Intermolecular's CEO Discusses Q4 2013 Results - Earnings Call Transcript

Feb. 6.14 | About: Intermolecular, Inc. (IMI)

Intermolecular, Inc. (NASDAQ:IMI)

Q4 2013 Earnings Conference Call

February 6, 2014 16:30 ET

Executives

Gary Hsueh - Senior Director, Corporate Development and Investor Relations

Dave Lazovsky - President and Chief Executive Officer

Rick Neely - Chief Financial Officer

Analysts

Edwin Mok - Needham & Company

Weston Twigg - Pacific Crest

Operator

Good day, ladies and gentlemen and welcome to Intermolecular Incorporated Full Year and Fourth Quarter 2013 Earnings Conference Call. All participants will be in a listen-only mode. Please note this call is being recorded. My name is Karen. And I’ll be your operator for today.

I’ll now like to turn the conference over to your host for today, Mr. Gary Hsueh, Senior Director of Corporate Development and Investor Relations. Please proceed sir.

Gary Hsueh - Senior Director, Corporate Development and Investor Relations

Thank you, Karen. Good afternoon and welcome to Intermolecular’s full year and fourth quarter 2013 earnings call. We announced results after the close today and you’ll find a copy of the press release on our website at www.intermolecular.com. On the call with us today are Dave Lazovsky, President and Chief Executive Officer and Rick Neely, Chief Financial Officer.

Today’s conference call contains forward-looking statements. Any statement that refers to expectations, projections or other characterizations of future events including financial projections and future market conditions is a forward-looking statement.

Actual results may differ materially from those expressed in these forward-looking statements. Intermolecular assumes no obligation to update these forward-looking statements, which speak only as of today. For more information about factors that may cause actual results to differ materially from forward-looking statements please refer to the press release we issued today as well as the risks described in our Form 10-K for fiscal 2012 and our subsequent quarterly reports on Form 10-Q as filed with the SEC, particularly in the sections titled Risk Factors.

Before we begin, please note that during this call, we will discuss non-GAAP financial measures as defined by the SEC and Regulation G. We believe non-GAAP financial measures provide useful supplemental information to both management and investors, but note that these measurements are not a substitute for GAAP and should only be used to evaluate the Company’s results of operations in conjunction with corresponding GAAP measures. All non-GAAP measures are reconciled to the most directly comparable GAAP financial measures in our press release issued today.

And with that I will now turn the call over to Dave.

Dave Lazovsky - President and Chief Executive Officer

Thanks, Gary. Good afternoon everyone and thank you for joining us on today’s call and webcast. I’ll begin by reviewing the dynamics in our business in 2013 that have impacted the company’s near term financial performance. I’ll then discuss the steps we’ve taking now to improve our financial performance, enhance our strategic opportunities and position the company for profitable growth.

2013 was a difficult year. A year in which two of our largest customers from 2012, GLOBALFOUNDRIES and ATMI significantly reduced their level of CDP service activities with us. This impacted top-line growth, margin performance and resulted in a bottom line that did not meet our near term target operating model of non-GAAP breakeven results prior to the expected ramp of volume-based royalties.

Additionally given the recent pivot and a strategy of these two customers, we disclosed further amendments to the collaborative development agreements that have impacted the ongoing services run rate with them in 2014. As a result we implemented a restructuring affecting approximately 18% of our headcount, that will streamline operations and allow us to maintain the strength of our balance sheet. We believe this restructuring and our current customer focus will strengthen the company’s ability to drive the transition of the business model from a 20% licensing and royalty mix business today to our longer term target model of a 50% licensing in royalty mix supporting a target of 30 to 35 non-GAAP net income.

Today we are on a critical path to the majority of our customers and their development of next generation products and semiconductors and clean energy. Our capabilities to accelerate device innovation have continued to expand with increasing depth and breadth in the expertise of our technical team and the sophistication of our proprietary R&D platform. As a result our CDPs with customers in both semiconductors and clean energy have made significant progress in (rating) technology for volume manufacturing.

