Veeco Instruments Inc (VECO) 2002 Q1 法說會逐字稿

Please standby. Good day, everyone, and welcome to this Veeco first quarter 2002 earnings conference call. Today's conference is being recorded. For opening remarks and introductions, I would like to turn the conference over to Miss

. Please go ahead, ma'am.

Thank you. Good morning, everyone, and welcome to our first quarter 2002 conference call.

I'm Deborah Wasser, Veeco's Vice President of Investor Relations. Joining me today are Ed Braun, our Chairman, CEO and President, and Jack Rein, our Chief Financial Officer. Veeco announced our first quarter 2002 results at 7:00 a.m. Eastern time this morning.

If you haven't yet seen the press release, please visit the veeco.com Web site or call

at 516-677-0200 extension 1403 and we'll get you a copy immediately.

This call is being recorded by Veeco Instruments and is copyrighted material. It can not be recorded or rebroadcast without Veeco's express permission. Your participation implies consent to our taping.

To the extent that this call discusses expectations about market conditions, market acceptance and future sales of the company's products, future earnings expectations or other wise 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.

These factors are discussed in the business description and management discussion and analysis sections of the company's report on

report for shareholders. This call is being Web cast live at the veeco.com Web site and will be available for replay and archived for future reference. The company does not plan to update the information on this Webcast once it has been archived.

I would also like to just briefly inform you about our calendar of upcoming investor activities. We'll be appearing at the Merrill Lynch conference in San Francisco next week, Wednesday May 1st. The

conference on Thursday May 2nd in New York. The Salomon Smith Barney semiconductor conference in Monterey California on Wednesday May 8th, and the Wells Fargo conference in San Francisco on Monday May 20th. More information about these appearances is available on our Web site.

I would now like to turn the call over to Ed.

Thank you, Deb.

Good morning. Veeco reported its financial results for the first quarter ending March 31st, 2002. We reported revenues of $80.1 million. A net loss of $3.5 million or 12 cents per share, with cash earnings per share at break even. Cash earnings per share exclude amortization expense, and assume a 35 percent tax rate.

First quarter bookings of $70.2 million increased five percent from the prior quarter. Compared to prior year quarter, Q1 orders and revenue were down 36 percent, in a recovering but still difficult market. Our Q1 performance was in line with our order guidance and we exceeded both revenue and earnings guidance. We are encouraged that our orders have improved in each of the last two sequential quarters, up nine percent from $61.5 million to $67 million in Q4 of last year.

And now up five percent from $67 million to $70 million in Q1. And we forecast orders to be up above $70 million in Q2. Our market diversification continues to work to smooth in -- individual industry segment volatility.

For example, within our Q1 sequential order increase of five percent, our individual market segments had significant changes. Data storage orders were up 38 percent, to $24.3 million, with a book to build of .84 to one.

Telecom was up 22 percent, to $14 million with a book to build of .82 to one. Semiconductor was up 26 percent, to $9.4 million with a book to build of 1.5 to one. Research was down 26 percent due to seasonality but above prior year, to $22.6 million with a book to build of .81 to one. Again our total for the quarter was $70.2 million, a book to build of .88 to one.

Cancellations, which heavily impacted the prior six months, were reduced to less than one percent this quarter. So net bookings were up 60 percent sequentially.

The market segment distribution of orders were 35 percent in data storage, 20 percent telecom wireless, 13 percent semiconductor, 32 percent research, and all were driven largely by technology buys in each segment.

Orders by geographic distribution were heavily influenced by our success in the Asia/Pacific region in the quarter, where orders were up, 149 percent sequentially, to $24.3 million.

Reflecting significant activity in wireless, purchase of our molecular beam

systems and semiconductor purchases of our atomic force microscope tools, as well as data storage enjoying growth in metrology, tools in A/Pac.

In fact of our top 20 customers for this quarter, from on the order book, 11 of the 20 were either A/Pac, Japanese or Chinese accounts, including some startups and some new accounts to Veeco.

Overall the geographic breakdown of orders were 39 percent North America, 35 percent A/Pac, 17 percent Europe, nine percent Japan.

So the first leg of this recovery has a quite high international content. Examining revenue, our $80.2 million was above our guidance but down 18 percent sequentially, and likely represents a near bottom in this cycle. We expect technology buys to drive sequential quarterly growth in the second half of this year.

Let me comment about the market segments individually. In semiconductor, .13 micron, 300 millimeter deep etch and CMP applications are continuing to drive continued interest in our atomic force microscope.

Advanced semiconductor photo mask projects resulted in another multimillion dollar order for a Veeco ion beam deposition system this quarter.

That's our fourth system for photo mask applications, now approaching a 15 to 20 million dollars a year level for this new ion beam deposition product.

