Intevac Inc. Q2 2008 Earnings Call Transcript

| About: Intevac, Inc. (IVAC)

Intevac Inc. (NASDAQ:IVAC)

Q2 2008 Earnings Call

July 28, 2008 4:30 pm ET

Executives

Kevin Fairbairn - President and CEO

Jeff Andreson - CFO

Joe Pietras - VP and GM of Intevac Photonics

Luke Marusiak - COO

Analysts

Bill Ong - American Technology Research

Mark Miller - Brean Murray, Carret & Co.

Hongyu Cai - Goldman Sachs

Rich Kugele - Needham & Company

Peter Wright - CIBC World Markets

Operator

Welcome to the Intevac’s 2008 Second Quarter Results Conference Call. All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question-and-answer session. (Operator Instructions). Please note this conference call is being recorded today, July 28, 2008. Kevin Fairbairn, Intevac’s President and Chief Executive Officer is hosting the call today. I would now like to turn the conference over to Mr. Fairbairn. Please go ahead, sir.

Kevin Fairbairn

Thank you. Good afternoon and thank you for joining us today. With me are Jeff Andreson, our Chief Financial Officer, Luke Marusiak, our Chief Operating Officer and Joe Pietras, our Vice President and General Manager of Intevac Photonics. After Jeff reads the Safe Harbor statement I will give an update our recent activities with Joe providing additional details on our progress in Intevac Photonics and then Jeff will discuss the second quarter results and provide our guidance for the third quarter and full year 2008. We will then open up the call for questions. Jeff?

Jeff Andreson

During the course of this conference call, we will comment upon future events and make projections about the future financial performance of Intevac, including statements related to projected orders projection rates, shipments of our products, revenue, gross margin, operating expense, other income, profitability, tax rate, earnings per share, cash flow, capital expenditures, depreciations, stock-based compensation expense. We will discuss projected demand for hard drives, our 200 Lean systems, and upgrades.

We will discuss the impact of upgrading legacy tools, the transition to bit pattern media recording, and product development plans. We will discuss the status of our Lean Etch semiconductor manufacturing product and other new product development programs. We will discuss our plans for our photonics business, projected applications and anticipated orders and shipments.

These forward-looking statements are based upon our current expectations and actual result could differ materially as the results of various risks and uncertainties, including without limitation, the possibility that markets for our products may not be as largely developed as quickly as projected that we may not be able to develop and deliver new products and technologies as planned. That orders and backlogs maybe cancelled, delayed or rescheduled; that we may fail to achieve expected cost reductions, tax rates or financial results; that the auction rates securities market recovery is delayed and other risk factors discussed in documents filed by us with the Securities and Exchange Commission including our annual report on form 10-K and quarterly reports on form 10-Q. The contents of this July 28 call include time sensitive, forward-looking statements that representative our projections as of the date of the call. We undertake no obligation to update the forward-looking statements made during this conference call. Any redistribution of this call without our express written consent is strictly prohibited. Kevin?

Kevin Fairbairn

Thank you, Jeff. We are pleased to report better than expected results for the second quarter. Revenues totaled $32 million with four 200 Lean shipments in the quarter. Our net loss was $937,000 or $0.04 per share, which was $0.10 better than our high end of our guidance. Our results include stock option expenses of $1.6 million or $0.05 per share.

Our highlights for the second quarter include our first 200 Len Gen II revenue as an evaluation system shipped during the quarter, was accepted earlier than we had forecasted. We also shipped a second Gen II evaluation system in the quarter which means that we have placed Gen II evaluation systems with two of our three major customers.

We announced the acquisition of Oerlikon Group's magnetic media deposition business, which we have now closed. As Joe will expand upon later, our imaging instrumentation business has been renamed Intevac Photonics, which saw another revenue quarter for Q2 and made significant progress on new products for ongoing business growth.

So far in the third quarter we have received a purchase order from a new customer for a Gen II system that we will ship in early 2009. And finally this morning we announced that hard drive industry veteran, Dr. Mike Russak has joined our management team responsible for equipment business development.

