Intevac's (IVAC) CEO Wendell Blonigan on Q2 2016 Results - Earnings Call Transcript

| About: Intevac, Inc. (IVAC)

Intevac, Inc. (NASDAQ:IVAC)

Q2 2016 Results Earnings Conference Call

August 01, 2016, 04:30 PM ET


Claire McAdams - IR Counsel

Wendell Blonigan - President and CEO

Jim Moniz - CFO


Mark Jordan - Noble Financial

Richard Kugele - Needham & Company

Mark Miller - Benchmark

Nehal Chokshi - Maxim Group

Brian Alger - ROTH Capital Partners

Peter Peng - B. Riley


Good day, and welcome to Intevac's First Quarter 2016 Financial Results Conference Call. At this time, all participants are in a listen-only mode. Later we will conduct a question-and-answer session, and instructions will be given at that time. [Operator Instructions] Please note, that this conference call is being recorded today, August 1, 2016.

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

Claire McAdams

Thank you and good afternoon everyone. Thank you for joining us today to discuss Intevac's financial results for the second fiscal quarter of 2016, which ended on July 2. In addition to outlining the company's financial results, we will provide guidance for the third quarter of 2016 and commentary on the full year.

Joining me on the today's call are Wendell Blonigan, President and Chief Executive Officer; and Jim Moniz, Chief Financial Officer. Wendell will start with an update on our businesses, then Jim will review second quarter results and our outlook going forward before turning the call over to Q&A.

I would like to remind everyone that today's conference call contains certain forward-looking statements including, but not limited to statements regarding financial results for the company's most recently completed fiscal quarter, which remains subject to adjustment in connection with the preparation of our Form 10-Q, as well as comments regarding future events and projections about the future financial performance of Intevac.

These forward-looking statements are based upon our current expectations, and actual results could differ materially as a result of various risks and uncertainties relating to these comments and other risk factors discussed in documents filed by us with the Securities and Exchange Commission, including our annual report on Form 10-K and quarterly reports on Form 10-Q.

The contents of this August 1 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.

Wendell Blonigan

Thanks, Claire, and good afternoon. Before I begin, I want to take this opportunity not only to thank but to congratulate the employees of Intevac for their outstanding results in the last quarter as they achieved successful bookings in multiple strategic initiatives across the company. Today, we reported Q2 financial results exceeding guidance driven by increased contract R&D sales in Photonics, a pull in of hard disk drive technology upgrades in thin-film equipment, and stronger gross margins in both of our businesses. This resulted in revenues at the high end of the range and operating results significantly better than forecast.

The big news in the second quarter however was orders. With nine systems booked in the second quarter our thin-film equipment backlog grew to nearly $50 million, the highest level since the second quarter of 2010.We not only booked a multisystem order in our core HDD market but in each of our strategic growth initiatives end markets as well.

In the hard drive industry, the recent order of four 200 Leans to be delivered in the second half in Q1 reflects our ongoing partnerships with our customers and the need for strategic technology improvements in support of their product roadmaps.

In the Solar industry, the energy implant tools booked reflect an incremental market opportunity for our suite of technology solutions. The highlight of the quarter was in the display cover panel market, the order of three new systems by Truly Opto-electronics marks an important milestone, as these systems will add volume oDLC manufacturing capacity to their display cover glass operation.

As we pursue the diversification of our thin-film equipment business, the transition from an R&D or pilot tool to a build out of production capacity is a significant accomplishment, a crossing of the chasms so to speak.

Our optical diamond-like carbon protective coating solution, oDLC, has demonstrated outstanding performance as a cost-effective, optically transparent, scratch protection solution for display cover panels. This multisystem order from Truly quadruples the oDLC film capacity and supports a significant amount of their overall cover glass production.

The first volume quantities of cell phones protected with our coating are scheduled to start shipping at the end of the summer and with the additional capacity tools to be installed before yearend, our customer will be in position to address significant volume orders early next year.

At the same time, our in-house coating operation continues to produce and process hundreds of samples for multiple cover panel applications and our strategy to market our tools films through this in-house operation is yielding a very encouraging field of new customer engagements. We believe we have the lowest cost anti-scratch solution available in the marketplace with up to 20 times the scratch resistance of uncoated glass, a 10 times reduction in haze due to abrasion and a 20% increase in breakage resistance. We continue to demonstrate these results through our sampling activities.

