Intevac Inc (IVAC) 2019 Q2 法說會逐字稿

Good day and welcome to Intevac's Second Quarter 2019 Financial Results Conference Call. (Operator Instructions) Please note that today's conference call is being recorded today, July 29, 2019.

At this time, I would like to turn the call over to Ms. 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 2019 which ended on June 29. In addition to discussing the company's recent results, we will provide financial guidance for the third quarter of 2019 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 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 remain 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 29 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 Q2 results above the high end of guidance. Revenue of $22.3 million came in above the guidance range, attributed to favorable results in Photonics and customer points in our hard drive systems upgrade business. Higher gross margins, coupled with close control of expenses, also drove our net loss favorable to forecast at $0.05 per share.

In the second quarter, we achieved multiple critical milestones necessary to lay the groundwork for our future revenue growth trajectory in both Photonics and Thin-film Equipment or TFE.

In Photonics, we recorded a strong quarter-over-quarter increase in revenues for the IVAS program, and the business as a whole ramped to quarterly revenue run rates exceeding $9 million.

During the quarter, we were also finalizing negotiations for a new contract award, which yielded a record $40 million order for Photonics.

In our TFE growth initiatives, the strategies we've been driving over the last several quarters bore fruit. We made important progress engaging with handset makers, which provided the customer pool to install our first VERTEX evaluation system to a leading display cover glass manufacturer.

We also achieved success in qualifying our MATRIX PVD system for advanced packaging applications, which resulted in our recently announced agreement to deliver our first major evaluation system to a leading OSAT or Outsourced Semiconductor Assembly and Test provider.

Our progress in each of our businesses and financial performance in the first half of the year continue to support our objective to achieve year-over-year revenue growth in 2019. As we move forward from the first half of the year, we continue to manage a number of moving pieces in our business. These pieces can be positively or negatively impacted not only by current industry climates but by the global trade and macroeconomic environments as well. We will continue monitoring how our business environments are unfolding and provide updates to our forecast accordingly.

Now for an update of our business segments, starting with Photonics. In Photonics, we've recorded a significant quarter-over-quarter increase in revenues from the IVAS program. This award was announced in December, and we have detailed its importance on our last 2 earnings calls. The final product specifications were completed in Q1, which generated an increase in the development scope for our camera modules and an increase in the associated contract revenue opportunity for this program. In Q2, this expanded scope grew the contract award from the initial $28.6 million to $31.5 million currently.

Digital night vision is a key part of the IVAS platform. Over the next 18 months, the 2,300 camera modules we are delivering will leverage the successful accomplishments of our state-of-the-art Low Light Level CMOS cameras developed over the past year, along with next generation ISIE 19 sensor technology development as well. There was little we were allowed to communicate regarding the program and timing beyond our development effort and all of our modules will be delivered before the end of 2020. That being said, we do know there has been initial touches of the IVAS technology as documented in a CNBC news story in April. You could find the video by googling IVAS CNBC.

Our now $31.5 million contract is for the development and the delivery of the initial lot of digital night vision cameras for IVAS system development and qualification. The major revenue opportunity for us lies in the actual fielding of the IVAS systems to our dismounted soldiers, and the qualification and selection processes are completed. Until this month, the IVAS award was the single largest order ever booked in Photonic and represents the largest future revenue opportunity for this business. If successful, the projected volume of digital night vision camera modules beyond the initial development contract to be fielded to the dismounted soldiers would be in the hundreds of thousands of units.

The success of the IVAS program, over the next 5 years, is the primary component of our potential to double the level of revenue in our Photonics business compared to the last 5 years, and beyond 2023, continue to drive the largest revenue opportunity component, comprising our $1.4 billion revenue opportunity pipeline.

Also helping us achieve this doubling of revenues is the new record order for Photonics announced earlier this month, a $40 million contract award to supply digital night vision cameras in support of the U.S. government. This award now represents the largest single booking to date for Intevac Photonics and increases our Photonics backlog to a historic level of just over $83 million.