Mike was the President and CTO of Komag for seven years. His career extends more than 30 years and we are delighted to have Mike on board. Let me update you on fundamentals of the hard drive industry and explain its impact on our business outlook. The world's need for affordable date storage continues to grow rapidly. iSuppli is reporting that 21% year-to-year growth in hard drive unit shipments for Q2 and projecting 70% increase for 2008 over last year. This is impressive considering the current economic headwinds. The industry has a long history of double digit growth, even in difficult times with the exception of 2001 when the tech bubble burst.

Growth in hard drives is a key driver for our business, as the industry these days invest just in time for capacity. Given the seasonal nature of hard drive shipments, customers ideally want new capacity installed in the first half of the year to support peak production rates in the second half which causes lumpiness in our revenues. Introduction of new technologies can cause changes to this ordering pattern and accounting rules such as SAB101 can impact quarters in which revenue is recognized.

As we expected, 2008 has been a slow year for new system capacity additions in the hard drive market and in spite of the significant growth in hard drives year-over-year, the primary reason for this has been the upgrade of reuse of approximately 20 of our legacy tool which at this time last year had been sitting in storage.

These upgrades of legacy tools have substantially met the incremental capacity requirements of one of our largest customers. You may remember that during the second half of 2007 and the first quarter of 2008 we had record levels of revenue from upgrades. While the upgrade business delayed the purchase of new systems in the short-term, over the longer term, these upgrades will result in more revenue for Intevac.

The upgraded legacy tools produced about 40% fewer disks per year compared to our 200 Lean Gen II and are capable of producing the world's most advanced highest capacity discs. We believe these systems will need to be replaced within the next two to three years.

While the second half of 2008 is soft, we believe 2009 will be significantly better than 2008. Our customers are experiencing increasing pricing pressure in the market they compete for market share. For this typically has little impact on the media unit volumes, provided the underlying demand remains intact. In fact, lower prices can lead to higher volumes. As you look forward to 2009, industry analysts estimate media demand as over 1.2 billion discs or 70% growth over 2008.

Intevac customers manufacture about 65% of the world's media and in order to meet this incremental demand, we believe our customers will need to add a significant number of 200 Lean Gen II systems in the first half of next year. Further one of our customers recently announced closure of their California media manufacturing facility, replacing this capacity will require about eight Gen IIs. We have another customer who this year started the process of replacing their legacy tools with 200 Leans and has indicated they will continue to replace tools in 2009. Therefore, we are optimistic about the growth of our hard drive business in 2009. Beyond 2009, growing capacity needs and the ramp of patent media are expected to further drive growth. Let me explain about this upcoming media technology change.

Media technology changes are a positive for our business. The change to Perpendicular media technology in 2007 drove a significant ramp in our business in 2006. We have another major change coming called patent media, which will require new manufacturing steps. There will still be the magnetic media depositions steps on our existing 200 Lean products; however this step will now be followed by two new steps.

The first step is lithography, to put down resist track patterns on the disk. We have developed a new system called litho prime, to deposit a priming film on the disk before it goes for third party lithography tool. We will ship our first litho prime evaluation system in Q3. The next step is the etching and planarization of the resist pattern hard disc. This will be done on the second 200 Lean system that will incorporate etch, resist, strip and planarization sources to support this new process step. We expect patent media will begin ramming in 2010 to 2011 time scale. The good news is that this technology can potentially double the market for 200 Lean systems as it requires discs to be processed through two 200 Lean equivalent systems compared to one system today. Our goal is to ship 200 Lean Etch capable systems for R&D and pilot use in 2009.

Earlier this month, we closed the acquisition of Oerlikon magnetic media deposition business, which we believe is a beneficial transaction for the hard drive industry. Oerlikon developed some compelling source and cathode sputtering technologies. We are currently working to integrate their knowledge and IP in order to enhance the capabilities of our own systems. We will make it available Oerlikon developed sources for our large installed base of legacy and 200 Lean systems as well as new systems.

