Veeco Instruments Inc (VECO) 2002 Q2 法說會逐字稿

Good day, everyone and welcome to the

Veeco second quarter 2002 earnings conference

call. Today's conference is being recorded. For

openings remarks and introductions, I would like

to turn the conference over to Miss Debbie Wasser.

Please go ahead.

Thank you. Good morning

everyone. This is Debra Wasser, Veeco's Vice

President of Investor Relations. Joining me on

today's call are Ed Braun, our Chairman, CEO and

President, and Jack Rein, our Chief Financial

Officer. Veeco announced our second 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 Nicki Pemasic

516-677-0200, extension 1403, and she'll get you a

copy immediately.

This call is being recorded by Veeco Instruments

and is copyrighted material. It cannot be

recorded or rebroadcast without Veeco's expressed

permission. Your participation implies consent to

our taping.

To the extent that this call discusses

expectations about market conditions, market

expectance and future sales of the company's

products, 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, as the actual

results may differ materially from the statements

made today.

These factors are discussed in the business

description and management discussion and analysis

section of the company's report on Form 10-K and

annual report to shareholders.

In addition, we refer you to today's press release

to read specific information concerning our

filings for our proposed merger with FEI Company.

This call is being web cast live and at the

veeco.com website 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webcast once it has been archived.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'd now like

to turn the call over to Ed.

Thank you, Deb. Good morning.

Veeco Instruments today announced its financial

results for the second quarter and six months

ending June 30th, 2002. The company met its prior

guidance for the second quarter, reporting

revenues of 77.3 million, a net loss of 1.6

million or 6 cents per share, and pro forma

earnings per share of 2 cents.

Second quarter, 2002 bookings of 78.2 million

increased 11% sequentially from the first quarter

2002. Veeco's metrology orders increased 29%

sequentially to 41.1 million, while process

equipment orders declined 3% to 37.1 million for

the quarter.

Metrology orders of 41.1 million represent a high

for the last six quarters and are expected to

continue to increase quarter upon quarter based on

both semiconductor and nanotechnology group.

Process equipment orders of 37.1 million, clearly

above the low point of the second half of 2001,

are likely to remain stable in Q3 and grow in

2003.

Veeco sales for the second quarter of 2002 were

77.3 million, a 31% decrease from the 112.1

million reported for the same quart ner '01.

Metrology sales were 40.4 million in the second

quarter compared to 38.9 million in the second

quarter of '01.

Veeco's process equipment sales were 36.9 million

in the second quarter of this year, compared with

73.2 million in the second quarter of last year.

Veeco's sales by market in the second quarter

reflect the company's broad-end market focus and

consisted of 39% in data storage, 14% in

telecommunication wireless, 12% in semiconductor

and 35% in scientific research.

Veeco's bookings for the second quarter were 78.2

million, down 3% from the year ago period, but up

11% sequentially from the first quarter of 2002.

Second quarter, 2002 metrology bookings, as I

commented, were 41.1 million, compared to 40.2

million in the second quarter of '01, and second

quarter process equipment bookings were 37 million

compared to 40.1 million in the second quarter of

last year.

The company's second quarter book-to-bill ratio

was 1.01. Veeco's bookings in the second quarter

consisted of 31% data storage, 12% telecom

wireless, 16% semiconductor and 41% scientific

research.

We are pleased that our orders have improved in

each of the last three quarters, and are within

our overall 11% sequential order increase for Q2.

Our diverse end market included more significant

growth in semiconductor, where our sequential

growth was 34% in the quarter.

Our sequential growth in scientific research was

41% in the quarter. Data storage was flat, grew

about 1%, and there was a 34% decline in telecom

orders compared to Q1.

Let me address these core markets individually.

Our semiconductor Q2 orders increased 34% to 12.5

million, and that's the third quarter of

sequential increase in semiconductor orders, and

those orders included 11 orders for production

in-fab atomic force microscope systems compared to

three orders in the Q1 period, driven by the need

to improve low yields on .13 micron line widths,

copper and 300 millimeter wafer programs.

New fabs are reporting very low yields in the

range of 10 to 30% on critical new process steps,

and that's clearly driving the need for continued

metrology buys, but likely, it's slowing the next

wave of industry-wide 300 millimeter CAPEX

investments until the yields improve and IC device

course on 300 millimeter wafers improve in

comparison to 200 millimeterment.

We expect to see more adopters of Veeco's AFM in

the fab going forward, so we expect continued

moderate quarter-to-quarter order growth for both

Q3 and Q4 in our semiconductor sector.

We had a positive reaction at Semiwest to the

introduction of our new Veeco Dimension X3D atomic

force microscope for sub .1 micron metrology,

including a new lithography measurement

capability, which adds a sizeable new segment to

our available market for IMFs. We expect to take

additional Dimension X3D orders in Q3.

Our semi orders are now up nearly 70% from their

2001 bottom, a good progress, but a long way from

new highs.