Before moving on to our other equipment markets, I will add that the INTEVAC VERTEX System and our oDLC film for display cover panel currently represents the largest future revenue opportunity in our thin-film equipment business.

In the hard disk drive market, in Q2 we demonstrated the continued need for our systems with an order of four 200 Lean systems outfitted with the latest technology enhancements and processing capabilities. We believe this order is part of an ongoing strategy to optimize existing media capacity for the changing nature of the hard drive industry and to continue to reduce the cost per gigabyte of storage.

Last quarter in addition to the 200 Lean orders, we also saw the pull in of upgrades that both booked and installed inside the quarter leading to revenues coming in at the high-end of guidance and margins exceeding expectations. These upgrades included advanced carbon source technology reflecting our continued leadership in diamond -like carbon coatings.

Looking at the overall industry conditions in the second quarter both PCs and hard drive units surprised to be upside which is encouraging evidence of a possible industry stabilization. The growth segment within hard drives continues to be the near-line segment, which is a positive for media units giving the increasing number of disks in each near-line drive.

In Q1, the TIE ratio or average number of media disks per drive was just over two and is expected to have increased again in Q2 due to the growing mix of near-line drives. The TIE ratio for the near-line segment is much higher than the overall hard drive TIE ratio from over four this year to over seven projected for 2020.

In an HDD unit volume environment of the 100 to 120 million units per quarter, the current industry media capacity would be utilized once the over HDD TIE ratio - overall HDD TIE ratio gets to the range of 2.5 to 3 disks per drive. Given our systems bookings in Q2, we continue to have confidence we will see similar levels of hard drive revenue this year compared to 2015.

In the Solar market, we were pleased to report in Q2 the order of two implant tools for a new solar cell technology which utilize as n-type ion implant building of mono-crystalline p-type cells. While it is too early to size the market opportunity for this new technology, it is incremental to our estimated five year revenue opportunity of $175 million for solar equipment.

In the n-type crystal and solar cells which is the primary market segment targeted by our MATRIX platform for PVD and implant, a recent announcement from a Tier 1 solar company stated they would end production of their crystalline silicon product. We are monitoring this event closely to understand how this news may affect the 5-gigawatts of incremental capacity previously forecast to be installed in this segment by 2020.

In the meantime, our MATRIX platforms continues to be a PVD process tool of record for advanced metallization of high-efficiency n-type solar cells offering best-in-class target utilization and the lowest cost of ownership while providing high precision deposition performance. Included in the backlog at the end of Q2 are two MATRIX systems one for PVD and one for implant. The PVD tool will ship in the next several weeks and the implant tool is still expected to ship in the second half.

To sum-up the environment in our thin-film equipment business, the second quarter was an inflection point in terms of new tool orders that will drive the future growth of our company. Our three product platforms together address nearly $1 billion of revenue opportunity for us over the next five years.

Now for an update on our Photonics business. As I mentioned earlier, financial performance of our Photonics business was above expectations in Q2.We saw an increase in contract R&D revenue and outstanding operational execution which delivered improved yields on our sensor and camera systems. These factors led to gross margin in operating profitability above our long-term model for the business.

The favorable evaluations following the delivery of our high resolution ISIE4000 goggle prototypes to NAVAIR or U.S. Naval Air Systems Command led to $2 million of contract R&D bookings in Q1 and an additional $1.6 million in Q2 for the continued development and enhancement of the goggles in the ISIE 4000 sensor.

These 2 x 2 K high-resolution digital goggles are being evaluated as a key part of the Navy's enhanced visual acuity initiative which is envisioned to bring the digital advantage and augmented reality to the community of Rotary Wing Naval Aviators currently flying with analog night vision goggles.

Our technology demonstrated for ground force digital monocular goggle for the U.S. Army was delivered to the night vision lab in May and has received excellent initial reviews. We've been able to demonstrate differentiated lowlight performance and have begun demonstrating the power of digital technology over analog. With Bluetooth connectivity, image capture, wireless image transmission and reception, augmented reality picture and picture, digital zoom and the implementation of the extreme low light multi-frame signal integration. The technology demonstrated will continue to go through the evaluation process over the next several months.