We are supporting Oerlikon entire media installed base worldwide. Under the terms of the acquisition, we disposed of the litigation that would have cost an estimated $500 million to bring to conclusion; we have yet to include then incremental revenue due to this acquisition in our 2008 forecast as we are in the initial phase of integration.

Regarding out Lean Etch programs, sharply falling memory chip prices have put up a speculative Lean Etch customers into a state of turmoil, this is made our progress and shipping our first Lean Etch evaluations systems frustratingly slow. We remain optimistic of our prospects in the semiconductor etch market and continue to make progress with the leading memory companies.

We have a tremendously talented Etch team here at Intevac and we continue to move some of these resources over to patent media, etch development thus reducing our spending on the Lean Etch program. There is still a possibility that we will ship the Lean Etch tool before the end of the year, although with higher uncertainty due to the significant reduction in memory chip capital spending we are currently witnessing.

Finally, earlier this month we announced a 200 Lean Gen II order that will ship in early 2009, and we are very pleased to report that this tool will go to a new Intevac customer for their R&D use.

I will now turn the call over to Joe to comment on the second quarter progress of our Intevac Photonics business.

Joe Pietras

Thank you, Kevin. In June we renamed our imaging, instrumentation business to Intevac Photonics. Over the past two yeas we have broadened our product lines to address a wide range of applications in the Photonics industry. Intevac Photonics groups together as three business units of cameras and sensors in Santa Clara, DeltaNu Raman Instrument in Laramie, Wyoming and Intevac Vision Systems, formally Creative Display Systems in Carlsbad, California. Through Intevac Photonics, we will increase our branding of products that serve the multi-billion dollar defense and commercial imaging and instrumentation markets.

I am pleased to report that Intevac Photonics achieved record revenues of $6.4 million in Q2, with product revenues at a record $2.4 million or nearly 40% of our revenue. In the first half of 2008 our product revenues have doubled over the same period last year as we continue to grow our Photonics business through increasing product sales and strategic acquisitions. Our military digital night vision business continues to strengthen. In Q2 we continued delivering production levels of our digital night vision camera module to Sagem, our NATO customer and expect to double our delivery rate by the end of 2008.

We are also delivering a notable number of camera modules to U.S. military customers for development of several ground and avionics digital night vision applications. We expect to receive our first low rate production order for two U.S. military applications in the second half of 2008.

During Q2, we completed successful demonstrations of our next generation digital night vision sensor to multiple branches of the U.S. military that are funding its development. We expect this advanced sensor to be applicable in a wide range of U.S. military applications. In addition, we continue our efforts to expand our digital night vision business into value-added goggle products.

Our development of the digital enhanced night vision goggle or DENVG continues with our partner DRS Technologies. We are on track to deliver prototypes of an enhanced performance DENVG design to the U.S. army for field testing in the second half of 2008. We expect to continue advancing our design to support the U.S. Army and deploying DENVG, which will have a sizeable initial production award valued at $150 million over three years.

Using our core technology at Intevac vision systems, we are also developing an advanced digital night vision goggle product, which we expect to market in late 2008 as a complete night vision systems solution to multiple opportunities in ground and Avionic applications.

In our commercial business we are increasing our focus on product opportunities with volume based applications occasions, especially those involving DeltaNu Raman instruments. In Q2 we successfully delivered and demonstrated prototypes of a compact Raman reader to a major medical products company for use in a specific diagnostic application, an opportunity expected to contribute up to $20 million to $25 million in revenue over the next several years.

We are also developing a hand held Raman system for a major company involved in the remote detection of chemicals for security applications. An opportunity we estimate can grow to $5 million to $10 million per year by 2010. Our strategy to expand our commercial products business is key to our growth. In the near term, however, is the commercial side of the business that is being affected by the current economic slowdown. So our growth in 2008 will not be quite as strong as we had estimated at the beginning of the year.

However, we are making significant progress in our photonics business and pursuing opportunities totaling about $250 million over the next four to five years. I will now turn the call over to Jeff to discuss our financial results for the second quarter and our outlook for the third quarter and full year, 2008.