We expect customers to initiate volume production this year with new technologies in DRAM, advanced glass products, and semiconductor materials resulting directly from our CDPs. In 2013 we diversified our customer base and increased the revenue opportunity for future licensing and royalty strengths. Our licensing and royalty agreements now span roughly $40 billion of our customers in revenue compared to approximately $25 billion at the end of 2012.

In terms of R&D productivity and IP generation, we maintained the elevated space of IP creation by filing 261 U.S. patents in 2013 compared to 250 in 2012, which grew our total IP portfolio to 1,230 U.S. patents and applications owned or exclusively licensed as of the end of 2013. The majority of this growth was attributable to program IP meaning IP that is under the output of our collaborative development programs for our owned internal R&D programs. Both of which are royalty bearing when used in commercialized products by our customers.

Program IP comprised 84% of the U.S. patents that were filed in 2013 compared to 74% in 2012. Patent filings within this segment grew by 19% year-over-year underscoring the productivity of innovation resulting from our R&D platform and collaborative development programs. Before I provide additional detail on specific CDPs I’d like to highlight what we see as the key takeaways from events in 2013.

First innovation in advanced device technology by its very nature can be unpredictable, particularly the timelines for the commercialization of new products. The key factors for us are to remain on the critical path of our customer’s product roadmaps and help them accelerate time to market. We believe thereby consistently delivering value to our customers and becoming the standard for their R&D we’re reducing risk and the implementation of new technology and IP resulting from our CDPs and improving the timelines of our associated incremental licensing in royalty revenue.

Second, we believe our collaborative engagement model and the accelerated R&D provided by our HPC platforms are working. We’re delivering results to our customers with technologies that have already moved into high volume production including 30 nanometer and 25 nanometer DRAM with Elpida Micron and advanced materials used today at leading edge logic and memory device nodes. In 2014 we expect to see the next wave of technologies resulting from our CDPs transitioned into manufacturing.

This includes 20 nanometer DRAM, additional novel materials, and advanced glass coatings. As an example earlier today we announced an extension and expansion agreement with Guardian, was also committee to initiate production of Low-E glass products this year that have been developed within our CDP. The third key takeaway is the expanding range of applications for our innovation platform and collaborative engagement model in semiconductors and clean energy. We believe capturing these opportunities with collaborative IP based business model will put the company back on our growth path with new CDP engagements and will deliver strong shareholder returns over the long term.

Now I’d like to spend some time to take you through recent changes in our CDPs with GLOBALFOUNDRIES and ATMI as well as recent renewals with First Solar and Guardian. In conjunction with the release of Q4 financial results we disclosed a change in our CDP engagement with GLOBALFOUNDRIES. As a result of a pivot in GLOBALFOUNDRIES strategy related to our CDP, development activities have been suspended for the remainder of 2014 with mutual agreement to discuss opportunities for re-engagement for calendar 2015. All other terms of our original agreement remain unchanged including IP ownership and rights and GLOBALFOUNDRIES royalty obligation do us for use of IP developed under the CDP.

In addition we have reached an agreement with GLOBALFOUNDRIES to accelerate payments on all obligations in 2014 in the first quarter. The reasons underlying this change may also impact the use in timing of our developed IP. The other customer that achieved their strategic course was ATMI. This week ATMI announced a merger agreement with Entegris. As with all of our CDP and IPO licensing agreements, we retained rights on technology developed within our CDPs in the events of a merger or acquisition of our customers. In the case of ATMI this includes existing materials and any future materials developed on our HPC platforms.

In addition we will continue to recognize licensing revenue from HPC platforms purchased by ATMI as long as they remain in use. As you may recall our engagement model with ATMI has always been unique. This structure of the licensing and royalty agreement with ATMI stipulates that no matter who does the development as long as the materials R&D is performed using our HPC platform Intermolecular has royalty rights when the materials are commercialized.

