Veeco Instruments Inc (VECO) 2020 Q2 法說會逐字稿

Good day and welcome to the Veeco Instruments Inc.

Second Quarter 2020 Earnings Conference Call.

At this time, I'd like to turn the conference over to Anthony Bencivenga, Head of Investor Relations.

Please go ahead, sir.

Thank you and good afternoon, everyone.

Joining me on the call today are Bill Miller, Veeco's Chief Executive Officer; and John Kiernan, our Chief Financial Officer.

Today's earnings release is available on the Veeco website.

Please note that we have prepared a slide presentation to accompany today's webcast.

We encourage you to follow along with the slides on veeco.com.

This call is being recorded by Veeco Instruments and is copyrighted material.

It cannot be recorded or rebroadcast without Veeco's express permission.

Your participation implies consent to our recording.

To the extent that this call discusses expectations about market conditions, market acceptance and future sales of the company's products, future disclosures, future earnings, expectations or otherwise make statements about the future, such statements are forward-looking and are subject to a number of risks and uncertainties that could cause actual results to differ materially from the statements made, including as a result of the COVID-19 pandemic.

These factors are discussed in the business description, management's discussion and analysis and risk factors sections of the company's report on Form 10-K and annual report to shareholders and in our subsequent quarterly report on Form 10-Q, current reports on Form 8-K and press releases.

Veeco does not undertake any obligation to update any forward-looking statements, including those made on this call, to reflect future events or circumstances after the date of such statements.

During this call, management may address non-GAAP financial measures.

Information regarding such non-GAAP financial measures, including reconciliation to GAAP measures of performance, is available on our website.

With that, I will turn the call over to Bill for his opening remarks.

Thank you, Anthony.

Good afternoon, everyone, and thank you for joining the call.

We have been executing well despite the ongoing pandemic.

Today, I will take you through our Q2 highlights, provide a brief COVID-19 update and then turn it over to John for a financial update and guidance.

Then I will discuss our markets and technologies before taking your questions.

Q2 results were driven by strength in our data storage business within our scientific and industrial market, and revenue came in at $99 million.

The business drove a healthy gross margin of 43%, and along with well-managed expenses, we achieved non-GAAP operating income of $8 million and non-GAAP earnings per diluted share of $0.11.

Comparing to our financials from a year ago, we significantly improved operating results due to steps taken over the past several quarters such as delayering the organization to improve accountability and reduce cost, rightsizing the manufacturing footprint and divesting a noncore product line.

We are seeing broad strength across our product lines with notable activity in 5G-related RF filter applications with our wet etch and clean products.

From a balance sheet perspective, we managed cash well during the quarter with strong cash flow from operations of $20 million.

Along with debt refinancing and a product line divestiture, we increased our cash position by $59 million.

John will explain this in more detail.

Our team has been resilient throughout the stages of the COVID-19 health crisis.

All our sites operated at or near our normal capacity throughout the quarter.

While we are pleased with our operating trajectory so far, we do recognize that we continue to operate in the midst of a global pandemic.

Our operating guidelines have been set up with the health of our employees in mind, and all safety measures we initially introduced are still in place.

We have begun to introduce a limited number of employees into our facilities but are doing so at a measured pace.

In fact, a significant majority of our employees that can work from home are continuing to do so until further notice.

Overall, we are positioned well.

The market drivers where we participate such as 5G RF, the cloud and high-performance computing are all trending positively.

We have strong customer engagements and have built a healthy backlog.

Wafer fab equipment spending is forecasted to increase in 2020 and again in 2021.

We continue to invest in R&D to advance our core technologies.

From all indications, Q2 revenue appears to be a low point, and we are optimistic about the second half of the year.

And with that, I will turn the call over to John for a review of the financials.

Thanks, Bill, and good afternoon, everyone.

Today, I will summarize our revenue by market and geography, cover our P&L, balance sheet and cash flow and then take you through our guidance.

I will discuss non-GAAP financial data.

I would encourage you to refer to our reconciliation between GAAP and non-GAAP results, which you can find in our press release or at the end of our quarterly earnings presentation.

As Bill mentioned earlier, we had strong performance in our scientific and industrial market which made up 44% of our $99 million in total revenue.

