Intevac Inc (IVAC) 2017 Q2 法說會逐字稿

Good day, and welcome to Intevac's Second Quarter 2017 Financial Results Conference Call. (Operator Instructions) Please note that this conference is being recorded today, July 31, 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 second quarter of 2017, which ended on July 1. In addition to discussing the company's recent results, we will provide financial guidance for the third 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 a review of each of our businesses and our outlook going forward, then Jim will review second quarter results and discuss our financial outlook for the third 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 certain 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 July 31 call include time-sensitive forward-looking statements that represent our projections as of today. We undertake no obligation to update the forward-looking statements made during this conference call.

I will now turn the call over to Wendell.

Thanks, Claire, and good afternoon. Today, we reported Q2 results, exceeding guidance with revenues of $31 million and $0.05 per share in earnings. Revenues increased for the fifth consecutive quarter and more than doubled over the same quarter last year as we continue to make significant progress towards our revenue growth and profitability objectives for the year.

I am pleased to report that we recognized revenue on 3 of our solar ion implant systems during the quarter, 1 MATRIX pilot tool as part of our joint development program; and 2 ENERGi solar implant tools, which we shipped in 2016. Continued strength in our core hard drive business led to nonsystem orders exceeding expectations going into the quarter and total revenues exceeding the high end of guidance. We booked 3 new 200 Leans in the quarter, which equates to 11 200 Leans booked over the last 5 quarters despite media overcapacity in the industry.

Looking at the first half of 2017. We've achieved over $52 million in new equipment orders, a 27% increase from the first half of last year and more than tripled our Thin-Film Equipment revenues over the same period. We've now delivered 3 straight quarters of profitability for our equipment segment, contributing to total first half earnings of $0.13 per share.

In our Photonics business, we continue to make good progress towards the development of our next-generation ISIE 19 sensor, and new orders rebounded significantly to over $6 million. In the second quarter, we were awarded new orders for the Joint Strike Fighter program as well as booked additional funding for the development of our next-generation technologies and the programs that will drive the future growth of Photonics.

Today, we are raising our full year 2017 revenue guidance again based on continued strength in our HDD business as well as our expectation to book and ship additional VERTEX tools into the display cover panel market before year-end.

Now for an update on each of our businesses, starting with Thin-Film Equipment. In the hard disk drive market, the program to update and upgrade the technical capabilities of our customers' installed base continues. We booked 3 and shipped 1 200 Lean in the second quarter, with 5 in backlog at the quarter end. We have said that this is an ongoing technology upgrade program, which we could see continuing into the foreseeable future, providing us with a solid 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 industry. In fact, as we discussed last quarter, the installed base of media capacity is actually lower today than it has been in over 7 years given the permanent retirement of a portion of the industry's media capacity. We believe media capacity has declined from a 300 million disks per quarter to just under 265 million per quarter.

The growth segment in the HDD market continues to be in high-capacity nearline drives, which is positive for our business given the significant number of disks in each nearline drive. The industry tie ratio, or average number of disks per drive, has been growing at an annual rate of 13% to a record 2.2 disks per drive in the first quarter. If the tie ratio continues to increase at this rate, demand will exceed the installed media capacity in around 2 years in a flat HDD unit environment.

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 revenues over the next 5 years, with the high end dependent on the timing of a return to capacity system orders.

Compared to the 4 system shipments in 2016, we expect to ship 6 200 Leans in 2017. Given the nonsystems business upside we saw in the first half of the year, we now fully expect our hard drive business to increase in 2017 from 2016 levels.

In the solar market, we revenued the last of our MATRIX systems in backlog during second quarter, and we continue to expect the market for our MATRIX PVD and implant products, focused on high-efficiency n-type solar cells, will be soft over the next year and until overall weakness in the solar industry has improved. Recent dialogue in the solar industry at the Intersolar Conference this month centered around the potential effects of the Suniva Section 201 petition currently under investigation at the ITC. The potential for a decline in domestic demand with increased pricing is a concern. And on the flip side, the possibility of cell manufacturing build-out in the United States is a possibility. It's clearly a turbulent time in the industry with a decision date set for mid-September and a report to be submitted to the President in mid-November.