And this, we think, is a nice addition to our atomic force microscope growth in the semiconductor sector. In AFM, we are well positioned to respond to what appears to be a significantly larger semiconductor fab prospect list.

Or as capital spending plans appear to be increasing for the next few quarters, we are cautiously optimistic. In data storage, an increase in aerial density continues.

The industry is now development of thin film heads for 80 Gigabyte platters. This requires the next generation of TMR technology, that drives spending and research and pilot production, in process equipment and metrology.

Veeco is a clear market leader with a very large installed base and is a critical supplier to the major thin film head manufacturers around the world.

During the quarter, our second and third -- ten target cluster PVD deposition tool was accepted, and we are seeing strong interest in our diamond light carbon ion beam deposition tool, that provides protective coatings on thin film heads.

In addition to applications for, desktop and mobile PCs, we, we see new drive applications including TV set top boxes, video on demand, digital cameras, game boxes, auto navigation, all are emerging and I think will be important in the '03, '04 time frame.

And some additional industry consolidation continues as Hitachi and IBM have announced a potential merger. Both are very good Veeco customers. The overall health of data storage appears to be improving. And the telecom wireless sector recovery will be driven by wireless growth.

Veeco will focus on active device applications, in deposition and metrology. Veeco's broad product line of enabling technologies, which now include molecular beam

, are important to this sector.

, our more recent acquisition of molecular beam

had orders increased in the quarter to 13.4 million from 8.8 million in the prior quarter, as the industry uses this prolonged down turn in telecom to put emphasis on the development of new integrated optical and wireless devices, at wafer level. And so here we see activity at new Asian startups, and in Europe, for combinations of molecular beam

, ion beam deposition and PVD, three of Veeco's core products.

And lastly by market segments in research, Veeco remains the leader in nanotechnology AFM, and in scanning probe microscopy. And we have broadened our Santa Barbara product offerings for new material and life science applications, including both high resolution imaging as well as nanomanipulation, and nano scale force measurement, for molecular applications.

Nanotechnology centers around the world continue to be well funded, and are now attracting combinations of biologists, chemists and materials scientists, and this continues to be a very promising growth, multi-year growth opportunity for Veeco. I will stop here and ask Jack Rein, our CFO, to review our Q1 financials, and then we'll return for some final comments, and your questions -- Jack.

And, thank you.

Good morning. For the three months ended March 31, 2002 sales were $80.1 million, a decrease of 36.1 percent verses the 2001 first quarter. This decline is attributable to decreases in both process equipment and metrology sales. Process equipment sales totaled $44.8 million, and metrology sales totaled $35.3 million for the quarter.

Gross profit was $33.7 million for the quarter or 42.1 percent of sales, against 46.8 percent in the year ago quarter. The reduction in gross margin percentage is attributable to the decrease in sales volume, in both process equipment and metrology.

Sequentially, gross margins improved by six tenths a percent, from 41 and a half percent in the fourth quarter 2001 excluding merger and restructuring charges.

The sequential gross margin, excuse me improvement resulted from favorable mix and overhead reductions that were implemented in the fourth quarter 2001. Operating expenses totaled 32.4 million verses 37.6 million in the prior year quarter, for a reduction of $5.2 million dollars. R&D spending came in at 16.6 percent of sales for the current quarter. SG&A expenses came in at 23.8 percent of sales for the quarter.

We continue to focus on controlling spending while ensuring adequate resources for the in-product development and customer responses

. Other expense decreased $1.4 million dollars with the elimination of foreign currency loss we experienced in the first quarter of 2001.

Amortization expense totaled $2.7 million dollars in the first quarter of 2002, verses $1.4 million in 2001. The increase is due primarily to the intangible assets acquired in connection with the acquisition of

, and Thermal Microscopes.

The restructuring charge of $837,000 incurred during the first quarter of 2002 related to the reduction in force, announced and initiated in the fourth quarter of 2001. While the actions were initiated in the fourth quarter of 2001, current accounting guidelines require that associated charges be recorded when the actions are implemented. We anticipate a similar restructuring charge of approximately $700,000 in the second quarter of '02.

Interest expense net totaled $1.5 million as compared to interest income net of $800,000 in the

2001 quarter.

The increase in interest expense is a

direct result of, the issuance of $220 million of convertible subordinated notes which occurred in December of 2001. Earnings for interest and taxes, before amortization and restructuring charge totaled $1.3 million dollars, or 1.6 percent of sales compared with $21 million, or 16.8 percent in the first quarter of 2001.