Given this royalty arrangement our engagement model with ATMI has been to proliferate our HPC platforms across the ATMI’s R&D centers and to train their technical teams on our R&D methodologies. For 2014 there have been a couple of changes to our near term revenue from ATMI. There will be a reduction in this year in the CDP service revenue line as well as licenses from certain HPC platforms owned by ATMI. This structure of our licensing and royalty agreement remains unchanged from the original agreement that has been effective since 2006.

The only change in 2014 is the transition back to a volume-based royalty structure from the fixed payment structure that applied in 2013. This is a positive for Intermolecular and help solidify our ability to grow into our royalty opportunity with advanced process materials particularly as 28 nanometer and sub 28 nanometer wafer starts continue to ramp through the next several years. We expect semiconductor process materials developed on our HPC platforms will continue to build commercial momentum in 2014 with increasing volumes for both advanced logic and DRAM applications across multiple customers.

In clean energy we recently renewed agreements with two major customers, First Solar and Guardian. With First Solar we closed out 2013 with solid technical performance. For 2014 our new scope of work brings to bear each company’s complementary strengths that is our core strength in materials and process integration and First Solar is (permanent knowledge) of cad-tel photovoltaic device integration. As a result Intermolecular’s resources apply to the program and the CDP service run rate have been adjusted accordingly in 2014.

I’ll now stress that the near term reduction in our CDP service revenue run rate with First Solar has no impact or bearing on future royalty opportunity. We believe both companies are allocating the right capabilities and resources at this stage of the CDP to achieve our aligned technical and commercial objectives. As I touched on earlier Guardian renewed their CDP with an extension and expansion of our collaboration. We entered into an agreement that extends the scope of the relationship and calls for additional resources to be deployed to increase the pace of new product development and commercialization. This includes resources to support initial production implementation of our Low-E glass technology expected this year.

The increased scope of R&D in this next phase is a collaboration with Guardian will allow for the development of a much broader range of advanced glass products for new end markets, all of which fall under our existing licensing and royalty agreement. Guardian’s extension and expansion agreement was just recently booked this week so it’s not reflected in our reported backlog at the end of 2013.

Before I hand the call over to Rick I’d like to thank the Intermolecular team for their significant contributions in 2013 and for maintaining a high level of focus and perseverance as we work through this transitional period. Our priority is first and foremost to execute on our existing CDPs to help our customers accelerate innovation and bring better products to market faster.

I look forward to the team’s dedication, commitment and continued focus on the three key areas of growth for the company which are extending and expanding existing customer programs, executing on our existing CDPs to facilitate commercialization of developed IP and to strengthen our pipeline of licensing and royalty revenue and adding new customers and opportunities in semiconductors and in clean energy.

Now I’ll turn the call over to Rick to review our financial results for the fourth quarter and the full year 2013. Rick?

Rick Neely - Chief Financial Officer

Thanks, Dave. After being on the ground at Intermolecular for four months now, I’m a strong believer in the long-term opportunities that lie ahead for the company, but in order for us to realize those there are actions we needed to take for the near term improvement that will continue to maintain the strength of the balance sheet. As Dave mentioned we announced a reduction in our workforce of approximately 18% of our full-time headcount which should result in annualized savings of approximately $6 million to $7 million in total expense in operating costs and cost of revenue for our CDP programs.

In addition there will be a one-time restructuring charge for this action of approximately $1.1 million in the first quarter. Though quite painful this action will align our resources to our best opportunities. Before I dive into our financial objectives for 2014 let me briefly summarize financial results for the fourth quarter and the full year.

