Intevac Inc (IVAC) 2017 Q3 法說會逐字稿

Good day and welcome to Intevac's Third Quarter 2017 Financial Results Conference Call. (Operator Instructions)

Please note that this conference is being recorded today, October 30, 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 third quarter of 2017, which ended on September 30. In addition to discussing the company's recent results, we will provide financial guidance for the fourth quarter and full year 2017.

Joining me on today's call are Wendell Blonigan, President and Chief Executive Officer; and Jim Monis, Chief Financial Officer. Wendell will start with a review of each of our businesses and our outlook going forward, then Jim will review third quarter results and discuss our financial outlook for the fourth quarter and full year 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 October 30 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'll now turn the call over to Wendell.

Thanks, Claire, and good afternoon. Today we reported Q3 results exceeding guidance, with revenues of $27 million and $0.05 per share in earnings. Year-to-date compared with the first 9 months of 2016, revenues have increased 72%, gross profit has nearly doubled, and new orders are up 26%, as we continue to make significant progress towards our revenue growth and profitability objectives for the year.

Growth in our Equipment segment and execution on our Thin-film Equipment growth strategy has now driven 4 straight quarter of profitable results for the company. We booked 2 new 200 Lean systems in the quarter, which equates to 13 200 Leans booked over the last 6 quarters, despite media overcapacity in the industry. We also saw a higher than expected level of upgrades, which were accelerated from Q4 into the third quarter, driving revenues above the high end of guidance.

Backlog in Equipment is at 7-year high of $59 million, the majority of which is expected to revenue in 2018. Included in backlog for 2018 are the 12 ENERGi implant systems and 3 of the 5 200 Leans currently in backlog.

In our Photonics business, new orders increased again to over $8 million. The increase in order activity was driven primarily by the booking of funds for the development of our next-generation night vision sensor, the ISIE 19. We also increased photonics revenues, which were up 12% from Q2 and up 15% from the third quarter of last year. We continue to expect our full-year 2017 revenues will be up about 40% from last year, with profitable bottom line results.

Now for an update on each of our businesses, starting with Thin-film Equipment. In the hard-drive market, the program to upgrade the technical capabilities of our customers' installed base continued. We booked 2 and shipped 2 200 Leans in Q3, with 5 in the backlog at the quarter end. We have said that this is an ongoing technology upgrade program, which we 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 earlier, the installed base of media capacity is actually lower today than it has been in over 7 years. This has given the permanent retirement of a portion of the industry's media capacity. We believe media capacity has declined from 300 million disks per quarter to just under 265 million per quarter.

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

Compared to 4 system shipments in 2016, we expect to ship 6 200 Leans in 2017. Along with the non-systems business upside we saw in the first 3 quarters of the year, hard-drive revenues have been stronger than expected, which will deliver meaningful growth over 2016 levels.

A bigger part of our future growth story is our VERTEX product and our progress deploying our protective coatings into the display cover panel market. The VERTEX deposits optical-grade diamond-like carbon, or oDLC, as a protective coating for display cover panels. We believe the largest driver of significant revenue growth potential over the next few years continues to be for the VERTEX.

Our revenue guidance of 40% growth for 2017 includes the 4 VERTEX that were revenued in Q1, along with an additional VERTEX system in Q4. As of today, we have 1 VERTEX in finished good inventory, which will allow us to quickly respond to a new order and ship this additional tool. As we've said previously, this order could come from either an existing or a new customer.

In 2017 we witnessed top-5 cellphone manufacturers making the move to the glass-back covers to enable wireless charging. This transition has clearly been driving increased interest in oDLC. At this point we can say that every major player in the industry is aware of what we are doing to protect glass on mobile phones and that includes back covers.

oDLC sampling and demo activity taking place both at our customer sites and in-house by top-5 cellphone manufacturers was exceptionally robust in the third quarter. Helping to drive activity is growing interest in integrating oDLC as a protective coating with other film stacks. The integration of oDLC with other film is now a significant driver of current customer evaluations and qualification activity.

Over the last several quarters we've developing a number of variants of our oDLC film stack, specifically tailored for unique product applications. In some applications color and transparency are the most critical criteria, in others its impact resistance and in some other it's the coefficient of friction. Each of these variant films have been tested and modified, depending on results. This activity of tuning these films for specific applications is a major factor in the extended evaluation cycles that we are seeing. Our first customer truly is in production and is actively adding customer projects, incorporating our coating. They are also making good progress in gauging top-5 cellphone manufacturers on the incorporation of our oDLC.