Our new 3D AFM air surface metrology products will

complement quite nicely FEI's 3D subsurface dual

beam FIB and SEM metrology products for demanding

.13 micron and copper varied defect and varied

layer subsurface semiconductor applications.

Moving to our scientific research market, that

segment had Q2 orders of 31.9 million, an increase

of 41% sequentially. This sector includes the

combination of nanotechnology, life sciences,

university research and industrial research.

Our high resolution atomic force microscope and

our new scanning probe microscopes have become the

research standards for atomic imaging and

measurements and are leading us to new products

and new nanoscience markets much.

Geographically, Europe, Japan and China have now

followed the US government in funding

multi-disciplinary nanotechnology centers

sponsoring molecular and atomic nanotechnology

research across life sciences, pharmaceutical,

molecular research, material science, as well as

semiconductor, data storage and telecom

applications.

It is still very early in this emerging growth

area, but the national science foundation predicts

that the total market for nano technology products

and services will reach $1 trillion by 2015 and

comments that it's hard to think of any single

industry that isn't likely to be disrupted by

Within scientific research, nanotechnology should

be viewed as an area of both short and long-term

Veeco growth. Veeco's atomic force microscopes

will continue to be scene as critical enabling

imaging and high resolution measurements tools

allowing us to expand our strong intellectual

property and our market penetration by introducing

new imaging and new molecular analysis in

manipulation products going forward, and to

further benefit from these emerging technologies

that stem from today's nanoscience research.

Moving to data storage, the data storage market Q2

orders were up 1%, essentially flat, at a level of

about 24.6 million. Within data storage, aerial

density growth continues and new technology buys

sustain at least flat capital spending going

forward.

In this quarter, we benefitted from our breadth of

etch and deposition product lines as orders for

eye and beam deposition, eye and beam etch and

diamond-like carbon systems increased while PVD

declined in the quarter. The combination of eye

and beam deposition and physical vapor deposition

in a single cluster tool remains important for

next generation thin film sensor heads, and we

intend to accelerate the integration of our

Plainview and Rochester equipment sites to lower

our operating costs and to produce a common Veeco

platform offering integrated technologies of PVD

and IBD.

This is quite important to our major accounts in

data storage, Seagate, IBM, Hitachi, Read-Rite,

TDK, ALPS and Fujitsu. We expect storage to be at

least flat in Q3 at about the 25, $26 million

level in orders.

In telecom wireless, orders declined in Q2 from 14

million in Q1 to 9.2 million in Q2, and the orders

were entirely research and university-focused.

There are no capacity or production buys in this

sector. We continue to pursue those R and D process

developments that will define future integrated

optical telecom wireless devices, and that's where

we think the recovery lies.

We continue to provide enabling process technology

for this device development. Telecom and

semiconductor device manufacturers are currently

exploring chip sets that talk it each other, and

this will be a sizeable growth opportunity in 2000

- late 2003 and 2004, but will be R and D based for

the next few quarters, remaining at the current

orders rates.

So in summary, across Veeco's diverse markets, we

see overall continued order growth in Q3, based on

continued double-digit expected growth in

semiconductor, double-digit expected growth in

scientific research and nanotechnology, flat to

slightly up data storage orders and flat telecom

orders.

Veeco currently estimates that the third quarter,

2002 sales will be in the range of 75 to 80

million, with pro forma earnings per share between

2 and 4 cents, using a 35% tax rate and exclude

amortization expense.

Veeco currently forecasts that third quarter, 2002

bookings will continue to grow and exceed $75

million, and we expect margins to continue to

improve reflecting growth in our two high margin

market areas of semiconductor and scientific

research.

Commenting on Q2 financial performance and product

mix, I would say that despite its 3% decline in

revenue, our margins increased in Q2, as

cost-cutting measures continued and as higher

metrology product content produced better

operating margins overall.

Current growth margins in metrology are

approximately 53%, and current growth margins in

process equipment improved slightly in the quarter

to about 37%.

We will continue to take steps to lower our

overall costs, reduce our break-even point, and

integrate product platforms to allow the benefit

of common hardware and software platforms to our

customers in both process equipment and metrology.

In 2003, we expect to see process equipment growth

coming from the next generation of thin film

sensor head deposition requirements, from

semiconductor advanced speaceship and

subwavelengths in deposition which requires IBD

and PVD and process development research in

wireless applications.

At this point, I'd like to introduce Jack Rein,

our CFO, to address Q2 financials, and then we

would be pleased to take your questions. Jack?

Thank you, Ed. For the three-months

ended June 30, 2002 sales were 77.3 million, a

decrease of 31%, versus the 2001 second quarter.

The decrease is attributable to the process

equipment products which increased a 50% decline

compared to the prior year's second quarter, while

metrology sales increased by 4%.

The decrease in process equipment sales resulted

from a the decline in sales from optical filter

deposition equipment to the telecommunications

industry as well as the decrease in sales to the

data storage industry.

Gross profit was 35.2 million for the quarter or

45.5% of sales, compared to 53.1 million or 47.4%

of sales for the 2001 second quarter. The decline

is attributable to decrease in sales volume and

process equipment. Sequentially, gross margins

improved 3.4% or 42.1% in the first quarter of

2002.