Revenue for the fourth quarter of 2013 was $15.6 million, a 12% sequential decrease from the September quarter and a year-over-year decrease of 10% from the fourth quarter of 2012. CDP revenue represented 69% of total revenue in the fourth quarter, licensing and royalty revenue 25%, and product revenue comprised the remaining 6%. The primary factor behind this sequential decline in revenue was due to product sales. We recognized $2.7 million in product revenue in the third quarter related to our agreement with Ulnanotech and this dropped to $0.9 million in the fourth quarter.

As you know product sales have and will continue to exhibit quarter-to-quarter variability. For 2013 revenue totaled $67.4 million which was relatively flat year-over-year. CDP revenue represented 68% of total revenue, licensing and royalty revenue 22% and product revenue represented 10%. We had four customers which were greater than 10% of total revenue during the fourth quarter and four customers greater than 10% for the full year. Customers that were greater than 10% of revenue represented 63% of total revenue in the fourth quarter and 55% of total revenue for the full year.

Net loss in the fourth quarter of 2013 on a GAAP basis was $4.4 million or a loss of $0.10 on 45.9 million basic shares. This compares to net income of $0.5 million or earnings of $0.01 per diluted share of common stock in the same quarter a year ago. For the full year we reported a GAAP net loss of $8.8 million or a loss of $0.20 per basic share in 2013 compared to a net loss of $0.8 million or a loss of $0.02 per basic share of common stock in 2012.

Please review today’s earnings press release for both GAAP and non-GAAP measures and the reconciliation between our GAAP and non-GAAP results. Key items in our reconciliation from GAAP to non-GAAP measures include the exclusion of stock-based compensation expense. We reported a non-GAAP net loss for the fourth quarter of $3 million or a loss of $0.07 per basic share. This compares to a non-GAAP net loss of $0.8 million or a loss of $0.02 per basic share in the third quarter of 2013 and non-GAAP net income of $1.5 million or earnings of $0.03 per diluted share a year ago.

Factors underlying the year-over-year decline in net income included the reduction in CDP service revenue from GLOBALFOUNDRIES and ATMI, increases in operating expense as a result of the growth and investment in internal R&D, and additional headcount to support new customer programs included new micro-CDPs as well as the one-time intellectual property sales of First Solar that we recognized in the first quarter of 2012.

For the full year non-GAAP net loss totaled $3.3 million or a loss of $0.07 per basic share compared to non-GAAP net income of $2.9 million or earnings of $0.06 per diluted share in 2012. Now I want to echo Dave’s comments and reiterate our dissatisfaction with the net losses relative to the potential of a long-term financial model. Based on my time here to-date there are two main areas I see for improvement to meet one of our key financial objectives in 2014 which is to maintain the strength of our balance sheet prior to the expected ramp in licensing and royalty revenue.

The first area of focus is controlling costs. The total operating cost structure increased 13% quarter-over-quarter in the fourth quarter and almost $5 million or 13% year-over-year. This growth has been reversed with a recent reduction in workforce and other associated expenses. Going forward we’ll be more selective on the timing and magnitude of investments in target areas of strategic growth. The other area is working capital. In 2013 the company’s ending net inventory position grew by $1.7 million or 36% on flat sales.

In 2014 we have begun implementing the improved procedures to control deployment of cash towards inventory and we believe these controls will significantly improve the velocity of cash conversion from working capital. With both measures implemented I believe the company will be in a better position to get back to non-GAAP breakeven results and neutral to positive free cash flow while allowing the operational flexibility to continue investing in internal R&D and new micro-CDPs to strengthen our deal pipeline for 2014 and beyond.

Gross margin for the quarter was 46% versus 48.9% in the September quarter and 62.5% reported for the fourth quarter of 2012. The main contributor for gross margin is typically revenue mix. However the fourth quarter was negatively impacted by an inventory write-down of approximately $1 million as a result of our year end inventory assessment. Without the inventory write-down our gross margin in the fourth quarter would have been six percentage points higher or approximately 52%.