Encouraging for our solar business and adding to the confidence in our 5-year revenue opportunity estimate of $175 million is the 12-system energy implant order booked earlier this year, which was the company's largest-ever equipment booking received outside of our core hard drive market. This order for nearly $23 million will support 1 gigawatt of high-efficiency solar cell implant capacity. Shipping through the end of this year, we expect to recognize revenues on these tools in 2018 after receiving the first customer acceptances. Based on successful results of this new manufacturing line, this customer could be in a position to add additional capacity starting in 2018 as well. Since this customer is in China and supplying their domestic demand, we expect no impact from the Suniva petition.

The largest driver of significant revenue growth potential over the next few years is our VERTEX project -- product. The VERTEX deposits optical-grade diamond-like carbon, or oDLC, protective coating on display cover panels. The production capacity order booked in 2016 was an important milestone for this business, and winning a second Tier 1 customer for the VERTEX was equally significant. We revenued all 4 of the VERTEX tools in backlog in the first quarter, 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 evaluation and qualification processes. 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. Since last quarter, they have been heavily promoting their glass back cover solution into the marketplace and running evaluations with multiple potential customers. During the quarter, we participated in their marketing activities in Asia to continue the expansion of projects to fill their installed capacity. For smartphones, they have secured 2 additional customers for cell phone cover glass and have been making good progress expanding their programs for wearables. Our second customer continues to progress through an exhaustive evaluation and qualification process for the VERTEX tool and its film stacks. And since our last call, the VERTEX system has cleared multiple production-readiness criteria. For our oDLC film specifically, we are in various stages of evaluation depending on the application and progressing to decision points for an initial application.

The extensive evaluation and qualification processes in which we are engaged has taken longer than we anticipated, but the positive aspect is that our customers are making a substantial commitment in time and resources to bring our technology to market. Given their commitment, we have worked to reduce our lead times and are actively managing our inventory in order to quickly deliver on orders in the second half of the year.

In addition to our efforts with our existing VERTEX customers, we continue to engage with additional cell phone and cover glass manufacturers leveraging our in-house coating capability. Assuming a 25% adoption rate in the smartphone and tablet cover glass markets, our 5-year revenue opportunity for the VERTEX is approximately $500 million, with additional opportunities for back cover glass on cell phones, wearables, auto infotainment and more all incremental to that figure.

Finally, with regards to our oDLC films, I'd like to call your attention to a white paper we recently published on our protective coating solution, which you can find on the VERTEX section of our website.

Now moving on to Photonics. For the past 4 quarters, our Photonics division has been delivering gross and operating margins well above our target model for this business, which is 35% gross margin and 12% to 15% operating margin. In the second quarter, we had an unexpected sensor yield excursion that adversely impacted our gross margin and drove our results below our target model. We have modified some of our processes to address the issue and have already seen improvement in our yields this month. We expect the yield excursion to be a unique event to the second quarter. Also impacting our results in Photonics was a decision to increase our investment, strengthen our position and increase the revenue potential from the Family of Weapons Sights-Crew Served Program. We added additional functionality and content in our wireless head-mounted displays with our original prime, and we are now positioning with a second prime on the program. The Crew Served Program will be split between 2 primes, and it's our objective to be the head-mounted display provider for both. The added cost of this investment, along with the yield excursion, affected our Q2 margins. But going forward, we expect our Photonics margin to return to the target model ranges.

Turning now to our accomplishments. We made significant progress in Photonics last quarter advancing our next-generation sensor development programming -- program and expanding our opportunities for binocular goggles products. On the last call, we were excited to announce the approval of the DELTA-I program for the Department of Defense's Coalition Warfare Program. This program funded by DOD, SOCOM and several coalition partners will provide the funding to complete the development of our ISIE 19 sensor as well as multiple, digitally-fused infrared night vision goggles, incorporating the ISIE 19 to the coalition. In the second quarter, we made steady progress in moving through the required process to get on contract scheduled to begin funding in April of 2018. In the meantime, we continue to develop our new sensor technology and successfully booked $400,000 in Q2 and expect an additional $2.2 million from the government this week, bridging any possible gap in development funding from now until the significant award in 2018.

