields.

Based on all the new program activity, what we are working on with the U.S. and foreign militaries as well as our programs for dismounted soldier systems, our expanded revenue opportunity pipeline exceeds $1.4 billion over the life of the programs we are engaged with and are pursuing.

Key to expanding this revenue opportunity pipeline was the development of 2 new technology demonstrators I mentioned earlier. The first one is a 2K x 2K high-resolution digital goggle for NAVAIR's EVA or Advanced Visual Acuity (sic) [Enhanced Visual Acuity] program, and the second one is a monocular targeted for the dismounted soldiers' fourth generation digital night vision goggle program. Both demonstrators generated increased interest in the ISIE 19 and grew the potential of the overall size of the digital night vision programs on which we are engaged in or pursuing.

I would encourage you to review the latest version of our investor presentation, which details the opportunities for our digital night vision cameras, integrated night vision and ground force applications.

So in summary for the company overall, our outlook for 2017 has improved since our last conference call. Last quarter, we guided year-on-year revenue growth of at least 25%, which equated to additional $8 million in new equipment orders booking and converting to revenue in the year on top of the backlog we ended the year with. We continue to be optimistic we will book and ship additional VERTEX tools this year, which should revenue at shipment.

As I mentioned earlier, at this time, we are not including any portion of the 12-system solar production capacity order in our 2017 revenue outlook. We continue to expect 27 (sic) [2017] revenues for Photonics will be similar to 2016 and now expect our hard drive business will be at least as strong and most likely up from 2016.

Given our current engagements with both new and existing equipment customers, we are raising our 2017 revenue guidance from 25% to now at least 35% growth over 2016 with profitable bottom line results. As we move further into the year, we will continue to get better clarity on potential upside to our new outlook and will communicate accordingly.

I will now turn the call over to Jim to discuss our first quarter results, provide guidance for the second quarter and to discuss additional details in the financial outlook for the year. Jim?

Thank you, Wendell. Consolidated first quarter revenues totaled $30.4 million. This was above our guidance of $28 million to $29 million.

Thin-Film Equipment revenue totaled $21.5 million and included 1 200 Lean and 4 VERTEX systems for display cover panels, along with upgrades, spares and service.

Photonics revenue of $8.9 million included $6.9 million of product revenues and $2 million of contract research and development revenues.

Q1 consolidated gross margin was $13 million or 42.9%, also above our guidance, with favorable contribution from both business units.

Q1 R&D and SG&A expenses were $10.9 million, up from Q4 and exceeded our guidance due to increased accruals for variable compensation programs as a result of the improved outlook for revenues and profitability for the year and increased legal expenses for patent activity and contracts.

Our Q1 net income was $1.8 million or $0.08 per diluted share, better than our guidance, driven by better gross profit from both business units. Our backlog was $73 million at quarter end.

Thin-Film Equipment backlog of $56.2 million included 3 200 Lean HDD systems, 1 pilot MATRIX solar ion implant system, 14 ENERGi solar ion implant systems and nonsystems HDD backlog. 2 ENERGi tools are installed at our customers' factories at quarter end and are awaiting customer acceptance, while the MATRIX implant system revenued in April.

The backlog in our Photonics business was $16.7 million.

Now let me turn to the balance sheet. We ended the quarter with cash and investments including restricted cash of $46.3 million, equivalent to approximately $2.16 per share based on 21.4 million shares at quarter end. Cash flow used by operations was $2 million during Q1.

Q1 capital expenditures were $1.4 million and depreciation and amortization was $1 million for the quarter. Our quarter end cash balance is in line with our cash objectives of approximately $50 million.

Now let me turn to the full year outlook for 2017. We continue to expect our Photonics business will see similar levels of revenue in 2017 compared to 2016, and we now believe we may see an increase in hard drive revenues over 2016. Based on the strength and outlook for our HDD business as well as our continued confidence that we will see additional revenues on our VERTEX business, today, we are raising our revenue expectation to at least 35% over 2016.

At this revenue level, we would expect gross margins of around 39% with operating expenses of between $38 million to $40 million for the year.

Below the operating line, we expect to see interest income of about $200,000 and net taxes of around $600,000 for the year.

For Q2 specifically, we are projecting consolidated revenues to be between $27 million and $30 million. We expect second quarter gross margin to be between 37% and 38%.

Q2 operating expenses are expected to be between $10.5 million and $11 million. We expect interest income of about $50,000 and net taxes of about $100,000 in the quarter.

