Intevac Inc (IVAC) 2017 Q4 法說會逐字稿

Good day, and welcome to Intevac's Fourth Quarter and Full Year 2017 Financial Results Conference Call. (Operator Instructions) Please note that this conference call is being recorded today, January 31, 2018. At this time, I'd 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 fourth quarter and full year 2017, which ended on December 30. In addition to discussing the company's recent results, we will provide financial guidance for the first quarter of 2018 and our preliminary 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 fourth quarter results and discuss our financial outlook 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 and year, which remain subject to adjustment in connection with the preparation of our Form 10-K 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 January 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 Q4 results favorable to guidance, with revenues of $24.8 million and breakeven profitability. The continued technology investments by our HDD customers and upside in upgrades helped drive revenues to the high end of the range and drove better than forecasted gross margin and bottom line results.

For the full year, our results were consistent with the strong growth and profitability objectives set at this time last year. We returned to profitability and exceeded our earnings guidance. 2017 was another pivotal year for Intevac, in which we continued to execute our strategy to grow our Thin-Film Equipment business with substrate independent thin-film processing platforms serving multiple large markets.

Summarizing the highlights for the year. This was our third straight year of growth in both revenues and orders. New orders were $108 million, up 11% from 2016. Revenues were up 41% from 2016, driven by strong growth in both our core HDD market as well as our new Thin-film Equipment growth initiatives.

For the Thin-Film Equipment business in particular, revenues were up 75% year-over-year. We recognized revenue on every product platform during the year, the 200 Lean, the VERTEX, the MATRIX and the ENERGi. Year-end backlog for this business increased for the fifth straight year to $52 million.

In our Photonics business, new orders were driven primarily by the booking of funds for the development of our next-generation night vision sensor, the ISIE 19, which will be the core technology in most long-term programs we are engaged with now or are pursuing and will drive our product-based revenues in the future.

2017 was our third straight year of improving operating results, achieving our milestone and return to profitability without relying on capacity additions in the hard drive disk market, as we delivered an EPS of $0.18 per diluted share for the fiscal year. Each of these highlighted accomplishments sets the stage for the continued positive momentum of the company, which we have been relentlessly building over the last several years.

Now for an update on each of our businesses, starting with Thin-film Equipment. A big part of our growth story is our VERTEX project in our progress deploying our protective coatings into 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. In 2017, we recognized revenue on 4 VERTEX tools, 3 of which are in production at Truly Opto-electronics and one which is being used for quoting multiple applications of oDLC for performance evaluations and testing at a second Tier 1 customer.

A key driver of the increased oDLC sampling in demos during 2017 has been a growing interest in integrating oDLC as a protective coating with other film stacks. The integration of oDLC with other films is now a significant driver of current customer evaluations and qualification activity. Over the last couple of years, we have seen Samsung and now Apple transition to glass back cover panels, primarily to enable wireless charging. This transition has clearly been driving increased interest in oDLC by multiple companies, as many cellphone makers follow these industry leaders. We saw a surge of interest in the back half of 2017 on the back cover glass application.

We are pleased to report that a top-5 cellphone maker has selected our oDLC coating to protect the decorative film stack on the back cover glass for a new phone that will be released in the coming months. The capability to deposit oDLC on back cover glass was a key factor in Truly winning this order. This is a major milestone for the progression of our VERTEX business, with production just starting to ramp now. Although it's not our place to make announcements for phone makers, we are very excited about providing value and differentiation that should very soon be visible in the cell phone marketplace.

Recent launches of phones that incorporate glass back covers have decorative coatings or laminates on the inside of the cover glass. Coating on the inside requires you to view the color effect through the glass and is subject to the reflections we all see in sunlight, making it difficult to see what is behind the glass. We have been working on protective -- protection of decorative films that are on the outside of the back cover glass, which makes the color exceptionally more vibrant and striking. These coatings require scratch and wear protection, and our oDLC deposited by the VERTEX is the solution.

