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Edited Transcript of IVAC earnings conference call or presentation 29-Jan-20 9:30pm GMT

Q4 2019 Intevac Inc Earnings Call

SANTA CLARA Jan 31, 2020 (Thomson StreetEvents) -- Edited Transcript of Intevac Inc earnings conference call or presentation Wednesday, January 29, 2020 at 9:30:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Claire McAdams

Intevac, Inc. - IR Counsel

* James P. Moniz

Intevac, Inc. - Executive VP of Finance & Administration, CFO & Treasurer

* Wendell T. Blonigan

Intevac, Inc. - President, CEO & Director

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Conference Call Participants

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* Nehal Sushil Chokshi

Maxim Group LLC, Research Division - MD

* Peter Peng

B. Riley FBR, Inc., Research Division - Associate Analyst

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Presentation

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Operator [1]

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Good day, and welcome to Intevac's Fourth Quarter and Full Year 2019 Financial Results Conference Call. (Operator Instructions) Please note that this conference is being recorded today, January 29, 2020.

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

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Claire McAdams, Intevac, Inc. - IR Counsel [2]

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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 2019, which ended on December 28. In addition to discussing the company's recent results, we will provide financial guidance for the first quarter of 2020 and outlook looking forward.

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 current outlook, then Jim will review fourth quarter results and discuss our 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 remains 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 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 will now turn the call over to Wendell.

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Wendell T. Blonigan, Intevac, Inc. - President, CEO & Director [3]

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Thanks, Claire, and good afternoon. Today, we reported strong fourth quarter results. Revenue of $35.4 million was above expectations due to an all-time record level of hard drive upgrades, exceeding our forecast for the quarter. Earnings were at the high end of guidance at $0.22 per share. We ended the year with total sales growth of 14% over 2018. Full year profitability of $0.05 per share and positive cash flow generation with a net increase in our total cash and investments of $2.5 million compared to year-end 2018.

2019 was a year of important progress in our strategic growth initiatives with significant momentum building in photonics and a number of important milestones achieved in our Thin-Film Equipment or TFE business.

Recapping our highlights in 2019. I'll start with our Photonics business. We achieved revenue growth of 37% year-over-year, which was driven primarily by a strong ramp of development revenue for the IVAS program. We announced an all-time record order of $40 million, which, combined with the IVAS award received in late 2018, contributed to an all-time record in Photonics backlog during the third quarter. Year-end backlog was $71 million, a 62% increase from 2018.

In our Thin-Film Equipment business, we grew revenue by 6% year-over-year. The hard drive business was down a bit in 2019 due to a lower level of upgrades throughout the full year compared to record upgrade business in 2018. Despite this, we grew revenue in our TFE business by shipping 9 ENERGi systems during the year.

We were successful in closing 2 evaluation agreements for systems outside of our core HDD market during the year. The first was a VERTEX Spectra evaluation system with a Tier 1 display cover glass manufacturer, which has multiple development projects ongoing with handset manufacturers. The second was our MATRIX PVD evaluation system for advanced semiconductor packaging, giving us our initial footprint in this new market. In 2019, we also made progress in finalizing the agreement to place a second VERTEX Spectra evaluation system, which we expect to close in February and ship in Q1.

We also developed and launched the new VERTEX Marathon system, enabling our most advanced DLC technology, the ultra-durable DiamondClad coating to be applied at less than half the cost of oDLC 1.0 on previous generations of the VERTEX tool. Each of these milestones support the long-term revenue growth and profitability objectives for Intevac.

In terms of our financial performance in 2019. Total revenue was $109 million, an increase of 14% over 2018. Gross profit increased 25% year-over-year with improved gross margin in both our TFE and Photonics businesses. With R&D and SG&A expenses held flat, operating income grew to $4 million. We achieved our objectives to return to profitability with full year earnings exceeding guidance at $0.05 per share.

We generated positive cash flow from operations of approximately $5 million for the year and also achieved our objective to add to our cash position and ended 2019 with over $40 million of total cash and investments. These highlights, among other strategic internal activity, display the successful accomplishments achieved in the important year of growth in 2019.