The Digital Monocular technology demonstrator is for evaluation and analysis for the next generation enhanced night vision goggle program. We believe successful validation of our technology demonstrator will position us as the solution for ground force digital night vision, and enable funding for the development of a prototype fused monocular goggle solution.

As Stated earlier, we continue to execute well on our volume production programs and in Q2 booked $5 million of Apache cameras destined for foreign military helicopters in the Netherlands and Saudi Arabia.

Our production program for the F35 joint Strike Fighter which made us their show debut in London last month is running at low rate initial production levels. And in Q2, we booked an additional $1 million of ISIE11 camera subassemblies for technology upgrades of previously fielded ISIE10 cameras. These upgrades will be delivered this calendar year on top of the contracted production runs.

In total, the revenue pipeline for Photonics program little over $500 million and when we add in our pursuits including ground force applications, the opportunity pipeline expands upward to nearly $1 billion.

So in summary, Q2 was a very exciting quarter for our company. Backlog increased by over $30 million and backlog in our thin film equipment business alone is nearly $50 million. The majority of this backlog will convert the cash during 2016, even though revenue recognition for some tools will likely occur in early 2017. As I've indicated on previous calls, our thin film equipment revenue is lumpy and backend loaded in 2016.

With nine new tools booking in the second quarter our confidence continues to increase that 2016 revenues will be up from 2015, as much as 10% with upside potential dependent on adoption momentum and sign off timing of our new equipment growth initiative systems.

I'll now turn the call over to Jim to discuss our second quarter results, provide guidance for the third quarter, and to discuss the outlook for the year. Jim?

Jim Moniz

Thank you, Wendell. Consolidated second quarter revenues totaled $14.9 million, at the high-end of our guidance range due primarily to higher than expected upgrade sales.

Thin-film equipment revenue totaled $6.1 million, including upgrades in spares and field service. Photonics revenue of $8.8 million included $7 million of product revenues and $1.8 million of contract research and development revenues. Q2 consolidated gross margin was $6.1 million or 41.1%, above guidance with favorable contributions from both business units.

Thin-film equipment gross margin was 36.2% up from the first quarter and down from the second quarter of last year. The improvement from Q1 was primarily due to a higher mix of higher margin upgrades and improved factory absorption. The year-over-year decline was primarily due to lower revenue including lower upgrade revenue and lower forecast - lower factory absorption.

Photonics gross margin was 44.4%, slightly higher than last quarter and up from the second quarter of last year, and was above our long-term model for this business. The high gross margin in Q2 was due to continued favorable mix of product revenue, as well as favorable sensor yields and lower inventory reserves in the quarter.

Q2 R&D and SG&A expenses were $10.1 million, just above our guidance range driven by slightly higher engineering costs for our new thin-film equipment initiative programs. Our Q2 net loss was $3.5 million or $0.17 per share, above our guidance range of a loss of $0.26 to $0.29 per share driven by better margins. Our backlog was $75.3 million at quarter end.

Thin-film equipment backlog of $49 million included four 200 Lean HDD systems, three VERTEX display cover glass coating systems, one MATRIX solar PVD system, one MATRIX solar implant system and three energy solar implant systems. This is the highest backlog for thin-film equipment group since 2010.

Backlog in our Photonics business was $26.3 million. We ended the quarter with cash and investments including restricted cash of $42.4 million equivalent to approximately $2.05 per share based on $20.7 shares at quarter end. During the second quarter, we did not repurchase any shares. Q2 capital expenditures were $789,000 and depreciation and amortization was $1.5 million for the quarter.

Turning to guidance for the third quarter of 2016. We are projecting consolidated Q3 revenues to be between $21 million and $23 million. The primary difference between the high end and low end of the range is whether we achieve customer acceptance for revenue recognition on one of the recently announced energy systems. Within this range we expect third quarter gross margin to be between 35% and 36%.

Operating expenses are expected to be between $9 million and $9.5 million. We expect no tax benefit in nominal tax expense. For Q3, we are projecting a net loss in the range of $0.04 to $0.11 per share based on an estimate of 20.9 million shares.