At this point, we believe this initial launch will ramp gradually in the first quarter of the year and occupy significant installed capacity. We anticipate, as the end product gets to market, these highly vibrant back covers will proliferate to additional models and handset makers and look forward to keeping you up to date on the success of this exciting new application.

Our second customer continues to move deliberately through evaluation process for oDLC for multiple uses, including months' worth of user field testing for an initial application. This extensive evaluation and qualification process in which we're engaged, albeit taking longer than we initially anticipated, has been an incredibly important step for us as we are learning what matters most in film performance for each application, developing performance metrics, testing methodologies and multi-film integration requirements. It has also given us a clearer picture of the differences in requirements and introduction processes between competing handset makers. Given the accumulated knowledge and effort between us and our customer, we continue to work together towards the initial adoption of our solution on a launch application.

Over the last several quarters, in our labs in Santa Clara, we've been working on the next generation of oDLC to ensure we maintain technology -- our technology leadership position and add functionality that is being requested for different applications across the industry. In support of our efforts to maintain our leadership position, we've been granted a U.S. patent for our oDLC deposition stores and have developed new source technology in support of our newest oDLC film stack we call oDLC 2.0. This new source technology is not only applicable with oDLC and oDLC 2.0, it also will provide a solution on VERTEX to deposit antireflective and decorative coatings for the display cover panel market in the future.

We have been focusing on depositing ultra-hard films that when protected with our oDLC can move the scratch resistance of glass closer to industrial sapphire in what's called a Mohs hardness test. In our lab, we've demonstrated the ability to deposit thin-film oDLC underlayers that pass the Mohs 7 hardness test, and when protected by oDLC, retain all mechanical functionality of the original oDLC film.

Cover glass typically scratches at Mohs 5. Industrial sapphire scratches at Mohs 8, similar to our new films. We have just begun initial discussions regarding oDLC 2.0 with our customers and plan to have the new technology productized and available for new VERTEX shipments and upgrades for the installed base in the back half of the year.

We have one VERTEX in finished goods inventory and long lead material for several additional systems, which will allow us to quickly respond to new orders. And as we said previously, these orders could come from either existing or new customer. While the timing of a major revenue inflection point for the VERTEX is difficult to predict, this year, our objective is to see a positive response to our first phone application for a top-5 handset maker and grow orders, revenue and backlog on the VERTEX over 2017 levels.

At this point, early in the year, our expectation is that we will book 5 to 10 VERTEX tools in 2018, but with the opportunity for upside to that range, dependent on the traction we get with our initial launch on the top-5 handset maker's phone. We'll update you on that range as we progress through the year.

In the hard drive market, the programs to upgrade the technical capabilities of our customers' installed base continues. We have booked 13 200 Leans over the last 6 quarters, 4 shipped in 2016, 6 in 2017 and 3 tools are currently in backlog for 2018 revenue. We have also witnessed increasing strength in upgrades to our customers' installed base of 200 Leans, primarily to add additional processing chambers and upgrade to our newest technologies. We have said these are ongoing technology upgrade programs, which we see continuing into the foreseeable future, providing us with a solid base of business in our core HDD market.

The fourth quarter was another period of upside relative to expectations in both PC and hard drive unit. We don't have final numbers on exabyte growth or media units, but it's possible, 2017 saw the strongest uptick in exabyte shipped on hard drives in several years. The growth segment in the HDD market continues to be in high-capacity nearline drives, which is positive for our business, given significant numbers of disks in each nearline drive. The industry tie ratio or average number of disks per drive has been growing over 10% a year to a record 2.2 disks per drive last year. 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.

In the meantime, the technology upgrade program is underway, both in new 200 Leans and multiple tool upgrades in the field continues and has contributed to strong growth in our hard drive business over the last 2 years and is expected to drive another strong year for this business in 2018.

Now for an update on our activity for solar equipment. Our backlog currently includes 12 implant -- ENERGi implant systems for high-efficiency solar cell manufacturing. Our purchase contract call for our customer to take delivery of all 12 tools before the end of last year. Delays in their factory build has resulted in them delaying the delivery schedule for these systems. We shipped the first 3 systems in the third quarter and are working with our customer to determine delivery timing on the remaining 9.

