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 The company does not plan to update the information on this webcast once it has been archived.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.