With the success of the new tool bookings in the second quarter, our confidence continues to increase that 2016 revenues will be up from 2015 as much as 10%. At this revenue level, we expect gross margins in the range of 35% to 36% with operating expenses of between $37.5 million to $38.5 million for the year. We believe that we can deliver positive cash flows from operations in 2016 and our objective is to achieve a net increase in our cash balance in 2016.

As a reminder and to reiterate Wendell's earlier comments about the timing of shipments, revenue and cash flow, the majority of the 12 systems in backlog are scheduled to ship before year end.

While most of these tools require customer sign off for revenue making the timing of revenue recognition difficult to predict, the majority of the system backlog will be converted to cash during 2016.

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

Question-and-Answer Session


[Operator Instructions] And our first question comes from Mark Jordan from Noble Financial. Your line is now open.

Mark Jordan

Good afternoon gentlemen. I have question relative to the three system VERTEX order for oDLC, you say that the first one will ship in October and requires customer sign off, the other two would ship in December. So, I tell you that if you don't get signed off on the first and then two and three go out in December nothing would be realized until that first unit is accepted and that's why that whole packet could shift into early 2017?

Wendell Blonigan

Yes, you've got that absolutely right. We certainly are working on that. We have not typically shipped a new tool and be enabled to sign it off within the same quarter. Historically, there is a chance that could happen. So we'll have to continue to drive that and keep everybody informed of where we're at.

Mark Jordan

Okay. Given the guidance then that you have of high single digit up to 10% revenue growth, I think it is that really is based upon the assumption that you will take for free HDD tools to revenue and that the others - potentially the other units been all slipped into 2017. So would - that since you'd probably be looking $30 million plus of tool revenue that could - that would probably occur in 2017 versus 2016?

Wendell Blonigan

Yes, the kind of break out of that backlog Mark is with two, or three of the four 200 Lean's will - they revenue at shipment because they're standard tool, three of those to come in this year. We are expecting it's likely that the PVD MATRIX tool will sign off this year as well as I said in the in the script.

We expect that tool actually shipped in a few weeks, so that's the August timeframe. But it's unlikely the implant tool was that's a tool that was actually put together on the GDP so it’s got a lot of technical things that will need to be worked through after it ships. And we’d like to able the revenue one of those energy tools that are going out. And your previous question is exactly right, the swing factor is the VERTEX tools and the timing of that first one that ships.

Mark Jordan

Okay. And just a final question for you relative to the profit margins on thin-film. You had $500,000 more revenue but had almost 2 million swing in terms of the operating profits in the units. In addition to I mean, could you give a little more granularity with regards to the amount of upgrade that got pulled in and how much of that was revenue of that group to cause such a significance swing again almost 2 million in operating profits for the group?

Wendell Blonigan


Jim Moniz

Yes, I can answer that question. So basically we had a little over $3 million in upgrade revenue in Q2.There was probably maybe 1 million that got pushed into Q2 from the second half of the year. And that was at a good margin for us, plus we were able to get a litter higher margin on our repaired spare business. So that’s really what drove the margin in the thin-film equipment in Q2.

Mark Jordan

Okay. All right. Thank you very much.


Thank you. Our next question comes from Rich Kugele from Needham & Company. Your line is now open.

Richard Kugele

Thank you. Good afternoon. Just following up on that question on, so the bridge me again on the Delta for the Q3 gross margin guide versus what you printed I mean is it just the extra upgrade revenue that pulled in because you’re shipping so many more systems, so it's just a little surprising or are you just being conservative?

Wendell Blonigan


Jim Moniz

Yes, I can answer that. So we actually saw some benefit in Q2 in terms of the overall gross margin in both business lines, in thin-film equipment and Photonics. And we don't necessarily expect that we'll see the same level of revenue dollars from upgrades in Q3, so that has a little bit of slightly downward pressure on the margins with thin-film equipment. And then we're not sure we’ll see the same high level of Photonics gross margin.

So I hate to say it’s conservative, we certainly would like to beat the number but at this point in time, what we see is what we gave as guidance for Q3.

Richard Kugele

And then I was thinking as some of these customers in Asia are increasingly adopting some of your thin-film solutions across a number of different strategic imperatives. What are you having to do on the support side, are you needing to open up any offices over there or staff up in any way or do you have partnerships to help on that end?