For Q2, we are projecting earnings per share to be approximately breakeven, plus or minus $0.02 a share. We are assuming 23 million diluted shares outstanding.

This completes the formal part of our presentation.

Andrew, we are ready for questions.

(Operator Instructions) And our first question comes from the line of Rich Kugele with Needham & Company.

I just wanted to ask a couple of questions. In terms of the spares and upgrades, was that something that came in as a surprise to you guys? Or how should we be thinking about modeling that? Is that how you get to a flattish hard drive year versus additional systems?

We certainly saw it coming in the first quarter stronger than we had forecast as we left the year. I just think there's -- the overall sentiment in the hard drive space compared to a year ago this time is certainly much improved, and we'll see activity related to next-generation technology that may be rolling out at the different customers that's driving some of the spare in upgrade business.

And in terms of the ENERGi systems, is $2 million a reasonable ASP for each one of those tools?

When we -- we look at that whole deal as a 14-system deal, 2 that we shipped last year and then the 12 on order here. And when you take that entire deal and blend it -- the total value divided by the number of systems, it's just under $2 million. But right about $2 million is about right place to model.

And are there any component constraints on being able to deliver all those tools?

We actually have some inventory here that had been written down. I think the longest pole in the tent is the actual main chamber that is a friction stir welded product, and we've got those secured for these delivery schedules. So we keep monitoring it because the supply chain in equipment is very busy right now, so we're actively managing that and making sure that we've got our components in time.

Okay. Last question. Just can you just remind us, do you have anything left on the buyback that's available?

There was, I think, about $1.5 million that was left out of the $30 million that was set aside to do that, but we have not been actively in the market at this point.

Your next question comes from the line of Brian Alger with Roth Capital Partners.

Looking at the increased guidance here versus the backlog, it would at least appear that you guys have a pretty high degree of confidence in getting some VERTEX orders, even though we don't have them in the backlog as of yet. Can you maybe help us understand where that confidence is coming from?

Well, I think, in general, it's -- we're looking at where we're at in the process with different customers. We're looking at -- I would say we're looking at timing and momentum and things like that. And as we move through the first quarter, we had confidence going into the year. As you recall, I think there were 2 or 3 that we had put in the 25 – up 25% guidance, and we still feel confident about those. And again, as soon as these tools are evaluated and the end customers are lined up, they can move pretty quickly. And I think I talked about it last conference call from a lead time perspective. We're normally around 5 months; we've been taking action to bring that, where our goal is to bring that under 4 and closer to 3. And now that we've got perfunctory sign-offs on the VERTEX tools and their base configurations, we expect that anything that we ship is going to show up as revenue at shipment, not like it has been, where you have to wait for the customer's sign-off to happen.

That's good. You described a couple of different projects that Truly is engaged in, and I know you're talking in a bit more detail with Truly because, number one, they've been named; and two, they've been a customer a little bit longer. But do you have a sense for how much of your capacity that you've delivered to them thus far is being absorbed by the projects they've announced to date with the 3 different handsets working on the back side and working on these different wearables? Are they getting to the point where they need to order additional tools in order to facilitate new projects?

I think, certainly, with the current projects that they were discussing publicly that I quoted off of their Investor Day, they probably have additional capacity available. But the -- on the flip side of that, we also know a lot of the different programs they're working that aren't necessarily committed. Depending on which one of those go and at what pace, that would be what would drive additional tools there. But they don't necessarily share their utilization with us, but we can -- we're on-site, so we have some feel on how the tools are being utilized.

Okay. And just in the realm of possibilities here. Clearly, we're more confident on the VERTEX side versus MATRIX. But to be fair, I didn't expect you to get a 12-system order on the ENERGi systems either. Where are we with the customers evaluating MATRIX for increasing their efficiency? Because that seems to be what drove the ENERGi tools in terms of their order. Is there any remote possibility that we should be looking at for MATRIX coming in and surprising us similar to the way ENERGi did?

Yes, it's always a possibility. We're not -- certainly not giving up. We're still out there actively in the market. We certainly know that the 2 initial programs that we launched the MATRIX on, one of them did not continue their build out and the other one is now on hold. So there's other activity with MATRIX beyond solar as well, so we're actively driving it. 12 systems worth of MATRIX, that would be a surprise to me too, given where we're at right now and just where the customers are at realistically.