At the recent Paris Air Show, we demonstrated our digital monocular goggle for multiple European and foreign-based militaries and primes. And out of those efforts, in Q2, were awarded a contract with the Australian Army to develop and deliver binocular night vision goggles. Equally important, we have now received an export license for our ISIE 11 sensor, which enables this important program. The high-resolution digital binocular goggle and digital monocular demonstrators, which Intevac developed in 2016 with profits from the business, has enabled us to expand our opportunity pipeline, secure the funding for our next-generation sensor and engage us in goggle opportunities.

Finally, in Photonics, we made steady progress in the development and opportunity expansion in the Family of Weapons Sights-Crew Served Program. Our development is on schedule with our prime contractor, and we have increased the content level by adding our proprietary see-through prism into the wireless head-mounted display offering. We also added new and advanced functionality in our objective to provide a solution for multiple primes on this program. The Family of Weapons Sights is an important near-term product program for us and represents around $70 million of opportunity out of the total $1.4 billion opportunity pipeline of programs that we are engaged with or actively pursuing.

So in summary, for the company overall, our outlook for 2017 has continued to gain momentum since our last conference call. In our Thin-Film Equipment business, traction in new orders and revenues mark an important milestone in the growth trajectory of our company. So far this year, we have recognized revenue on all 3 of our new equipment platforms, the VERTEX, the MATRIX and the ENERGi, and booked follow-on orders for 12 ENERGi implant tools and 3 additional 200 Leans.

2017 is a year that represents the crossover from pilot to capacity production systems for our new Thin-Film Equipment growth markets.

Last quarter, we raised our revenue guidance from 25% year-over-year growth to 35%, which incorporated a forecast for additional VERTEX tools booking and shipping within the year. Given the upside in our hard drive business and our continued outlook of similar performance in Photonics, we now believe we can grow revenues 40% year-on-year with profitable bottom line results.

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

Thank you, Wendell. Consolidated second quarter revenues totaled $31 million. This was above our guidance of $27 million to $30 million. Thin-Film Equipment revenue totaled $22.4 million and included 1 200 Lean, 2 solar ion implant ENERGi systems and 1 Intevac MATRIX solar ion implant system, along with upgrades, repairs and service. Photonics revenue of $8.5 million included $7.4 million of product revenue and $1.1 million of contract research and development revenues.

Q2 consolidated gross margin was $11.5 million or 37%. The higher revenue than guidance contributed to higher gross profit dollars, but the margin percentage was at the low end of the range due to lower-than-expected margins in Photonics.

Q2 R&D and SG&A expenses were $10.1 million, down from Q1 and lower than our guidance primarily due to reduced expenses for contracts and R&D.

Given revenues above the high end of the range, along with reduced operating expenses, our Q2 net income exceeded guidance and was $1.1 million or $0.05 per diluted share.

Our backlog was $68.9 million at quarter end. Thin-Film Equipment backlog of $54.6 million included 5 200 Lean hard drive systems, 12 ENERGi solar ion implant systems and nonsystems HDD backlog. The backlog in our Photonics business was $14.4 million.

We ended the quarter with cash and investments, including restricted cash, of $42.8 million, equivalent to approximately $1.98 per share based on 21.6 million shares at quarter end.

Cash flow used by operations was $2 million during Q2. Q2 capital expenditures were $1.1 million, and depreciation and amortization was $958,000 for the quarter.