The sequential gross margin improvement resulted

from a greater proportion of metrology sales that

had a higher gross margin as well as improved

gross margins in processed equipment on lower

sales volume, resulting from the overhead

reductions that were implemented in the fourth

quarter of 2001 and the first quarter of 2002.

Operating expenses came in at 33 million or 42.6%

of sales, down 2.8 million from the second quarter

of 2001.

This reflects 5.9 million of spending cuts,

including a $1 million reduction in foreign

currency exchange losses, offset in part by the

impact of our acquisitions in 2001 of acquiring

the FTM expenses, whose costs could not be

reflected in the prior year's comparable quarter.

R and D expense totalled 13.9 million, representing a

decline of about 900,000 in the 2001 quarter, but

up 600,000 sequentially as a result of the

completion of several key atomic force microscope

new products.

SG and A came in at 19.3 million compared to 20.7

million in the second quarter of 2001. The

decrease is principally due to a decrease in

selling and commission expenses as a result of

decreased sales volume, offset partly by SG and A by

the FTM acquisition, which had no comparable

spending in 2001.

Restructuring costs of 1.1 million during the

second quarter of 2002 exclude severance expenses

related to cost reduction programs announced and

initiated in the fourth quarter of 2001.

While the actions were planned and initiated in

the fourth quarter of 2001, current accounting

guidelines required that associated charges be

recorded when the actions are actually complete.

Reduction in work force took place principally at

our process equipment group operations.

Amortization expense totalled 3.2 million in the

first quarter 2002, second quarter versus 900,000

in the 2001 quarter. The increase is due

principally to the intangible assets acquired in

the connection of the acquistion of Applied Epi

and FTM Microscopes.

Net interest expense net totalled 1.5 million, as

compared to net interest income of 400,000 in the

comparable 2010 quarter. The increase in interest

expense is a direct result of the issuance of our

subordinated convertible notes, which occur to be

separate in 2001 and January, 2002.

Earnings before interest taxes and amortization

and restructuring charges totalled 2.2 million

compared to 17.4 million in 2001.

Veeco's second quarter, 2002 net loss was 1.6

in process equipment products. Gross margins for

the six months were 43.8 percent of sales compared

to 47.1 in 2001.

Gross margin decline is primarily attributable to

the buying decrease in the process equipment

sales, in particular the optical filter deposition

products for the telecommunications industry. R and D

expense totalled 27.3 million, a decrease of 2.7

million from the 2001 six-month period.

SG and A was 38.4 million, down 3.5 million from 2001.

The decrease in SG and A is due to decreased selling

expense and response to the sales volume decrease.

Other expenses net decreased 1.9 - by 1.9 million

to $200,000 in income. This is due to the

reduction in foreign exchange currency losses

experienced in the first half of 2001.

Restructuring costs of 1.9 million for six months,

principally complied of severance losses

associated with a 7% work force reduction.

Amortization expenses totalled 6.9 million in the

first six months of 2002, compared with 2.3

million in 2001. The decrease is due primarily to

intangible assets acquired in connection with the

acquisition of Applied Epi and FTM Microscope.

Interest expense net totalled 3 million as

compared to net interest income of 1.2 million in

the comparable 2001 period.

The increase in interest expense results in the

issuance of subordinated notes we spoke of

earlier. Earnings before interest taxes

amortization and restructuring charge totalled 3.5

million compared to 38.4 million in 2001.

Veeco's six month 2002 net loss was 5.1 million or

18 cents per share compared to net income of 22.9

or 91 cents per diluted share in the 2001 six

month period.

Pro forma EPS for six months was a penny, using a

35% tax rate and excluding restructuring charges,

amortization discontinued operations. This

compares to $1.02 for the 2001 six months.

We currently are forecasting the third quarter '02

revenues in the range of 75 to 80 million with

forecasted pro forma earnings per share in the

range of 2 to 4 cents.

Cash equivalence totalled 221 million at the June

30th balance sheet. We closed on the sale of the

Ranger Conductor and Measurement business in May,

2002 and collected 3.7 million on the sale.

Accounts receivable were 73 million, the DSOs

coming in at 75 days. Inventory was 104 million

at June 30th with a 1.6 times turnover.

CAPEX was 4.2 million in the six months of 2002.

Depreciation expense came in at 7.2 million.

Balance sheet liquidity positioning was made quite

strong with 1 to 24 million in stockholder's

equity. At this point, we'll return to Ed for

additional comments and your questions.

Thank you, Jack. I would remind

all that we did announce a very exciting and

compelling merger opportunity Veeco FEI announced

the signing of a significant definitive merger

agreement. Veeco and FEI had submitted Hart Scott

Rudino notification filings to the Federal Trade

Comission and the Department of Justice and we

currently plan to file our preliminary joint proxy

statement with the SEC in August.