Jeff Andreson

Thank you, Joe. Consolidated second quarter revenues totaled $32.1 million and included four 200 Lean systems. Photonics sales were $6.4 million and consisted of $4 million of contract, research and development and $2.4 million in product shipments. Q2 consolidated gross margin of 41% was within the beginning of quarter guidance. Equipment gross margins decreased to 42% as compared to 47% in the prior quarter as the mix of upgrades was far lower in quarter two.

Gross margin was down compared to 43% in the year ago period, due to the lower number of 200 Lean’s sold during the quarter. Photonics gross margins decreased from 35% from 42% in the first quarter, and from 39% in the year ago period as a result of the lower factory utilization in our vision systems business, formerly Creative Display Systems, as we continue to ramp this recently acquired business.

Q2 operating expenses of $15.8 million came in better than guidance and 9% lower than the year ago period. We continue to tightly manage our expenses in response to the current business environment while ensuring we do not impact the future growth opportunities. Our 2008 tax rate is forecasted to result in a net tax benefit for the year and this quarter resulted in a net tax benefit at $955,000.

Q2 net loss totaled $937,000 or $0.04 per share. The net loss included $1.6 million of pre tax stock-based compensation expense equivalent to $0.05 per share. Our backlog decreased to $27.7 million at quarter end down from $43.5 million at the end of quarter one. Backlog included four 200 Lean systems as of our quarter end and includes five tools as at this call. Now I will discuss the balance sheet.

Cash and equivalents decreased to $116 million or approximately $5.35 per share, from $125 million at the beginning of the quarter primarily as a result of our growth in working capital. Our investment portfolio at end of Q2 included $78 million in student loan backed auction rate securities. All of our investments continue to be rated AAA. In early June we had a $3 million security called at par and continue to see refinancing occurring in the marketplace.

In quarter one, we determined and reported that a temporary impairment exists and recorded a charge to other comprehensive income of $1.6 million or 2%. No additional impairment was recorded in quarter two. Our expectation is that the market will correct over the next 18 months and as such have concluded this is a temporary impairment. We established a line of credit to borrow against these securities if needed, but currently do not anticipate borrowing as we have adequate cash to support the business.

Capital spending totaled $933,000 in quarter two. Depreciation and amortization, including DeltaNu and CDS purchase accounting amortization; totaled $1.2 million in quarter two. Our headcount at the end of the quarter totaled 490 employees with 8% being temporary employees. I will now provide our guidance for the third quarter and full year 2008.

We are projecting consolidated Q3 revenues of $24 million to $28 million, which includes four 200 Lean revenue shipments. We expect second quarter gross margins in the range of 30% to 33%. The reduction in gross margin is a result of a higher mix of systems versus technology upgrades, and lower factory utilization in the remainder of the quarter.

Operating expenses are expected to remain in the range of $15.5 million versus $16.5 million. Other income and expense will be approximately $800,000 reflecting lower interest rates. For Q3 we are projecting losses in the range of $0.20 to $0.25 per share, which includes an estimate of $1.8 million of pre tax stock-based compensation expense equivalent to $0.05 per share as well as an anticipated net tax benefit.

For the full year we are lowering the range of our 200 Lean system shipments from 12 to 16 down to 11 to 12. As one of our major hard disk customer has elected to delay their capacity additions to 2009. Our industry lead times enable our customers to add capacity closer to the peak production period. We now expect Intevac Photonics revenue to be in the range of $20 million to $30 million for 2008, which is less than our beginning of the year guidance but will still result in year-over-year growth in the range of 30% to 60% which represents strong performance in light of the current economic conditions.

Our projected full year consolidated revenue guidance is $115 million to $125 million, which brings down the low end of our beginning of year guidance of $120 million to $150 million. We expect gross margins to average from 41% to 42% for the full year, remaining in the same range as previously guided. We are guiding operating expenses lower in the range of $63 million to $65 million and other income, primarily interest income on our cash of approximately $4 million.