Our second customer continues to move deliberately through the evaluation and qualification process for multiple applications. The extensive evaluation and qualification processes in which we are engaged continues and has taken longer than we initially anticipated. The important aspect is the work is not ebbing and our customers continue to invest significant time and resources to bring out technology to market.

Now an update on our activity in solar equipment, our backlog currently includes 12 ENERGi implant systems for high-efficiency solar cell manufacturing. Our purchase contract calls for our customer to take delivery of all 12 tools before year-end, but delays in their factory build has resulted in them delaying the delivery schedule for the systems. We shipped the first 3 in the third quarter, with the scheduling of the remaining tools still being determined. As a result, we no longer expect all 12 tools will revenue in a single quarter, previously presumed to take place in early 2018. With our current visibility, the first 3 tools should revenue in the first half, with the revenue timing for the next 9 tools dependent on a revised shipment schedule.

Now moving on to Photonics, in the first third quarter revenues rebounded by over $1 million to a total of $9.5 million, with growth in operating margins also normalizing within our target model range for the business. Importantly, orders increased to over $8 million, driven by our success in booking the funded development contracts we've been pursuing over the first 3 quarters of the years. Highlighting the order increase was a $2.3 million contract for the development of our next-generation sensor, the ISIE 19, through the design and initial prototype stages. We also booked several additional development programs, including funding for integrating our night vision, sensor, and free form Prism into a helmet for explosive ordinance removal, funding for the integration of our free form Prisms into future augmented reality day-night soldier systems and man tech funding to mature our proprietary see-through free form Prisms manufacturing process.

We are also continuing on contract for the development of the initial prototype deliveries of our wireless head-mounted displays for the family of weapon site crew-serve and M2 weapon site programs.

Progress was made in camera system sales, as we replaced on contract for delivery of the integrated night vision camera on the Striker II helmet for the typhoon aircraft in Europe, and received new international orders from France, the U.K. and Israel for our digital night vision.

On previous calls, I've discussed the excitement that we have around the DELTA-I coalition warfare program. In the first week of October, we had a key milestone for this program. Together with the U.S. government as sponsors of the DELTA-I program, we hosted an Industry Survey Day at AUSA in Springfield, Virginia. The DELTA-I program will deliver 24 night vision goggles to the 4 nations and 6 entities funding the development for evaluation by operators in the field. The binocular night vision goggle will incorporate 2 of our next-generation sensors, the ISIE 19, and a high-definition long-wave infrared sensor, providing fused imagery. The award of the DELTA-I contract is expected during the second quarter of 2018.

So looking now at the big picture for our Photonics business, we've made excellent progress in positioning ourselves in the development programs needed to address our revenue opportunity pipeline. We delivered our final cameras for the Apache fleet in Q3, and are now underway working with the Apache program office to begin not only the development of the second camera for that platform, but the specification and concepts for replacing the current night vision cameras with our ISIE 19-based ones, all of this consistent with our Photonics growth strategy.

Our opportunity pipeline spans a long period of time, as military development programs are initiated well ahead of production plan to ensure readiness to support our military. Inside our pipeline are several development programs that will eventually drive a wave of new product revenue, similar to what we've experienced in the Apache program over the last several years.

With all of the new development programs we just talked about, with the completion of the initial phase of the Apache program, our Photonics revenue profile is now moving from a product-driven one to a funded R&D revenue profile. This means that our Photonics results will now be trending to the lower end of our profitability target range for this business, which is 12% to 15%.

So in summary, for the company overall our outlook for 2017 remains strong, with revenue growth of approximately 40% over 2016, expanding gross margins and profitable bottom line results. And while it's premature to provide guidance for 2018, given the activity levels in both our core and new business initiatives, we believe we are on a path to continue to grow revenues and earnings next year.

I will now turn the call over to Jim to discuss our third quarter results and provide guidance for the remainder of 2017. Jim?

Thank you, Wendell. Consolidated third quarter revenues totaled $26.7 million. This was above our guidance of $25 million to $26 million. Thin-film Equipment revenue totaled $17.2 million and included 2 200 Lean systems, along with upgrades, spares and service.