Total operating expense for the quarter was $11.4 million compared to $10.7 million in the September quarter and $10.1 million in the same period a year ago. This sequential increase in total operating expenses was primarily a result of reallocation of tactical resources to support increased investment in internal R&D programs as well as strengthening of our sales and marketing organization to help solidify our sales pipeline in 2014.

As these internal R&D efforts are converted into paid CDP programs, ongoing levels of investment in these areas will reallocate back into cost of sales. For 2013 total operating expense was $43 million compared to $38.1 million in 2012. Other net expense during the quarter of $190,000 primarily reflects our quarterly net interest expense of approximately $200,000 related to our 0.0325 three year term loan.

Our December 31, 2013 balance sheet included cash and cash equivalents of $72.1 million. This slight sequential decrease in our cash position was a result of capital expenditures of $4.5 million in the quarter to support existing CDP programs partially offset by positive cash flow from operations of $1.8 million. The key contributor to positive cash flow from operations was collection of accounts receivable which declined by $3.4 million in the quarter. Total backlog at December 31, 2013 was $56.4 million of which we expect to recognize approximately $30 million as revenue in 2014 and the remainder beyond 2014.

Now for the financial outlook for the first quarter of 2014. Again I’d like to remind everyone that the following statements are based on current expectations as of today and include forward looking statements. Actual results may differ materially and we do not undertake any obligation to update this outlook in the future. Our guidance in the first quarter of 2014 is as follows. We project revenue in the range of $15 million to $16 million. This revenue projection includes roughly a $11 million of our December 31, 2013 reported backlog and the accelerated payment of GLOBALFOUNDRIES total obligation for 2014.

Non-GAAP net loss excluding stock-based compensation expense and a one-time restructuring charge is projected to be a loss between $0.5 million and $1.5 million loss or between a loss of $0.01 per share and $0.03 per share on approximately 46 million basic shares.

Now I’ll turn the call back to Gary.

Gary Hsueh - Senior Director, Corporate Development and Investor Relations

Thanks, Rick. And now we’d be happy to answer any questions that you might have. Karen, would you mind providing Q&A instructions?

Question-and-Answer Session

Operator

(Operator Instructions) Our first question comes from the line of Harlan Sur from JPMorgan.

Unidentified Analyst

Hey guys this is (indiscernible) for Harlan. I have a question, few questions. My first question is regarding the GLOBALFOUNDRIES according to the 8-K. There is not much color, so I was hoping if you can provide some color, was it related to any execution on the team’s part or something change on GLOBALFOUNDRIES projection or financial, anything or any color would be appreciated?

Dave Lazovsky

Sure. So I’ll tell you what I can of the details of the GLOBALFOUNDRIES agreements and we certainly can’t go into these specifics on GLOBALFOUNDRIES financial situation or on their strategy. But we do believe that GLOBALFOUNDRIES has prioritized an external technology transfer from a third-party over their own internal technology developments to wish our CDP has been contributing. And therefore we’ve agreed with GLOBALFOUNDRIES again to suspend the CDP activity for 2014 and we’ll be discussing with them the collaboration engagement going forward for 2015 later in the year.

Unidentified Analyst

Okay. And then from what I can recall the SanDisk and Toshiba CDP renewal, that should be coming up for renewal sometimes in this quarter, in the current quarter, any updates on that front?

Dave Lazovsky

Yes, that’s correct. The SanDisk and Toshiba renewals we do this quarter, that program is progressing quite well. What we’ve a lot of confidence that program will continue and we’ll provide you an update to the outcome in our quarterly update at the end of the quarter.

Unidentified Analyst

Okay. And then the last question I have regarding First Solar. There were some operational misexecution that resulted into reduced fees for calendar 2014. What exactly was the nature of this misexecution and what are some of the correct steps the team has been taking in order to avoid such event with other programs going forward?