This was led by Ion Beam Systems shipments to our data storage customers.

The advanced packaging, MEMS and RF filter market made up 22% of our overall revenue driven by advanced packaging lithography system shipments to OSATs and device manufacturers.

The front-end semiconductor market contributed 18% of our overall revenue, resulting from laser annealing shipments.

And LED lighting, display and compound semi was 16% of revenue with MOCVD and wet etch and clean products sold to a variety of customers.

By region, the U.S. was 30% of revenue and included sales of several technologies to a variety of customers.

EMEA was 26% of overall revenue and was driven by sales to data storage customers.

Rest of world, which includes Japan, Taiwan, Korea and Southeast Asia, was 26% of overall revenue from sales of LSA, lithography and wet etch and clean products.

And finally, China was 18% of overall revenue, mainly from MOCVD system and service sales.

We are experiencing challenges closing new orders in China due to the current trade restriction environment and have lost several orders that we were anticipating.

As a result, in the near term, we expect revenue from China customers to decrease as a percentage of our overall revenue.

Now turning to non-GAAP operating results.

We achieved gross margin of 43% in the second quarter.

Our manufacturing efficiency improvements, along with a better product mix, are contributing to improved gross margins.

OpEx for the quarter was $34 million.

As mentioned last quarter, we are ahead of schedule on our expense reduction target and our restructuring activities are now complete.

In addition, Q2 OpEx benefited from less travel and other variable expenses as a result of COVID-19 related restrictions.

On a non-GAAP basis, tax expense for the quarter was approximately $400,000 with net income coming in at $5.5 million.

EPS was $0.11 on a diluted share count of 49 million shares.

Now moving to the balance sheet and cash flow highlights.

We ended the quarter with cash and short-term investments of $301 million, a sequential increase of $59 million.

The cash increase was made up of $20 million in cash flow from operations; approximately $30 million in net proceeds from our convertible debt offering, which I will describe in more detail in a minute; and $10 million from the previously announced sale of a noncore product line.

From a working capital perspective, our accounts receivable decreased to $67 million, resulting in a reduction in DSOs from 73 in Q1 2020 to 61 for the quarter.

Q1 2020 DSOs were higher than average due to the timing of when payments were due, some falling just outside the quarter.

Accounts payable decreased $10 million to $26 million, driving days of payables down to 42, partially offsetting the decrease in accounts receivable.

Inventory increased $7 million to $137 million resulting from investments we made in adding safety stock related to COVID-19 supply chain actions and in preparation for higher shipments in the second half.

And lastly, our CapEx during the quarter was $900,000.

I would like to spend a minute on our recent convertible debt offering.

Our original convertible debt, which was issued in 2017, had a face value of $345 million, a coupon of 2.7% and is due in January 2023.

In May 2020, we issued $125 million of new convertible notes with a coupon of 3.75% due in June 2027.

We retired $88 million of the January 2023 notes, which was the rationale for the transaction.

After transaction fees and the cost of the cap call, we added approximately $30 million of cash to the balance sheet, thus improving our liquidity.

Our long-term debt is now $382 million made up of 2 tranches of notes with a weighted average coupon of 3% and a carrying value on our balance sheet of $317 million.

Our annual cash expense on this debt is $11.6 million.

Now turning to Q3 guidance.

Although there are still uncertainties surrounding the potential impact of the COVID-19 pandemic, given our current visibility, we are providing Q3 guidance.

Q3 revenue is expected to be between $100 million and $120 million, with non-GAAP gross margin between 42% and 44%.

We expect non-GAAP OpEx to be between $35 million and $37 million.

On a go-forward basis, we expect to keep SG&A as low as possible but plan to strategically increase R&D in certain areas to support our growth initiatives.

GAAP EPS is expected to be between a loss of $0.12 and a gain of $0.04 per diluted share.

Non-GAAP EPS is expected between $0.10 and $0.26 per diluted share.

And now for some additional color beyond Q3.

At this time, based on our backlog and strength we are experiencing in data storage and 5G RF filters, we see Q4 revenue trending slightly higher than Q3 2020.

And with that, I'll turn it back over to Bill for a market update.

At this time, I want to spend a minute providing an update on the markets we serve and our technologies.