I'll now turn to an update on each of our businesses. First, starting with Photonics. In Q4, we reported the highest level of revenue in the last 5 years, largely due to the IVAS program. This program has ramped quickly in 2019 and sequential growth in revenue each quarter. The IVAS contract is for the development and delivery of the initial lot of digital night vision camera modules for IVAS system-level development and qualification. We will begin to ship cameras late this year, and given changes in the scope of the IVAS program, we will continue to ship through the first half of next year. If successful, the projected volumes of night vision camera modules beyond this initial development contract to be fielded to the dismounted soldiers would be in the hundreds of thousands of units.

Given our forecast for steady revenue flow from the IVAS program and now full rate production of cameras for the Joint Strike Fighter program, we expect quarterly Photonics revenue will fluctuate around the Q4 level throughout 2020.

We continue to announce incremental awards that will build upon our Photonics backlog, which provides multiyear visibility for continued strong growth and profitability. Two of these awards were announced early this month: 1 for the DELTA-I goggle program for special ops; and 1 LIVAR camera contract for Northrop Grumman. In addition, we anticipate participating in the Navy's Enhanced Visual Acuity program, or EVA, which we expect to award late Q1.

With regard to our ongoing technology advancement efforts, we have completed the initial ISIE 19 sensor design and performance qualifications and are now finishing our first ISIE 19 based cameras for night vision labs. Supported by the government, we now have successfully met the design specifications required to take digital night vision to its next level of performance, including enhanced frame rate capability and higher dynamic range. We are currently building the ISIE 19 sensors in small quantities in support of several programs that will be the launch vehicles for the ISIE 19. We have multiple I 19 cameras in backlog to support not only new programs such as IVAS, DELTA-I and EVA, but upgrade programs for the F-35 Joint Strike Fighter as well.

The record $40 million order received last year, combined with the recently announced contract awards have built a strong foundation for our future growth. We have multi-year visibility for our manufacturing operations and continued validation of our digital night vision technology. Our confidence has increased for another year of strong growth for photonics in 2020, with revenue currently expected to be up 20% to 25% year-over-year.

Turning now to our Thin-Film Equipment division, starting first with our HDD business. 2019 hard drive unit demand ended on a positive, with continued demand from the nearline segment driving a significant increase in the tie ratio or average number of disks per drive to around 2.5 with forecast to accelerate to over 3 in 2020. Our hard drive customers are running our tools at very high utilization rates while completing a record amount of tool upgrades during the seasonally busy Q4.

Our visibility for upgrade levels in 2020, however, remains somewhat limited. We currently have 200 Leans in backlog. On our last call, we reported these tools were scheduled to ship in July 2020, and as of today, we expect the shipments to pull in and ship late in the second quarter. Without the visibility of timing for additional orders, which we believe will materialize once our customers confirm strength in the nearline demand continuing through the year, our current forecast for 2020 includes 2 fewer 200 Leans than in 2019. As a reminder, the 4 tools shipped in 2019 and the 2 scheduled for 2020 are adding to the industry's installed media capacity.

We continue to believe that the hard drive industry could max out its media capacity by the end of the year, which will require additional 200 Lean orders. We do not have the visibility from our customers at this time, however, to anticipate whether any additional 200 Leans will need to be shipped for capacity during this calendar year.

Long-term forecasts indicate midyear growth of 8% annually through 2023, in support of the 25% growth rate for Exabyte shipped on hard drives. Just like other parts of our equipment business, the HDD media business can be lumpy quarter-to-quarter and year-to-year.

The overall takeaway from the long-term outlook for hard drive media given the growth of nearline cloud storage demand is that the HDD business continues to be strong and profitable for us. While today, our forecast is for a softer year in 2020. Our hard drive customers tend to start each calendar year with relatively conservative views on capital investment, yet we often exit the year with a stronger and more profitable HDD business than what we forecast in January. We are also optimistic for the resumption of capacity tool orders in support of nearline media demand beyond this year.

Second, for the energy platform, in our solar cell ion implant business, we continue to have confidence in the future potential for the energy product line. Last year, our customers accelerated their delivery schedule of the tools in backlog and 9 tools were recognized in 2019 revenue, totaling around $15 million. We continue to discuss the need for additional tools for 2020 in support of a multi-gigawatt capacity expansion in China, which would utilize ion beam doping.