Given the multiyear nature of this contract and sensitivity around the program, we are unable to detail the actual application, time duration nor number of cameras. Our customers' requirements prohibit us from divulging these details because they would provide too much visibility into the overall program status and rollout. What we can say is that this is a production program for cameras based on our current ISIE 11 technology, which we have been providing for a number of digital night vision applications since 2013. This latest award closely follows awards for both the U.S. Army's IVAS ground soldier program and Apache helicopter foreign military sales, announced last December, demonstrating Intevac's commitment to delivering the latest digital night vision technology to our war fighters. With this new order and increased backlog, we have multiyear visibility for our manufacturing operations and continued validation of our digital night vision technology.

The drivers that support the doubling of our Photonics revenue in the next 5 years compared to the last 5 consist of the IVAS program as well as established programs for Apache, LIVAR and the Joint Strike Fighter. Added to this base are multiple international and emerging digital night vision programs, including the DELTA-I Coalition Warfare goggle, the Navy's enhanced visual acuity system and the Striker II helmet-mounted system.

In military avionics, Intevac provides digital night vision camera modules based on our patented Electron Bombarded Active Pixel Sensor for integration into helmet-mounted display systems or HMDs, providing state-of-the-art capability to the most advanced avionic platforms in the U.S. military.

For the Joint Strike Fighter program, in particular, the F-35 HMD system provides pilots with unprecedented situational awareness incorporating airspeed, heading, altitude, integrated night vision and targeting information projected on a helmet visor rather than on a traditional heads up display.

In summary, in the near term, the IVAS award supports our confidence and a return to revenue growth for Intevac in 2019 and, for Photonics in particular, year-over-year revenue growth of excess of 30%. The additional contract award announced this month supports our confidence and continued multiyear growth for Photonics ahead.

Moving now to our equipment business. In Thin-film Equipment, as I mentioned earlier, we were pleased to report significant progress in our growth initiatives outside the HDD market, and in particular, our efforts to expand our current footprint into display cover glass industry. As a reminder, we put in motion a dual-track strategy of 2 quarters back to help accelerate adoption of our VERTEX tool. The first was to target and work directly with top-tier cell phone makers and their design teams to generate end-customer demand for our films. And the second was to offer evaluation tools to the largest cover glass manufacturers to minimize their risk in investment while they capture customers for our technology. These strategies have now begun to pay off. The VERTEX evaluation system we discussed on last quarter's call has since been installed into a leading display glass manufacturer's facility in China. We announced the final agreement in May, shipped the system in June and the tool is currently in process qualification for decorative back cover glass applications. This evaluation system bolsters regional accessibility to Intevac's newest technology and enables new, differentiated and fully-integrated film stack configurations that expand the freedom and options available for the design of next generation's smartphones. Ongoing evaluations and demos with leading handset makers helped to drive this system into the field, where we have gained traction with customers excited to sample products with the fast design turns required to meet smartphone OEMs' aggressive product development cycles. This evaluation system has a decision point 1 year after delivery, by which point the tool must either have been converted to revenue or returned. If successful in qualification demos and evaluation, it is a candidate for revenue inside of 2019, but the evaluation window does extend into 2020.

We're also working with other potential customers through the VERTEX at the same time, including a second evaluation system agreement currently in negotiation with another leading cover glass manufacturer. We also continue to work with both top-tier and boutique cover glass manufacturers who are candidates for additional revenue systems. We're very encouraged with the progress we've made and the access these [first-seed] tools with industry leaders and continued tool deployments will provide to the world's leading handset manufacturers.

We've also been making good progress with our newest version of protective coatings for display cover glass applications, oDLC xT, and have reached sapphire-like scratch resistance performance under Mohs 8 lab testing. This new film formulation was enabled by the new deposition source technology we released in the fourth quarter of last year. There is still some development work remaining. However, we expect to begin sampling oDLC xT in the fourth quarter for rigorous customer testing.