Within our scientific and industrial market, data storage has been strong, bolstered by strong cloud and data center demand.

For many years, we've invested in Ion Beam technology and worked in close partnership with our customers to enable aerial density increases of their read and write heads.

This drives performance in our high-capacity drives used in cloud and data center applications.

As our customers continue to seek technological advantage and add capacity, we expect this market to continue to stay strong for us into 2021.

Front-end semiconductor results were driven by sales of our LSA products as customers ramp their current advanced nodes.

Veeco's LSA technology leverages our unique dual laser architecture and process advantages to offer better temperature control for our customers.

This advantage allows them to stay within their thermal budgets, which is critical at today's advanced nodes.

Looking ahead, we are encouraged by engagements we are having with our logic customers as they begin developing their next nodes.

We believe we can expand our market opportunity in laser annealing with the combination of additional process steps at next nodes with existing customers and new customers as well.

In the EUV market within front-end semiconductor, we continue to work closely with our EUV mask blank customers.

While we did not ship an Ion Beam Deposition system in the second quarter, we did receive another order for a system and still see this market as a 2- to 4-system opportunity per year.

In compound semiconductor markets, we continue to make investments in our MOCVD product portfolio.

Our latest product, the Lumina system, deposits arsenides and phosphides and is based on our TurboDisc technology, providing excellent film uniformity, yield and low defectivity over long campaigns.

The Lumina system is designed for applications such as indium phosphide lasers for datacom and telecom, 3D sensors for facial recognition and world-facing applications, LIDAR for autonomous vehicles and red LEDs for micro LED displays.

This system is performing well, and we have received excellent feedback from our top Tier 1 customer.

Our Propel platform is a 300-millimeter capable, fully automated, single-wafer reactor, also based on our TurboDisc technology for best-in-class film quality, and it can be clustered with multiple chambers for high-volume manufacturing.

The Propel system deposits gallium nitride for applications such as 5G RF GaN power amplifiers, power electronic devices used in wireless charging and micro LED.

We see opportunity in the compound semiconductor markets where our Lumina and Propel systems would be an ideal fit.

Despite this, our near-term visibility remains limited, especially in China, where the regulatory environment is providing headwinds.

Customers are weighing options between buying equipment from U.S. suppliers like Veeco or alternative non-U.

S. suppliers when available.

Our advanced packaging, MEMS and RF filter market posted an improved second quarter driven by multiple advanced packaging lithography systems and upgrades sold to OSATs and device manufacturers.

The advanced packaging lithography portion of this market is driven by applications such as artificial intelligence and high-performance computing.

We continue to see growth in the portion of the advanced packaging lithography market where our technology is applicable and size this market to be roughly $100 million per year.

The RF filter portion of the market has great potential and is driven by 5G RF adoption and increasing RF content in mobile devices.

In fact, some industry reports estimate the number of RF filters per mobile device to increase from 40 to 70 as we transition from 4G to 5G.

As an indication of this market's strength, we recently received a significant order for multiple wet etch and clean systems for an RF filter application.

Despite the challenges facing the global economy, we are continuing along our transformation path to improve profitability and grow the company.

Looking at our 2020 progress to date.

We put appropriate actions in place and maintained our resiliency during the global pandemic.

We executed Phase 1 of our company transformation, which included reducing our expenses, improving gross margin, optimizing R&D spending and strengthening our foundational businesses, which fund our opportunities for growth.

We are continuing to work on growing the company, which is the second phase of our transformation.

We have new products, which are enabling us to grow market share in our existing markets, and we are also extending our core technologies into front-end semi, photonics and RF applications.

As a reminder, our new tagline, making a material difference, stands for improving performance, ensuring quality and delivering value to our customers.

We are committed to making a material difference and building a stronger Veeco that serves all of our stakeholders.

And with that, John and I will be happy to take your questions.

Operator, please open the line.

(Operator Instructions) Our first question comes from Patrick Ho with Stifel.

Congrats on the nice quarter and the outlook.

Maybe, Bill, to first start off, you guys have been executing quite well, and your margin profile clearly reflects that.

