Intevac, Inc.

In addition to outlining the company's financial results, we will provide guidance for the third quarter and full year 2012.

On today's call are Kevin Fairbairn, President and Chief Executive Officer; Jeffrey Andreson, Chief Financial Officer; and Drew Brugal, Executive Vice President and General Manager of Intevac Photonics.

Before turning the call over to Kevin, I'd like to remind everyone that today's conference call contains certain forward-looking statements including, but not limited to, statements regarding financial results for the company's most recently completed fiscal quarter, which 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 July 31 call include time-sensitive forward-looking statements that represent our projections as of today. We undertake no obligation to update the forward-looking statements made during this conference call.

I'll now turn the call over to Kevin Fairbairn. Kevin?

Good afternoon, and thank you for joining us today. Our second quarter results included revenues of $31.8 million and a net loss per share of $0.06, both at the upper end of our guidance.

Today, I will update you on our progress in our Equipment business, Drew will discuss the Photonics business, followed by Jeff, who will discuss our financial results and outlook.

In the second quarter, our Equipment business demonstrated strong execution with operating results exceeding expectations due to the combination of near-record gross margin performance and prudent control of operating expenses. We achieved very significant markdowns for our Equipment business diversification into the solar market.

We shipped our first 2 ion implant systems for the doping of silicon solar cells. We also received sign off on our first silicon texture etch system.

Turning to the hard drive market. The outlook for drive shipments for the remainder of the year has softened from the industry's and our initial expectations earlier this year, due primarily to the macroeconomic headwinds.

We have seen the estimates for the fourth quarter to be significantly reduced from a range of 185 million to 210 million drives as we enter the year, to about 170 million drives currently. We continue to believe that media capacity stocks become constrained above the quarterly TAM of 180 million drives.

Whereas, we previously expected this to occur in the second half of this year or potentially the first quarter of 2013, given the current outlook, our customers are understandably being cautious on the timing of capacity additions and have pushed out the ordering of capacity systems we have previously expected this year.

Growth in digital-data storage over the last 5 years has demonstrated and is somewhat insulated from the impact of challenging economic conditions, and continued to grow about 50% each year. We don't see any reason for data generation growth to slow now.

The long-term outlook continues to be positive for our hard drive equipment business. Since 2007, disks have grown at a compounded annual rate of almost 7%, with hard drives growing just slightly less.

The combination of digital data growth combined with a slowing growth of areal density is forecasted by industry analysts to double the annual unit volume of disks or hard drives by 2016 as compared to 2012. This equates to a compound annual growth rate of 18% for disk, which is more than double the forecasted growth rate of hard drives.

Today, there's the equivalent of approximately 300 of our 200 Lean magnetic media manufacturing production systems in use today by the industry.

On an industry-wide basis, this number will have to nearly double by 2016 to support this expected level of growth in disks, and represents a very significant opportunity for us in the future. Even if these estimates turn out to be too optimistic and the industry only achieves the historic rate of growth for disks we have seen since 2007, then we are still looking at a significant opportunity with over 100 machines, given the lack of new capacity added in 2012 and the additional impact of the legacy systems expected to be retired by that point.

We will continue to work hard to support our hard drive customers' needs through a combination of providing the most cost-effective technology solutions and execution to commitment, and strive to earn their trust and win the bulk of available systems business in the future.

Now, I'd like to review the solar market and the progress we are making on new product penetrations with leading customers in the industry.

In reading the headline news, you might think that the solar industry is shrinking, but actually, it is growing in both unit volume and gigawatts installed. This is in spite of the global economic headwinds and the reduced government subsidies in Europe.

The growth has been driven principally by the continued decline in the cost of solar modules. Installed solar prices per kilowatt hour are now below retail electricity prices in many of the advanced economies.

And in some cases, are near the half [ph] where cost of wholesale electricity in countries that don't have access to conventional low-cost carbon-based or hydroelectricity generation. In countries with higher amounts of sunshine, solar is actually cheaper than available wholesale electricity.