Veeco's first quarter 2002 net loss was $3.5 million dollars or 12 cents per share, compared to a net income of $12.9 million or 51 cents per diluted share in the first quarter of 2001. Cash EPS for the quarter was break even, using a 35 percent tax rate and excluding restructuring charges, amortization expense and discontinued operations. This is compared to 56 percent, 56 cents for the 2001 first quarter.

We're currently forecasting 2002 revenues in the range of $75 million to $80 million dollars with forecasted earnings at approximately break even. Cash and cash equivalents totally two -- $219.1 million at March, March 31st,

for $16 million in the result of proceeds received from convertibles, notes or

options. Excluding these proceeds, cash flow was essentially break even for the quarter.

Accounts receivable was $69.8 million, down $18.6 million from the December 31 period, with BSOs coming in at 82 days.

Inventory was $99.3 million at March 31, down $2.1 million from the December 31st balance, with a 1.8 times turnover.

was $2.1 million in the quarter, depreciation totaled $3.7 million. Long term debt increased by $19.6 million in the first quarter due to the -- due to the over-allotment of convertible notes issued in December of '01.

Our balance sheet liquidity position remained quite strong. We have $420 million of shareholders' equity. At this point we'll return to Ed for some additional comments.

Thank you, Jack. In summary, again I would comment that while industry conditions remain difficult we are pleased to have surpassed both our revenue and earnings forecasts for the first quarter,

delivering a break even quarter at the cash operating level rather than the loss that we had forecasted. These results were achieved through cost reductions and higher than forecasted revenues, despite a 36 percent decrease in revenues from the prior first year quarter.

Because bookings in the first quarter of 2002 decreased 36 percent from the prior year but were improved five percent sequentially, in line with our

. New technology buys prompted a 38 percent increase in data storage orders over the prior quarter, a 27 percent increase in semiconductor orders, and a 22 percent increase in telecommunication wireless orders for the quarter.

We experienced seasonal weakness in research bookings, while higher than the first quarter of 2001, were down

percent compared to the fourth quarter. Because first quarter orders from Asia/Pacific were up 149 percent sequentially reflecting significant activity in wireless and semiconductor applications. Net bookings were up sharply in the first quarter verses the prior quarter, as order cancellations were insignificant in this quarter.

We are pleased that Veeco's market diversification has enabled us to report two consecutive quarters of modest order improvement, despite swings within our different industry segments. We expect additional technology order growth to continue in the second quarter.

As Jack commented, Veeco currently estimates that the second quarter 2002 revenue will be in the range of $75 million to $80 million, with cash earnings per share again approximating break even, using a 35 percent tax rate and excluding amortization.

Veeco currently forecasted second quarter 2002 bookings -- will be greater than $70 million, sequentially up from the first quarter. Veeco continues to expect overall market recovery to result in sequential bookings and revenue growth in the second half of 2002.

Operator, we would be pleased to stop here and take questions.

Thank you. Our question-and-answer session will be conducted electronically.

Anyone wishing to ask a question may do so by simply pressing the star key followed by the digit one on your touch-tone telephone. We'll take your questions in the order that you signal us, and we'll take as many questions as time permits.

Once again if you would like to ask a question, you may do so by pressing star one now. And we'll take our first question today from

with Salomon Smith Barney.

Thanks. Good morning, everyone.

Jack, a question of you on SG&A. On a dollar basis it was -- it was reasonably flat. Can you give us a sense as to where you think that's gonna go, as we progress here over time?

We're gonna be controlling our spending, as I commented, we, we look to, reduce it, going forward in the sequential quarters.

On a dollar basis reduction?

Yeah. For the foreseeable future. Until, until business picks up.

OK. And then, and a question on the disk

business. It's one where, you know I think we've seen some push and pull in technology, and I think the, the orders and revenues there have been pretty lumpy if you look over, you know maybe a five quarter period.

Can you give us a sense if you're seeing some kind of stabilization now or, or even better some kind of, view on growth there? Or do you expect it to remain, reasonably lumpy for the foreseeable future?

I, I think it'll stabilize,

, at, you know, almost everyone is now working on, 80 Gigabyte platters, which require additional materials in the sensor, in their read/write sensor heads.

And so we're continuing to see spending associated with, new deposition tools for TMR heads. We did experience, what's lumpy is the metrology spending.

The, the process equipment spending I think is a bit more continuous, and metrology spending is, appears up and down over quarters. So I think at the very least it will be stable, driven by their, higher aerial density research spending.

Right. Well then lastly, you sometimes have given us some full year forecasts for revenues. Do you have an update for that?

No, I -- we're -- I, Glen, I think we're in, the consensus of companies these days is that although we see a recovery we're, we, we are only comfortable giving a quarter at a time.

OK, thanks.

And next we'll go to

with Merrill Lynch.