Now that you've had the Ultratech business under the fold for a bit of time and you're starting to see traction for some of the products and the markets that have been under pressure before you purchased it, can you discuss some of the efforts on the operating model side in those businesses where they're now contributing to your overall margin profile and earnings leverage improvements?

Yes.

Great question, Patrick.

Let me pass it to John to talk about some of the expense reduction we did, and then I'll talk about some of the other things that we've done.

Go ahead, John.

Sure.

Thanks, Bill, and thanks for the question, Patrick.

So post acquisition for Ultratech, what we initially saw were the synergies that we expected post acquisition, and we were able to get those fairly quickly and mainly in the SG&A area.

And then last year, what we're able to do that start to pay dividends and benefits is we eliminated excess capacity that existed with Ultratech having manufacturing facilities in both Singapore and San Jose.

And we moved that Singapore operations to San Jose.

And more recently, in terms of improving the business model in gross margins, we've been working on in-sourcing versus outsourcing.

And we've done analysis for a number of subassemblies, where it's made sense for us to bring those in-house.

And we've done that and eliminated some margin stacking there as well.

And as we indicated last quarter, we divested a noncore product line that was a product line that we acquired as part of the Ultratech acquisition.

So all those activities are starting to pay dividends and prove out in the improved business model for Ultratech.

So Patrick, let me turn it over to Bill, and he'll talk a little bit more about some other activities as well.

Yes.

Thanks, John.

What we've also done is we've moved to a functional structure across the company, moving from a business unit structure.

So we have moved, for example, all of Ultratech engineering under one leader, and the same thing in technology and marketing as well.

And we've moved Ultratech into Veeco's product life cycle process for how we develop new products.

And I think we are able to drive more accountability into the organization.

So I think that's a fundamental change there.

And then also, over the last year or so, we spent some time talking about how we were able to recover lost LSA business that Ultratech originally had at 28 nanometers and then lost.

And so we've been able to come back and win business at the most advanced nodes with 2 leading customers.

We are working on another application step with those customers, and we are also -- we're making some progress working on increasing the customer base beyond those 2 at leading-edge nodes.

And then finally, I guess, I would say and maybe most importantly, even beyond Ultratech, I think we've done a really good job rebuilding the Veeco leadership team, and we've done that by promoting some excellent people and top-grading some people.

But at this time, our team is jelling really well, and we're starting to execute well.

So pretty positive.

Great.

That's really helpful, Bill and John.

Maybe as my follow-up question, you gave a bit of color on some of the activity you're starting to see on the advanced packaging side, particularly a pickup in your litho business.

As you know, Bill, historically, that's been a very mobility-driven marketplace in terms of advanced packaging buys.

Could you talk about stuff like AI, high-performance computing?

Can you maybe at least qualitatively give a little bit of color of how much of the buys are still mobility related?

And how much are some of these new devices that are seeing more, I guess, complex advanced packaging processes?

Yes.

That's a great question, Patrick.

I would say now it's really kind of largely driven by, as you said, artificial intelligence and high-performance computing.

And the pickup we did see in Q2 is encouraging.

It's certainly a pretty big step-up from Q1.

And that recent activity has been from OSATs and IDMs for those drivers that you just spoke about.

But certainly, it's not enough to offset kind of smartphone weakness or mobility as you said.

So as we've said before, our lead times are short.

So our visibility into growth is fairly limited.

We are maintaining our leading share at the kind of the greater than 1 micron resolution applications like fan-out wafer-level packaging, bumping and copper pillars.

We are continuing to invest in that product line, and we are planning to ship a new product in the coming quarters.

So in summary, we are seeing some positive uptake in our Q2 numbers, and we'll stay tuned to see how it progresses.

We'll now take our next question from Rick Schafer with Oppenheimer.

Congrats on the solid results and great margin.

I guess my first question, Bill, is probably for you.

It's kind of high level.

But as Intel struggles in advanced lithographies, I guess, they're pretty well interested at this point.

I'm just curious what the -- how that's affecting Veeco?

And what are some of the puts and takes for you if Intel decides to outsource more at the leading edge?

Yes.

I don't really want to comment anything specific about Intel, but I will tell you, our products in front-end semi remain strong.

From an EUV standpoint, we are not -- we make the mask blank equipment to deposit the mask blank -- the metalizations.