Wendell Blonigan

We don't anticipate with the initiatives that in the adoption that we have right now. We’re going to need to add additional infrastructure. We do in the DLC area, we do work through a distributor for that so there's some of that activity and some of the support activity covered there. But fundamentally the equipment that's going out there is within the reach of our already established field service organization where that would be out of Singapore, in China or around the Southeast Asia area.

Richard Kugele

And then just in terms of follow-on orders, is this the type of industry or all these call it non-hard drive related equipment sales, where you expect that you need new customers to order and that everyone else has ordered as - let’s kind of say satiated with what they need or do you tend to see a greater opportunity from the ones that have ordered expanding in their footprint and now having proven that can bear or order more?

Wendell Blonigan

I think if you look nearer term, it’s when we look at the new initiatives it's really the customers that we've already put tools in place and have them build out capacities. So truly was one of those, it's a small capacity build-out but it's still really good thing for us to get to make happen in the field.

So initially it’s going to be more continuing buying and capacity build-out of the customers we've already engaged with. But beyond that as we look a little longer term it’s about capturing new customers for those initiatives.

Richard Kugele

Excellent. Well, thank you very much.


Thank you. Our next question comes from Mark Miller from Benchmark. Your line is now open.

Mark Miller

Congratulations on the strong orders. I think you had mentioned last time, I was just wondering to know if it changed it. You were in evaluation with other manufacturers besides Truly for the VERTEX tool, was that number 4 or 5 or there my point is out of thin air?

Wendell Blonigan

It's probably a little bit north of that that. We have engagements up and down the supply chain certainly for the cover glass makers. That's the correct numbers about 4 to 5 of the cover glass makers but we’re also sampling up and down that food chain as well. But ultimately the equipment would be handled by some of the larger cover glass makers.

Mark Miller

I believe you indicated $2 million in bookings for the ISIE goggles, was the 1 million in upgrades included in our total or is that in addition to the 2 million in ISIE goggle bookings?

Wendell Blonigan

Yes, the - what I discussed on the conference call about the ISIE 10 replacements on the JSF F-35 that's an addition to those bookings. Our contract R&D bookings were based off of the NAVAIR ISIE 4000 high-definition goggles. It was 2 million that were booked in the first quarter and another 1.6 booked in the second quarter to that program.

Mark Miller

Okay, thank you.


Thank you. Our next question comes from the Nehal Chokshi from Maxim Group. Your line is now open.


Thank you and congratulations on all the - what are some of all your major thin-film equipment market it’s really fantastic.

Wendell Blonigan


Q – NehalChokshi

On the oDLC with Truly, what percent of their output do you think will be capable of having the oDLC film once those three tools are running in full production?

Wendell Blonigan

Yes, unfortunately I can't answer that. We have been in some discussions and they would prefer that we not actually discuss what their full manufacturing capacity is. But what I can say is that when you look at each one of our tools that we're putting out there, in rough calculations the VERTEX tool does approximately 500,000 five inch cell phones a month and that's when you run it - that’s what we call the nameplate capacity if you’re going to run it all day and all night, every day of the week all year long.

So when you see now that they will have four systems installed the nameplate capacity will be about 24 million five inch cell phones that you regulate that down a course to probably six days a week and maybe 16 to 18 hours a day. So that gives you some idea of what kind of volume capability they have to put oDLC down.

Nehal Chokshi

Just to be clear that 24 million is a per year basis?

Wendell Blonigan


Nehal Chokshi

Got it. Okay, I understood. All right and then I believe that the smart phone cover glass market it's characterized by a few big OEMs and Truly is not by far the biggest one. I think it's characterized by two very big ones out there. And any pieces of evidence you can offer that suggest that one of those two big ones are starting to move the route what Truly has gone?

Wendell Blonigan

I’m afraid I’m going to have to let those guys make those announcements. Realistically I think Truly was a very unique engagement with us somewhat because of their size and where we were coming with our films to able to really co-announcing co-promoting to do that. I think as you go to the bigger companies they’re much more all their cards are down and they're not really -- they don't allow us to really tell that we're engaged with them.