Just as in other areas of our equipment business, these additional tools are also moving pieces, and we will need to get the new expansion in China to launch in order to regrow our energy backlog. We believe, however, we do have the potential to see new orders during the first half of 2020, and that our business with this solar customer this year could be similar revenue-wise to 2019. We'll keep you updated on orders and changes to our forecast as we progress through the year.

Third, for the MATRIX platform. The MATRIX to date has been serving the high-efficiency solar cell manufacturing market and now advanced semiconductor packaging. In Q4, we completed the build, test and installation of our first MATRIX PVD evaluation system for fan-out panel level packaging with a leading OSAT or outsourced semiconductor assembly and test provider.

The MATRIX PVD system is beginning evaluation and qualifications at their R&D facility 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. With 2020 expect to be a qualification year, our current forecast does not include MATRIX revenue closing in the year. We believe the MATRIX will become part of our growth story starting in 2021.

And finally, I'll conclude with our progress in expanding our current footprint in the display cover panel market, which continues to have the largest growth potential over the next few years for our Thin-Film Equipment business. There are 4 key display cover panel updates for today's call. First is our new consumer product, Diamond Dog tempered glass screen protectors, which we debuted at the consumer electronics show. Second is an update on our progress with our first VERTEX Spectra eval system shipped last year. Third is an update on our progress with the second VERTEX Spectra EVA expected to ship in Q1, followed by progress on our Vertex Marathon product launch.

I'll start with Diamond Dog, which is our best-in-class screen protector showcased at the ShowStoppers event at CES earlier this month. Diamond Dog is a branded consumer product selling for $29.99 that utilizes our DiamondClad coating on a retail cell phone screen protector. We believe its performance surpasses the best screen protectors on the market today and at a lower cost. Its sapphire-like protection against scratches, abrasion and breakage is several times better than competing products. The reception of Diamond Dog was extremely favorable during the show and selected media attendees snapped up over 250 samples. We invited attendees to try and scratch our screen protectors, which they could not.

We also participated in multiple one-on-one media interviews, along with film demonstrations, which are now currently releasing on the web. We are encouraged by the traffic and preorders on our website, mydiamonddog.com, and we expect to start shipping in volume beginning in March.

In addition to our website, Diamond Dog screen protectors will be available for pre-order on Amazon in late February. The primary objective behind this direct-to-consumer launch is to create industry and customer awareness of our DiamondClad coatings capability to accelerate DiamondClad demo activity on our eval tools and drive demand for Vertex Marathon systems. So while the focus is generating tool sales, there is, however, a large and lucrative market for high-end screen protectors of around $300 million annually, and from our testing, Diamond Dog is a superior product. We look forward to keeping you up-to-date on the consumer response and handset maker traction resulting from the Diamond Dog product launch.

Next, an update on our first major eval program with a Tier 1 display cover glass manufacturer. The customer pull generated by our strategy to engage with top 5 handset makers, resulted in the delivery of our first evaluation system with a major display cover glass manufacturer in 2019. This VERTEX Spectra was quickly qualified and signed off in August for decorative back-cover glass applications. And the tool has been busy, extremely busy running demos since then.

We've been working on multiple designs with multiple top 5 handset makers, and we're pleased to report that the first design program in development has now moved into an initial preproduction run. If this run is successful and the handset maker moves to full production with this design, it presents a follow-on order opportunity for our recently announced Vertex Marathon system. We still have a ways to go, and customer adoption can be unpredictable, as we've experienced in the past. But the interest level for decorative patterning applications to multiple projects underway and this initial preproduction run are all very encouraging.

Cell phone manufacturing pool is also driving our progress placing a second VERTEX Spectra eval system with an additional display cover glass manufacturer, also in China, to ensure dual sourcing capacity in the supply chain. Given the large-scale of the parent company conglomerate and this being the first evaluation agreement of this type we have entered in the cover glass industry, finalizing the terms of the agreement, particularly with import/export ambiguity around U.S.-China trade, has taken much longer than anticipated. We remain confident at this time that the system will ship shortly as all the terms of the agreement have been negotiated and closed and has been signed by us and the customers' operational management.