Right, right. Well, fair enough. 35-plus percent growth without those systems coming in to the revenue mix is pretty good so far. So keep it up.

And our next question comes from the line of Mark Miller with The Benchmark Company.

Congratulations on your implant orders. I just was wondering, basically, you've mentioned 2 customers, Truly being the first. But you were in qualifications or in valuations at other vendors for the VERTEX tool, and can you give us any update how -- it's been a while, and any update how those qualifications are going? Are you receiving positive feedback or you have things to work on?

Yes. Again, I can't talk a lot about that, but what I could probably refer you to is as we look at raising our outlook, as we move through the year here, we don't have those orders booked yet, but we're certainly moving our forecasted outlook to The Street, based on success in that particular product line. So that -- so what that means is it means I'm happy with the progress we're making, and Jim is as well, that we have that confidence to go out and raise.

You're expecting somewhat higher HDD revenues. I assume it's from additional replacement systems. I guess, really old MDP-250 coders is my assumption, which I used to use, by the way, when I worked in the industry, if they're still around. I'm just wondering, how far down the line are you in terms of this replacement opportunity? Are you 25% to 30% of what's out there?

We've been a little bit vague as to foreseeable future. So I would say, realistically, when we started it, it's, I'd say, we're better than halfway done. But we also aren't really saying that, that's what we're doing either. So it's just really technology upgrades is what we're talking about, and we certainly see technical road maps that will continue to drive additional NSO technology upgrades in the equipment as well.

And your tax guidance for this quarter was $100,000? Is that correct?

Yes, it was. We do have quite a bit of NOLs and also tax credits, but we do have an alternative minimum to factor now that we're profitable. There's a nominal amount of tax that we do report.

And our next question comes from the line of Nehal Chokshi with Maxim Group.

Great to see the increased confidence of driving [grades] on the calendar year '17. Before I get to that, I'm sorry, Jim, I didn't quite get what your revenue guidance was for the June quarter. Could you just repeat that real quickly?

Yes. We said the revenue guidance for Q2 was between $27 million and $30 million.

Okay. All right. Well then, given that June Q guidance of revenue, which is quite high relative to consensus from where we are, could you just parse through what are -- what's going into that $27 million to $30 million as far as equipment orders versus spares versus Photonics?

So if you remember, in Wendell's conversation, he said that we currently expect Photonics to have a similar year, 2017 versus 2016. We have 1 200 Lean in that for Q2. We have additional -- what we call NSOs, which are nonsystems order, in the hard drive business and we saw some stronger orders in Q1, which will result in revenue in Q2. We also have the $9 million in implant tools. One was the joint development tool and then the other 2 ENERGi implant tools.

Okay. So would you expect nonsystem orders to be up q-over-q?

Yes, I would.

Okay. All right. Now for the $8 million raise there, you attributed that to both increased confidence in VERTEX orders and forthcoming hard drive strength. Can you parse out that $8 million between those 2 factors there? Is it 50-50, about?

So we haven't (inaudible) with a lot of specifics, other than to say that we do believe that the hard drive business will be -- has an opportunity to be up over '17 and we still continued -- have increased confidence that we will book and ship VERTEX orders.

And I think from -- just to kind of complete that, there's a lot of moving parts and a lot of mixing and matching of different pieces of equipment that equal up to that number. So you'll be able to see it basically when we announce (inaudible).

Yes.

And our next question comes from the line of Craig Ellis with B. Riley Financial.

This is Peter Peng calling for Craig Ellis. First question I have is just kind of your C '17 parameters. The gross margins and OpEx, does that include the 12 ENERGi system?

No, it does not. Because as you'll remember, as Wendell said, there are no ENERGi systems in our guidance at this moment.

Okay. And then just kind of digging into the second quarter guidance. Does that kind of imply that Photonics is going to be down quarter-over-quarter?

We didn't literally give that level of guidance, and I think it's going to be similar, plus or minus a few hundred thousand dollars.

Okay. And then the ENERGi tools, is that something that's going to be rev rec potentially in the first half of 2018? Or is it something more back half?