Now turning 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 will see an increase in hard drive revenues over 2016. Based on the strength and outlook for our hard drive business as well as our continued confidence that we will see additional revenues in our VERTEX business, today, we are raising our full year revenue growth expectation to around 40% over 2016. At this revenue level, we would expect gross margins of around 39% with operating expenses of approximately $41 million for the year. Below the operating line, we expect to see interest income of around $400,000 and net taxes of around $800,000 for the full year.

For Q3 specifically, we are projecting consolidated Q3 revenues to be between $25 million and $26 million. We expect third quarter gross margin to be around 41%. Q3 operating expenses are expected to be around $10.5 million. We expect interest income of around $50,000 and net taxes of around $100,000 in the quarter. For Q3, we are projecting earnings per share to be approximately breakeven, plus or minus $0.01 a share. We are assuming 23.5 million diluted shares outstanding.

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

(Operator Instructions) Your first question comes from Brian Alger with Roth Capital Partners.

Obviously, an impressive quarter on the top line and nice earnings with that lower R&D. Want to focus first on the solar products, the ENERGi obviously getting the backlog right now. But your commentary as it pertains to MATRIX, is MATRIX currently only being contemplated for domestic use here in the United States? Or are there foreign suppliers that are also looking at it?

Well, I think, when you look at the spaces we're really focused at, which is the bifacial space and the interdigitated back contact space, we're not -- there's not a lot of active capacity plans that are happening right now. The ENERGi implant is actually on a bifacial cell, but they're not using it for metallization. They're printing rather than plating. The 2 PVD tools that we have out in the market were for copper seed. So we're not seeing a lot of activity there. And as a matter of fact, one of the big n-type makers took one of their -- at least announced they were taking some capacity offline. So that's what gives us the outlook we think it's going to be soft. Are there opportunities? Whenever there's someone out there that is looking for a patterned implant in their device structure as well as doing metallization plating, those are really the product offerings that we have on MATRIX.

Got it. Got it. And as it pertains to the ENERGi, with the Chinese customer, 1 gigawatt coming on from these tools, our understanding, obviously, is that they do plan to build out additional capacity beyond that first gigawatt. What's the impression you have thus far in terms of their timing of additional orders?

I think, in general, without getting too specific about their plans, what we've seen publicly being announced -- and you can follow that as far as where the money is coming from to support the builds, it's not quite as aggressive as it was maybe 6 months ago but still moving forward.

Okay. And that's all for Chinese domestic use, as I recall, correct?

That's -- the majority of it is our understanding, although they don't necessarily share where they're selling to.

Great. And just one last clarification. We're talking about 2018 revenue rec, but we're still on a normalized cash receipt, right, in terms of getting the majority of the revenues -- or getting the majority of the cash, I should say, upfront, correct, on those tools?

That is correct, yes.

Your next question will come from the line of Craig Ellis with B. Riley.

I just wanted to follow up with the press release statement and something from the prepared remarks regarding VERTEX lead times. Can you help us understand how significantly those can be reduced? And is that something that winds up becoming structural so that it's part of the ongoing program after the accomplishments that you've made that lead times will stay low? Or is there something that's more onetime about what's going on right now?

Well, if I understand the question, as far as -- the standard lead times for those tools is about 5 to 6 months, and we've talked publicly about bringing those down under 4. But that being said, I mean, if you look at the maximum lead times, fundamentally, you take the order and you would buy all the components and build it, and that would build up your lead time. On the very other far end of the spectrum, you can build the tools inventory, and then the lead times are basically what it takes to do the transaction and ship. So we're cognizant of where we sit in the cycle. And we, as we'd said, are very focused on managing our inventory to ensure that we can move quickly in the back half of the year.

Got it. That's helpful. And then related to that, you have a customer that's looking at VERTEX for smartphone and wearables applications. Can you talk a little bit more about how material you think wearables could be as a demand driver for VERTEX?