Our internal demo activity remains strong as we currently engage with multiple projects within customers. These projects include protective coatings, decorative coatings and anti-reflective coatings, all supported by the versatile VERTEX system. While we remain confident that VERTEX continues to be a significant revenue opportunity for us and comprises the majority of the incremental growth we presented and a potential doubling of our TFE revenues over the next 5 years compared to the last 5, since our last call, we've modified our outlook for VERTEX revenue timing as the evaluation agreement time extended into 2020. These tools may convert to revenue this year, and other potential tool sales remain possible, but for now, we're conservatively moving our forecast for VERTEX revenue timing into 2020. That being said, we are eager to see the current eval system project activity, and we'll have more clarity on in-customer adoption later in the year. We will update you on evaluation progress as well as additional VERTEX business activity on our next call.

Now moving to the MATRIX. In addition to the exceptional progress we made with the VERTEX last quarter, we also achieved a significant milestone for the MATRIX platform in advanced semiconductor packaging in pursuit of our equipment growth initiatives. About a month ago, we closed an agreement with a leading OSAT provider to place our Intevac MATRIX PVD system for evaluation and qualification in their R&D facility. This tool is scheduled to ship in the fourth quarter and is designed to lower the cost of advanced semiconductor packaging architectures. These architectures enable smaller package footprints for mobile devices as well as improved thermal and electrical performance as compared to conventional packages.

Consistent with our internal product development process, we've worked to leverage core technology and competencies in the company and adapt them to new markets with future potential. Also in our process is to be required to engage with a leading company to be a foundation customer for us to enter the market and establish the MATRIX as a production-proven solution in that new market application. After approximately a year of development work and customer demonstrations, we were very pleased to pass the stringent selection criteria with the leading OSAT and enter into the agreement to deliver our first tool for this new application and market for Intevac. Our MATRIX tool for advanced packaging is a versatile platform that can be easily configured to handle multiple substrate sizes, including 200 and 300 millimeter wafers, the wafer level fan-out on applications as well as substrates up to 890 millimeters wide for panel level fan-out applications.

We believe the entry port -- point for the tool can be the industry's transition from wafer level to panel level packaging which, I've noted in the past, has been pushing to the right but remains the next major transition in advanced packaging roadmap. This application is a longer-term play for us, but taking this step now, ahead of a panel level transition, is critical for the program.

We believe success fielding this production and production qualifying this first MATRIX PVD system can lead to additional traction with other leading OSATs and can be a meaningful component of our potential to double TFE revenues over the next 5 years compared to the last 5.

As for our ENERGi platform, in our solar cell ion implant business, since last quarter we have gained more confidence in the future revenue potential for the ENERGi product line. Our customer has accelerated their delivery schedule for the 5 tools remaining in backlog and, in fact, 3 of those tools shipped in July, with the last 2 scheduled to ship within this quarter. So the last of the tools in the initial 12 system order will revenue earlier than we thought at the time of our last call, and we are starting to discuss additional tools for 2020 in support of multigigawatt capacity expansions in China that would utilize the ion beam doping as well. For 2019, our ENERGi revenue outlook has solidified, and for 2020, we believe we have the potential to grow ENERGi revenues year-over-year based on the current discussions with our customers.

And finally an update on our HDD business. Recent HDD channel information indicates hard drive units came in about as expected in the second quarter. While expectations for nearline drive demand in the second half of 2019 has varied significantly since the start of the year, our outlook is relatively consistent with what we discussed last quarter.

In February, Trend Focus published an estimate of meeting unit growth this year that resulted in industry capacity utilization rates exceeding 90% in the fourth quarter. In May, they published an update tempering expectations for the end of the year, with some uncertainty around drive demand for cloud applications. However, the long-term forecast continues to indicate media demand growth of 7% annually over the next 5 years, in support of the 25% growth rate expected for Exabyte shipped on hard drives. Depending on capacity leveling of the production of disks each quarter, we continue to believe that the hard drive industry could exhaust its media capacity by the end of 2020. This incorporates the assumption that the 200 Lean shipping in 2019 and 2020 are added to the installed capacity within a quarter of delivery. We entered 2019 with 6 200 Leans in backlog, shipped 1 each in Q1 and Q2, expect to ship 2 more tools later this year, and 2 will remain in backlog for 2020.