Dave Lazovsky

Yes, so just to be clear the structure of the engagement with First Solar for 2014 was focused on what needed to be accomplished in 2014 and not a product of operational execution last year. The objective this year was to improve – continues to be to improve the conversion efficiency for their cad-tel photovoltaic device. And as I mentioned earlier that’s a company that has a deeper level of technical acumen and expertise in cad-tel device technology and integration than arguably any company in the world.

And we’re providing a complementary set of skills around materials end-of-life integration. And the objective this year was to leverage the complementary set of capabilities from both companies to execute the technology developments and the commercialization objectives that First Solar has with that technology this year and we have structured the resources accordingly and that’s what the results of the adjustment in the level of CDP services run rate for 2014 came from.

Unidentified Analyst

I do have a follow-up question, during the last earnings call you had mentioned that (indiscernible) is engaged in a mini-CDP with a Tier 1 display customer. I was wondering how is the progress on this micro-CDP and any timeframe when we can expect it to turn into a full CDP and..

Dave Lazovsky

Yes, so the – yes so the current status of our engagements in display it’s still early stage in general. We have micro-CDP activities ongoing but it is still early stage. We are seeing a increase in customer traction around these applications particularly for metal oxide TFT but given the early stage we’ll be providing updates as we progress in future calls.

Unidentified Analyst

Okay. Thank you.

Dave Lazovsky

Sure.

Operator

Thank you. And our next question comes from the line of Edwin Mok from Needham & Company.

Edwin Mok - Needham & Company

Great. Thanks for taking my question. I just want to clarify and sorry if I have missed that, but on the GLOBALFOUNDRIES acceleration of payment here. Is it just the CDP payment that you expect for the year or is that some part of the licensing fee that you expect and also that you’re collecting it in the first quarter and that you don’t (exact to color) anything from this customer. And a follow-up question on that is how do you remain engaged with this customer after call the change that have happened there slowdown and that do you get to be re-engaged with this customer again?

Dave Lazovsky

So yes Edwin, this is Dave. Yes, your question on what was the revenue expected in the first quarter are associated with the acceleration. That is a combination to the CDP services as well as the minimum royalties that are due for 2014 so the full payments will be paid upfront in Q1. And the second part of your question related to how we’re staying engaged we’re keeping an open dialog with GLOBALFOUNDRIES. They’re concerned right now with our own technical objectives associated with technology transfer, I’ll be re-engaging with them later in the year to discuss collaboration opportunities going forward.

Edwin Mok - Needham & Company

I see. So the plan basically is once they got over that the technology fronts third part of that right and then obviously a long-term (indiscernible) technology, right. Then you guys will have potentially in our engagement that we open in an engagement with them and the conversation probably start sometime later on this year though is how I should think about that?

Dave Lazovsky

Yes, I mean there is still ongoing dialog. There is a lot of work going on from the standpoint currently of intellectual property protection and patent prosecution and yes we’ll keep an open dialog and make sure that we have the ability to redeploy the resources if and when appropriate to support GLOBALFOUNDRIES objectives.

Edwin Mok - Needham & Company

Great. That’s very helpful. And then switching gear on to the Guardian expansion that you guys mentioned on the call. I was wondering few things I guess right. First thing is Guardian you guys have been working with them for a while and developed some of the solution for these class products that you have, right. Are we – should we expect to start to see royalty from those developments that you’ve done before, right. And then in terms of this expansion I’d imagine that, that means there is some additional CDP revenue because your engagement with them is expanded. Am my reading, understanding correctly?

Dave Lazovsky

Yes, that’s correct. So in both cases a lot of progress has been made around the technologies that are being developed. So in particular Low-E glass has been an area focus for us and Guardian does expect to put that technology into production at some point this year and we’ll keep you up to speed on the progress there. And yes given the increase in scope of that program there is an increase in resources and an increase in the CDP services run rate expected just to put a little bit of color on the order of about a 20% increase in the magnitude of the CDP services run rate for that program.