Well, it certainly depends on the size of the wearable. So the very small sport watches, I believe, they've -- Truly has announced they'd do the Polar watch. That doesn't drive a lot of square meters of glass. However, some of the bigger applications will scale accordingly. But certainly, it's a function that we're seeing interest in, in that wearable space. And it's a little less daunting of a process, I would say, to get qualified on that type of an application. And I did mention in my prepared remarks, Truly did get a couple of cell phone makers. They're small, I would say, Tier 2 in China that are using the film on their cover glass. So we're still working with them. Like I said in my remarks, we were out marketing together their back cover solution, and we certainly see a lot of attention being paid to glass back covers as a trend moving forward.

And that trend is driven by wireless charging, Wendell? Or is there something else that is driving interest in that on the part of customers?

I think it's -- the primary driver is wireless charging. You also look at transmission. I think you can get -- your radio signals don't have to be quite as powerful, so you can actually get some extended battery life as well by transmitting in and out through insulators. So -- but fundamentally, you're right, it's the wireless charging.

And then just 2 that are financial related for James. Regarding the operating expense in the quarter, it came down more significantly than we had expected. You said that was related to contracts and R&D. Was one meaningfully greater than the other with respect to the contribution to the reduced OpEx? And is that OpEx level sustainable going forward? Or was there something that was onetime in nature that benefited OpEx in 2Q?

So I think R&D was down a little more specifically than the contract side of it. But if you remember, in Q1, we always see a higher increase in OpEx in Q1 just because we true everything back up to the start in terms of employer taxes and other types of things. And then as we've increased the revenue and the profitability, we saw more variable comp. So I expect, as we gave guidance to OpEx in Q3, for us to be around the mid-10 level in Q3, and we were just slightly below that in Q2.

Okay. And then the last one for me, and I'll jump back into the queue. With regard to the higher year-on-year revenue growth guidance, 40% year-on-year, very good, nice to see, I think I heard the company mention that part of that was due to an additional VERTEX tool. So I expect that, that's either in 3Q or 4Q, if I heard correctly. Can you clarify when you would expect to rev rec another tool?

I would say that -- we'll just leave it at the back half right now. The situation is dynamic, so we did build into our last revenue guide additional VERTEX into the -- into our plan. It's still there.

Your next question will come from the line of Ben Klieve with NOBLE Capital Markets.

All right. So I have a few questions here. First, regarding kind of how we should look at taxes as you turn towards kind of more sustainable profitability over the longer term. Because I'm wondering, as we look into '18, do you have a rough idea kind of what your pretax income breakdown is going to be on a domestic versus international basis going forward?

Well, as you can imagine, we aren't guiding '18 right now. But I can tell you there's a certain minimum amount of alternative minimum tax, which is what you're seeing in '17. And as we look forward, we have over $60 million of NOLs and about $13 million of federal R&D tax credit. So we certainly have the ability to reduce the taxes going forward despite what we hope would be much higher income in '18, but we haven't guided to that yet.

Right. Okay. And so then -- another question I have regarding guidance. The guidance that you have for this year, what does that include from a 200 Lean delivery perspective? Did -- I know you had 1 -- the most recent order you indicated wouldn't be shipped until '18, and then you had a 2 system order in May. Are those 2 systems included in your '17 estimates? Or is that going to get pushed out to '18, do you think?

No. In the prepared remarks, I had mentioned that we anticipate for the calendar year of 2017 to ship 6 200 Leans.

Okay, okay. Sorry, I missed that. And kind of last question I have is if you can elaborate a bit on the Photonics activity and the new orders that -- or excuse me, the new activity that you've discussed. To what degree do you see any potential for follow-on orders from these awards? I know you said this year you expect it to be -- the Photonics to be pretty flat year-over-year. But is there anything that you can -- that you are taking out of the Photonics activity now that, that kind of gives you more longer-term hope? Or is this -- is the market still relatively flat over the longer term as you see?