We aren't really seeing an impact.

As a matter of fact, one of our customers announced a facility expansion.

And so we're having great engagements with those customers, expecting that market to be about 2 to 4 systems per year.

And from an LSA perspective, we are seeing opportunities to expand in -- with other customers beyond the 2 that we have today.

So I would say we're still bullish on front-end semi, whether it's, I think, almost independent of what Intel does.

Great.

And John, maybe a question for you.

I just wonder if -- obviously, gross margin was great in 2Q.

And you've given the guide for 3Q.

But could you maybe talk about the direction of gross margin looking at maybe the fourth quarter or next year?

And what some of the puts and takes there are for further expansion towards your longer-term target?

Is LED still much of a drag at all at this point?

And maybe, I don't know if you could give a sense of what revenue run rate needs to be to kind of hit that mid-40% target?

Yes.

Good question, Rick.

I think we're creeping up on that target with what we've done in the first half of this year and what we're -- and what we've recently done in Q2.

So we've taken the actions, as I mentioned earlier, around rightsizing our manufacturing footprint.

So really, extra volume will help drive higher gross margins in the future.

So if we get to higher revenue levels, margins should benefit from that and with quarter-to-quarter variation based upon product mix.

As the LED and particularly, the China commoditized LED business that's no longer a significant part of our business is certainly helping on the product mix and in the gross margin improvement over time.

We'll now hear next from Brian Lee with Goldman Sachs.

This is Alex on for Brian.

So quick question and just a follow-up.

Just a follow-up on the gross margin question.

Towards the beginning of the year, you discussed some possible inventory sell-down as potentially driving closer to 40% margins for the year.

I know you have limited visibility into 4Q as of now.

But do you expect any inventory sell-down to weigh on margins toward the end of the year?

So yes, Alex, we did mention earlier in the year, we saw some potential headwinds as we sold off some slower-moving inventory.

That's having a lesser impact on our margin profile than we expected.

And given the visibility right now, we've guided for Q3 in the 42% to 44% gross margin range.

We would expect variations from quarter-to-quarter.

But given our current profile, that's where we're operating.

Got you.

That's helpful.

And I know you discussed the EUV market sizing a bit.

So I was wondering if you could kind of expand on that, I guess, in light of ASML's recent positive commentary?

And can you kind of quantify from a revenue perspective what that impact is or how large that tool size you said is in 2020 and potentially a trajectory into 2021?

Yes.

What we've said is for every, I think, 12 to 15 ASML scanners, the industry needs about one of our machines.

So -- and these machines run in excess of $10 million each.

So the 2 to 4 systems per year is kind of what we're targeting -- looking at for right now, that kind of puts it in kind of the $25 million to $50 million range, something like that.

We'll take our next question from David Duley with Steelhead Securities.

Nice results.

A couple of questions.

On the LSA front, could you just give us an idea about what you think the size of that market is for you guys?

And maybe differentiate a little bit.

You talked about winning business at advanced nodes, but that business had some trailing node -- trailing edge nodes business as well.

Maybe if you could just help us understand what's going on with the -- and I think most of that's in China, actually.

So if you could just give us some further commentary around that stuff, that would be great.

Yes, David.

I would say, to answer the first part of your question, we've been sizing that market at $100 million per year.

We do see opportunities for that to be expanding.

So I would probably call that kind of the low end of the sizing right now with opportunities.

As we get more application steps, I think, that could be significant.

I know I spent a lot of time talking about the leading-edge nodes and winning various applications and expanding customers.

But we do have trailing-edge tools that we sell into China, 14- and 28-nanometer.

And John, how would you size -- that's kind of like 20%?

Yes.

That's been somewhere, Bill, in the 20% to 25% range of the annual system sales for LSA.

Yes.

Okay.

And is there increased activity there?

Or are the Chinese restrictions also impacting that segment of business?

What we're seeing, David, is where a Chinese customer has an opportunity to buy non-U.

S., we are seeing them exercise that.

And -- but where they don't really have alternatives, it seems that they're continuing to buy U.S. and -- although -- I don't know if I have a direct example.

But I would say the LSA business doesn't really have a good direct non-U.