One signature remains for the deal to close, which we are told will occur when they return from the Lunar New Year holiday. Once closed, we will announce via press release. And I look forward to updating you on the progress of the tool activity rather than the contract status going forward.

The strategy with both these evaluation agreements is to generate production demand with major handset makers enabling these tools to convert to revenue in 2020, while driving additional growth through follow-on orders. We also continue to work with smaller and boutique cover glass manufacturers who remain candidates for additional revenue systems.

And finally, an update on the Vertex Marathon system and DiamondClad coatings we launched last quarter. Both the Vertex Marathon system and DiamondClad films were the result of our internal development programs to push the performance envelope of our protective coatings to approach that of sapphire and also dramatically reduce the cost of depositing the coatings on cover glass.

DiamondClad is a proprietary multi-step process that performed similar to sapphire in scratch testing at the Mohs 8 standard and is far superior to industry-standard glass with anti-fingerprint or AF coatings, which scratch at a Mohs 5 level. At the same time, we have also reduced the cost of acquiring this multilayer technology through the launch of a new platform architecture for our technology to Vertex Marathon.

In addition, to DiamondClad deposition, the marathon system can be optimized to deposit hard anti-reflective and decorative coatings as well as unique patterning applications, utilizing our ion beam sources. Because the Vertex Marathon tool is scalable, all or any combination of VERTEX technologies can be accommodated on a single tool.

In addition, we've introduced the Vertex Marathon system to the customers we are engaged with in eval programs, so they can predict high-volume production costs. We expect that the Vertex Marathon tool will be the volume production workhorse and the VERTEX Spectra will be primarily used in R&D for development activity. Both platforms are available for purchase at this time.

Our in-house Vertex Marathon system has been installed in our cleanroom is operational and running DiamondClad process as we speak. We began providing samples to select cover glass and cell phone manufacturers last quarter for testing. And that activity is ongoing.

We continue to be encouraged how our evaluation projects are progressing and are excited with the introduction of Diamond Dog, DiamondClad and the Vertex Marathon into the market. The activity around the VERTEX system remains key programs in our company, and I will continue to update you on our progress each quarter.

So in summary, in 2019, we completed the development of our next-generation night vision technology, while achieving strong growth in orders and backlog in Photonics and achieved critical milestones for our corporate growth initiatives in Thin-Film Equipment. As we move into 2020, we continue to manage a number of moving pieces in our business, particularly in our Thin-Film Equipment group. These pieces can be positively or negatively impacted, not only by current industry climates, but by the global trade and macroeconomic environment as well.

In addition to economic and trade uncertainties, we are closely monitoring the recent outbreak of coronavirus and any possible impact to our business plans. Many of our equipment customers are located or base their manufacturing and operations in China, and the resumption of normal business following Lunar New Year is indeterminate.

Looking ahead at the full year 2020. First, in Photonics and military digital night vision, we have the backlog and the multiyear visibility to forecast strong growth ahead for 2020. We currently expect year-over-year growth in the range of 20% to 25%, which would be a historical record amount for the business.

Second, in our hard drive, which we believe will be relatively stable and profitable for the foreseeable future, we expect to see some softening in 2020 based on lower tool sales. We are working to gain visibility on the upgrades and tool orders that can drive our forecast higher, but at this time, we expect the softness in our hard drive business on a dollar basis to be roughly offset by the incremental revenue growth expected in Photonics.

Third, in solar, we're encouraged by discussions with our customers so far that 2020 could be another good year for shipments. Our current outlook is that sales of energy systems in 2020 will be comparable revenue-wise to the roughly $15 million recorded in 2019. In our newest market, advanced semiconductor packaging, we could begin to see a contribution to revenue in 2020, but it's more likely to be a component of our revenue growth story in 2021 and beyond. Therefore, as we drive for another year of growth in 2020, our current outlook for the combination of Photonics, hard drive and solar revenue is to be roughly similar to that of 2019. And the incremental business providing revenue growth in 2020 will be primarily enabled by VERTEX system adoption.