As a result of our recent negotiations, a little over a week ago, we now expect the first 3 tools we shipped will begin installation at the end of Q1, with 3 more shipping in the year and the remaining 6 shipping in the first half of 2019. Given the expected installation timing and dependent upon the acceptance duration, it looks like the first 6 tools should revenue this year, with the first 2 requiring sign-off and the rest will revenue at shipment. Once we have finalized our negotiations, we can be more specific on the timing. Certainly, going into this conference call, the expectation was all $22 million of ENERGi backlog would revenue in 2018. As we stand today, about half of that backlog would revenue in 2019. And this delay accounts for about $11 million worth of revenue moving out of the year.

The major platform we initially sold to solar applications is the MATRIX. While VERTEX is a substrate-independent vertical carrier-based platform, the MATRIX is a horizontal carrier-based platform suitable for multiple end-market applications. In the solar market, we expect MATRIX opportunities to consist of factory upgrades over the next few years, as there's a minimal n-type capacity build-out expected in the near term. We are actively in discussions with the current customer on the opportunities that exist.

2 weeks ago, we took the opportunity at the Needham Growth conference to announce, both via press release and IR presentation, our efforts in emerging application for our MATRIX in advanced wafer-level and panel-level packaging. Last week, we were informed that our presentation at the IWLPC conference late last year was voted best advanced manufacturing and test track paper. A press release from the conference panel and our presentation will be available on our website shortly.

This is a new market, where our advantages of high productivity thin-film processing solutions provide a compelling advantage over current solutions. In particular, our solution reduces the cost of the redistribution seed layer by 2/3 compared to existing process technology. The MATRIX presents a cost reduction path for the industry OSATs, as they move from wafer- to panel-level processing, as the same MATRIX platform can be configured for today's 300 millimeters wafers or panels up to 890 millimeters wide.

Consistent with our product development process, we are currently engaged with Tier 1 OSATs and have ongoing activity for both wafer-level and panel-level demonstrations and evaluations. We've participated in a number of industry conferences, and completed the majority of the development work on process modules for this system during 2017.

I look forward to updating on our progress addressing this new market for Intevac over the coming quarters. At this point, we don't expect to revenue any MATRIX systems for this market this year, but our objective is to book and ship the first tool to a Tier 1 foundation OSAT customer before the end of the year.

Now moving on to Photonics. As we look back on 2017, I'd like to congratulate the Photonics team for their outstanding results in the design, build and deployment of the EI2 Apache camera. Intevac completed the initial deployment of 1,194 cameras to the U.S. Army and 4 military partners in the fourth quarter of last year. It is an outstanding honor to be the night vision technology of choice for the leading-edge fighting platforms of the U.S. military. We at Intevac take great pride in delivering leading-edge technology to our armed services and providing them differentiated advantage against our enemies.

We also look forward to the continuing projects we are working on with program Apache, including the current rollout of the next generation of firmware to Apache fleet, the addition of a second camera into the Apache for the weapons officer and the upgrade of the current installed base of cameras with the ISIE 19 sensor currently in development. A second camera on Apache would bring about a new wave of significant product revenues for this program, similar in scope to the initial Apache deployment.

Our production programs for the F-35 Joint Strike Fighter camera continues to run steady volume, and we delivered our 1,200th camera module in Q4. Also in Q4, we received our next production order on the JSF program that runs through October of this year. Follow-on orders are expected as we move through 2018 to extend uninterrupted production through 2019.

As we move into 2018, our Photonics division is hedged down and knees deep in multiple development programs that we successfully booked in 2017, all of which position us to capture significant portions of our revenue opportunity pipeline of over $1.4 billion of programs we're engaged with and are pursuing, including dismounted soldier opportunities.

We are well underway with the funded development of our ISIE 19 sensor, which will be the key component for our future, as most of our new programs will use this sensor as the core technology and will be the upgrade path for installed base of ISIE 11s, our current sensor. First silicon is now in-house, and we are in the testing and packaging stages. Our target is to have our first ISIE 19 prototype sensor operational by year-end.