Well, I think what we see this year is we are -- the business in Photonics ebbs and flows between funded development and product delivery. And beyond the Joint Strike Fighter, we continue to be in volume, LRIP manufacturing, and that program is going for quite some time. We are going to see the Apache program, which is again a product that is transitioning more to sustainment, and then it will come back at a little later time with -- to upgrade those cameras to the next-gen technology. So we're transitioning as we move to the back half of this year into a more dominant R&D-funded activity, which is built around making this brand-new sensors, the ISIE 19, we've been working on it for a while. And it was really key for us in the first half of this year to shore up and make sure we had all of that funding in place because it can take some time. And I think my commentary today is that we made great progress. The DELTA-I program came through with this. That comes in, in April next year is when the funding starts there. However, I also said, in the second quarter, we booked $400,000 to continue that effort, and we expect another $2.2 million to continue that effort to come in this week. So you're seeing the transition in between a little more funded development versus product. This is all kind of the natural cycle of it, but what it's really doing is setting us up with the next sensor to fill all the sockets we've already filled and will fill with the ISIE 11 sensor. Yes. I just -- one thing I did mention on the call that I would highlight is that the last binocular program that we were engaged with was a joint project we did with another company in 2013. We have not had a lot of activity in funded development for binoculars since that time. However, as we moved into the first half of this year, we now have 2 programs, the DELTA-I, which is delivering the binocular goggles, as well as the Australian Army program that we just got aligned with is also delivering goggles. So that's another set of products for us that we're under development today to deliver in the future.

Your next question comes from the line of Mark Miller with Benchmark Company.

You've been discussing the second customer for the DLC coating for quite a while, and you termed there had been exhaustive testing. I'm just wondering, in terms of the qualifications, are you through with all the qualifications you've done so far? Are you successful? Are you still working on a couple of issues there?

Well, I think this -- in the applications that we're dealing with right now, slightly different than what we dealt with, with the first products at Truly. And there's a multidimensional type of evaluations that have to occur. Some of them very technical. Some of them not so technical. Some of them are more look and feel and things like that. So as we go through this process, there's new type of testing that's happening that we haven't done before with our previous customer as well as our desire to continually improve the performance of the films that we're putting down as well. So it's a little bit of both. It's ongoing. I mean, to kind of put it in perspective, we did a lot of work with our in-house coating on this particular project. And we put the first tool out in the field in December for this customer, signed it off in January, so you can basically say that the tool has been under evaluation for about 4 months. So -- although we talk about the order and we built the tool and we're in evaluation, we're still working.

Okay. Are there any specific issues with this customer -- related to the customer such as delay and a reduction of new products that are also impacting you?

No, I couldn't comment on anything like that.

Okay. Turning to hard disk drive. You've raised your revenue estimate for this year because of nonsystem revenues. Is this being generated by retrofit of a number of tools or a limited number of tools? I'm just wondering the magnitude of this opportunity. Or is it just simply more spares and service related?

No. I think the bulk of this that -- the upside that we saw and some of the ongoing activities beyond the 200 Lean sales that are going in for technology upgrade is driven more by the evolution of the actual media technology itself. So it's not completely broad-based, but it's certainly traveling with product lines that would be upgraded to, say, a new process or something like that. So that's kind of where we see that.

Okay. So it's more of an upgrade than just increased service revenues, which could extend (inaudible) of system?

That's correct. That's correct.

(Operator Instructions) Our next question will come from the line of Nehal Chokshi with Maxim Group.

I want to add on to Mark's initial questions about the VERTEX qualification process. You did describe that it was taking a little bit longer than anticipated. I think some of your answers to what Mark had to say describes why that is, but I wanted to see if there was anything additional there that is driving that longer-than-anticipated qualification process.

Maybe one of the answers to that is my judgment on how long it was going to take might have been off a little bit. We're in lots of new stuff, so that's a good thing.

Right, right. Okay. Now given that this qualification process has taken a little bit longer than anticipated, do you -- how would you describe your confidence level, whatever level it may have been, that VERTEX will move into that 25% adoption of cell phones at some point in time in the future relative to what your confidence level was one quarter ago?