In the display cover panel market, our objective is to report meaningful revenue in 2020. However, it's too early to provide a range. We are excited about our new DiamondClad protective coating and in the coming months, we look forward to achieving market adoption of this higher performance and lower costing coating, enabled by the Vertex Marathon platform. We believe our 2 strategic evaluation placements have significant potential for success, which can drive Vertex Marathon system orders this year. It is our objective to deliver another year of growth and profitability for the company in 2020, while continuing to execute on our strategic initiatives.

We also intend to keep our cash levels above the $40 million threshold we established in 2018. And finally, as a reminder of our comments last quarter, we continue to expect 2020 to be a heavily back-half weighted year.

I'll now turn the call over to Jim to discuss the details of our recent financial results and our outlook so far in 2020. Jim?

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James P. Moniz, Intevac, Inc. - Executive VP of Finance & Administration, CFO & Treasurer [4]

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Thank you, Wendell. Turning to the fourth quarter results. Consolidated fourth quarter revenues totaled $35.4 million, above our guidance of $34 million to $35 million. Thin-Film Equipment revenue totaled $24.4 million and included 2 200 Lean systems, along with a record level of upgrades, spares and service. Photonics revenue of $11.1 million included $4.9 million of product revenues and a record $6.2 million of contract, research and development revenues.

Q4 consolidated gross margin was 46.5%, above guidance of 42% to 44% as a result of positive contributions from both businesses. Thin-Film Equipment gross margin was 46.9%, up from the fourth quarter of last year and the third quarter of this year due to higher-margin HDD systems and upgrades.

Photonics gross margin was 45.7%, up from last quarter and up from the fourth quarter of last year. The improvement was primarily driven by higher revenue, strong operational efficiencies and favorable product mix. In Q4, R&D and SG&A expenses were $9.2 million, at the low end of our guidance due to continued control on expenses and timing of engineering materials purposes.

Q4 net income was $5.2 million or $0.22 per diluted share, at the high end of our guidance, driven by better gross margin profit -- for both businesses.

Our backlog was $92.4 million at year-end. Thin-Film Equipment backlog of $21.4 million included 2 200 Lean HDD systems. The backlog in our Photonics business was $71 million.

We ended the year with cash and investments, including restricted cash, of $42.8 million, equivalent to approximately $1.83 per share based on 23.3 million shares at year-end. The growth in cash year-over-year was $2.5 million, and we ended above $40 million, which was our objective.

Cash flow generated by operations was $6.1 million during the quarter and $4.9 million for the year. Q4 capital expenditures were $828,000 and depreciation and amortization were $813,000 for the quarter.

Now moving to Q1 2020 guidance. We are projecting consolidated revenues to be between $18 million and $18.5 million. The Q1 projection includes lower HDD upgrades than the record Q4, no Thin-Film Equipment systems, and a similar Photonics level as Q4. Current backlog includes 2 200 Leans scheduled for June. Additional systems and revenue for the remainder of 2020 will be dependent on new bookings. Given the lower Q1 revenues, which will affect factory utilization and the change in revenue mix in both Thin-Film Equipment and Photonics, we expect first quarter gross margin to be between 39% and 40%. Q1 operating expenses are expected to be between $10 million and $10.5 million, slightly higher than our expected run rate for the full year due to the timing of investments in research and development, along with some typical seasonal increases.

We expect quarterly OpEx to be around the $10 million level for the remainder of 2020. We expect interest income of around $200,000 and GAAP tax expense of about $400,000 in the quarter. We are projecting a net loss in the range of $0.12 to $0.14 per share based on 23.5 million shares outstanding.

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

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Questions and Answers

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Operator [1]

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

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Nehal Sushil Chokshi, Maxim Group LLC, Research Division - MD [2]

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Yes. I want to focus it on the Diamond Dog here. You mentioned that it's a lower cost basis than the competitors. So what's the driver of having a lower cost basis, given that -- I presume that there's at least an extra step in creating this diamond layer relative to the difficult-to-prep glass?

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Wendell T. Blonigan, Intevac, Inc. - President, CEO & Director [3]

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I think it's part of it is -- and thanks for the question, Nehal. Part of it is our positioning in the market as a new entrant. I think there is a pure sapphire screen protector that can perform at a similar level, but it's 3x the cost. So we wanted to be in a position that we still made -- and I would say there's a very healthy margin being made in this business that we had a product that would outperform everything in the market at a cost that wouldn't scare people away.