Each company will seek stockholder approval of the

merger at special meetings to be held in the

coming months, and we currently expect to close

the merge ner October. Veeco and FEI have

established a combined integration team which has

already begun focusing on merger synergies and

working to create an integrated, efficient, highly

profitable Veeco FEI. We believe that the Veeco

FEI merger represents a strategically compelling

opportunity for the stockholders of both companies

and will create an exciting new leadership

equipment supplier in both metrology and process

equipment.

Veeco FEI will have critical mass and growth

opportunities driven by our complementary

leadership technologies in 3D metrology for

semiconductor scientific research and data storage

markets.

In addition, the new company will possess a strong

sales and service channel to support our worldwide

customer base and a stronger, broader management

team. Vahe and I look forward a completion of

this transaction early in Q4 and feel this is a

very, very significant step in the growth of both

companies.

Operator, at this point, we'd be pleased to take 00:23:49 questions.

Thank you, gentlemen. Today's

question and answer session will be conducted

electronically. If you would like to ask a

question, please press the star key followed by

the digit one or your touch tone telephone. We'll

take as many questions as time permits and in the

order that you signal us. We'll pause for just a

moment to assemble the roster.

And our first question comes from Robert Maire of

Bear Stearns.

Could you give us a little insight as

to going forward, we're looking forward at orders

being up, given the recent state of announcement

of somewhat reduced CAPEX or concern about that,

maybe give us a breakdown as to where you see more

of the increase coming from or which sectors will

be more aggressive in moving up in the coming

quarters?

Yes, Robert. I think Q3 order

increases will be similar in size and composition

to Q2, in that, you know, these very low yields

that people are experiencing at .13 micron in

copper, I think, are forcing earlier adoption of

AFM, and so we'll see a continued growth in our

AFM metrology business associated with low yields,

and I think we'll see continued growth in nano

technology. I think data storage orders, while

they're at a stable level, you know, likely will

be unchanged in Q3, and I think telecom will be

unchanged in Q3.

So the growth will come from semiconductor,

advanced metrology and nanotechnology for a modest

order growth of something in excess of 75 million,

75 to 80 million in Q3.

In data storage, given the recent sale

of IBM's disk drive business and such, any

particular change in strategy there or change in

potential customer base given that sale or any

other, you know, what's your outlook on the data

storage industry over the near term and where do

you think they are on the technology?

Well, the aerial density growth

continues within the industry. We continue to see

interest in combinations of PVD, ten target, six

target PVD combined with IBD and I and B oxidation

throughout the industry. We delivered our first

five our six systems.

IBM and Hitachi have both traditionally been

strong Veeco customers. They are now themselves

trying to define the R and D solution of choice for

them for next generation heads. They

traditionally have always used a combination of

IBD and PVD and we're discussing new tools for

their next generation heads that will likely be a

combination of those technologies with, I think,

orders coming probably late Q3, early Q4.

Okay, and one other last question.

Given the merger with FEI, one of the things

that's always been talked about in metrology are

integrated metrology tools, integrating them with

process equipment tools and such. Are there any

conflicts of interest or other things that would

prevent you from getting on tools and what do you

see in terms of your ability to, you know, develop

that kind of a tool set that would be integral to

other front-end processed tools?

Yes, you know, we've watched over

the last couple of years the interest in

integrated metrology tools you described, and we

have quoted from time to time our own cluster

deposition etch and deposition tools with a

module, with a metrology module, but I would say

that activity is modest in comparison to the

growth we're seeing in standalone, inline

metrology fab tools.

Great, okay, thanks.

Next we'll hear from Brett Hodess of

Merrill Lynch.

Hi, this is Amir Disye (phonetic) in

for Brett. The first question is, regarding the

orders that you reported of 78 million, were there

any cancellations or adjustments in that order?

Is that a gross or a net number?

All of the numbers were gross

numbers. The cancellations for - the

cancellations and adjustments for the quarter were

about $4 million, so they're sort of in the noise

level, and in fact, none of them were in

semiconductor.

Okay, great, and what area were they

in?

They were in telecommunication

and iron sources.

Okay, the other question was,

regarding your outlook on orders, in your prepared

comments, you talked about the semi and the

research area being up double digits in order

growth in the other sector, such as

telecommunication and data storage being flat, but

your order outlook, the number you gave was I

think about, I think 75 million or so, a little

bit down from the 78 million. Is there a reason

for that conservative order in the outlook? Is it

just the industry environment or are you seeing

anything specifically with regard to the semiarea

that might allude to the slowdown basis on the

capital spending cuts?

No, it's just really

conservative. I say we'd be clearly above 75

million. I think orders will be up from the $78

million level, and I think the growth will come

within semiconductor and nanotechnology, I think

data storage will be flat to up a little bit.

Telecom will be flat.

I think, you know, one of the important comments

here, there's a lot of discretion about slowdown

in CAPEX in 300 millimeter, and I think, you know,

that's, we each have our own opinion as to what's

happening, and I think the problem is not so much,

you know, an uncertainty in macroeconomics or an

uncertainty in next level of demand.