Photonics revenue of $9.5 million included $7.3 million of product revenues and $2.2 million of contract research and development revenues. Q3 consolidated gross margin was $11.3 million or 42.3% and above our guidance. The higher revenue than guidance contributed to the higher gross profit dollars. Q3 R&D and SG&A expenses were $10.3 million, up from Q2, but lower than our guidance, primarily due to reduced expenses for R&D.

Given revenue above the high end of the range, along with reduced operating expenses, our Q3 net income exceeded guidance and was $1.2 million or $0.05 per diluted share. Our backlog was $72.8 million at quarter end. Thin-film Equipment backlog of $59.4 million included 5 200 Lean HDD systems, 12 ENERGi solar implant systems and non-systems hard-drive backlog.

The backlog in our Photonics business was $13.5 million. We ended the quarter with cash and investments including restricted cash of $44.8 million, equivalent to approximately $2.06 per share based on 21.8 million shares at quarter end. Cash flow generated by operations was $2.3 million during Q3. Q3 capital expenditures were $1 million, and depreciation and amortization was $900,000 for the quarter.

Turning to guidance for the fourth quarter, we are projecting consolidated Q4 revenues to be between $24 million and $25 million. Within this range, we expect fourth quarter gross margins to be between 35% and 36%. Q4 operating expenses are expected to be around $10 million. We expect interest income of about $100,000 and net taxes of about $200,000 in the quarter.

For Q4 we are positioning in a loss of between $0.06 and $0.07, based on 22 million basic shares outstanding. Given our guidance for Q4, we expect full-year revenues will be in the range of $112 million to $113 million, consistent with our previous guidance that revenue would be up around 40% from 2016.

We expect gross margins to be between 39% and 40% for the year, with operating expenses of approximately $41 million for the year.

Below the operating line, we expect to see interest income of about $400,000, and net taxes of about $1 million for the full-year.

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

(Operator Instructions) Our first question comes from line of Brian Alger from Roth Capital Partners.

I want to dig into the timing of the ENERGi systems. Obviously that's been in backlog here for a little bit. And to the best of our knowledge, at least here at Roth, it appears that the customer has received a lot of the funding, at least for most of their CapEx buildout. I'm curious as to what you know at this point for the additional 9 systems. Is that something we see going into the field here early in the next calendar year, or is just still wide open?

We're in discussions with them, and we've began those discussions. We've got the next 4 tools that we'll be completing here shortly. So we anticipate to have some better clarity. But I know that the factory itself has been delayed. I think it's-- as we know right now, they still haven't moved tools in. So that's kind of what we're seeing that those first 3 tools, given where we're at and they don't have them installed yet, it's probably at least a quarter delay for those first 3. So that would be sometime probably in the beginning of Q2, assuming they get moving again. And then we'll have better clarity on where the rest of those tools lend by the end of the year for sure.

Okay, great, appreciate that additional color. The Photonics business was a little bit better than expected in the quarter. I'm curious as to -- it sounds as though going forward though, because we don't have a lot in the way of the product sales at least in backlog right now that you expect to see a drop in revenues; can you maybe quantify that a little bit for us? I mean the gross margin decline that you're talking about is pretty substantial.

Yeah, the -- so a couple of things, thank you, Brian. Absolutely, as Wendell said, the production business itself for Apache, we saw the majority, all of that ship in Q3. And so as we go into Q4 and into next year, as we've been kind of positioning the Photonics business, it's going to see a higher element of the funded R&D. And that higher element of the funded R&D essentially by its nature just has a lower gross margin. We're still working to target our gross margins for Photonics to be at around 35%. We'll see it a little bit lower in Q1, just based on the mix of the business that we have in the fourth-- I'm sorry, in Q4, just based on the mix of the business we have remaining in the year.

And we should see the revenues actually go down a little bit. It may go down as much as $2 million in Q4 versus what we saw in Q3. And that's one of the things that is both driving the guidance, the $24 million to $25 million, and also having an impact on the overall gross margin in Q4.

Right, okay, got it. And in terms of these other projects, obviously you guys have got a lot of different projects you're chasing, whether it's upgrading the systems for the Apache or some of the next generation land fighter stuff. When do we see the product side of it or the production side of revenues start ticking back up? Is that second half of '18 or is that further out?