Novel service manufacturers are benefiting. Those companies with high-efficiency models with competitive pricing will be at a very low margins, are running a full utilization.

Companies who lag in terms of module efficiency are struggling and in some cases, have exited the business. The companies that have exited or are now extinct are not limited to Europe and the U.S.

There's a significant number of smaller Chinese companies who have quietly disappeared as well.

Ion implant for silicon doping and texture etch to increase light capture. The biggest opportunity we currently see is in ion implant, which has the potential to replace today's diffusion furnaces for the silicon doping steps.

The doping of silicon by ion implant is recognized as one of the most promising technologies that can enable higher cell conversion efficiencies. Companies have already demonstrated higher efficiencies using ion implantation systems are based on those used in semiconductor industry.

Fortunately, for Intevac, these semiconductor type systems do not need the throughput or cost requirements of solar cell manufacturers. They are more expensive than our product and the existing diffusion furnaces used today.

In addition to being too complex for the solar industry, our LEAN SOLAR ion implants are submit a [ph] designed to meet the cost requirements of the industry, while providing all the technology advantages and extendability of ion implant doping. We are pleased to report that we have now shipped our first 2 ion implant system to 2 large well-capitalized customers.

Our short-term focus is to ensure the successful qualification of our systems and capture additional customers so that we can get qualified from production system orders and deliveries in 2013.

The second largest opportunity we've seen in solar is in texture etch. In April, we completed the final acceptance of our first NanoTexture Etch system at a very large Asian customer.

In this process application, we are modifying the surface of the silicon cell to absorb more light with a legacy work versus a legacy wet etch processes by replacing it with a vacuum-based plasma etch.

We are on track with our goals to penetrate this market and to position the company for repeat orders beginning as early as the fourth quarter and certainly, into 2013. We continue to believe that the solar market represents a very large opportunity for us.

I will now turn the call over to Drew Brugal to provide an update on our Photonics business. Drew?

Thank you, Kevin. The Photonics business continues to lay the groundwork for future growth, having booked a record $19 million in orders during the second quarter.

These orders came in several areas. As we announced earlier in the quarter, we received a $10 million order for the U.S.

Army's Apache helicopter program for the manufacturing transition phase and the initial lot of low rate production cameras. The U.S.

Army intends to fit the entire Apache fleet with our camera, making the total program revenue potential in excess of $50 million over the next 5 to 7 years.

In our long-range airborne identification systems or LIVAR, we have received orders for $5 million to support the ongoing production of the current version of our camera. Currently fielded on the Northrop Grumman lightning system, as well as for the development of a new version of the camera to facilitate expansion onto new platforms such as unmanned aerial vehicles.

As we stated on the last call, we continue to receive funding to advance the state-of-the-art of our most advanced, 4-megapixel sensor, and to improve the sensitivity of our 2-megapixel sensor as part of our multiyear contract for improvements in performance and manufacturability. We have received $2 million in funding during the second quarter and anticipate an additional $3 million of funding in the second half of 2012.

Lastly, we had a successful live demonstration of our night-vision camera, the same camera used on our Apache helicopter program, with the U.S. Army and continue to make good progress in completing the development of our digitally-fused goggles that we are developing for use in both avionic and ground applications.

I will now turn the call over to Jeff to discuss our financial results and outlook. Jeff?

Thank you, Drew. Consolidated second quarter revenues totaled $31.8 million, at the high end of our guidance of $29 million to $32 million.

Equipment revenue totaled $25.1 million and includes 2 200 Leans and our first NanoTexture Etch solar system recognized in the quarter. Photonics sales of $6.7 million consisted of $3.6 million in product shipments and $3.2 million of research and development contracts.

Q2 consolidated gross margin of 44.8% was above our guidance. Equipment gross margin of 47.1% was higher than the first quarter due primarily to higher margin upgrades and spares and improved factory utilization.

Photonics' gross margin of 36.3% improved over the first quarter as we continue to lower the cost of our lowlight camera products.