As far as what we are seeing for our HDD business in 2019, our outlook is somewhat reduced from what we expected a quarter ago. This is mainly related to the level of field service and upgrade business now expected in 2019, as the 4 200 Lean shipments scheduled for the year are unchanged since last quarter. The reason for this modest reduction in hard drive upgrades and field service in the second half is because we believe that tool availability will be very limited due to high capacity utilization. We also believe that these projected high-utilization rates are what drove customer poolings of upgrades, accelerating them from the second half into the second quarter. In addition, some of the upgrades and service planned for the second half may push into 2020 when seasonally lower production rates are expected.

The overall takeaway from the long-term outlook of our hard drive media is that our HDD business is relatively stable at current levels. And given the need for capacity additions to support the forecast demand of hard drive storage for the cloud, we continue to expect the business to contribute at least as much revenue over the next 5 years as it had over the past 5, with some modest upside depending on media capacity needs to support nearline growth.

So to sum up our progress in Q2. In Photonics, we significantly ramped revenues for the IVAS program, returning to higher quarterly run rates for this business. The new record order in Photonics gives multiyear visibility and supports our position as a critical supplier of digital night vision technology to major U.S. military programs.

The VERTEX is quickly being qualified with a top-tier display cover glass manufacturer to gain access to leading handset makers. Additional traction is expected this year for the VERTEX, with a new agreement in negotiations with another top-tier cover glass manufacturer. Our demo activity for VERTEX remains strong, with multiple projects in process.

Our first MATRIX PVD evaluation agreement for advanced semiconductor packaging was completed, and we have increased confidence for the ENERGi revenue trajectory this year and going forward.

Coming into the year, we expected revenue growth of around 20% compared to 2018 levels. Given a slowdown in spending on service and spare parts plus upgrade timing in the back half of the year with our hard drive business and evaluation time windows for the VERTEX that extend outside the year, we believe a portion of that revenue originally targeted for [2019] most likely pushes into 2020.

We now expect our year-over-year revenue growth to be between 10% and 15%, with profitability at the breakeven level. So while we've clamped down our 2019 revenue growth rate expectations, we have now achieved critical milestones for the primary objectives of our 2019 corporate growth initiatives and are very excited about our future business opportunities.

I'll now turn the call over to Jim to discuss the details of our recent financial results and outlook. Jim?

Thank you, Wendell. Consolidated second quarter revenues totaled $22.3 million, about 6% above the high end of the guidance range. Thin-film Equipment revenue totaled $13.3 million and included 1 200 Lean system along with upgrades, spares and service. Photonics revenue of $9.1 million included $4 million of product revenues and $5.1 million of contract, research and development revenue.

Q2 consolidated gross margin was $8.4 million or 37.5%, and above guidance of 34% to 36% as a result of more favorable revenue volumes and mix from both businesses.

Q2 operating expenses were $9.3 million, up slightly from Q1, and at the midpoint of our guidance, primarily due to a more focused emphasis on selected programs in R&D. This resulted in a net loss of $1.2 million or $0.05 per share, a smaller loss than our guidance.

Our backlog was $93.7 million at quarter end. Thin-film Equipment backlog of $50.3 million included 4 200 Lean HDD systems, 5 ENERGi solar ion implant systems and non-systems HDD backlog. The backlog in our Photonics business was $43.3 million which, since the end of the quarter, has increased to over $83 million upon the receipt of the new $40 million order announced this month.

We ended the quarter with cash and investments, including restricted cash, of $40.5 million, equivalent to approximately $1.76 per share based on 23 million shares at quarter end.

Cash flow generated by operations was $39,000 during Q2. Q2 capital expenditures were $1 million, and depreciation and amortization were $885,000 for the quarter. The company continues to manage its cash very closely to maintain a minimum balance of approximately $40 million. As a result, stock buybacks during the quarter were limited. We repurchased 9,000 shares of common stock for a total of $42,000 during the second quarter.