I think more it's the 300 millimeter investments

that have been made are early in their yield

improvement, and I think people are not yet seeing

low-cost dye coming from the new 300 millimeter

fabs, and so that's good for metrology in that

they'll buy more metrology equipment while they

improve those yields, but it probably means a

delay in the next wave of CAPEX spending for 300

millimeter, but I think, you know, the 300

millimeter ultimate cost is so compelling that

more people will build fabs but, you know, with

some delay.

Okay, so I guess what you're saying is

you feel that you're somewhat immune to the macro

kind of effects on the slowdown just because of

the opticalist phase that you're in for the FM

products?

Immune is a tough word. I would

say we're a technology company. We don't sell a

lot of capacity equipment, and I think as a

technology company, our enabling metrology tools

and AFM even in this quarter went from 3 tools to

11 tools. They will be more adopted for AFM. I

think we'll continue to see significant growth in

metrology in semiconductor in Q3 and Q4, despite

the fact that overall in the industry, you may not

see large CAPEX improvements, but you'll see

technology buys.

There's a good point. Regarding the

adoption, are you seeing in the adoption phase

more customers adopting it? Can you quantify the

number of customers you're seeing adopting it and

in terms of the applications, are you seeing

applications adopting it or seeing more tools

being adopted for the R and D and production?

The 11 tools we sold, I think

there was only one multiple buy, and it was a

broader cross-section geographically than Q1.

So whereas in Q1 we saw a lot of buys coming from

APAC in Japan, in Q2 we saw more North American,

European and Japan buys, and they were having to

do with .13 micron deep etch CMT applications,

which all of which will continue, and many of

those customers will buy a second or third AFM to

help solve, to take more data to solve their yield

problems, and most importantly, this introduction

of our 3D AFM and semi gives us a whole new

market, and that's lithography applications, where

now we can look at right after the stepper, we can

look at photoresist sidewalls, photoresist

dimensions using AFM, and that's a very big

market. I would expect we'd see that growth on

top of etch and CMT and copper for .13 micron.

I think the future for AFM in the fab looks very

strong for the next year.

Okay, great, and last question, on the

wireless telecom area, of the 9 million in orders,

how much of that was optical and how much was

wireless and how much was equipment versus maybe

spares?

It's about half wireless. We're

in the noise levels now, it's about half wireless

and half optical and about probably 30 or 40% of

the total are spares and iron sources. So we're

down to sort of 3 or 4 systems a quarter coming

from iron tech and 3 or 4 systems a quarter coming

from applied epi, the molecular beam epitaxy.

I'll give you a little color there.

The molecular beam epitaxy is almost all research,

a lot of university research, frequently sponsored

by industrial companies for molecular beam

epitaxy. There's a future there, but no capacity

buyers shortterm.

For iron tech, we're selling our SPECTOR 1s at

rather low prices, and this quarter, we're

introducing SPETOR 2, which is the 50 gigahertz

thin film filter deposition solution. So it will

be interesting to see,whether - and there's a

prospect list with more traditional names on it,

so it will be interesting to see in Q3 and Q4

whether there's uptake in the 50 gigahertz area,

but I'm sor to fcalling it flat just to be

conservative.

So the drop off in orders in that 00:35:13 segment over Q1, was that unexpected or was there

some orders that were given last quarter that

maybe were just a lumpy time right now level?

It's the latter. In Q1, there

was a rather large multiple order from Taiwan,

China that didn't exist in Q2, so it was lumpy.

All right, thanks a lot, Ed.

Thank you.

Moving on to Glen Yeung of Salomon

Smith Barney.

Hi, Ed. Can you talk about the mix of

business expectations for Q3 between process

equipment and metrology and perhaps relate that to

what the gross margins will look like?

As you can see, in this

environment our process equipment business is, you

know, flat to down a little bit, and our metrology

business continues to grow. So last year we were,

while both businesses were quite healthy, we were

a third metrology and two-thirds process

equipment. In the first half, I think we were

sort of 50/50, Jack, 50% metrology and 50%

equipment, and I think metrology is going to grow

in the second half of the year, metrology will

probably continue to overtake process equipment in

being over 50% of our business at very healthy

gross margins.

So you know, part of our recovery we'll be blessed

by the fact that the metrology content will grow

in Q3 and Q4. I think equipment comes back more

in '03 so this will help recovery of margins

overall.

You quoted metrology gross margins in

the quarter of 53?

Yes, and 57% in equipment.

Where can the metrology gross margins

additional point on your metrology question. Not

only the gross margins 53, 54% now, but the new

tool that we demonstrated successfully at Semiwest

has a much higher ASP, something around 1.8

million, 1.9 million compared to our traditional,

1.3, 1.4, so the margins will will be even higher.

Going to your PVD question, we continue to see

investment in technology in data storage in their

next generation platters, 60 and 80 gigabyte

platters which will require GMR moving to TMR,

which takes advantage of ultrahigh vacuum PVD IBD

combinations. There's some consolidation

occurring within the industry as was mentioned

earlier in Hitachi and IBM,. I think Seagate is

gaining market share. I think TDK, ALPS, Fujitsu

and Sony are also investing in technology.