Our forecasted 2008 tax rate will result in a net tax benefit for the year. The net tax benefit for the year will be in the range of $4.5 million at the high end of our guidance to approximately $5.5 million at the low end of our guidance. For the full year, we expect a loss in the range of $0.15 to $0.30 per share, which includes an estimated $6.6 million of stock-based compensation expense, equivalent to $0.18 per share.

Our acquisition of Oerlikon's magnetic media business closed in July and the financial impact has not been included in our guidance, as we will be completing the acquisition accounting as well as business integration occurring during the quarter. This completes the formal part of our presentation. Operator we are ready for questions.

Question-and-Answer Session

Operator

(Operator Instructions). First question comes from Bill Ong.

Bill Ong - American Technology Research

Yes, hi, good afternoon, gentlemen. I have a question on Oerlikon Magnetic acquisition. Can you just talk about the incremental market opportunity by client businesses, as you would have a pretty substantial market share on your Lean tools, and also maybe prior to the acquisition, how many tools were they planning to ship this year for evaluation and just get some insight on the business in the way with this quite business?

Kevin Fairbairn

Hi, Bill, this is Kevin here. We see the incremental opportunity coming from some source technology, which they had developed and we were still in the process of developing. Those sources can be put on the 200 Lean as well as the 250B.

In particular, they have one source, which is used for R&D development that we've have had requests over the years to develop, and now we can make that source immediately available. In terms of incremental system cells, we don't see any benefit from the acquisition. They had placed two eval systems, but the customers were looking at them more from a point of view of understanding the capabilities of a tool rather than incremental sales. We expect those tools will be bringing those back.

Bill Ong - American Technology Research

Okay, and then so, as a follow-up, since using them as a sourcing opportunity for your Lean systems, does that give you some R&D cost savings maybe down the road?

Kevin Fairbairn

Yes it does. We saw two areas for cost deferment. One was legal cost, which we estimated, at $5 million dollars, and then there are a series of engineering projects that we would no longer have to do or things that we expect that the customers would have asked us to improve based on what they saw on the race track which was the Oerlikon Systems, which we can now just move across without spending engineering money.

Bill Ong - American Technology Research

That's great, thank you very much.

Operator

Your next question comes from the line of Mark Miller.

Mark Miller - Brean Murray, Carret & Co.

I would just like to follow-up that a little bit more on the Oerlikon purchase, especially the sputtering cathodes. And I am just wondering if you just give us a little bit more there; is that more efficient, does this save the customer money? Is there less down time in?

Kevin Fairbairn

There is a series of sources that they have. As I mentioned, they had one source that was used for R&D, not for production, which we've had multiple requests over the past couple of years to make them available on our systems. In terms of their regular source technology, it's not clear yet that they had any advantage in terms of efficiency but they have done some things which made changing targets faster, which all of our customers would benefit from, and they had one source that was in qualification with one of our customers that we would be able to pick up like qualification trail. And obviously if that goes to production, we’ll get revenue on that.

Mark Miller - Brean Murray, Carret & Co.

Just wondering, with the new customer, can you give us any color as to what caused them to look at you now as opposed to the past? Was it an improvement, or just satisfaction with the old supplier?

Kevin Fairbairn

None of the above, Mark. It's covered under an NDA, so we can't say who the customer is unfortunately.

Mark Miller - Brean Murray, Carret & Co.

Okay. Thank you.

Operator

Your next question comes from Hongyu Cai

Hongyu Cai - Goldman Sachs

Thank you. A couple of questions, please. First of all, could you talk a little bit more about the decline in your gross margin, both in the equipment and imaging businesses? And how you expect them to trend in the next few quarters?

Kevin Fairbairn

Okay. We'll have Luke answer the question considering the equipment, and Joe will give you the answer relative to imaging.

Luke Marusiak

I'll address the equipment side of it, and just want to talk a bit about our first half margins. They were generally high because of a higher mix of technology upgrades and the spare shipments versus system shipments in the first half, and these are forecasted to decline from the first half levels as we see systems business become a larger percentage of the mix. But it's important to note with the exception of the factory utilization impact we're not seeing any erosion in margins.