We are in funded development for the camera module for BAE Striker II helmet system, which is planned to deploy on the Typhoon Eurofighter. In 2018, Intevac is back into the binocular applications, with our last binocular program having ended in 2014. Development of the binocular for the Australian Army is nearing completion and we'll be currently comparing -- procuring the initial prototypes for test and evaluation. We anticipate first light through these prototypes in Q1.

We are also the prime for the DELTA-I Coalition Warfare Program goggle. This program will deliver 24 fused night vision goggles to the 4 nations and 6 entities funding the development for evaluation by operators in the field. This binocular night vision goggle will incorporate 2 of our next-generation EBAPS sensors, the ISIE 19, and a high-definition long wave infrared sensor to provide a fused digital image. The award of the DELTA-I contract is expected during the second quarter of 2018. We are also being funded for additional night vision projects that are classified and we cannot discuss.

Finally, we delivered our first prototypes for the Family of Weapon Sights-Crew Served program in December. Our content in this program is the wireless head-mounted display that mounts through the helmet and wirelessly connects to the soldier's weapon. Included in the HMD is our proprietary see-through free-form prism. This display system is also used on the M2 weapon sight program that we have also been selected to deliver.

With all the new development programs we just talked about and 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 has a couple of implications. First, the margin profile of the business will be trending lower as fees on funded development contracts are capped by the government, which has also been pushing suppliers for cost share on some programs. Secondly, while production programs such as our current Joint Strike Fighter contract tend to be reasonably predictable and steady, development programs, however, are different.

They can be subject to the politics of Washington. Currently, we are continuing resolution as the budget is not yet approved. New starts are on hold and existing money is being moved around. Given the current climate inside the Beltway, we'll need to follow our programs in place and bookings forecast carefully. Our objective is to deliver similar revenue levels in 2018 compared with 2017, but we need to remain diligent for possible changes driven by political gridlock or budget shortfalls.

So in summary, for the company overall, we are excited about the significant opportunities ahead of us in 2018. And our efforts in our equipment growth initiatives put us on a path for continued revenue growth and increased profitability.

In Thin-Film Equipment, we expect to see another strong year for our hard drive business with similar revenues as 2017 and increased revenues in our equipment growth markets. This year-over-year revenue growth would consist of increased revenue on our VERTEX product and revenue recognition for half of the backlog of our ENERGi product.

Quarterly revenue this year will be lumpy as usual and back-end-loaded, similar to the profile in 2016, but opposite of 2017, with the first quarter revenues being lowest and the fourth quarter projected to be the highest. Driving this back-end-loaded profile are several factors. First, as I discussed earlier, our ENERGi implant tool installations for solar and the required 2 sign-offs for revenue recognition have pushed out now around 5 months, most likely into late Q2 or early Q3 depending on overall factory readiness.

Second, there's a likelihood that some of the current forecasted VERTEX systems could be a new configuration with new source technology that would require a field sign-off prior to revenue recognition. And third, we're seeing lead times for a key vacuum component on our 200 Leans and process modules extend to the overall capital equipment component demand in the industry.

Given all that we've discussed and the exciting opportunities in front of us, we expect to grow revenues by at least 10% this year and continue to drive profitable operations. As with years previous, there are a lot of moving pieces, and we'll continue to update you on our annual forecast as things develop throughout the year.

I will now turn the call over to Jim to discuss our Q4 and full year 2017 results, our Q1 forecast and some additional commentary on 2018. Jim?

Thank you, Wendell. First, I'll reiterate a few highlights about our full year financial performance.

Revenue increased 41% to $112.8 million. While Photonics revenues were similar to 2016, we saw a significant growth in Thin-Film Equipment with revenue up 75% year-over-year. Total gross profit was up by 50%, while R&D and SG&A expenses were only -- were up only 8%. We returned to profitability in 2017 for the first time since 2010 and recorded EPS of $0.18 per share. Total orders were up for the third straight year, increasing 11% to over $108 million. We ended the year with cash and investments, including restricted cash, of $43.5 million.