Q2 operating expenses were $14.9 million versus our guidance of $15.3 million to $15.6 million and declined nearly 7% from the first quarter, as we continue to prudently manage our expenses.

Our Q2 net loss was $1.5 million or $0.06 per share, in the upper end of our guidance. The net loss included a $0.05 per share impact related to a year-to-date adjustment for our tax rate and also included $944,000 of stock-based compensation expense, equivalent to $0.03 per share.

Our backlog was $43.3 million at quarter end and did not include any 200 Leans or LEAN SOLAR systems. In addition to the reported backlog, the company has 2 evaluation systems that we recognized as orders and revenues once accepted by the customer.

We ended the quarter with cash and investments of $103.5 million, equivalent to approximately $4.45 per share. Our free cash flow was a net use of cash for the quarter of $5.4 million and include capital expenditures of $815,000 and depreciation and amortization of $1.1 million for the quarter.

I'll now provide our guidance for the third quarter and for the remainder of 2012.

We are projecting consolidated Q3 revenues of $15 million to $16 million, which includes no hard drive or solar systems recognized.

We expect third quarter gross margin to be in the range of 33% to 34%. Operating expenses are expected to be in the range of $14.5 million to $15 million.

Other income and expense will be approximately $200,000, and excludes any impact associated with changes to the valuation of our investments or foreign exchange.

For Q3, we are projecting a net loss in the range of $0.27 to $0.28 per share, which includes an estimated $1 million of pretax stock-based compensation expense equivalent to $0.03 per share.

I'll now turn to providing our current outlook for the remainder of 2012. Given the softening and the forecasted hard drive systems for the fourth quarter that Kevin discussed, we do not expect to ship any additional 200 Leans this year, as the unit volumes are not expected to reach the level needed to drive incremental capacity needs as we exit 2012.

We expect revenue from our hard drive equipment business to be $51 million to $52 million, including service and upgrades, and Photonics revenues to be $30 million to $31 million for the year. Revenues from our new products will be the range of $6.5 million to $9 million, representing 3 to 4 tools recognized as revenue this year.

In addition, these tools, we expect to have 2 to 3 additional systems delivered pending final qualification.

Given these revenue ranges, we would expect total revenues in the range of $88 million to $92 million, gross margin to be 39% to 40%, and operating expenses to be in the range of $59 million to $60 million. Other income and expense is expected to be $3 million, which includes the $2.2 million gain from the sale of our mainframe technology in Q1.

Our expected tax rate is expected to be 30%. We are projecting our full year net loss to be between $0.62 and $0.66 per share.

Operator, we are now ready for questions.

A couple questions. First, so the orders that were tentatively expected in the second half of 2012, were they pushed to a specific time frame in '13 or are they just indefinitely pushed out?

It's Kevin here. There's been no -- the orders got pushed until they place another orders, as you know.

So, I wouldn't say they're indefinitely postponed, it's just that there's no need for capacity this year.

Okay. And then in terms of -- you talked about 300 tools, right, being just worldwide deployed?

Was that the right figure?

That's correct.

For the industry, Rick.

Yes. Can you break that down between systems that could be replaced at some point versus 200 Leans?

Well, the -- we have roughly -- just over 10% is legacy tools that could be potentially retired, say, run out of steam.

Okay. And of those 200 Leans that are out there, are they all capable of making current disks?

Do any of them need to be expanded? Is that what's going on with your spares and upgrades?

All the tools can support all the technology out there. Most of our upgrade business is because we come up with more efficient sources, so we can enable customers to reduce the amount of target material that is wasted.

And therefore, significantly lower their manufacturing cost. So that's why we always get good upgrade business.

Okay. And then just 2 last ones for me.

One is the -- obviously, one of the major acquisitions in the space has taken place now. Is there any greater clarity on whose -- well, what would you expect to continue to get orders once demand were there from all your legacy

[Audio Gap]

If we had orders, we will be announcing them, but we wouldn't actually tell you which customer -- by which customer name. But as we said in the past, we feel that with the large number of tools that we have that's Hitachi [ph] and stuff [ph], that WD acquired, so that's a great reference point for us both in terms of technology and cost of ownership.