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Nehal Sushil Chokshi, Maxim Group LLC, Research Division - MD [4]

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Understood. Okay. So just to be clear, when you say a lower cost basis, you were referring to a sapphire-based cover glass? Or were you referring to a tempered glass -- cover glass?

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Wendell T. Blonigan, Intevac, Inc. - President, CEO & Director [5]

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No. It's an actual sapphire cover glass.

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Nehal Sushil Chokshi, Maxim Group LLC, Research Division - MD [6]

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Got you. Understood. Okay. And then you did note that there is an attractive $300 million TAM for Diamond Dog, and that definitely sounds about right. And perhaps a little bit small, actually. And you did mention that the purpose here is to drive equipment orders not to capture that TAM. But given this TAM and given the attractive margin structure, do you think it's worthwhile to try to deploy capital to build a brand around this?

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Wendell T. Blonigan, Intevac, Inc. - President, CEO & Director [7]

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Yes. We are definitely doing that. And I think we did spend some upfront money in our packaging, in our websites and position it. And I think maybe to elaborate on the process of getting to where we were at, we certainly were doing lots and lots of testing with the DiamondClad coating. And we want to see how that stood up to what was in the market. And just seeing the fact that we've outperformed by several times more expensive or similar priced units and that -- looking at the margin structure that there was real business to be had, we are definitely going to -- we have a business plan in place over the next few years for this product line because there is an attractive market there for this business. But again, the primary driver that moved us into this area was to generate activity and demands for tool sales.

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Nehal Sushil Chokshi, Maxim Group LLC, Research Division - MD [8]

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Okay. Just to be clear, when you said that you did deploy some capital here, I got to believe it's got to be on the sub-million dollar range here, though.

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Wendell T. Blonigan, Intevac, Inc. - President, CEO & Director [9]

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Yes, yes, absolutely.

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Nehal Sushil Chokshi, Maxim Group LLC, Research Division - MD [10]

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Okay, okay. And when I am talking about is it worthwhile to deploy capital, I'm picking in the tens of millions of dollars a range to build a brand, distribution, these 2 primary things, which does take capital, especially working capital. So that's what I'm really referring to. So I'm not too sure if you did address that, what I was actually referring to.

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Wendell T. Blonigan, Intevac, Inc. - President, CEO & Director [11]

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Yes. We have no plan to put tens of millions of dollars worth of capital at this point in time. What we want to do is get introduced in the market, and then incrementally, drive this business over the next couple of years. Now depending how the response is we'll alter our plans as we move through.

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Operator [12]

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

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Peter Peng, B. Riley FBR, Inc., Research Division - Associate Analyst [13]

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This is actually Peter Peng calling in for Craig Ellis. My first question is, can you just kind of put some parameters on what you think the market share could be for this DiamondClad?

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Wendell T. Blonigan, Intevac, Inc. - President, CEO & Director [14]

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The DiamondClad is actually the coating itself. Are you speaking of market share for DiamondClad or the actual screen protector?

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Peter Peng, B. Riley FBR, Inc., Research Division - Associate Analyst [15]

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What you're -- yes, actual screen protector, what your targeted market share is on this $300 million revenue opportunity?

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Wendell T. Blonigan, Intevac, Inc. - President, CEO & Director [16]

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Right now, our business plan is targeted to get ourselves introduced in the market and roughly break ourselves even in this first year, and then we'll assess market share after that. But depending on how well it's received in the market and us knowing how well it performs, we think there could be significant opportunity there for market share. And I think there's also as we get better known, I think there's opportunities for us to license our technology as well.

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Peter Peng, B. Riley FBR, Inc., Research Division - Associate Analyst [17]

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Got it. And once these products start ramping, how should we think about the margin profile? Is it going to be accretive? Or is this going to, I guess, dilute some of the margins?