Good morning, Ed. A couple of questions.

First, can, on the data storage side, can you give us an idea of what you think the -- where we're at in the technology move to the TMR head? Are we, are we just moving out of the R&D stage? Or are we starting to move towards the production stage there? That, that's my first question.

Yes,

I think we're very early in that cycle. I think TMR, you tunneling magneto resistive heads probably represents a couple of percent of total head production, in 2002. And will reach maybe 30 percent in 2004 so it's a, it's a growth segment that will occur over the next three or four years.

We've, you know we're installing the first six tools, so you know one or two per head manufacturer, which will have to be followed by three to five, in this next wave.

So I think we'll see a steady incremental growth as TMR goes from, a couple of percent to 30 percent of head manufacturing over the next two years.

OK and, and so, it sounds like you're in pretty much all of the leading head manufacturers now with the ten target tool?

We're, the ten target tool is being used by two or three of them. Others are still using combinations of our six target tools. So we're selling both some of the older Veeco product, and, and some of the newer Veeco product, as people are approaching TMR with different method, different process methods. But all of them are having to deposit more materials onto the head.

Then, switching gears to the semi side a little bit, you know you mentioned that there's more

being talked about by your customers now. Can you talk a little bit about the adoption of the ASM as a production tool? You, last quarter you told us that, you had a number of

and it moved to multiple tools, there and, are you continuing to see that trend?

Yes, we continue to see more and more people now buying multiple

, for inline

applications again having to do with .13 micron EMT, copper, and deep trench measurements. And the prospect list there is up significantly this quarter. I -- as I commented. I -- the prospect list is at least twice what it was at this time in the first quarter. And, and, and that's with just a few multiple buys.

So, it's both, it's a combination of multiple buys that are still pretty modest, one or two, you know, two per

the, two per

, we're not yet at a three or four per

, and, just

addition number of early enablers looking to put their first tool, into

. So it's a combination of both, one of and a couple of, probably 50/50 on the prospect list.

OK. And then, maybe one more question for Jack. The margins increased nicely in the quarter, even on the dip in revenues, and I know the guidance the next quarter is, sort of flat actually on, you know revenues and, and break even.

But, can you give us a little bit of thought, in terms of what the margin outlook is gonna be, as you -- it sounds like you'll be seeing a continuing shift towards some of the data storage products and, and the, the AFM for semis it sounds like based on the comments, made today?

Yeah, I, I think we're gonna see pretty margins in the second quarter. I think that we could see a -- we expect an up tick in the third and fourth quarter, sequentially each quarter,

.

Very good, thank you.

And,

, also remember that's influenced by, most heavily by the mix of equipment and metrology in a quarter.

You know in, metrology has, even in the downturn has maintained a fairly significant margin. So as it grows faster than equipment in this portion of the recovery, it will help margins.

Thank you for that clarification, Ed, 'cause that's sort of what I was wondering. It sounds like you're getting some, some good business on the data storage process tool side but it also sounds like metrology, at least near term is growing a little faster and, may be giving you a little more leverage once, once the revenues start to grow again.

I think that's true.

Right.

Thank you.

Next we'll go to

with

Hi, good morning.

Just wanted to ask you a question on the AFM side of the business related to nanotechnology applications.

Are you seeing, Ed, any change in the customer base related to -- you know, instead of primarily government and research organizations? Are you starting to see more private investment in that area? And also, if you could just give us your outlook for the year related to, related to the AFM business and nanotechnology? Thanks.

Truly. The -- you know, while there is some venture capital flowing into this sector in addition to the government spending, and so we do see some startups buying AFMs, I would say the majority of the purchases are these now sizable nanotechnology centers that are at every major university.

I mean it. Harvard, Cornell, New York, you know they're, as well as in Japan and now in China, very significant, well funded sectors or centers, that have a combination of AFMs and scanning probe microscopes from Veeco.

And they are the larger customers than these small startups, currently. I think the small startups might have more influence in our revenue in 2003. And I think that the sector will grow, within Veeco, even in this difficult year. Our sales to nanoscience centers for research AFMs I think will be up for the 12 months of '02 compared to '01.

OK, great. Another question is, that I have is, do you have a number for the, for the backlog and then -- and then any color you can give us in terms of the

composition of that relative to, you know data storage, semi, research et cetera.

On the backlog is about, I think something under $110 million. Just around that.

Yeah, yeah, right.

And that -- but I don't have at my fingertips the market segment content of that.

we break it out that way in eyes of you know we've got it, you know we've got it by business unit, we've got it by product but we, we really don't have that

.

It's more heavily, they're colored, I can tell you, where it's not. There's no backlog, you'll, you'll take heart from the fact that there's no backlog in telecom. There's backlog in data storage and in semiconductor, and a little bit in research. But I would say it's mostly semiconductor, and data storage.