Sometimes we’ll have NDA and part of the NDA is that we’re not allowed to say we have an NDA with these people. So we’ll have to let those announcements come from different channels than us. But certainly all of the cover glass makers are our customers that we like to capture.

Nehal Chokshi

Right, okay. And then you mentioned that you're processing hundreds of samples with your in-house optical DLC lab, can you help us parse what does that actually mean in terms of how many smartphone models are you engaged on currently?

Wendell Blonigan

In our coating service we’re doing not only cell phones but we’re doing a number of different size samples including large to the tablet size, all the way down to small to like a wearable size. So without talking too much about what end customers, there are more than several that are taking a look at our coatings at this time.

Nehal Chokshi

Understood. Maybe another way to help out here is that when an end customer comes to you and says and we’re interested in oDLC coating, how many samples per given model do they need in order to get confidence that this would work for them?

Wendell Blonigan

I think it depends on the application. As an example like a point of sales piece of cover glass, they don’t need a ton but they put it through some rigorous testing. I think when you are talking about the front face of a cell phone the numbers are in the thousands.

Nehal Chokshi

Got it. Okay, thank you.


Thank you. Our next question comes from Brian Alger from ROTH Capital Partners. Your line is now open.

Brian Alger

Good afternoon guys. I’ll echo the congrats, good results so far, certainly an improving outlook. Just a couple of follow-ups I guess. On the VERTEX business, we have an indication from truly what type of devices will be utilizing the VERTEX machines, are we talking smartphones and do we know which regions these will be signed into?

Wendell Blonigan

Well, certain, Truly we’ll make those accouchement on their own. We have spoken I think last conference call and even referenced to again in this that the first production orders off of that are cells phones in China. We expect sometime around the end of the summer for those to start being out in the marketplace but certainly they’re working on the full spectrum of cover glass application.

As an example, Truly actually manufactures their own smart watch that has the oDLC on it. So they are looking at a boarder base of applications which include the cells phones as well but mostly at this point from Truly would be Chinese market based.

Brian Alger

Okay that’s helpful. And as we look at the growth and the opportunity I just want to be clear on the services side, when you’re doing the samples of the cover glass it’s not have that as a business itself, rather it’s meant to be a precursor into selling tools correct?

Wendell Blonigan

That’s absolutely correct. We don’t necessarily at this point want to be competition for coating business with people we’re selling equipment to. This is really put in place strategically to help facilitate seeding the market and having volume capability sampling for customers that are buying our tool while we’re in the process of building the tools and getting it installed so they can capture their customers and be ready to go once their tools are up in production.

Brian Alger

Okay, great. And then shifting gears back over towards the hard disc side with the lean tools. You made the comment that you are of the opinion that the current orders for the 400 Lean tools are for current media capacity and I think in the original press release you talked about the technical buys. I am wondering if by adding the four tools into the equation that that changes the cross over point on the TIE ratio for you in terms of where the industry reaches full capacity or not.

Wendell Blonigan

Yes, okay Brian. So what I would say is that the 400 system order that we were able to announce we believe is part of an ongoing program to bring the exiting manufacturing capacity to the level it needs to be in order to produce the latest generation of HDD media. So we do not believe that we are adding capacity into the overall market at this point.

What I would say is that, if you look at the capacity as it stands today some of that capacity cannot do the latest technology node media. So we’re really in a process of taking the exiting capacity and getting it up to speed with where the technology and the different films need to be today. So we don’t anticipate that growing the installed base or moving the TIE ratio cross over mathematics at all.

Brian Alger

Okay, great. And obviously we’ll figure out after the full numbers are out were the TIE ratio should go out for Q3 here.

Wendell Blonigan

In fact, it grew a bit from the Q1 which was just hair over 2.

Brian Alger

Right. And then finally - it feels like every portion of the business is going well here with increasing visibility certainly coming into the thin film market. I guess the biggest wildcard and the thing I have a trouble of getting my arms around is this opportunity of Photonics. You’ve described the upgrades from ISIE10 to the ISIE11 for the JSF, almost overnight bringing in the additional $1 million.

What kind of - and we have the big number of $0.5 billion in terms of total pipeline. Can you maybe map out how we get from where we are currently with the backlog of call it 26.3 to that pipeline of 500 million, how do we build that up and what kind of timeframe is that over?