This is Wendell. I think, don't forget we do have a product business. We're shipping cameras for the Joint Strike Fighter. It's the really the Apache program that had played out. Certainly I think when we look at the programs that we're in development with, I would say that the family of weapon sites, wireless head-mounted display is probably the furthest along in its development schedule, so to speak, as they're taking prototypes. And they'll start doing some limited runs of those in '18.

Okay, great. And one last one if I can, just on the oDLC front, you said you have a tool in finished goods inventory. Is there something that you're expected to come over the (inaudible) or is that just prudent planning just in case?

This is -- we've talked pretty much all year about how we're kind of managing that inventory and watching lead times. And it's really in one particular scenario, we believe that there will be a need for something very quick to basically bring up another supplier. So we wanted to make sure we had that tool available to make that happen. And then we managed a bit of our inventory as well. We've got some long tent poles, so to speak, as far as some of the commercial components that we've either placed on order or at least got in the queue, but nothing crazy.

Our next question comes from the line of Ben Klieve from NOBLE Capital Markets.

A couple questions, first on the HDD market. You discussed that capacity fell just a hair below 265 million units in Q3. And my question is that last quarter you said that it fell from kind of 300 million range down to 265 million, and then so a pretty sizable drop, and then just down a hair in Q3. I'm wondering if you can describe kind of what you see as having driven that and if you think that 265 million is kind of a stable base, if you -- kind of how you look at that capacity over the next couple quarters.

Okay, sure. So Ben, I think we gave the same number last quarter at 265 million is where we've gone through the install base, basically counting machines and what occurred is you had specifically on our equipment where there is another -- a metal layer or another step was being added to the media process, which required what we call process modules, and that falls into our non-systems business. And we started working on that, that particular program, I want to say -- I'd say late 2015, beginning 2016. And then that project got halted because they actually took machines that were currently part of the overall capacity, and they disassembled them all and then used those modules to put on the other tools.

So we know that there are machines that have basically been retired and we know that when one particular customer shut down their operations in Singapore, we're aware that some of those machines never came up and they're in storage. Now those could come back, but we'll have to wait and see. So that's kind of what we've seen occur over the '16, in the '16 time frame is why we see those machines coming offline.

Got you, thank you, and then one other question from me, kind of two-part here, regarding the valuation process around your VERTEX product. First, I'm wondering if you could kind of describe a bit the evaluation process for Truly versus your second customer. And then also, as you sit back, with this long process with the second customer as you play Monday morning quarterback, I guess; is there -- do you see anything that maybe you can -- that you can do differently, be kind of more proactive to kind of accelerate this evaluation process for your future customers? Or is this just something that you're basically going to have to -- just have to deal with, if you will?

Well, I can answer the second, Monday morning quarterback question first. We're doing everything we can. But specifically when you're working with some of the larger end customers that are really driving the specifications and the criteria, there's a very limited amount of pushing you can do. We want to be sure that we're very responsive and we're turning demos the way we need to be turning them. They have the machine and we've just got to keep moving forward and as I said in my remarks, we've also been working on different variations of the film, depending on what exactly the application is, whether that be for a wearable, for a front or back cover, or for a tablet; whatever that application may be. And we've got to keep doing that.

And I would say to your first question about Truly and the second customer, one thing you should see is that Truly and us, we went in as partners on this. And it was really Truly's strategy that they would go in and they wanted to be the very first company out in the market to have this capability. And what we're seeing now in the third quarter specifically around some back cover activity that was a very smart move. Because they're seeing customers they may not have saw previously or without that capability. So they've been very proactive doing that.

When I look at the second customer, their process is more driven not from the cover glass operation, but by who their end customers are and what they're telling them to do. So in those particular -- in that situation, they're not out necessarily promoting. But they've got the machine. They've got it hooked up. They know how to run it. And when it's time, if they add capacity they'll be ready to do that. But they won't do that ahead of time, necessarily.

Kind of a long-winded response, but I hope it got your questioned answer there.

Oh no, very much. I appreciate the color.

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

I guess first let's start off with the Truly. Last quarter you gave a rundown of opportunities that Truly was pursuing. I was wondering if you had -- if you can provide any incremental customer wins that really has progressed with in order to gauge how they're doing with the anti-scratch tool.