Yes. So I want to clarify a couple of things. So we had 2 of the ENERGi tools that were out in the field last year that I referenced those in my prepared remarks. We did some upgrades to them. Those 2 systems are in our 2017 revenue plan in Q2. The other 12 -- and because we had to do a number of upgrades on those tools, they don't make the criteria of a perfunctory sign-off that would allow us to take revenue at shipment. So we actually have to go through that process again with the first 2 tools that we ship. And given just the variability, the timing, customer readiness, it puts it -- the first one very, very close to moving out of the calendar year, the second one for sure. So we don't anticipate we'd get the 2 sign-offs in time to take revenue. Once we get the second one, then everything that's shipped comes as revenue all at once.

Okay. And then -- okay. Just kind of going back to the upgrades in software. And if I'm doing my math correctly, it seems like it's clocking around $5 million to $6 million per quarter. And historically, that number kind of fluctuates on a quarter-by-quarter basis. Do you kind of see any seasonal factors playing in the second half? Or you kind of expect this stable revenue?

Yes, I don't really see any seasonal. And I think if you wanted to parse the nonsystems business, I think we have multiple times said that the spares and the field service roughly run around $10 million a year. And then it's the upgrades that are the ones that are episodic from 1 quarter to the next quarter.

And our next question comes from the line of Ben Klieve with NOBLE Capital Markets. Your line is now open.

All right. Just have a couple of quick questions on this. So you've spoken now with a pretty high degree of confidence here regarding VERTEX orders still coming in later this year and revenue-ing by year-end. And your HDD commentary regarding your hope of growth year-over-year has been a bit more hesitant. So I guess, I'm kind of wondering, similar to your -- an earlier question regarding the VERTEX [market], where do you get that -- the degree of confidence regarding HDD growth year-over-year? And is it fair to say that there's -- that the time line on this is going to be pushed up a little bit more than the VERTEX orders? Are you going to need to have those orders in within the next month or 2 as opposed to kind of earlier -- or early in the fall for your VERTEX orders?

Well, it depends on what -- if it's an upgrade or a system. So we're carrying 3 200 Leans in backlog right now, 4 for this year. We carried 3 coming in, we revenued one this quarter -- or last quarter. My overall confidence in that business being stronger is based on the order flow and the visibility we have into what we think is coming towards the end of the year. And certainly, the overall environment seems to be, like, much more positive than it was a year ago at this time, as far as stability in the industry. So that's what drives the confidence that, that is going to be at least as strong and most likely up. Now we'll have to go through the process and get those orders booked, but unless something unforeseen happens in the marketplace, that's what we feel right now.

Okay. And then your commentary regarding the, I believe, you said Magic Glass with Truly. Did you say that, that was the casing on the back? Or did you say that would be the camera on the back of the smartphone?

They were particularly referencing the 3-dimensional back cover glass for the phone -- for phones.

Okay. And then so is that -- I guess, where do you see that trend? I mean, is that something that you see really picking up pretty significantly as one of the drivers of your VERTEX growth? Or is that still -- is that back case still kind of in the early stages?

I would say it's in the early stages. Certainly, we're starting to see, as I mentioned, some sampling coming in, just to see how well we can cover these 3-dimensional objects versus just a flat piece of glass that's on a pallet. And we've been very pleased with how our source technology addresses that and the tests that we do, particularly sand oscillation showed very nice performance. But I think as far as the back cover glass, I think it's -- a lot of people are talking about it, a lot of people have it on road maps, but it's certainly got a ways to go yet.

Okay. Well, it'd be interesting if you're going for it there.

And our next question comes from the line of [John Gruber] with Intevac (sic).

Intevac. That's all right. Yes, I've just joined yesterday. Question, in your release, you talk about $12 million government funding or something for the Photonics and $1 billion future revenue opportunity, which doesn't jive with flat revenue in the '17 versus '16. So maybe you could explain that.

Yes. First of all, the question on the $12 million, that's the funding from DELTA-I that's going to come that we've been planning on getting in our forecasting for the development of the ISIE 19 sensor as well as the digitally fused goggle that's part of that DELTA-I program as well. As far as our pipeline, when we look at the military business, you look at, say, a platform, say Apache, the Joint Strike Fighter. Those aircraft platforms are going to be around through 2050, 2060, and we look at a lifetime of the products -- the projects that we're on, including the initial installation of our technology, the technology upgrade of those sockets going forward, we're also in this pipeline of opportunity. We have the ground force application, which is the generation 4 night vision for the ground forces. That doesn't field until, I think, 2022 when that goes out. So I think we look at -- the Photonics is not a quarter-over-quarter, year-over-year type of a business. These are long-term programs that we have to look at in a different light to see what the real opportunity is, just initially getting in on the programs but then servicing those programs as we move through time. Does that explain a little better?