Quarter-to-date, we have purchased another 14,000 shares of stock for $69,000. As of July 29, 2019, the company has purchased -- has repurchased 5 million shares for $29.2 million out of the $40 million plan.

Now turning to the full year outlook for 2019. Our full year outlook has moderated somewhat due to the timing risks Wendell mentioned. We continue to expect Photonics growth of at least 30% this year but have tempered our expectations of Thin-film Equipment revenues in 2019 to be slightly up from 2018 levels. Together, these combine to a total revenue growth in the range of 10% to 15% over 2018. At this revenue level and expected product mix, we expect gross margins in the range of 35% to 36%, with operating expenses of between $36 million and $37 million for the year. We expect interest income of about $600,000 and GAAP income tax expense of about $2 million for the year, of which more than half will be noncash.

At the midpoint of our guidance ranges for the year, we are projecting breakeven profitability. For Q3 specifically, we are projecting consolidated Q2 revenues to be approximately $25 million, plus or minus $0.5 million. We expect third quarter gross margin to be between 32% and 33%. The decrease in gross margin is due to the expected mix of 5 lower margin ENERGi tools in the quarter and no 200 Leans. This is expected to reverse in the fourth quarter, with 2 200 Leans in the revenue forecast.

Q3 operating expenses are expected to be between $9 million and $9.5 million. We expect interest income of about $100,000 and GAAP income tax expense of about $500,000 in the quarter. As I mentioned previously, our cash taxes will be much lower. For Q3, we are projecting a net loss in the range of $0.06 to $0.08 per share, assuming 23 million shares. This completes the formal part of our presentation.

So Lyn, we are ready for questions.

(Operator Instructions) Your first question comes from the line of Mark Miller from The Benchmark Company.

Congratulations on your orders. I'm just wondering, we've been talking for some time, that this pick-up to the nearline drive sales later this year. But Microsoft came out and said they were seeing some excess capacity in the data centers. Any more color on what you think is going to happen? Are you still sticking to better HDD sales as the year progresses?

That statement and I haven't read that, Mark, this is Wendell, and based off of Trend Focus, and they have kind of gone bullish to a little bit bearish. I think what we're seeing, at least in the operation of our tools and we mentioned in the call, is utilization rates coming up in the back half. So they're certainly running harder than they were in the first half, so that would give us some indication that the demand is picking up there.

You mentioned that you are in a discussion about a second VERTEX Spectra tool evaluation agreement. What else can you tell us about VERTEX and also the MATRIX in terms of opportunities, in terms of how many forms you are in discussions with for each?

Yes, I'll start with the easy one. It's the MATRIX. So there's one particular OSAT we've been working with and that's basically a qualification tool that's going to an R&D facility. We have to be very careful about divulging details because it would be part of people's future plans. The transition to panel level is something that we're all trying to get our hands on when that's going to transition, but it's certainly in everyone roadmap. So we really want to be in a good position, production proven, and qualified when that transition occurs. And again, we're leveraging the platform and it's actually the same application we do in the solar space for sputtering, which is buried at copper seed work.

On the VERTEX, we have the negotiations that I referenced in the call as an additional eval system with one of the big players. We still have a few points on that contract that we need to get ironed out. But I can say that a lot of these activities are being driven by the work that we had done with handset makers and their desire to have that technology available. So we're very, very pleased that that strategy we've put in place finally bore some fruit, and we've got the first 2 all ready. We have that inventory one, building the second one now. We always want to keep one in inventory and that we can move that in the fourth quarter. No problem.

Project-wise, we've got a lot of different programs going on. I would say just shy of a dozen: of protective coatings, decorative back coatings, anti-reflective coatings. And we're seeing a number of different substrate applications while we're doing front cover glass and back cover glass. We have some work on wearables, camera lenses as well as PVD plastics. So we're seeing a lot of good traction from our initiatives, in getting these tools out into China where they can do quick turns with the design teams. It was very important and a big step forward for us.