S. competitor.

So haven't really seen much change there, but we have another pieces of the business.

Okay.

Great.

And then on to advanced packaging, would you expect the current strength that you're seeing to continue into next year?

And could you remind us what your market share is in that marketplace?

I believe it's pretty high like 65%.

If you could just update that.

And you gave some stat about having high market share below 1 micron or something like that.

Is that an implication that at smaller geometries, you don't have as much market share?

Or do geometries matter at this point?

Yes.

Yes.

So I would say our market share is about 50% to 60% in this, I think, greater than 1 micron.

And then the less than 1 micron advanced packaging market, we really don't compete in that.

That's where ASML and Canon really compete there.

So of that greater than 1 micron, we have about 50% to 60% of that.

And that's been over $100 million, but recently, it's been a bit depressed.

But our market share position is about 50% to 60% there.

And sorry, one more.

The -- like the fan-out and the other kind of buzzwords of packages, the chiplets and the heterogeneous packages, the micron range of those things that are still multiple microns, we're not going to have those sift into the ASML-type marketplace or below 1 micron?

There are a lot of advanced packaging steps below 1 micron, but there are a lot above 1 micron.

And so there are some at 5 microns, 10 and beyond.

So -- but yes, there's definitely a big piece of it that is -- that will stay greater than 1 micron.

We'll take our next question from Gus Richard with Northland.

You feel pretty confident about the fourth quarter.

Can you give any color around backlog coverage over Q3, Q4?

Are you pretty much booked and basically execution at this point?

I would say -- I'll take a shot at it.

John, you can follow up.

I would say we do have a pretty strong backlog position.

And as I said in our prepared remarks, we have sold a significant piece of business for our wet processing equipment in 5G RF filters, which the customer is really pushing to have it delivered here in the next 2 quarters.

So yes, I think given our backlog coverage and this other significant order, it's largely an execution issue for us now.

It's not an issue.

I think that's what's left to be executed.

Okay.

Okay.

Got it.

And then...

Yes.

I would say, Bill covered that well.

Okay.

And then just circling to some of the product lines.

How does the front end look for you in the back half?

It was a little weak in the quarter and expecting EUV to come back or an increase in the LSA in the back half?

Yes.

I would say we are expecting -- we didn't have an EUV tool shipment this quarter.

So we will have EUV shipment in the second half.

So that will pick up.

And we're also expecting LSA to be up from this quarter as well.

We'll hear next from Mark Miller with The Benchmark Company.

Congratulations on your upside earnings.

OSATs have traditionally bought in bunches.

Are you starting to see these orders come back and you expect the large orders in quarters ahead?

As I said in the prepared remarks, our visibility in AP, advanced packaging, litho to the OSATs, they're really demanding of very short lead times.

And so they're not sharing long-term forecast with us.

So we -- our visibility is not that strong.

So it hasn't been kind of like what I mentioned with the 5G RF filters, where it's a significant order.

We haven't seen anything like that yet in advanced packaging lithography.

You guided for the third quarter margins slightly better than the June quarter.

Just looking at what's in the backlog, do you think the backlog has a similar mix?

Or is it a richer or somewhat softer mix?

Sure.

So we're guiding from 42% to 44%, so the midpoint would be 43%.

That's what we just achieved this quarter.

So we're seeing -- our visibility right now is a similar quarter.

Bill did indicate that the mix should be a little bit stronger for semi.

We had a little bit light mix, Mark, for the quarter.

So we had a little bit of a lighter mix there.

But overall, we've got good visibility into the backlog for Q3 and feel comfortable with that 42% to 44% gross margin range.

In terms of the highest mix or highest margin products, would it still be -- AP litho and data storage would be above average, IBD?

I would say our data storage as well as our EUV are probably the higher ones.

And that does conclude our question-and-answer session.

I'd like to turn the conference back over to management for any additional or closing remarks.

Thank you, operator, and thank you for joining us today.

It looks like we made it through our trough quarter, and we are looking forward to revenue growth and continued profitability in the second half.

I look forward to updating you at upcoming virtual conferences this quarter.

Thank you, everyone.

Thank you.

That does conclude today's conference.

Thank you all for your participation.

You may now disconnect.