Now turning to the fourth quarter results. Consolidated fourth quarter revenues totaled $24.8 million. This was at the high end of our guidance of $24 million to $25 million. Thin-film Equipment revenue totaled $17.9 million and included two 200 Leans along with upgrades, spares and service.

Photonics revenue of $6.9 million included $4.2 million of product revenues and $2.7 million of contract research and development revenues. Q4 consolidated gross margin was 39.8%, above guidance due to a more favorable mix of business in Thin-Film Equipment. Thin-Film Equipment gross margin was 45%, up from the fourth quarter of last year and down slightly from the third quarter of this year.

Photonics gross margin was 26%, lower than last quarter and the fourth quarter of last year. The decline was primarily driven by lower margins on products and a higher mix of lower margin research and development contracts.

Q4 R&D and SG&A expenses was $9.7 million, lower than Q3 and below our guidance due to timing of engineering material purchases. The Q4 net loss was $41,000, basically breakeven, better than our guidance, driven by better gross profit from the Thin-Film Equipment business and lower than forecast operating expenses.

Our backlog was $64 million at year-end. Thin-Film Equipment backlog of $51.7 million included three 200 Lean HDD systems and 12 ENERGi solar ion implant systems. 3 ENERGi tools were delivered on our customers' factories by year-end, but are pending installation.

The backlog in our Photonics business was $12.3 million. We ended the year with cash and investments, including restricted cash of $43.5 million, equivalent to approximately $1.99 per share based on 21.8 million shares at year-end. Cash flow used by operations was $639,000 during the quarter and $2.4 million for the year.

Q4 capital expenditures were $803,000, and depreciation and amortization were $994,000 for the quarter.

Now let me turn to the full year outlook for 2018. Our objective is to deliver similar Photonics revenue levels in 2018 compared to 2017. And success here will be driven by capturing increased amounts of funded R&D business. We expect to see another strong year for our hard drive business, with similar revenues as 2017.

For our ENERGi implant systems, recent negotiations a little over a week ago give us confidence that with the 3 systems already shipped, that should begin installation late Q1. And with 3 more systems to be shipped in the year, we will see growth in our revenues from the solar market in 2018. Given the expected installation timing and dependent upon the acceptance duration, this assumes all 6 systems will revenue in the back half of the year.

For our VERTEX platform, our objective this year is to grow orders, revenue and backlog on the VERTEX over 2017 levels. Although early in the year, our expectation is to book 5 to 10 VERTEX tools in 2018. And we'll update you on that range as we progress through the year. With all incremental growth coming from our Thin-Film Equipment business, 2018 equipment revenues would increase by at least 15% over 2017. And our current outlook is for total revenues to grow at least 10% while increasing net profitability for the year.

At this revenue level and expected product mix, we would expect gross profit margins in the range of 36% to 38%, with operating expenses of between $40 million to $41 million for the year. We expect interest income of around $400,000 and income tax expense of around $1 million for the year.

As Wendell mentioned in his remarks, quarterly revenue this year will be lumpy and back-end-loaded, with first quarter revenues being the lowest and fourth quarter projected to be the highest. For Q1 specifically, we are projecting consolidated revenues to be between $17.5 million and $18 million. Based on customer requirements, the Q1 production includes only one 200 Lean versus the two 200 Lean systems that will revenue in Q4. And the Q1 projection also includes about $2 million less in hard drive nonsystem revenue than what we recorded in Q4 2017.

Total Photonics revenue in Q1 will be similar to what we recorded in Q4 2017. However, we will have about $1 million more in funded R&D revenue in Q1 2018 than we had in Q4 2017. Installation of the 3 ENERGi systems currently at the customer will occur late in the quarter. So the acceptance in revenue will not occur until after Q1.

We do not have a VERTEX system in the Q1 revenue projections at this time since there is a likelihood that the next systems could have a different configuration and requires sign-off. Given the lower Q1 revenues, which will impact factory utilization and the change in revenue mix in Photonics, we expect first quarter gross margins to be between 29% and 30%. Q1 operating expenses are expected to be between $10.5 million and $11 million, higher than our normalized level due to higher research and development spending along with some typical seasonal increases.