OK.

activity we've seen recently is in, you know will be delivered over the

next nine months so that's a good backlog item.

OK, great.

The telecom world has really been very quiet with the exception of wireless, so the backlog there is quite modest.

So I take it there's not much, it doesn't sound like there's much risk going forward of kind of cancellations or problems with that part of the backlog.

Yeah, and that's very newsworthy, because if you remember, we had $24 million in cancellations in Q4. If I remember correctly we had $70 million in Q3, and probably the only good news associated with telecom backlog, being $4 million, is there's nothing cancelable. And the -- and the cancellations in this current quarter were around a million dollars. I mean they were insignificant.

OK. Great, thank you.

And once again if you would like to ask a question you may do so, by pressing star one. Next we'll go to

with Bank Of America Securities.

Thank you. On your forecast for next quarter's earnings here, are you excluding the amortization expense here?

Yes, that was cash,

.

Cash EPS.

Cash and, can I ask you why were you, why you're shifting to this cash EPS? I mean amortization's kind of an ongoing expense I'd assume, isn't it?

Amortization is an ongoing expense. I mean it's -- I would say that it's been reflective of what the industry is following. And many of the analysts have asked us to make the distinction, so we're being responsive to the Street.

OK but can you tell me, this is writing off the

good will and, the other acquisition goodwills basically?

That's right. It's not goodwill. It's a good will for

amortizable any more, the intangibles we led into, yes.

OK. And, what's the life span on that write-off? How long out do we go here?

The life span, well the life span range is, depending upon the

, but on average is probably seven years.

Seven years. OK. So, in, we've been, in the past, though, we're looking back at our models here and you've been including that in SG&A, are you now going to break it out and put it below the line?

We have not

, we have not included it with SG&A, we've broke, always broken it out separately.

OK. Ed, can you tell us how big the AFM business is across all segments at this point?

Well, last year, AFM, for the -- for the year 2001 was about $130 million, $140 million. Of which about half was semiconductor and half was research.

OK. And do you expect it to be above that level this year?

No, I think you know in the -- within the equipment industry, you know, I think Veeco's performance in 2002, Mark will probably mimic the industry performance of being down from the prior year, but then being up again to, a new high in 2003.

OK. And, I ...

Now we didn't add, you know, semiconductor may be down and research may be flat or up a little bit.

OK, well that's where I was a little curious, if this seasonal pattern you'd been, talking about is, I mean, is that something you saw last year at this time? I don't remember that.

Yeah, last year's first quarter was also down it -- you know the, a lot of, as I commented earlier a lot of the nanoscience funding is still government funding.

And so government funding tends to accelerate in the December quarter where they pull stuff forward to complete their budget, and suffer consequentially a little bit in the March quarter, and then it comes back the rest of the year. I think that will happen again this year.

OK. So, would you expect the June quarter to be up for the research?

Yes.

OK. Thank you.

Thank you.

Next we'll go to

with

.

Good morning. Versus previous quarters, we see a draw-down in deferred profits. What caused the change in the current quarter?

Well, certainly the decline in sales volume sequentially is the major reason.

Yeah, do you still have nonrefundable deposits and were some of them used in the current quarter?

We still, yes we still get nonrefundable deposits. There was a modest reduction in those in the quarter. I think it was about 500,000 and it's 600,000.

Good, thank you.

Sure, fine.

I'll take our next question from

with

.

Good, yeah, can you tell me about the photo mask? There's, you know, do you see any applications beyond that possibly etch applications in that market?

Yes. Fred, it really is both. I described it largely as, as deposition because you're putting multi-layer, you know, in EUV mask you, it's a dual material stack that you're repeating probably 20 times for a pinhole-free very thin films of

, on an EUV mask. But then there are also some etch applications.

So those tools that are in the three to four million dollar range, frequently have an INV match module on the cluster tool.

So in fairness they are often a combination of IBD, which is the principle method of putting down the very thin pinhole free film, accompanied by sometimes IBE for etch and PBD. The other place that etch is used is in the phase shift masks themselves, where one etches into the glass.

Also, can you tell me about the telecom area? I think when you acquired

I think you've quoted, you hope to do like $65 million this year or possibly quite a bit higher. Can you let us know where you are on that? And can you talk about possibly the proof of business and whether you see any life in that, at any time in the near future?

Sure, I'll take the latter first. In the filter business, which as you know has been near zero the last couple of quarters, and by that I mean, one or two systems per quarter for -- and the filters are changing to more integrated filters.