Truly still has the tools that they're running. They're still working mostly with wearables. We do have 1 back in project with an end customer that would move through Truly but, again, it will be in the wearable space. I don't think it will necessarily fill up their current installed capacity.

And then the second customer machine that we headed out there a year or so, we don't get a lot of feedback on that. It's very mysterious and kept secret what's going on with that. But as soon as we see something, we will certainly be talking about that one.

In terms of your 2 large orders for the IVAS and more recent night vision cameras, can you talk a little bit about margins and what impact would be more fully factory loaded will have on your margins both in terms of the mix of these night vision sensors as well as the increased factor loading. Shouldn't that do significant improvement for your margins?

The most recent order, the $40 million, we said is multiyear. That will certainly help increase the product volume which gives us the ability to stabilize the yields and also bring the overhead rates down. One of the things you've seen in the last few quarters, as volume has increased in our Photonics business, is we'll have a tendency to trend towards the high end of the 35% to 40%. As we've said, it's our objective and the government won't let us really get much more than a mid-30s percentage gross margin. But as we get larger backlog and we're able to become more efficient, we're able to get those gross margins into the high 30s percentage. And so we think that as we continue to move forward, that we should be between 35% and 40%.

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

I'll just take up where Mark left off and just clarify a point that you made longer term about Photonics. I was clear that this year's growth rate is still expected to be 30%. But what were the comments about potential growth in 2020? And can you provide any color on what the revenue profile for the business would be beyond that, in 2021?

Yes. As far as 2020 guidance, we'll talk a little bit more directionally next call, but what we stated in the script is that the $40 million contract is a multiyear contract. And it provides us very good visibility and loading in our manufacturing operations, and we see with these bookings that we now put in place the opportunity for multiyear growth for our Photonics business.

Okay. Multiyear growth. And does that include 2019, or is that beginning in 2020 then, Wendell?

Well, let's include it just because it's at 30% this year.

Okay. Good enough. Moving on to the solar business. Encouraging that your customers are interested in more capacity from you. Can you talk about what the potential for that business would be? Do you see the potential for an order of a similar size? Would it, for whatever reason, be smaller or could it be a larger order than the original order that you want?

I think it could be all of the above. I can tell you that they're talking about multi-gigawatt. So if you look at our ENERGi tool, each tool does about 100 megawatts, so around 10 per gig. So if it's 1 gig, it's probably roughly the same order of magnitude as what we had in the 12 system, maybe a couple less. I think at the end of this, we'll have 14 tools in their facility, when we're all done shipping this year. It would be filled with the exact capacity and when it rolls out, is not determined, but I don't think it makes a lot of sense to do much under a gig. And we certainly have a pretty good feeling that this one particular customer we've been engaged with has very good order flow and has hit some very impressive efficiencies in their solar architecture using the ion implanter. We still have some negotiating to do, and I think there's going to be a lot of arm twisting on price and things like that, but we certainly have the proven solution that they're running today in their high-efficiency cells. So we got a good starting point for that.

Do you have a sense for when there might be a decision, Wendell, whether it be later in the third quarter or fourth quarter? Or is it really 2020 before the customer would make a firm decision?

What they're telling us is that they're going to make their decisions this year. But I would caveat that, that it's already slipped several months since I was there talking to them and that was about 1 month ago.

Okay. Fair enough. But very interesting opportunity. And then just moving on and touching base on the HDD business. I think you've covered a lot of the dynamics, but as we look at that business and as you look at the potential for system sales next year. Do you have visibility whether some of the systems that you thought would come in this year are going to be potentially shipped in the first half of next year or the second half? And if no visibility now, when would you expect to get that visibility?

I think the 6 tools we came into the year with backlog, we initially had those all shipped in. They were all scheduled to ship in 2019. Even when we set our initial guidance for the year, we were suspect that 2 of those would move out into 2020 and that ended up being the case. So of the 4 tools in the plan, 2 of them have shipped already and 2 of them were shipped in the back half. And then 2 of them will go into backlog and ship in 2020. Timing on that, we're not exactly sure. But we'll work those out as we move through the last 2 quarters and when they like that capacity available. So they may need it in the first half. They may wait until their fiscal '21, which would be in July time frame. We'll have to see that, but it's certainly in our forecast. Will there be additional tools? I don't know at this moment and we'll certainly take those into account as we look at setting guidance for 2020 a little later in the year.