We expect interest income of about $50,000 and net taxes of about $200,000 in the quarter. For Q1, we are projecting a net loss in the range of $0.22 to $0.26 per share based on an estimate of 22 million shares.

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

(Operator Instructions) Our first question comes from Nehal Chokshi with Maxim Group.

Congratulations on announcing that a top-5 cell phone application adopt your oDLC coating. That's really huge, I think. Just to be clear, when you say top-5 cellphone application, are you talking about in terms of a particular SKU is the top-5 selling or are you talking about a top-5 OEM?

It's top-5 OEM.

Okay. And presumably, this is just one of many SKUs that they are basically testing this feature and their product in the market in terms of market response?

Yes, just looking at their -- the plans that at least we're privy to. They're going to ramp it up gradually through the first quarter. And it's our understanding it would be on one particular model just initially and then would go from there.

And presumably, this will be relatively high-end SKU as well, right?

I probably shouldn't even -- as I said in my prepared remarks, it's really not our place. But I'm very hopeful that there'll be more press on this as we move out in the quarter.

Our next question comes from Craig Ellis with B. Riley.

This is actually Peter Peng calling in for Craig Ellis. On the Lean system, can you just talk about your customers and where they're at in terms of the technology upgrade and how much of their capacity is upgraded and how much further?

Well, we've got several programs going on. I think that what we've seen is strength on the process module side that kind of drove some of the results in '17, and we're seeing decent visibility moving into '18 there. From the processing technology side, there's just a lot of different things that we're doing there. And on the equipment side, it's about -- that was fundamentally a 3-year program that was started around mid-2016 -- mid- to late 2016. So we're moving through that as we go through '18 as well.

Okay. And on the solar systems, beyond the 12 ENERGi system, are you expecting any more orders or just the ENERGi system that you're going to be seeing this year?

I think when we look at the ENERGis, those are, of course, in backlog, I mentioned in the prepared remarks, we have ongoing dialogue with the current customer. But I would assume that those -- any activity in that area beyond the ENERGi would be somewhat of a new configuration that would have to ship and sign-off. So I think those opportunities are probably revenue-based outside of the year.

Okay. And on your kind of your advanced packaging initiatives, can you kind of talk about the size of the opportunity and when you expect it to revenue? And is it just OSAT you're talking about or are you talking about some of the front-end manufacturers as well?

The -- our product development process requires us to move out of gate to have what we'd consider to be a Tier 1 target customer. So we've been working with the OSATs over the last year. Kind of the genesis of it is that as they look for cost reduction, they look to migrate to bigger formats from wafers to panel-level processing. There was a lot of work done to say, is front-end 300-millimeter semiconductor tools the right platforms. And there was initiatives to look into the solar industry and to some other industries. This type of technology that runs in a different mode was designed at not necessarily to do -- to follow Moore's law, but to have excellent particle performance, super-high throughput, and it kind of leans you to some of the solar tools. And that's really where we started our activity and dialogue was based on that. As far as opportunity, what I said in the remarks is that because our tool, the MATRIX uses a carrier to run through it, it's the identical tool if you want to run 300-millimeter tools through it or big panels through it. There is no change that needs to be made. So it's providing an upgrade path for anybody that's doing 300 millimeters that wants to transition to panel. And also, we're talking to people that just want to make their move to panel now. But I think when we look at the panel-level projections at this point, it's still in its early stages, and that's why we wanted to be on the front end of this. When we look at total number of projected redistribution layer passes over the next 5 or 6 years, that actually tend to be conservative. It would take a couple of hundred million of our tools if we were to get all that business. So it's an emerging business for us, but it was a very logical extension of work that we have done on MATRIX and proving out that tool platform and basically a barrier/copper seed deposition that we did in the solar market, which is completely and absolutely applicable in this advanced packaging market.

Okay, great. And then moving on to Photonics. You've got it for kind of a flattish year-on-year growth. But if I look at last year, revenues were between $8 million to $9 million a quarter, and now, tracking $6 million to $7 million . What makes you comfortable that the back half is going to pick up significantly?