People are not building, standard you know or the older design of, 100 Gigahertz or 200 Gigahertz but they're now building, compensation filters, gain flattening filters, a wider variety of specialty filters, that are, that still require the

, our deposition system.

And, like AFM, that prospect list in the next couple of quarters, is higher than it was in Q1 and Q4. But higher means we're going now from one or two systems per quarter to I think the prospect list for this quarter, has four systems in it. So, some modest recovery on the telecom optical side,

, but you now notice that it's still pretty small.

More activity on the wireless side, where

still has, you know a steady stream of orders and revenue, but probably won't make their $65 million prior year forecast.

And then, thank you, Ed.

And next we'll go to

with

.

I have a couple of,

questions Ed.

What do you think that $65 million number is gonna look like this year?

Well they did, you know, I think, the -- well, we haven't given a model zone. I'm hesitating to give you pieces of a model where we've not given a model.

But I think what we are saying is that, you know the $450 million of revenue that Veeco did in 2001 will be reduced in this year, likely, similar to all of the semiconductor equipment experience for this year.

And so in those pieces, I think data storage, semiconductor, telecom, all participate in this downturn year. And within telecom I think wireless will behave better than optical telecom. So, you know there'll be a more severe downturn in our

Specter business, than there will be a downturn in

, which won't make its prior number but will have a healthier year than

.

OK, and what were your

sales in Q1?

in Q1 was $11 million. And

,

.

And, well, following one

...

And

was about $4.5 million.

OK. And following on

, now you think that, you think that business is still gonna come back but, probably over the longer term, is that correct?

Yes, I think that what we're gonna see -- you know, if you look at the -- yeah, say, I think we're gonna see Specter filter deposition

clearly not each in the next couple of quarters, but still a pretty nice level.

But wireless and high frequency devices for cell phones will have a better growth in '02, compared to optical, and both will grow in '03 and '04. But the recovery I think in the, in the total telecom sector, will come first from wireless.

OK. But, Ed then, how much of the, could, could you give us a sense of how much of the assets on your balance sheet, are from

and also what portion of your good will is

as well?

I think Jack's gonna be the

.

I'll have to dig that up for you, Christina. We'll get back to you.

OK.

OK. Even, even if it's qualitative is it, you know maybe half of it or ...

It's not half. It's less than half.

OK. And also did you, did you

into the optical business this quarter?

Into optical telecom?

Optical telecom, yes.

No, very little. Most of the

sales are in semiconductor, and in data storage in this quarter.

OK. And then, following on another one of Fred's questions, in ion beam, depth of etch for photomasks, you're also addressing the phase shift,

markets so could you give us an idea of, well first of all what the competitive landscape looks like there, and then again what your unit opportunity is, for line, let's say per, you know 130 nanometer line.

Yeah, we, I, we think of the photomask opportunity as the combination of enhanced mask for phase shift, and EUV masks and

and optics. And it's, you know if you just look at the bookings over the last nine months, that business has come from zero, to about $15 million in the last nine months. If I look at the prospect list, you know, previously said, we said it was gonna be, you know, $10 million the first year and $30 million the second year.

I think it exceeds that. I think it's gonna get to $30 million pretty quickly, and probably has the potential of being $50 million, as activity is heated up in that area. And it's not a -- you know these are four, you know $3 million to $5 million systems. So it's not a question of a system per line. It's really a question of two or three systems per major supplier, of glass and masks and devices.

How much of that did you sell this quarter, Ed?

The revenue, zero.

OK.

The orders, of, there was one order this quarter.

And the ...

So this is all, you know we have a backlog of three or four systems that'll be delivered in either the next couple of quarters, so I think if you're factoring that into your model, in 2002 it's probably, on the revenue side $10 million, and in 2003 it could be, $20 million or $30 million.

And somebody just said, what was your headcount at the end of the quarter?

Headcount is about 1,350.

Thank you.

And we'll go next to

, with RBC Capital Markets.

Thanks. Ed. I was wondering if you can go into a little more detail on the backlog and cancellations.

One percent cancellations was that of backlog? Or bookings? And then could you tell us a little bit about how far under 110 million your backlog is right now.

I think it's about, it's,

109 to 110 million, and the cancellation was one percent of the beginning backlog.

So, that's almost like a normal adjustment to backlog activity in quarter. Where you know people, you know may change the configuration of something they've bought, and so an individual order may go up or down a couple a hundred thousand dollars. So I mean

it, for all practical purposes you could think of it as zero cancellations.

OK, great. Thanks.

And one final reminder, if you would like to ask a question you may do so by pressing star one.

We'll go next to

with

. Mr.

, your line is open. Hello?

Hello, do you hear me now?

Yes.

I'm sorry about that. I had it muted. Question for SEB101 stuff. What is the rough acceptance period from shipment to SEB101 acceptance currently?