Edwin Mok - Needham & Company

Great. Good color there. And finally we haven’t talked too much Micron the engagement there and it’s a much bigger engagement now right beyond DRAM and including non-volatile memory, right. Any incremental color you can offer since last quarter on that. And I understand the Elpida they are looking to compare to 20 nanometer you said you understand that is still on track?

Dave Lazovsky

Yes, very good progress at Micron, great company to work with, it’s extremely innovative and very fast. So it’s been a highly productive, highly collaborative engagement on both DRAM as well as the non-volatile memory. As you know we have 30 and 35 nanometer technology in production through the Elpida (ARM) and as they’ve disclosed they’re working to converge on a unified technology direction at the 20 nanometer node and we feel quite comfortable and confident in our position that the technology that would be implemented there will incorporate some of the work that we’ve done collectively with these companies. And again good solid progress as well on the non-volatile memory in front of some exciting programs underway currently.

Edwin Mok - Needham & Company

Great. That’s all I have. Thank you.

Dave Lazovsky

Yes, thanks a lot.

Operator

Thank you. And our next question comes from the line of Weston Twigg from Pacific Crest.

Weston Twigg - Pacific Crest

Sure, hi, thanks for taking my questions. I have a couple, one is related to GLOBALFOUNDRIES. I’m a little bit surprised at the rate that relationship I guess – I got suspended for the year. And I’m wondering if you could maybe help explain why if you’re working with GLOBALFOUNDRIES in advanced technology and if your program really helps accelerate advanced technology development, why they would prioritize somebody else’s technology to ramp over what they’ve been developing internally with you?

Dave Lazovsky

So Wes, I’m going to point you to what’s out there in the press, I’m not going to speak for GLOBALFOUNDRIES. So there is a lot of articles, there is a lot of research that you can find related to GLOBALFOUNDRIES near term strategy and I’m going to point you to that rather than going into the details of what’s happening with that customer.

Weston Twigg - Pacific Crest

Fair enough. The – I guess the other related piece to that and is the right (rethrough) for 2014 that this should be a down revenue year given the decline..

Dave Lazovsky

Yes, so I wouldn’t necessarily read that into our forecast, that’s certainly isn’t our intention for 2014. Our intention is to do what we need to do to grow this business and we’ve restructured the cost basis to facilitate the right level of profitability targets being achieved as well as the right cash flow targets being achieved, but our intention certainly isn’t for this to be a down year.

Weston Twigg - Pacific Crest

Okay. And then just maybe real quick on the GLOBALFOUNDRIES piece again, I’m just struggling with this. So last year you had narrowed the scope of your program GLOBALFOUNDRIES to focus on with you had characterized I think the most likely opportunities to be successful. And can you give us an update on just the progress of those programs and is there any chance that those programs may still result in some pretty much off the table at the moment?

Dave Lazovsky

Yes, certainly not off the table. We’ve done a lot of very good work collectively with the GLOBALFOUNDRIES technology development team and we’ve – we’re working very closely with them on multiple nodes of technology. In the middle of last year as you pointed out we did focus our activity with them on 14 nanometer. And frankly at this point given their own strategic focus we have very limited visibility at this point on the timing and the use of developed technology and IP given the circumstances with GLOBALFOUNDRIES technology strategy.

Weston Twigg - Pacific Crest

Okay. Thank you.

Dave Lazovsky

Sure.

Operator

Thank you. And our next question is a follow-up from the line of Sur from JPMorgan.

Unidentified Analyst

Hi, this is (indiscernible). A clarification for a 1Q guide, should we expect product revenue in 1Q and also the $30 million backlog that figure excludes $11 million backlog from 1Q, right?

Dave Lazovsky

So, yes. To answer your question, I’ll answer the first and I’ll turn the second part of your question over to Rick to address. But there is no product revenue in the current Q1 guidance.

Rick Neely

Relative to the backlog the $30 million is for the year which includes many things already in Q1 thus far.