Wendell Blonigan

When we look at the equipment business we look at kind of five year window off of forecast. When we look at the military business we’re talking about long range programs that are in place with the government and it’s a pipeline of activity.

So as an example the Apache pipeline, the initial components for that were for the U.S. based Apache helicopters but then when you look at the pipeline you look at for military sales, you look at technology upgrades and you look for in that particular example a second camera that would fitted into that business and that makes up the opportunity pipeline over a longer period of time.

So that’s the differences in the two business and it’s all long-term business. When I look at the nearer term, we’ve got production programs that are in place particularly Apache. We’re moving to the for military sales there, we’ve got the F-35 which is still only in limited initial rate production at this time and will ramp in technology upgrades on top of that but when we look very close near term of the Photonics business, it’s really the increases in the government funded R&D that’s being poured into this for the next generation sensors and products that is where the growth toggle is in that business in the very near term.

And of course the contract R&D right now we were really pleased with how we did in the first and second quarters of capturing some of that. We are in a continuing resolution and we don’t have a government budget at this point so there is no new starts but we also have the ability as we have done with our ground goggle the monocular is to be able to move that from one particular program into another program that has already started and has funding.

So it’s a complicated business, I understand it can get a little bit confusing but the pipeline for Photonics is a long term, it’s not a five-year, it’s a total program opportunity. Some of those programs run five years, some of those programs run 25 years. And then as we look at the very near term of that that business, it’s really the contract R&D that is where the growth component is on that and we're pushing very, very hard and we had some good success I think in the first and second quarters of capturing some of that.

Brian Alger

Great. Thanks for the color there Wendell and again nice job of booking the business and moving the three product lines of thin film forward. Thank you.


[Operator Instructions] And our next question comes from Peter Peng from B. Riley. Your line is now open.

Peter Peng

Good morning, guys. This is Peter calling in for Craig. First off, on your upgrades and software, you mentioned a little bit pulling from quarters. Can you just kind of talk about how you think about that segment going forward?

Wendell Blonigan

Jim, you want to take that?

Jim Moniz

Yes, I will. So in the particular upgrades themselves, we don’t give this level of granularity but in order to clarify your question we have less than $0.5 in Q1 and over $3 million in Q2 and so that’s kind of nonlinear as you look forward.

We expect to still see a relatively strong level of upgrade revenue for the year. We have a pretty strong sustainable repairs and service business in the hard drive business which is really what’s driving that because we haven’t installed enough of the new equipment initiatives to have really the spares and repairs.

But as Wendell said and as we talked about in the prepared remarks, we saw little bit of pooling in Q2, so that will migrate down a little bit as we go to the second half of the year. It won't be as high level as it was in Q2, and that will have a tendency to not to give us a benefit of those higher margins we saw in the thin film equipment like we saw in Q2.

Peter Peng

Okay. Thank you. And then, this is more a longer-term question. On your five-year revenue opportunities for your equipment side, can you kind of talk about your market share - your target market share positions in each of the display and solar and HDD?

Wendell Blonigan

Yes, I'll take it at the HDD, we are certainly looking at - and that particular piece of that pipeline we're looking at what we know about the customers. Again we've just put tools in. We look at if that is an ongoing opportunity which we believe it is. What our nominal run rates are in our service and support, as well as what kind of upgrades to the equipment that each customer may have in plan and is rolling out and then we totaled that up for the HDD.

When we look at the solar cell market we are looking at fundamentally customers that we are engaged with and what their build out plans are as rather than looking at the overall gigawatt growth forecast in projecting some percentage.

And then when we go to display cover panel, we are actually looking at the overall covered glass manufacturing operation and we are looking at a 25% adoption rate to generate what that market opportunity is. That's the three components to add up to that pipeline.

Peter Peng

Thanks. That’s all I have. Congratulation, guys.


Thank you. And I'm currently showing no further questions at this time. I'd now like to turn the conference back over to Mr. Blonigan for any closing remarks.

Wendell Blonigan

Okay. Thank you for joining us today, and we look forward to updating you again during our Q3 call in November. Until then, so long.


This does conclude today's teleconference. You may now disconnect.

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