I think as far as looking at our estimates of what that market opportunity is, I think it's the same. I think that -- again, as I had mentioned I think on a -- just recently in answering the question is that we continue to work on our protected films, and we have some of the OpEx that you see in equipment is working on the different films for different applications. I think any delay in adoption on front cover glass is offset by the fact that we are seeing activity on the back side of the cell phone as well, which were -- fundamentally were never in those estimates of square meters of cover glass processing in 2020.

When did you start seeing the activity on the back sides begin to kick in?

I would say it's more of a this year phenomenon.

Okay. And just to be clear, the question was really confidence level -- I'll just put it as a probability of something happening -- that confidence level or the probability of that this inflection will happen, has that changed relative to a quarter ago? Not the cam assessment but the probability that you would assign, whatever probability that might have been?

Yes. Well, it's the same because it's those tools that we were -- put in our guidance in our call 3 months ago are in the guidance that we gave today.

Okay. And just to be clear, the guidance that you did provide of 40% year-over-year growth, that does embed additional order or orders for VERTEX?

There's a lot of different moving pieces, so it could be either.

Okay. And my last question is that you did mention that you're looking at different ways to reduce lead time. One was to actually build systems into inventory such that if you get the PO, you can ship it on demand. At what point in time of the year would you decide to start to build systems into inventory, i.e. could we actually start to see inventory levels go up on a September quarter without the actual order being placed?

In the September quarter, it would probably be closer to the tail end of that quarter that we would be looking at additional inventory. We certainly have -- we're managing long lead parts now. Of course, they don't show until we can take receipts, so...

Yes, if I can. You don't forget that the 12-system order we got for the ENERGi tools won't show up as revenue until '18. So you will see some inventory build associated with the ENERGi tools that we're building and shipping because they'll show up in inventory built. We'll have -- you'll see some customer advances. And then as we ship them, they'll go into deferred revenue, but they'll stay in inventory until we revenue them.

Okay. And so that inventory build will start within the September quarter or December quarter for the ENERGi systems?

Those have already started. We got the order, I believe, in February, and so we started ordering material after that. So some of June will already have that inventory build in there. But keep in mind, we also got customer deposit for that. So we don't just manage the inventory to ship to the customer, we're continuing to manage the cash.

Your next question comes from the line of Orin Hirschman with AIGH Capital Partners.

So just in terms of the solar, in terms of potential additional orders. Do these have to go through installation and acceptance first in order to get to the next level or not necessarily if they are familiar with the products enough?

I would say, right now, they have the 2 tools. I think that we've gone through their history. We had to do some upgrading on those tools. We've revenued those now. And they've ordered the next batch of 12, so they're pretty familiar with the tools. I think that it's -- their overall -- when I reference success with that product line, it's really not only our tools, the other tools as well as the device itself and how it yields and what its efficiency levels are driven to. So there's a lot of pieces there. But when they're successful, they certainly have publicly announced plans that they're expanding.

Okay. So do they have to go through the whole installation procedure for the first capacity before they -- or have it up and running even before they would come back to you for the next [frame] although that (inaudible) here?

I think that's -- I don't -- there's no requirement that I'm aware of that the first tools out of this batch are fully through install. But I would assume, given the fact of whether timing is -- and I talked about being in a position in 2018, first tools are -- the first tool gets out of here this week. It's already boxed. So there'll be ample time to get those tools installed and running.

Okay. And in terms VERTEX, I'm not clear even though you've done this a few times on this call, so I apologize. Are you hoping to actually ship and revenue 1 more VERTEX system this year or if you'd get an additional order for this year?

Orin, I'm really having trouble understanding, as something happened to your line.

I apologize. In terms of VERTEX -- I apologize that you've said it a few times, but I'm still not clear. Are you hoping to revenue an additional VERTEX system this year or book an order for an additional VERTEX system this year?

We would -- at this point, the VERTEX tool has gone through its perfunctory sign-offs. So we would take revenue on anything that shipped out of our factory at shipment, most of the revenue. We hold back 10% or so for sign-off.

So in terms of what's baked into the guidance, I know 2 other people asked this, but I just want to make sure, is baked into the guidance from -- no additional revenue, 1 additional system revenue or just -- you were just noting the important thing that you would hope to get another order this year?