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James P. Moniz, Intevac, Inc. - Executive VP of Finance & Administration, CFO & Treasurer [18]

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Yes. I think it would be accretive, but I also think it's way premature to start modeling it. We've just introduced it, and we want to see what kind of reception we get in the marketplace before we actually feel comfortable modeling and giving you numbers to put into your model. But as Wendell said, this year, it's a matter of letting the success we have pay for the investment. So essentially try to breakeven this year as we try to gain market share and use that to show superior product out there.

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Peter Peng, B. Riley FBR, Inc., Research Division - Associate Analyst [19]

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Got it. And then on just the VERTEX customer and going -- your first eval tool -- Tier 1 display. Can you kind of talk about what the opportunity could be? I recall -- like recall correctly, Truly, there was a fall in order for 4 additional tools in that period. What -- I guess, if you can just kind of quantify what this is relative to Truly? Is this kind of bigger or smaller? How should we think about that?

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Wendell T. Blonigan, Intevac, Inc. - President, CEO & Director [20]

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I think the way to look at it at this moment in time and one of the reasons that our conference call script is worded like it is, there's just a lot of variables that need to be quantified. So as an example, it's what model would it be on and how many SKUs would it be on in that model. How fast would they need to roll it out? If they were planning on doing something this year, they need more tools to have enough capacity to do it. If they -- we're going to put it out in another 6 to 9 months out from the end of this year, then they could do it with maybe one tool. I think we're really going to have to wait a little bit further to see how that plays out. But I think, certainly, as we get into our evaluation programs, it's our intention to turn those tools to revenue with production orders this year.

Certainly, the first one. The second one now that we're in February, and if there's some delays that occur in getting the tool installed because of this pandemic in China that might complicate things a little bit. But that's, again, we have to see what's really going to happen there as well because it's kind of day-to-day in China.

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Peter Peng, B. Riley FBR, Inc., Research Division - Associate Analyst [21]

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Okay. And on the upgrades in software, it seems like if I just kind of look at my model and do the math, it seems like first quarter is going to be roughly around $7 million to $8 million. And then based on the color you provided, it seems like that upgrades in software could return back to around $11-ish million per quarter. How should we think about, I guess, getting back to those levels? Is it going to be more second half weighted? Or is it going to snap back into second quarter?

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James P. Moniz, Intevac, Inc. - Executive VP of Finance & Administration, CFO & Treasurer [22]

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So you're absolutely correct. We did have record upgrade revenue in Q4 '19. And the number you pointed out there around $7 million or so is what would be implied for Q1. And we would expect it to ramp, but a little early for us to determine if it gets back up to that record level that we had in Q4 of '19, but we would expect it to ramp above the $7 million as we go through the year, depending on our customer demand.

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Peter Peng, B. Riley FBR, Inc., Research Division - Associate Analyst [23]

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Okay. And last question, just on the Photonics. It seems like you're talking more of flattish Q-on-Q profile for the Photonics business. Just given some of these new program that's going to ramp, just wanted to -- if you can reconcile why this is more of a flattish growth throughout the year?

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James P. Moniz, Intevac, Inc. - Executive VP of Finance & Administration, CFO & Treasurer [24]

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Well, I think if you look at Photonics through 2019, their revenues did ramp up to approach that $11 million that we hit in Q4. And a number of -- a big driver of that was the IVAS contract that was awarded and then the Apache contract that was awarded, both of those major awards happened in Q4 of 2018. And so we're now at that kind of a level in a full year run rate. We hit that at the end of Q4 2019, which allowed us to grow 37%. So as we maintain that kind of a level that gives us our confidence to grow 20% to 25%. And some programs drop off and some of the programs that we announced, awards, kind of fill in that. But as Wendell alluded to and specifically said, with the growth of 20% to 25%, that would be a record revenue all-time for Photonics. So we're pretty proud of that.

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Operator [25]

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(Operator Instructions) Since there are no further questions left in the queue at this time, I would like to turn the call back over to Mr. Blonigan for any closing remarks.

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Wendell T. Blonigan, Intevac, Inc. - President, CEO & Director [26]

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Great. Thanks. 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 2019. 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 Q1 call in April. Until then, so long and go Niners.

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Operator [27]

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This concludes today's teleconference. You may now disconnect your lines at this time. Thank you for your participation, and have a wonderful day.