That's very helpful. And then, Jim, you may have mentioned it and I'm sorry if I missed it, but given the change in revenue expectation and the update to profitability, thoughts on the cash position exiting this year?

We still are working to exit the year at more than we entered the year. I think we entered the year, like, just over $40 million, maybe $40.3 million. And that's still our expectation, to exit the year at above $40 million.

(Operator Instructions) The next question comes from the line of Nehal Chokshi from Maxim Group.

Congratulations on signing that huge incremental Photonics contract. That's huge.

Thanks.

I think you may have already said this at the beginning of the script, that you can't talk about this, but I'm not sure if it was regarding this, so I'll ask the question anyhow. What are the key steps that you guys need to demonstrate for that IVAS program to go from R&D to production?

Well, there's a set of objectives, technical specifications for each of the cameras. The CMOS version and then our active gain solution, that we have to meet those range, the different starlight conditions and performance of the night vision. And I think the -- if we have to make power, it's going to be battery. The power is on the dismounted soldiers. And the field of view and the resolution of all those things and the objective specs. I think what we really are watching is the user community and how they're looking at the overall program. So once we finish delivering our cameras at the end of 2020, they'll go into evaluation. And it will really be that feedback that's really going to tell us where we are and where the program is. We'll know that we can make the specs. We probably won't get a lot of good information competitively what the competitors are having, if they are making a spec or not. But it really would be the overall acceptance of the IVAS system, and from what we're hearing initially, it's been very, very positive. Nothing we can really say at this moment, but I did -- and actually it was Claire who found the CNBC and the first touch on IVAS that was out in April. So you don't really get to see the actual unit they're testing, but you do get to see kind of the overall concept and talk to some of the military people that are involved with it and what they think of the system as well.

Okay. Great. And then within Photonics, the 30% year-over-year growth, how would you parse that between product and R&D contract?

Yes, I think, what you're going to see is the R&D contract because the IVAS program is a contract R&D program because it's got so much development in it. So we would see that that will grow this year. It will probably have -- let me look at the numbers real quick, just to give you an idea, so I don't speak out of school. So I would expect the growth of 30%, more than 30 -- the majority of the revenue this year will be in the nonproduct, in the contract R&D, influenced by the IVAS contract and other R&D programs we have, like for development of the ISIE 19.

Okay. So product revenue for Photonics is up pretty significantly year-over-year, but really that was off of a depressed base. In 2H '18, it ramped up pretty significantly. So we shouldn't expect as strong of a seasonal ramp, if that's what that was, correct? Basically kind of it would be flat lined here on the product side?

I think that's somewhat correct, but I do think you'll start to see, as we've been saying before, some of the Apache revenue will come in in the fourth quarter of this year. And then we'll continue to see strength in the JSF and LIVAR programs, which are really the 3 programs that make up the majority of our product. And then as Wendell pointed out, we got a slow start in Q1 on IVAS. We saw a good revenue in Q3 -- I mean in Q2. We'll see that in Q3 and Q4 as well and probably see some acceleration as you end the year on IVAS.

Another thing just to point out is the $5 million or so in funded R&D that we saw in Q2 was the highest funded R&D in almost 7 years for Intevac, in the Photonics division specifically.

Right. Okay. All right. And then for the evaluation tool that's been put into production -- that has been put in place at this cover glass OEM, can you give some color as far as maybe what is their size relative to Truly?

We went after the large guys, much larger.

There are no further questions at this time. I will now turn the call back over to Mr. Blonigan.

Thank you. So before I sign off, I'd like to thank the dedicated employees of Intevac all around the world for their tremendous effort and outcomes in this dynamic environment.

I also want to thank our customers for their continued business and appreciated partnerships. And finally, I'd like to thank our stockholders for their continued support of Intevac.

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.