Well, most of the ramp in the back half in our revenue profile is fundamentally based on the equipment, not so much the Photonics. We see that as running at a relatively stable run rate. I'll let Jim comment.

Yes. But specifically to the Photonics, a couple of things that I'll just point out, so you could remember. We have more product revenue in the first half, certainly in the first 3 quarters of 2017. And in the fourth quarter of '17, we didn't have as much product revenue. And so as both Wendell and I have been saying in the last couple of quarters and we mentioned again in our prepared remarks today, you are seeing the business in Photonics go to more of a funded R&D. And although we expect a similar amount of revenue in Photonics in Q1 that we saw in Q4, based on the order profile that we're projecting, we would expect the second half to pick up. But as Wendell said, it's really going to require us to be very diligent and vigilant on securing those bookings to allow that back half revenue in Photonics to pick up.

Okay. Can you just talk about your cash positions and how you're comfortable with, I guess, with all these initiatives going on? And where you'd be comfortable with in terms of your cash?

So as we said, we ended the year with just under $44 million of cash and no debt. And as we look into 2018, we expect to get cash flow positive throughout the year, even despite some of the investments in the initiatives. Because if you look at last year, we spent quite a bit of money in R&D as well. And with orders, we will continue on the equipment side of the business to get our payments on those orders. So we're comfortable that we have more than enough cash, and we'll continue to manage our cash well in 2018.

And our next question comes from Ben Klieve with NOBLE Capital Markets.

First, building up on the last question about the R&D versus equipment sales on the Photonics side. Given the kind of uncertainty out of Washington here, are you expecting a flat R&D run rate throughout the year? Or do you think that if you get a better visibility that there could be a ramping on the R&D side in addition to what sounds like you expect a ramping on the equipment side?

Yes, I think on the Photonics side, as we go into the year, there is a lot of unfunded requirements throughout the budget. And there's been some sequestering and reduction of budgets since some line items being struck. We -- it's our understanding that once we get through this gridlock, some of those requirements will be refunded into the budget. But we've got to get through where we're at now. And some of those programs that can provide R&D funded growth in the back half of the year need budget approval because I talked about the no new starts and things like that, that we're currently on and continuing the resolution. So we've just got to stay on top of it.

Okay. And then the 3 ENERGi systems that are expected to ship still later this year, I'm curious that -- the commitment that you have in that. Is that -- do you have any idea if that -- if your customer is still working through the dynamics that are delayed, the shipments of the other 6 as a variable that could impact the shipment of those 3? Or do you think right now, they have the capacity and the ability to take on the 3 units as a matter of waiting for the delivery? I mean, are there variables that you think could push back those 3 still, or do you think that's pretty firm at this point?

We haven't finished the final negotiation. We were there 1.5 weeks ago. We certainly can see that the factory that was basically halted is back and moving. We are aware that there was some additional funding that was announced publicly, that was going into that facility. So we believe from where we stood, say, mid-December to where we stand now, there's been significant movement. We talked to some of the other suppliers to see what they are hearing as well. So right now, it looks like the planning would be for those tools to move out maybe sometime in July. So they need to install the first 3, get that part of their lineup and then they take the next wave. That's kind of the current plan. So I think from where we were in December, where there really was not a clear plan for us and we were trying to work through it to where we now, we've now got scheduled plans and discussions going, I think we're in much better shape there. Until it's done, it's never done. But we also have cancellation clauses and down payments and things like that to protect ourselves on those type of activities. But right now, like I said, much clear than where we were 4 weeks ago and we see some movement forward.

(Operator Instructions) And we have a follow-up question from Nehal Chokshi with Maxim Group.

A couple of follow-up questions. One is that would you consider a buyback considering the -- where the stock price is? And I would agree with in terms of that you have more enough cash on the balance sheet.

That's something that we talk about in our board activity. It's always something that is considered as what is the right allocation for capital. But we always also want to keep in mind that we did do a buyback of about $30 million, just shy of $30 million. And as we're looking at some of these new initiatives that we're engaged in, we're also looking at, is there acquisitions, tuck-ins that we can do that could really amplify or accelerate those activities. So we keep all that in balance, but that's one of the things that we definitely discuss.