Yes. In that is -- at least a VERTEX in that guidance that we gave. And we've got a lot of moving pieces in our revenue. So we're not only looking at VERTEX. We're looking at our HDD business. We're looking at upgrades that could be going on there. And we kind of piece that all together, and that's where we come up with the 40%. But as we move from last quarter to this quarter, I think my point is we specifically said there was a VERTEX in there, in our guidance and it has not gone away.

Okay. So just 2 additional follow-ups on VERTEX, and I'll let somebody else ask. In terms of hoping to get another VERTEX shipment in this year, is it possible to come from a third customer? Or it has to come from 1 of the 2 existing customers?

No, no. It's -- the -- as I -- in my prepared remarks, beyond the 2 customers, we're working like crazy. We're also engaged with other cell phone and cover glass makers on different projects as well, but we manage that out of our coating operation here internally.

Okay. Meaning none of them have actually played with the tool themselves on their own premises yet?

That's correct. That's correct.

Do you feel that, that precludes an order till they play with the tool or not necessarily?

Typically, that's not been a requirement, at least with the stuff we're doing with other customers. It's really about the films themselves and the performance and getting enough confidence in the volume that a tool is required to provide that capacity. So as an example, with the activity with Truly, we put 1 tool in there. They purchased it. We were working with them. Ultimately, their end customers want to -- going to want to see that they can deliver the same film quality that Intevac can here in the U.S. So that drives that tool. And then really, in order to get a larger order, you have to have an existing capacity in place. Otherwise, it's a chicken and an egg, and that's what drove the 4 additional at Truly. So it's similar everywhere else.

And just the last question on VERTEX. Just in terms of the cover -- the back glass application have had the advantage in the wireless charging over the ASP 4, and that could be called question. Just is that something where you think you will see -- or your customers, I should really say, whether customers will see a design win in 2017 or unlikely?

In the case of Truly, they're out there absolutely with their Magic Glass solution that not only includes the 3-dimensional back cover glass and the tempering of that. But also with the PVD films that they're putting down to put patterning and color and matte finish or satin finish as well as the old DLC, they're out there pushing that hard. I think you're seeing the cover glass manufacturers themselves wanting to add value in that space by providing not only the cover glass, but the actual film stack that goes on them, depending on what each customer might want.

And is there -- on that specific point, do you -- what do you think is taking so much time on getting the back glass? And again, it may not be a lot of time because we're not in the trenches there to know what's going on. You are more. But what do you think is an impediment to getting those first design or designs?

I think it's probably -- in the activity that we were marketing, we're marketing what I would call people that are going to follow some of the bigger guys in China. So I think that there is a demand cycle that's driven by the top 2 or 3 cell phone makers that everybody moves with them. I'm not completely sure what the global capacity for 3-dimensional glass manufacturing is. With the 1D and 2D glass, almost all the cover glass guys can do that. But to be able to mold it and temper it into these 3-dimensional shapes, I think there's a limited amount of capacity there. And that might -- actually, some of that capacity is captive inside of the cell phone makers, I would think.

But does that mean you have to have AAA Tier 1 guy to do it first before someone like Truly will get an order? Or Truly has the capacity and the capability to actually get a Tier 1 order?

They certainly have the deposition capacity to take a significant order. In oDLC, they've got 4 machines. So I mean, depending on how you define significant. Four machines only going to do 24 million a year, which is a small order from a big guy. So again, with the back cover glass, certainly, we're seeing the trends, and the cover glass manufacturers want to add value in that space. Certainly, the -- I believe the new Samsungs out are all glass cover -- back cover glass. So things are moving in that direction.

Thank you. There are no further questions at this time. I'll now turn the call back over to Mr. Blonigan.

Thank you. Before I sign off, I'd like to thank the dedicated employees of Intevac all around the world for their tremendous effort and successful outcomes in this dynamic environment. 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 Q3 call in October. Until then, so long.

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