So I think we're going to see more technology buys

over the next two or three quarters and then some

capacity buys as data storage has a greater demand

for the newer heads.

And when you say capacity buys, that's

beneficial for the PVD business?

Yes, PVD and IBD combined.

Okay, and then lastly, if you could

just talk about - I guess visibility in the

nanosciences business is not an end-market that

I'm familiar with, so how that rolls out for you

and perhaps some words about the sales cycle, how

that business works for you I guess is my point.

Probably since all of us, you

know, are more semiconductor and data storage

knowledgeable in terms of our market knowledge

than we are nanotechnology or scientific research,

Veeco probably has to do a better job in finding

some market research studies that give, that

improve your modeling ability and as you know,

it's aI very broad market.

I mean, now all of these nanotechnology centers

are multi-disciplinary, so they're physicists,

biologists, chemists, material scientists, Double

E's working shoulder-to-shoulder using these

tools.

The buy cycle is relatively short. These are

often 100, 200, $300,000 ASP tools with a 90-day

bicycle. The number of transactions per quarter

are very high, a couple of hundred transactions

per quarter.

It's territory sales over a very broad array of

universities, and it seems very solid and

continues to grow. I mean, this quarter was a

high, a record high, and I think we'll continue to

see growth over the next couple of quarters that

will be, you know, at least high single digits,

more likely double digit.

Great, thanks.

And moving on to Graham Tenaka of

Tenaka Capital Management.

Nice quarter, considering. Just to

leverage off that last question of Glen's on

nanotech, when does it get large enough to get

reported or are you willing to give us sort of

revenue numbers on nanotech?

I think we're there. You know,

we've already asked our accounting people to dive

into our numbers and sort of break apart those

segments.

What we call scientific research, which is

probably about 40% nanotech, I'm guessing, Graham,

but we'll have numbers soon, it is the aggregate

of nanotech, life sciences, university and

industrial research, and nanotech, like life

sciences, are the higher growth elements and are

clearly double digit growth elements, and I think

our, you know, well over 40% of the total, but I

think in the next couple of quarters we'll break

that apart for you.

Great, I was just wondering if there

was anything going on in terms of pricing or if

you could describe industry conditions in

semiconductor?

For us, the higher gross margin

areas continue to be semiconductor, you know,

based on our metrology AFM sales having good gross

margins, and being in demand, and nanoscience and

research, where it's individual unit sales, there

aren't multiple buys, so the gross margins have

always been high there as well, compared to the

two areas that are still in recovery that have

lower margins, and that's data storage and

telecom, and I think data storage and telecom will

continue to have lower margins for awhile, until

fuller recovery in '03.

Okay. Addressing this nagging

question of the slowdown in semiconductors, are

you saying that while there may be a slowing in

the industry because of the higher yield in 300

millimeter that you see Veeco continue to grow

because of the higher proportion usage of

measurement tools?

Exactly. I think that, you know,

if one listened to all the papers presented at

Semi, I think most people were sort of shocked to

find out that .13 copper yields are as low as they

are, that they're 10 to 30%, and that we're very

early in the cycle, you know, people are trying to

implement unusual number of technology changes

simultaneously, copper, low K, high K, .13 micron,

300 millimeter, and so yields are disappointing on

300 millimeter critical steps, and I think those

have to be improved so people can see the expected

low cost dye coming from 300 millimeter before

there's an overall continued spending of 300

millimeter fabs.

And what time frame do you see before

people get that kind of response?

Well, you know, if you listen to

the process development people, I think they feel

they're a couple of quarters away from improved

yields, which would - arithemetic to lower cost

dye coming from 300 millimeter which would allow

people to belly-up to the investment for 300

millimeter. I think for the next two or three

quarters we'll all continue to see growth coming

from technology, metrology buys and then a greater

CAPEX in '03.

Based on recommitment to 300

millimeter?

Yeah, I mean, 300 millimeter, 00:44:27 when the yields are right, have a very compelling

cost structure for ICs compared to 200 millimeter,

but the yields have to be well above, you know, 30

or 40%. We somehow have to find yields that are

80, 90% on a 300 millimeter wafer, paint a fairly

compelling picture to make that next investment.

You think it's copper quarter before

they get to 1% level yields?

Before they get 60, 70, 80%, yes.

Great, thank you very much.

Next we'll hear from Mark Miller of

Hoefer.

Good morning. Just to start off with

the data storage sector, I'm wondering, do you see

TMR heads being cut in at 80 or after 80 gigabytes

per square inch?

At about that point. If you look

at platter size, generally they refer to that

product in platter size, so I think about 80

gigabyte platters, people start to introduce

advanced GMR or TMR, the next generation head, and

platter size beyond that is likely 100 to 120

gigabyte platters will require production of TMR

heads, and that's a sort of a year from now, a mid

'03 event.

You mentioned on the ten target tools

there was an eye and beam oxidation module. I was

wondering a few year ago the eye and beam

oxidation process was not competitive with

thermal. Have results improved in terms of

producing a good oxide layer or is this for

something else?