It certainly varies by practice tools since we have a, a wide variety of tools, and newer tools. We don't recognize revenue until a full field acceptance. And that can take 60 days, 30 days, 60 days. Likewise, a bifurcated sale where you have final field acceptance on an established tool, that can likewise take 60 days or so.

OK. And the second question, you've, suggested that a lot of your activity has been in Asia/Pacific. Could you -- I don't know if someone asked this question. I may have missed it. But in terms of business in China and Shanghai and, and potential for that, market in developing of new technologies, can you give us a little flavor on that?

Yes.

, I think we're, we here we're experiencing the same thing, that others are writing about, that right now it's heavily Taiwan. But there's a good element or a transfer from, or investment from Taiwan and Japan into China. So we're seeing both, heavy Taiwan orders and some start, the start of some orders in China.

OK, great. And anything you can tell us about the European market given

last week?

Pretty quiet. I would say Europe we're seeing more activity in telecom, you know Alcatel and others I mean, Europe has always had a pretty good content of wireless phone and compound semiconductor activity.

And we're seeing some wireless activity there. But in the mainstream semiconductor activity, you know, Europe has been stable. We did, you know we are seeing good AFM activity, you know, with in places like in

.

But I think the growth in Europe semiconductor right now doesn't appear to be as heavy as the growth in Asia/Pacific.

OK. And one last question. The adoption and sort of change-out rate for recording heads in the data storage industry seems to have been relatively constant. Do you see any acceleration or deceleration as we're moving to the tunneling head technology?

Well as, as we commented earlier, I think we're, at part of the cycle where it's still on the cusp of research and pilot production. And I -- so I think we'll see, you know, individual unit sales in TMR head deposition systems for the next couple of quarters, out maybe six to nine months from now, by multiple buys as they go into production.

OK. Thanks.

We'll take our next question from

with

.

Yeah, Ed or Jack, I may have missed the number but, but do you have, the order and shipment figures for the AFM profiler part of the business?

You didn't miss the numbers but we have the numbers. In the first quarter AFM orders were $20 million. And shipments were about $29 million.

OK, thanks.

And

with

has our next question.

Yeah, good morning, gentlemen. I've just received a fax with a comment about your quarter and about your business and I thought maybe I'd take the opportunity to let you guys respond to it.

It says the company took some light one-time charges in the quarter -- I'm reading directly from this report, so. Given that this is an ongoing practice for the company, this gentleman is adding an addition to another line to his income statement ongoing restructuring expense.

A two years, a two-year quarterly average of this expense amounts to $7.8 million per quarter, significantly reducing Veeco's true earning power. Do you guys expect this ongoing restructuring expense to continue and is that a fair judgment of the situation as it exists?

I'd like,

, I'd like -- I've commented there will be another charge in the third quarter. I don't really expect it to continue. I think, really there's been a change in accounting which says that it's a pay as you go type of scenario. While we announced a fourth quarter reorganization, closing of facilities, personnel reduction, those don't get effected in the same quarter.

And, some of these costs can be charged that quarter, others must be paid out and recorded as charges in the quarters as they are implemented. So there's been a change in accounting. I do view that as sort of a restructuring, if we don't take a 300 person headcount reduction every quarter, but those types of charges have been spread somewhat by the new accounting.

I think it's a little misleading if you -- what Jack just said is absolutely true. I mean if, one shouldn't imagine that you're going to reduce head count by 300 people, either every year or every quarter. So it's a little, it's a little impractical to take those charges and spread them over quarters as though they are reoccurring. They're not reoccurring.

Right, OK thank you.

And

with

has our next question.

I'd just like to clarify something about the ten target tools. These tools will be used for the tunneling type of GMR heads, is that correct?

Yes. Some customers refer to their heads as advanced GMR, and some as tunneling magneto-resistive heads. A probably clearer characterization is what size, what platter size, what capacity platter size are they working on, and you'll find in most cases people are using them for the introduction of either the 60 Gigabyte, or the 80 Gigabyte platter.

And you said you have installed six of these tools? Do you have orders in your backlog for any more of the tools than the six installed?

We have, some, we have additional orders, and we have six that we're in the middle of installing, and I think as of today three have been accepted.

OK. Could you just give us what you feel for '03 will be in your growth areas?

Well I think '03, as we've said throughout, and I, I know this is -- it's difficult that we're not providing, it's unusual that we and other semiconductor equipment companies are not providing a one-year model for you to look at, and we're providing information quarter by quarter, until visibility in the industry improves.

And I think we're also saying the same thing that, we think we're at a low point, we're past the low point in orders, by two or three quarters.