Unidentified Analyst

Got it. So is it fair to assume that your quarterly revenue run rate would be high single digits, low teens?

Dave Lazovsky

No, there is – there are several factors that are going to impact the quarterly revenue run rate. We have an acceleration payment in Q1 that’s coming from GLOBALFOUNDRIES, but if you look through that we have beyond Q1 there are multiple moving parts. One is the increase in the Guardian program that I’ve just discussed, the other is transitioning back to a volume-based royalty structure with ATMI for the materials that are in production today, understand that in – we recognized royalties one quarter in arrears.

And for the first quarter of this year there will be no royalties for ATMI recognized so there is no royalties reflected in the current guidance. So there is – in Q2 and going forward there will be royalties associated with ATMI and materials being recognized. The other incremental contributors to the ongoing run rate will be extensions of the existing programs and particular expansions of existing programs. This includes renewals for deals this quarter including SanDisk, Toshiba and any new deals that are currently in progress.

Unidentified Analyst

Thank you very much. And then last question is I would think that your proprietary capabilities would be very beneficial for Semi-Cap guys. Any engagement level with Tier 1 players in the U.S. or in Asia?

Dave Lazovsky

Yes. We do have – we have had historical in view currently have ongoing engagements with the semiconductor capital equipment guys, but there is nothing that we can publicly disclose at this point.

Unidentified Analyst

Alright. That would be helpful. Thank you.

Dave Lazovsky

Sure.

Operator

Thank you. (Operator Instructions) And I see no additional questions in the queue at this time. I’d like to turn the conference back to Mr. Gary Hsueh for any concluding remarks.

Gary Hsueh - Senior Director, Corporate Development and Investor Relations

Okay. Thanks, Karen. We’d like to thank everyone for joining us today and a webcast replay of today’s call will be available on our website at ir.intermolecular.com. Thank you so much.

Operator

Ladies and gentlemen, thank you for your participation in today’s conference. This does conclude the program and you may now disconnect. Everyone have a good day.

Copyright policy: All transcripts on this site are the copyright of Seeking Alpha. However, we view them as an important resource for bloggers and journalists, and are excited to contribute to the democratization of financial information on the Internet. (Until now investors have had to pay thousands of dollars in subscription fees for transcripts.) So our reproduction policy is as follows: You may quote up to 400 words of any transcript on the condition that you attribute the transcript to Seeking Alpha and either link to the original transcript or to www.SeekingAlpha.com. All other use is prohibited.

THE INFORMATION CONTAINED HERE IS A TEXTUAL REPRESENTATION OF THE APPLICABLE COMPANY'S CONFERENCE CALL, CONFERENCE PRESENTATION OR OTHER AUDIO PRESENTATION, AND WHILE EFFORTS ARE MADE TO PROVIDE AN ACCURATE TRANSCRIPTION, THERE MAY BE MATERIAL ERRORS, OMISSIONS, OR INACCURACIES IN THE REPORTING OF THE SUBSTANCE OF THE AUDIO PRESENTATIONS. IN NO WAY DOES SEEKING ALPHA ASSUME ANY RESPONSIBILITY FOR ANY INVESTMENT OR OTHER DECISIONS MADE BASED UPON THE INFORMATION PROVIDED ON THIS WEB SITE OR IN ANY TRANSCRIPT. USERS ARE ADVISED TO REVIEW THE APPLICABLE COMPANY'S AUDIO PRESENTATION ITSELF AND THE APPLICABLE COMPANY'S SEC FILINGS BEFORE MAKING ANY INVESTMENT OR OTHER DECISIONS.

If you have any additional questions about our online transcripts, please contact us at: transcripts@seekingalpha.com. Thank you!

Intermolecular, Inc. (IMI): Q4 EPS of -$0.07 beats by $0.02. Revenue of $15.6M (-10.6% Y/Y) beats by $0.03M.