Yes, it does. Second question. The fact you're not going to ship any of the ENERGi systems, the solar things. That's a big order this year you're going to ship -- that's -- will they all be shipped early next year? And that'll be a big increment for next year. So will they all be shipped...

Yes. How that's going to work is the shipments are actually going to occur at the second half of 2017. The revenue events will occur after the first 2 systems get installed and technically signed off. So we're in the procurement stage right now on those tools, and we expect to start shipping them in the, I think, right around August to start going out. And the customer would like them as fast as we can get them, and our plan is to have them all out of here by December. But this is one of those situations where there's a disconnect between the actual shipment event and the revenue event...

Right, but that big revenue event is '18 and that's the whole thing, correct?

Correct. Of those -- that order for 12. There's 2 of them out there now that we expect to (inaudible) rev.

And our next question comes from the line of Mark Miller with The Benchmark.

Just wanted to touch base on a couple of things. It looks like your Photonics margins sequentially declined by almost 300 basis points. That's typically one part driven by yields. I'm just wondering why that was down sequentially.

Some of that really just had nothing more to do with the fact that the specific programs we had in the $2 million funded R&D, was just a smaller percentage. And then last quarter, if you remember, we also had higher revenues because we were shipping some JSF replacements to the ISIE 10 with an ISIE 11. And as Wendell had said in his answer to John, one of the things that we do is, once we own the platform, when we come up with the next-generation sensors, we will go back and upgrade those platforms. And so we had that benefit in the December quarter that we didn't have in the March quarter. But still, very good gross margins even in the March quarter.

And then, in terms of your guidance, the OpEx came in about 10% -- or more than 10% above where you're expecting. What was the driver for that, the higher sales?

It was 2 things. It was a combination of the fact that we're forecasting better revenue and, more importantly, a higher amount of profitability for the year, so there's a variable comp element to that. And then we have some higher legal expenses where we did some additional patent filings in Q1. So we would expect some of that legal cost to come back down. But that's really the 2 things that drove it was higher variable comp and then some higher legal cost in Q1.

Our next question comes from the line of Nehal Chokshi with Maxim Group.

Yes, I just want to follow on, on that OpEx question there. So for the June quarter, though, you've guided for $10.5 million to $11 million. So it's really only in the back half you expect these legal expenses to come down, then. Is that correct?

Even in Q2, there's a mix with less legal and then some other things with regards to R&D going up. And again, as we look through the rest of the year, as Wendell said, we gave guidance, at this moment, of at least 35% up. And so based on the success we see for the next couple of quarters with orders, we would expect the legal cost to go down in the second half. Absolutely correct.

Okay. And then I want to come back to the VERTEX optimism here, which I share, by the way. But you cited 3 potential sources. Truly, your second customer or new sources. Could you rank order what you feel is the probability of these 3 potential sources as coming through?

I would say that given the fact that we have customers that currently have the tool, it most likely would come from a current customer. But we're certainly not ruling out our activity with new potentials as well.

Okay. And as far as between the 2 customers, it sounds like you kind of put the same probability between the 2?

I'll just -- we'll just leave it at that, if that's okay.

Okay. And then, does the magnitude of opportunity across these 3 sources vary significantly?

It certainly could. We're -- again, we're -- when we talk about Truly, they've got a number of programs but they are still working on big volumes. So wherever that larger volume comes is where we would see numbers.

Your next question comes from the line of Brian Alger with Roth Capital Partners.

Just one quick follow-up on the OpEx guidance. $38 million to $40 million on the full year, obviously, implies reduction, at least, on the quarterly numbers here. Is that more from the R&D side? Or is that all going to be coming out of SG&A between the accruals and the legal?

I would say the majority is going to come out of the SG&A.

So we're going to -- well, we should be keeping the R&D levels relatively high, and we'll be able to trim then the kind of ongoing operations?

That's the current plan, yes.

And I'm showing no further questions at this time. I will now turn the call back over to Mr. Blonigan.

Thank you. So before I sign off, I'd like to thank the hard-working and dedicated employees of Intevac all around the world for their tremendous effort and successful work over the past several quarters, building our backlog significantly. I also want to thank our customers for their continued business and appreciated partnerships. I thank all of you for joining us today, and we look forward to updating you again during our Q2 call in August. Until then, so long.

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