And we are hopeful that, that puts us in good shape when they consider new systems in the old WD.

Okay. And then my last one's for Jeff.

Just on the cash burn perspective, what type of cash flow do you expect to exit the year at? And what -- how much cash do you need to run the business or what's your target cash level, just all of [ph] being equal to run the business in the current environment?

Rich, I think given the guidance we've given you and, we're probably looking $15 million to $20 million in cash burn for this year. How much cash you need to run the business, maybe is -- varies by people you ask, but I think you could assume that we have somewhat more cash to run the business than we need.

But we also have some of this cash committed to the acquisition we did for solar implants. So some of it's earmarked and some of it's offshore as well.

With 21 weeks left in the year, indiscernible] time is about 17 weeks, is there a flexibility to shift the disk drive tools under 17 weeks, and how fast can you ship the tool if it was urgent?

If it was really urgent plus, if usually, if the customer would be working with us while they're getting all their paperwork in place, we could probably pull it down to maybe 14 weeks, a real stretch, maybe 12 weeks.

Okay. That's helpful.

Now, when a hard disk drive make an upgrade for Lean 200 tools, how long does that extend the life of the machine before the tool really [indiscernible] for life and you have to buy a whole new machine?

We don't see any end-of-life issues for the 200 Lean. It was designed to be an incredibly flexible machine, and customers have really liked that feature and it's really proven itself.

So the sources are interchangeable and it's very easy to come and bring new source technologies. Just like few years ago, we brought to market, in a really short period of time, Patterned Media etch systems.

So with the same architecture, we set the swap deposition sources, different types of etching sources, so very flexible flow [ph].

Bill, it's Jeff. And we think the 250b is nearing its last generation that's around the terabyte for 3.5-inch.

So, the 250b you're referring to is thus far [ph] the 10% of that 300 installed base?

Right, right.

Yes. And in fact, some of the legacy 250bs have been retired by some other customers who chose not to try to expand their technology lives for making media.

Okay. Understood.

So, I guess that also means that once all the 250bs are out of the installed base, so in going forward, it's pure capacity additions that will drive hardware revenue because anything that's installed would just be separate replacement or simply be upgrades?

Correct. But some of the technologies may have to add more process stations.

So you may find our 200 Leans which have 5 modules today and each module holds 4 process stations. You may find that we have to upgrade some of our systems to 6 modules to support the new heat-assisted magnetic recording.

So that's a fairly significant upgrade.

Okay. That's helpful.

And then my last question is, in the last quarter, solar revenue guidance was the $10 million to $20 million at the low end of range, so it seems to be even a little low than that. So, maybe give some insight on the fine-tuning of your revenue guidance in solar.

Yes. Bill, it's Jeff.

I think a lot of it's being driven by -- it's taking a little bit longer to get some of the capital through even though their evaluations still go through that process. And we're still working on some qualifications, even post acceptance on the texture etch.

But it's a slight slip out of the bottom. We said on the last call, the biggest piece of that was we expected that one of our early customers who took a PVD to our deposition tool to expand, and they put all those expansions on hold and that was the biggest piece from the $20 million down to kind of near $10 million.

I just want to clarify, Jeff, your earlier comment, you said total loss for cash burn for the year would be in the $15 million to $20 million. That includes Q1 and this current quarter?

Yes. That's going from year-to-year, so from fourth quarter to fourth quarter.

And I'm assuming in the inventory are the 2 solar machines that just shipped?

Exactly.

Okay. And then just give me one more clarification.

At the very end of your guidance, you're talking about the machines that may shift or wouldn't be recognized in the revenue. Can you sort of repeat what you're saying there?

Yes. We've said that we're trying to get additional qualifications out into the market and we would expect another 2 to 3 tools in finished goods.

I would like to thank everyone for joining us today, and we look forward to updating you in our next call on our third quarter results. Goodbye.