No, no, not only have the results

improved, but the oxide layer is now so thin that

you cannot see it thermally. You have to do it

with eye and beam oxidation because the oxide

layer is very, very thin and needs to be very

precisely controlled in uniformity and thickness.

share in the next six months and has very good

technology.

Now, Read-Rite, is there any financial

liabilities in case Read-Rite can't meet its

obligations to Veeco and its other suppliers?

No, we work very closely with all

of our suppliers including Read-Rite, so there are

no liabilities and we look forward to Read-Rite's

success over the next couple of quarters.

Final question, you mentioned Applied

Epi had a few tools. I'm wondering if you could

give us a little more information on how Applied

Epi did this quarter.

Applied Epi - hang on - as I

said, was down a little in orders from the first

quarter because of a large buy in Taiwan that

didn't repeat, and Applied Epi continues to sell

to a worldwide base of universities who are doing,

usually industry-sponsored work on molecular beam

epitaxy, continuing to advance laser bars and most

importantly, to provide integrated devices where a

common platform is being used to put three or four

components together on.

Do you have a sales figure for them

this quarter?

Six and-a-half million.

Did you hear that?

Yes. What about orders?

Orders, about five and-a-half

million.

Thank you.

Thank you, Mr. Miller. I would like

to remind today's telephone audience that if you

do have a question, it is star one on your touch

tone telephone. Next we'll hear from Greg Konezny

of Piper Jaffray.

Good morning, Ed. Regarding the AFM,

where do you think we are right now including the

11 orders that you got in the quarter in terms of

number of AFMs per fab?

Well, very low. We're still

really mostly zero to one.

A lot of these recent orders were from

customers that didn't have an AMF in the fab?

Right. These are new customers.

As I said, one of the orders was multiple buys.

So we continue to hear, you know, that when fully

invested, these people will need three to five

AFMs per fab and currently have zero to one per

fab.

So you can look at, you know, we could double our

AFM business in the next six quarters as people

more fully invest in metrology.

Okay, good, and regarding AFM

business, given the growth that you're seeing

there, are you seeing any new competition or any

change in the competitive landscape recently?

No. AFM, you know, I mean, we

sell alongside of CD Sends and other tools that we

don't manufacture but in the area of 3D metrology,

our product is unique. There are competitors,

Seiko, there are two or three small companies that

build an AFM, mostly for research. We sell them

CNE composition in a fab. We have probably a 70

or 80% market share.

We have a very strong intellectual property, and

this new tool that we've introduced at Semi really

brings together some of the intellectual property

that came to us from the IBM purchase a couple of

years ago of sidewall control and taking more data

points, and that opens up the entire area of

lithography metrology of what's called field

exposure matrix, people tuning their very

demanding lithography step at the photoresist

level, and that market is probably as large by

itself as the rest of the combined etch and CMP

market.

So is that included in the three to

five or would lithography be incremental to that?

Lithography would be incremental

to that, but we're just beginning that work.

The issue regarding thru-put on the FM

tools, have you changed your thru-put on those

tools much recently?

The 3D, the Dimension X

introduced at Semi has a thru-put of 15 wafers an

hour, so that's nearly doubled the existing AFM

thru-put and really now puts us in line to do a

much higher sampling rate in the fab on a

production basis.

Okay, all right, great. Thanks, Ed.

Next we'll hear from Peter Sakin of

Advent Capital.

I just wanted to know what was your

operating cash flow for the most recent quarter as

well as free cash flow, and also, you know,

looking at FEI versus you guys, you guys have done

a pretty good job on the cash flow and FEI has

been sort of negative operating cash flow, and

what are your plans once the deal closes as far as

cash flow?

I'll let Jack answer that.

We had positive cash flow of almost

almost $3 million at the cash flow level.

How much was that again?

Three million.

In free cash? And the CAPEX again was

4. 2?

That was six months. Sorry, I gave

you the quarter there. If you want to know what

the six month number is, hang on a second.

No, what's the quarter for operating

cash flow?

I just gave you that number, that

was the -

That was 39 million.

Right, and the CAPEX for the quarter

was 2.2. The number I gave earlier was the six

months.

Okay.

I think the combination of FEI

and Veeco, you know, having very high amount of

metrology, high gross margin metrology product

going forward and having modest CAPEX needs should

be very - should be cash positive as a

combination. Jack, you want to -

Yeah, I think one of the things that

we're going to continue to do is focus on, I think

we've done a good job, you talked about cash flow

being the name of the game, obviously there's

operating profit and receivables and working

capital. We've done a reasonably good job in a

tough environment on receivables, and our DSOs, I

think, are better than comps. Inventory is an

area we need to do better on. We've got programs

in the last six months to work on those and

certainly FEI as well, we will be looking at

inventories as a primary target to generate cash.

Okay, I just looked at the recent

quarters, and FEI is sizebally negative.

We're all focusing on cash as we go

forward, not only at Veeco, but I think the

industry as a whole is going to focus on that.