Joe Pietras

On the imaging side, it’s really attributed to some low factory utilization in our vision systems products. We expect to see that recovery, some of that delay was due to programs that pushed out about a quarter and we're starting to see some of those orders materialized now in Q3. We expect some recovery here in Q3.

Hongyu Cai - Goldman Sachs

Okay, thank you. And then our latest update from CD and WD indicates that both are concentrating their CapEx on test and assembly, instead of media. Could you share your view on that?

Kevin Fairbairn

You may have more details than we have. All we can comment upon is that everybody is forecasting significant increase in media growth year-on-year, and capacity in our opinion continues to be fairly tightly managed. So we believe there will be significant opportunities for us in 2009 on media systems.

Hongyu Cai - Goldman Sachs

Okay. And last question, your guidance for the tax credit for the full year increased from $2 to $4 million, to $4.5 million to $5.5 million. Is it because of higher operating loss you're expecting, or are there any other explanations for that?

Jeff Andreson

No, it's the fact we've taken our guidance and tightened it up in the range, and have a higher operating loss in the U.S.

Hongyu Cai - Goldman Sachs

Okay. Thank you very much.

Jeff Andreson

Thank you.

Operator

(Operator Instructions) Your next question comes from the line of Rich Kugele.

Rich Kugele - Needham & Company

Thank you, just a few questions. I guess, first, can you give us a sense at least directionally or percentage wise, how much more the Gen II costs over the Gen I. And whether or not we should be assuming that starting, and pick the time frame, that early '09 that all of the systems will ship as Gen II.

Jeff Andreson

Hey, Rich, its Jeff. So specifically your question was how much of the cost change versus, our say, Gen I tool. They're up a little bit. The plan is to have ASPs up 4.5 and 5 for that tool. So, gross margins, once we ramp them to volumes will be like the Gen II, if not a little bit better and then we expect mostly Gen IIs going forward.

Rich Kugele - Needham & Company

Okay. And then should we assume that all of the 20 legacy old Maxtor tools will be fully deployed and utilized by the end of calendar 2008?

Jeff Andreson

That would be a good assumption.

Rich Kugele - Needham & Company

And I was trying to think back to a time when someone could have ordered an R&D system and never ordered a production. Your history goes longer than mine. Is there any precedent for that?

Kevin Fairbairn

Unfortunately, Rich, we can't add any color to this one. We're under an NDA.

Rich Kugele - Needham & Company

Okay, and just a last question, on upgrade business, obviously pretty big step down for this next quarter. Do you think as new systems get ordered in 2009, that will offset some of the upgrade business, or that they’ll be just buying new?

Kevin Fairbairn

You're probably talking about will they upgrade to Gen IIs or buy new systems. And I think at this point we're not sure exactly the path each customer is going to take. Usually in the first half of the year is when the customers do a lot of upgrades beyond the Gen II-type of upgrades. Sources, etcetera…, guys do you want to add any color?

Jeff Andreson

Rich, in 2009 we expect, assuming we are successful developing these new modules for the 200 Lean, to either sell a significant number of upgrade modules for 200 Leans for patent media or sell actual systems configured for patent media, so that’s something that wasn't in the mix in 2008. We expect to be shipping some of those Oerlikon sources as well which customers are making request right now. We’re doing the homework to see how we would provide their sources.

Rich Kugele - Needham & Company

Okay Then one other question on Oerlikon; is the plan to talk about the integration revenue costs etcetera on the next earnings call, or will you be putting out something along the way?

Kevin Fairbairn

Hey Rich, if it’s material, we’ll update you but right now I don't think we expect it to be too material at this point. At least for the next month and a half or so.

Rich Kugele - Needham & Company

All right, that’s great, thank you.

Jeff Andreson

Hey, Richard, I wanted to add a little color to your upgrade question. I just wanted to point out that every Gen I is a potential upgrade opportunity because it can be upgraded to Gen II, and there's a pretty significant install base out there as you know.

Rich Kugele - Needham & Company

Okay, that's great. Thank you.