When was the last time that, that board discussion was -- had?

I think it's discussed in every board meeting to some extent.

Looking at where stock prices are, where programs are, where different opportunities may be, and that's always one of the things to consider.

Okay. So let's drill a little bit deeper into the VERTEX expectation for calendar '18, 5 to 10 tools. Now when you talk about 5 to 10 tools, the baseline in 5 tools, is there a definite 5 tools that you're tracking or is it a combination of multiple different opportunities that in aggregate when you add up those probabilities, you're looking at nearly 5 tools?

When we range it like that, we're looking at projects that we had and what would take to put the capacity and to make that happen. What's going on with different programs, with Truly (inaudible) installed capacity and how their capacity is being utilized. And then we look at the timing of when all that would roll out. So that kind of puts us in that 5 to 10 range. So it's not -- it's more focused on specific projects that we're working on with different customers and what we take to provide enough capacity to at least launch.

Okay. And does major -- the top-5 cell phone OEM, what's the probability that you would put on them actually going forward with going ahead and saying, yes, we are seeing the positive market response and therefore we are going to ramp this into more SKUs and therefore we're going to need Truly or another ODM to increase their capacity?

That's a tough question. What I can say is that the difference with the coatings on the outside and coatings on the inside is very, very evident and striking. And I think that if it was me buying the phone or if I was in someone else's shoes wanting cell phones, I would want it on the outside. So I think it's a new feature. So I think they're going to ease in to some degree. I think they're going to look at market acceptance and go from there. So it's really hard for me to put a percentage on what that adoption will be. But from my eyes, it's night and day.

(Operator Instructions) The next question comes from Mark Miller with Benchmark Company.

I believe you mentioned during the call that you were expecting minimal n-type cell capacity adds in 2018. I'm just wondering this was supposed to be a growing area. Is this taking a pause here or what's going on with n-type cell manufacturing?

No, there's a few things going on. I think that certainly we've seen some of the big n-type guys that you could follow publicly and where they're at with their production. They've taken some capacity offline. Certainly, they're working on costs. I think in activities in China, I think that there was a -- I think the SunShot program, forgive me if I've got that wrong, Top Runner or something like that, that there was a lot of funding going in on n-type that got diverted to p-type PERC cell rollouts. But I think now that we're back into 2018 that the activity may resume for us where some of the government R&D funding for the Top Runner type programs are set. And I think -- to your question, I think it's just been a real focus to go and upgrade the p-type facilities to the PERC solar architecture with some type of lumen oxide passivation scheme. And that's where the focus is.

Are you looking at any opportunity to combine your DLC coating with another antireflection reflection coating in the same tool? Would that be an opportunity to expand the scale of the market for you?

The answer to the question is yes. And in my prepared remarks, I talked about the 2.0 version, and that source technology being applicable for antireflective films as well as decorative films in the future for us off of the VERTEX or very similar VERTEX platform. There's a little bit difference in how the architecture of that tool will be configured, whereas, for say, an antireflective coating stack, you would want to do multiple interference layers. So you'd want to be able to run by each particular source multiple times rather than today where the VERTEX just does a single pass by. So there's a little bit more work to do there. But the source technology itself was initiated and developed to be able to do a number of different type of films, and in particular, to make very hard films.

Any implications of the higher U.S. tariff on solar cells? Are you expecting any reaction? Is it too early to tell?

Well, just what I'm reading right now is the one that we would particularly follow would be the n-type guy here in the U.S. who appears to have gotten tariffs in there petitioning that to make that stop. So I think that's a bit of an uncertainty in that particular space.

And finally a housekeeping issue. I see in your release, you're talking about year-end backlog up to $52 million. But I thought you said during the call, the backlog in December was $64 million. What am I missing here?

The $52 million is equipment only. The $64 million is total. Photonics was $12.3 million.

At this time, I'm showing no further questions. I will 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 Q1 call in April. Until then, so long.

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