As the metrology becomes the

higher content of our total business,

traditionally metrology has a higher gross margin,

traditionally it's a more standard product that

you're selling in larger numbers, so the

receivable, the collection of the installation of

it is faster and the payments are faster, so I

think that should show up in our improved cash

flow going forward.

Okay, thank you.

It was a week ago Friday. I

don't have that date. The 19th.

Great, thanks a lot.

Next question from Dave Duley of

Wells Fargo.

That is Manny for David. Good

morning, Ed. On the new AFM tool, could you talk

about the adoption, is it going to be inline

immediately, and maybe could you also talk about

the opportunity per line on, you know, the full

blown fab?

I think we just explained that,

but let me repeat. You know, we had eleven orders

in the quarter compared to three in the prior

quarter. Only one of the eleven orders were

multiple buys, so we're still very early in the

process of bringing fabs to a potential of three

to five AFMs per fab, from a current base of sort

of zero to one. I think we could more than double

the business in the next six quarters, and clearly

because of the low yields that people are

experiencing in copper .13 micron, we're seeing

more adopters of inline metrology for those

applications.

And you don't expect any sort of like

cannibalization within, you know, end over AFM

tool?

No. That's a good question. The

old, if I may call it old, the existing AFM tool

will continue to be sold for etch. CMT

applications and the newer tool will be sold for

lithography, photoresist and photomask

applications, so they will not - it will be

additive. There will not be any cannibalization.

Great, and just a quick question, how

many head counts do have you at the end of the

quarter?

1350. 1350.

Okay, thank you.

Next is Christina Osmena of Needham

and Company.

I had a couple of questions. What

were your AFM revenues in the quarter? I didn't

hear if you did say that.

Hang on, Christina, let me get

the - AFM revenues in the quarter were 29

million.

Okay, and what is -

That's a combination, again, of

semiconductorror and research.

You know, the scientific and research

markets, you gave us kind of a good sense of the

growth rates of the nano and the life sciences

markets, but could you tell us what you expect the

growth rate to be of the, you know, university and

industrial segments?

I would say 5 to 8%. I mean, you

know, and that's because those are the traditional

growth rates of industrial research on a very

broad basis, but the growth rates in nano tech and

life sciences are very, you know, are high double

digit.

So probably in, on a blended basis,

could we kind of put that at maybe the low teens

or the high teens?

I think mid-teens is probably a

good model, which is good.

Also, when you first acquired Allied

Epi, you gave us guidance that it would be

additive by 8 cents for the year 2002. That was

before September 11th.

Yes.

So and then you also gave us some

guidance you expected sequential growth from that

point. Now, things have changed since then.

Could you kind of revisit what you expect applied

epi to do maybe this year and next, top line and

bottom line?

Go ahead, Jack.

I would say we're looking at

approximately a $35 million kind of revenue for

Epi this year with maybe a 10 to 12% operating

profit.

So profitable in a down-market,

you know, the larger growth that all are expecting

to come from things like gallium arsenide on

silicon and the convergence of semiconductor and

telecommunication devices I think are pushed off a

year.

Okay, and also, what was your deferred

revenues in the quarter?

The balance sheet shows, I think

it's -

The profit on the balance sheet?

Yes, 7 million - 6.8 million.

That's good. That's deferred profit

which you shared the deferred revenue in this?

I don't have the number off of

the top of my head, Christina.

Thanks a lot.

Moving on to JD Baggett of Founder

Funds.

Two quick ones. One, the share count

looking forward?

We're running just under 30 million

on a weighted average, and depending upon what the

stock market does, that impacts our impact, but

I'd expect that would be the level we'd be at

obviously until we close the merger.

You don't look for significant impact

of that?

Right.

And OPEX, it sounds like in your 01:00:17 current guidance, you're thinking about that being

flat in dollars for the September quarter?

Yes, that's true.

And could you also hold that kind of

expense control on the December quarter prior to

the transaction?

We would certainly be looking to do

that.

Thank you.

Operator, I think we'll take one

more question.

Kevin Vassily of Thomas Weisel

Partners.

Very quick question is all on FEI.

You've talked actually in this call a couple times

about expectations of the footprint for AFM inside

the fab environment. Do you have a ballpark as to

what FEI might add to that three to five per fab

bogey you guys are looking for?

I think the FEI potential is

quite similar to AFM potential and complimentary

to it, as people begin to understand that one tool

is a surface analysis tool, and the dual FIB SEM

FEI tool a buried layer tool and as new materials

are added and as smaller geometries become more

significant, buried layer metrology in the fab and

in failure analysis will continue to grow, as it

has recently at FEI.

So I think the marriage is very, very powerful in

giving our customers now a combined solution going

forward for surface and subsurface metrology, and

I think their potential, the FEI potential is

similar in size to the AFM potential, but they're

just earlier in the cycle of transitioning from

failure analysis applications to inline fabs, and

we could help with that.

That does conclude today's

teleconference. We do thank you for your 01:02:39 participation.