Operator

(Operator Instructions). You have a follow-up from Mark Miller. Mr. Miller, your line is open.

Mark Miller - Brean Murray, Carret & Co.

Yes, I'm just wondering how far, when you say significant opportunities, do you think in relationship to what? Do you think the first half of next year you'll see a significant pickup in either orders or shipments or tools over what we saw year-over-year?

Jeff Andreson

That is our belief now, based on where we see the capacity in the industry and what's needed to support the peak productions in the second half of 2009.

Mark Miller - Brean Murray, Carret & Co.

So just want to go through the opportunities that you have mentioned on the call; you're talking about upgrades or systems for pattern media. There were these legacy tools from another shop that need to be upgraded and, then the generic growth in the industry. Is there anything else that would lead to significant opportunities?

Jeff Andreson

Clearly gaining traction with our Etch product would lead to additional revenues as well. We are talking equipment right now. On the imaging, we believe there's a lot of opportunity for continuing growth as well.

Mark Miller - Brean Murray, Carret & Co.

All right, thank you.

Operator

Your next question comes from the line of Peter Wright.

Peter Wright - CIBC World Markets

Yeah I’ve two questions. One; could you comment on whether the Seagate closure of their California media plant is positive, negative or neutral and two; would you, going into '09, would you think '09 is more like calendar '07 in terms of the tools business or more like calendar '08?

Jeff Andreson

Okay it’s a good question. So the first question is we definitely think it's positive for our business, because our understanding is that Seagate is either going to make up that capacity in Woodlands, which would be more 200 Lean orders, or get it from their media supplier, which is also an Intevac customer. So we see it as positive. In terms of which year is the closer surrogate for 2009, then we think 2007 is more clearly aligned.

Peter Wright - CIBC World Markets

Great, thank you, and any comments on the Etch business. Do you have a drop-dead date? Do you have any kind of contingency plan if things don't accomplish your objectives?

Peter Wright - CIBC World Markets

We continue to look at this very closely on an ongoing basis, and our assessment right now is it's still a very attractive proposition and still we're very well positioned. But, as I said in the call, we're all frustrated by the slowness of getting a tool out there. But we understand the memory customers are in the downturn right now and until they sort themselves out we're not going to get a tool in there. That market will recover as it always does. This is not the first time the semiconductor memory market has had a big downturn.

Peter Wright - CIBC World Markets

And then finally, could you give an estimate where you think cash might be after the closure of the acquisition? Lets say by the end of September, just approximately?

Jeff Andreson

Yeah, we don't guide the balance sheet but we don't see it dropping down all that significantly. In fact, we shipped a bunch of tools that were pretty much manufactured in quarter two. So that capital, or the working capital growth, we helped to spin back.

Peter Wright - CIBC World Markets

And is the acquisition closed?

Jeff Andreson

The acquisition is closed.

Peter Wright - CIBC World Markets

Was it closed by June 30?

Jeff Andreson

No, it was closed in July.

Peter Wright - CIBC World Markets

How much was that? I'm sorry.

Jeff Andreson

We're not disclosing that, actually. But it was not a material transaction so it is less than 10% of our total assets. That will give you the top end.

Peter Wright - CIBC World Markets

So you ended up with what, 147 or something? In cash?

Jeff Andreson

116 in cash.

Peter Wright - CIBC World Markets

66 and 80? Including your long-term investments?

Jeff Andreson

No, no, cash and all investments for 116, Peter.

Peter Wright - CIBC World Markets

116. And you will comfortably be above 100 million by the end of the quarter in most normal business environments?

Jeff Andreson

Yeah, that's a good assumption.

Peter Wright - CIBC World Markets

Okay. Good sir. Let's call it hopefully a conservative assumption.

Jeff Andreson

Yeah.

Peter Wright - CIBC World Markets

Okay. Thank you.

Operator

There are no further questions at this time.

Kevin Fairbairn

Okay, I would like to thank you for joining us today, and we look forward to updating you in our next call on our Q3 results. Good bye.

Operator

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

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