We're probably, most of us, currently at the low point in revenue, since revenue lags orders by one or two quarters.

And we're all anticipating an up tick quarter by quarter for the rest of the year, so that we'll end the year on a much higher note and probably many of us will go into '03 looking at an '03 that are, the new highs or near new highs compared to our history.

You know within, and you can see that, you know the order increase in our core sectors, data storage, semiconductor, and semiconductor and telecom, are all double digits currently. But from a pretty low

.

So I think we'll have double digit growth in orders, in many of our sectors, but revenue will lag by a couple of quarters, to the point where revenue is probably gonna be down in each of those sectors compared to '01, with the exception of research, which is less volatile, and probably will have growth, in, '02.

Thank you.

And we have a follow-up from

.

Jack, is it your intention to start building backlog at this point? Or will we see a further decline in the next quarter?

Well, I mean if you take the guidance that we've given, they could be a modest decline in backlog in the next quarter. Our intention is always to build backlog, though, generally.

But to the extent that you can, you can control your shipment basically.

And if I think if I did my math right, your shipments are still slightly above your SAM101 revenues, and potentially are going around the other way next quarter. So I want to get, you know, to the extent that you can control it, are you actively trying to grow backlog given that scenario?

Well, we're trying to. Our first priority is to please our customers and, and they are demanding tools right on a on a timely basis.

So I think by, you know shipping whatever we can from our

backlog on a timely basis, getting tools accepted, and some of these beta tools, there, that'll accelerate follow-on orders. So, what we don't, attempt to, manage shipments or reduce shipments to even them out.

Fair enough, thanks.

And we have a follow-up from

.

Hi, Ed could you, help us a little bit with the recovery that you see in the second half of the year. You're, you're confidence level there.

How high is it, and, is there any kind of color you can give us related to -- you know, are you, are you hearing certain things from customers about their plans in terms of, capital spending or, or, you hearing from your sales people in terms of ex- you know anticipated orders, slotted out in, in later quarters this year?

I just want to get a sense of the confidence level that you have in terms of, second half recovery in, in, in the orders.

Yeah that you know it, again that's a quite a fair question

over all the markets. But, you've expressed it in a in a good way and that's, you know what's the confidence level we're hearing from our own sales force, and our customers?

And I would say, the confidence level and the, the, the tone of the comments seem to suggest that semiconductor will recover, before data storage and before telecom.

So in the order of in which we see, plans looking firmer for recovery, they, semiconductor earlier than data storage, and both earlier,

while I think research is more just of a steady state, increased quarter upon quarter.

OK, so if, if you compare it against, you know over the last couple of quarters are you getting the sense from customers, you know regarding much, much more, better visibility in terms of, just what their customers are saying about their business? You know verses what we, what we've been going through the last couple of quarters?

Well if I reduce the question to, you know, where do we see a prospect list increasing, relative to each of, to each of the markets, the prospect list in semiconductor is growing at a faster rate than the prospect list in data storage or telecom.

And I think, you know that's a match with everything. We're all

, that probably the cap exchange that we're all sort of hoping for quarter by quarter, is closer to being scheduled to happening in semiconductor, than it is in telecom.

OK. Great, thanks, Ed.

Operator, I think we'll just take one last question if there is one.

And that will come from

.

All right. What were shipments in the current quarter, reported quarter?

Let's see, I don't have that immediately available. If you wait a second I can figure it out, though.

You know, you know Byron we've, at the beginning of SAB101 now is something we report it every quarter and, and we

. It's quite close to revenue. In fact we'll, we'll get back to you.

Yeah I'll have to get back to you I don't have that

.

Yeah, it's quite close

OK, and can we, assume the same then, the, current quarter, that ships and revs will be roughly the same?

Yeah.

Yeah.

And we'll get back to you that

Where the SAB101, chain from quarter to quarter is that, not that significant.

Right.

And in, in conclusion then I would say that, we are seeing, four or five,

for the next level of, of growth within Veeco, and they are, you know the automated inline metrology, having to do with .13 micron.

And, as you look further out on the horizon we see of course the evolution to 80 and 100 Gigabyte hard drive heads. The integration of wireless devices,

the convergence of wireless optical and semiconductor, advanced semiconductor photo masks for face shaft, face shift and EUV.

And, growth in nanotechnology, continue to be the five drivers that I think, we would hope would give us, not only sequential quarterly growth, over the next six to nine months, but very good annual growth going into '03. So we're cautiously optimistic, that we're at the low point, in, and that we'll see a quarter upon quarter improvement in the starting in the second, of '02.

I thank you all for your attention and we look forward to, speaking with you at these next conferences, and when reporting the second quarter. Thank you.

That concludes today's conference. We thank you all for joining us. Have a great day.