Yeah, I think from the prepared remarks, certainly the third quarter -- and this is kind of post announcement of the iPhone 8. You're seeing the glass back cover application, specifically with maybe some of the players that were going to wait to see what would happen in that announcement start the sampling activities. So that certainly has come around. And as far as their engagement with the top guys, their strategy to have the diamond-like carbon and some other key equipment has paid off pretty well for them. And they're in what I would call beyond the sampling set for some projects. They're actually more in the proof that you can manufacture this thing in some volume, so initial engineering volume run units to go forward.

So there's still some work to do, but good progress there.

Okay, and then you said that you have a VERTEX system in finished goods and that's to be able to provide a customer in the case that they need it on a relatively short lead time. If I recall correctly, the number of, let's say, smart phone cover glasses that it can produce in a year I think is like in the 5 million or 6 million per year range. And so I was under the impression that if one of your end customers are going to move forward with a production order, they're going to need multiple systems fast. And so I'm -- help me bridge the understanding between getting one system ready to go versus possibly needing multiple systems ready to go.

Yeah, well, we're not going to be able to build a bunch of finished good inventory. So I wanted to get in shape where we bring in our lead times down from around 6 months to around under 4 is where we want to go to. But then on top of that, as I discussed I think on the previous answer, there was a scenario that one particular end customer that we would like to capture, but they have requirements as far as how many suppliers and what the maturity of those suppliers need to be before they can make a commitment to move with basically -- as I talked in the script, some new functionality with some additional films that incorporate that.

We wanted to be in position where we could deliver that and get that obstacle out of the way as quickly as possible.

I see, okay, understood. Just two more questions, backlog; that was up 4 million Q-over-Q on a same-unit backlog and essentially the same composition. So is that backlog up due to Photonics or is it Thin-film Equipment spares?

It's up due Thin-film Equipment. And a lot of that is non-systems related, which is why the breakout we give of systems really hasn't changed. Because we booked 2 and shipped 2 on the hard drive. And the ENERGi are still in backlog. And it's really based on the fact that we saw some strong bookings in the non-systems business for the Thin-film Equipment. But not to be lost, and I probably should have expanded a little bit on Brian's question. We had over $8 million in bookings in the Photonics area, with $9.5 million of revenue. And the majority of that $8 million was in funded R&D.

And if you look at the Q3 results in Photonics of $2.2 million of funded R&D, that's the most we've had in almost 3 years. And it kind of positions, as we've been saying, as we move forward with some of the production like Apache volume coming down. We're going to be more focused on funded R&D, and we saw some good success with the bookings in ramping of the revenues. And we continue to see that revenue ramping up again in Q4.

Okay, understood, and my last question in the hard-drive world, there's been the introduction of microwave assisted magnetic recording by Western Digital. Could you discuss if that means anything for Intevac in terms of tool needs and just discuss that general dynamic.

Yeah, I think from what we know of it, and we don't know a ton about it, but we certainly after that was announced went out to understand what the requirements would be. We from a system perspective, from Intevac's tools, there's similar kind of upgrades that would be needed to do if you were transitioning that to HAMR. And that is mostly around higher temperature deposition of the material. So we say HAMR and now this microwave is kind of a wash for us. But it is interesting these higher density, aerial density technologies are certainly scooting to the right, which at some level is good. Because we'd like to sell systems rather than upgrades.

Right, just to clear though, my impression is that MAMR is the same material set as PMR, but a different recording head technology. Whereas HAMR is a completely different material set. And therefore, I guess one would think that with a completely different material set, completely new tools would be needed in order to accommodate HAMR. Whereas with MAMR, wouldn't it be possible to utilize existing legacy install base to accommodate MAMR?

We see both for HAMR media is also system upgrades, mostly around the operating temperature. We've already put some of those in the field already for development work. But I think you're right. There is something going on with the materials itself. But I've not been able to at this point get anybody to tell me exactly what's going on there on the material side.

Our next question comes from the line of Craig Ellis from B. Riley.

This is actually Peter Peng calling in for Craig Ellis, and thanks for taking the question. The first question is just on the Q4 guide. It seems like equipment could grow or be flat. What are kind of the gives and takes in that sector?

I would say as I said in a couple of the answers before, probably the biggest difference will be the fact that Photonics revenue will be down. We don't normally give that kind of guidance. But it could be down as much as $2 million from the $9.5 million. And so that's one of the things that's driving the revenue down with equipment relatively similar level between Q3 and Q4. And then because of a slightly different mix in equipment and then a higher amount of funded R&D for Photonics in Q4 and even an unusual mix of that funded R&D being lower than our normal target margins, that's what suppressing the margin down to the 35% to 36% in Q4.

And the upgrade strength, it seems like it's been strong for -- if we include the December quarter, it's 3 quarters of $8 million to $9 million run rate. How sustainable is this, and is this a lot of pulling in from 2018?

I don't think it's so much pulling into 2018. We think that 2017 we were hoping it was going to be stronger than '16 and it's turning out to be that way. In Q3, we've pretty much pulled some from Q4, which is why we didn't raise the guidance to growth of over 40%. But we're not seeing the '17 activity necessarily pull from the '18. And we hope and fully expect to have '18 be as strong as '17, as long as the plans we're discussing with our customers don't change materially.

Okay, thanks for that. And Photonics, so it seems like it's a meaningful stepdown in Q4. Is that going to normalize in the first half of 2018, or is this kind of the new run rate that we should expect?

We're not guiding '18 at this point. But I'll let Jim comment on what we can.

Yeah, I would say it's a little bit lower in Q4 than what we would hope the normalized run rate would be. And as we've been saying in 2017 we expected the revenues for Photonics to be similar to what they were in '16. We're not guiding to '18 yet. But based on the activity that we are working on with various customers and some of the success we saw on the bookings in Q3 for the funded R&D, we would expect to see kind of an acceleration, but most of that coming from funded R&D as we get into 2018.

Okay, and one last question and then I'll hop back into the queue. Your inventory kind of spiked, it seems like $6 million quarter-over-quarter. Beyond that one VERTEX tool, what else is kind of causing that spike?

The biggest issues there is if you remember, we received a large over $22 million order for 12 ENERGi tools with our customer and our contract required us to ship all of those by the end of the year. So we purchased the majority of that inventory and we're on a path to build and ship the majority of those. And we did ship 3 of those in Q3. But then the customer wants to look at their build plans of their factory having moved out. So they're trying to work with us to determine when we should ship the remaining 9 tools. But the majority of that growth, as you said, there was some with that one VERTEX finished goods. But it's really in the ENERGi tools.

Our next question comes the line of Mark Miller from Benchmark.

I just want to return to the discussion of the MAMR and HAMR which Western Digital (inaudible) are now projecting to start coming in 2019. Do you still expect the continued in growth in the number of disks? Because both these technologies will represent a significant increase in aerial density, kind of a quantum leap.

It depends if that comes true or not. I think even with some of the different -- you're not going to come out and one day shift all of the tools over to HAMR or you do it by, there would be a specific product or product line that you introduce there and it would be a gradual adoption. But I think right now we've got an upgrade path, and I think we're just going to have to wait and see how mature these technologies and when they're ready to roll out. Because they have been sliding a bit to the right.

And your lower margin guidance for next quarter, I realize revenues are lower, but is there any impact with mix specifically? Do you see less spares and upgrades in the current quarter?

We do see slightly less spares and upgrades. Some of that was because we pulled some of those into Q3.

The customer pulled them.

The customer requested that they go into Q3. And then as I've said a couple of times as the answers, we do expect less revenue overall in Photonics and a higher mix of that lower revenue, if you will, to come from the lower margin funded R&D for Photonics.

Finally, the taxes, Jim, up next quarter; can you explain that?

Yeah. Some of that is due to the strong hard-drive revenue. Most of our hard drive business goes through Singapore. And so there is a required tax there, even though we have $60 million of NOLs and over $13 million of tax R&D credits, there is a statutory tax that we do also have to pay. And most of that is driven by the strong hard drive business that's coming out of Singapore. It's not very material. It's not a lot of money. But that's what that's being driven by.

And at this time I'm not showing any further questions. I would like to turn the call back over to Mr. Blonigan.

Thank you. So before I sign off, I'd like thank the dedicated employees of Intevac all around the world for their tremendous effort and successful outcomes in this very dynamic environment. I also want to thank our customers for their continued business and appreciated partnerships, thank all of you for joining us today and we look forward to updating you again during our Q4 call in January. Until then, so long.

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