Veeco Instruments Inc (VECO) 2002 Q4 法說會逐字稿

Good day, everyone.

Welcome to the Veeco fourth quarter 2002 results conference call.

Today's conference is being recorded.

For opening remarks and introductions, I would like to turn the call over to Ms. Deborah Wasser.

Please go ahead

Thank you.

Welcome to the conference call reviewing Veeco's fourth quarter and year-end December 31, 2002.

I'm Deborah 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 results at 8:00 a.m.

Eastern time this morning.

We also announced two separate press releases, 1.) new order received on our semiconductor X3 Dtool; 2.) PVD technology.

If you haven't seen these press releases, please visit the Veeco.com website or call (516) 677-0200 ext. 1403 to get a copy.

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

It could not be recorded or rebroadcast without Veeco's permission.

Your participation implies consent to our taping.

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

These factors are discussed in the business description and management discussion analysis section of the company's report on Form 10-K and annual report to shareholders.

This call is being web cast live on the Veeco.com website and will be available to for replay and will be archived for future reference.

The company does not plan to update the information on this web cast once it has been archived.

I would like to turn the call over to Ed.

Thank you.

Good morning.

We are reporting our fourth quarter and 2002 financial results.

Fourth quarter sales were $68.6m, above our $65m guidance, and were a 6% decline from Q3, and a 30% decline from Q4 of last year.

The fourth quarter orders were $71.3m, well above the 10% decline that we offered in our guidance, and up 3% from Q3 and up 6% from a year ago Q4 of '01.

Within that amount, metrology orders were $42m, up 15% from prior quarter, and a high for the last eight quarters.

Process equipment orders were $29.3m, a decrease of 4% from prior year.

Our Q4 book-to-bill was 1.04 to 1.

For the full year, Veeco sales were $298.9m, a decrease of 33%.

Bookings were $289.1m, a decrease of 9%.

The book-to-bill ratio for the year was .97 to 1.

Including a restructuring charge of $124m, Veeco reported a loss of $137.9m in 2002 compared to an income of $20.3m in 2001.

Our 2002 revenue by market sector was 40% scientific research, 32% data storage, 15% wireless and 13% semiconductor.

In Q4, we completed significant cost reduction actions previously announced, including reduce are our headcount by a little over 20%.

In fact, during the 2002 year, we went from 1500 employees to 1100 employees, about a 27% headcount reduction for the year.

We closed, or reduced, five facilities.

We reduced the annual spending by approximately $24m.

So to be profitable at the EBITDA line at Q1 of 2003 and restore profitability to our equipment business.

All of this assuming a Q'1 '03 revenue in the range of $60m to $65m.

As a result of these necessary cost reductions and restructuring actions, we have taken a fourth quarter charge of $124m, of which $119.5m does not require cash outlays.

The total charges are a combination of inventory write-down, severance, facilities relocation or elimination, merger related expenses, and asset impairment to goodwill related to the continued weakness in the telecommunication and wireless segment.

Jack will outline these changes in more detail in a few moments.

On a GAAP basis, including these charges, Veeco incurred an operating loss of $130.6m for the fourth quarter.

Excluding these charges, Veeco's fourth quarter 2002 earnings before interest, taxes, and amortization, was a loss of $3.4m, a loss before certain charges for the fourth quarter was $.11 per share loss compared to the guidance of a loss in the range of $.10 to $.15, and $.02 better than the street consensus of $.13 loss per share.

Veeco had a positive cash flow of approximately $6.6m in the fourth quarter of 2002.

Our sense is we have come through a very difficult year.

The worst appears to be behind us.

Our core markets now appear stable with recent new orders clearly above the $61m low we experienced in Q3 of 2001, and having improved our order rate by 3% in the fourth quarter.

But we continue to see uncertainty in the timing of a fuller end market recovery.

Q4 to bookings by market were, however, encouraging, reflecting sequential growth in semiconductor to $15.1m, up 44% from Q3 and a high for the last eight quarters.

Sequential growth in wireless was up 11% to $8.4m.

We had a decline in data storage, down 11% from the prior quarter to $17.8m and a relatively flat scientific research result down 4% at $30m for the fourth quarter in order.

In all, our $71.3m was up 3% sequentially and up 6% from prior year.

Our Q4 market breakdown of orders was scientific research, 42% of the total, data storage, 25% of the total, semiconductor, 21%, and wireless 12%.

By product metrology was $42m, up 8% sequentially, and process equipment, $29.3m, down 3% sequentially.

Veeco's customers are placing emphasis on purchases of must-have new technology, and our priority is to ensure that our new product development road maps are aligned in 2003 with our customer requirements.

To comment by business unit within Veeco, we are pleased with the 2002 performance of our metrology group, which remained profitable despite an 11% decline in revenue.

Metrology orders increased 6% in 2002, driven largely by increased use of our atomic force microscope products in both the scientific research sector and as critical semiconductor metrology tools for low semiconductor yields in 300 millimeter and .13-micron feature size applications.

So our AFM technology continues to be required for the CPM, [inaudible], etch applications despite a weak capital equipment funding environment.

In addition, our metrology group has an aggressive new AFM and SPM product launch campaign for scientific research and nanotechnology applications scheduled for 2003 to allow further growth in this sector.

Our process equipment group had a very difficult and unprofitable 2002, due to the severe downturn in data storage and telecommunication wireless capital spending.

Process equipment saw the majority of the cost reduction actions, and is now poised for a return to profitability in Q1 of '03, this quarter.

That, based on leaner, operating structure and new ion beam deposition, ion beam etch and physical vapor deposition product launches aligned to 120 gigabit per square inch technology advances in data storage.

In addition, our process equipment group recently announced a joint venture agreement with -- joint development agreement with International Sematech(ph) for a next generation EUV photomask technology program, which includes the purchase of a Veeco ion beam deposition tool for approximately $4m to be the first deposition delivered to Sematech North at the University of Albany new nanotechnology center.

Considering the continued economic uncertainty and weak Capex environment, we remain focus on overall cost reductions and delivering improved earnings in 2003.

We will continue to invest in our core leadership products to meet our customer's next generation product road maps.

We are optimistic about Veeco's positioning for a fuller recovery in our end markets in the future.

Veeco currently forecasts a first quarter 2003 will be in line with current street estimates.

That is the bookings will be approximately flat compared to the fourth quarter of 2002 in the range of $67m to $71m.

Veeco currently estimates the first quarter 2003 sales will be in the range of $60m to $65m, and then we'll lose between $.07 and $.09 per share on a GAAP basis and earning between $.00 and $.02 positive per share, including amortization of $3.2m and certain charges of approximately $1m in using a 35% tax rate.

So this quarter, March of '03, well have gone from a loss of $.11 in Q4 to a positive $.00 and $.02 per share at the EBITDA line using a 35% tax rate.

On slightly less revenue, a measure, I think, of the magnitude of the cost reduction actions that we took in Q4.

Jack will comment on the financials, and I'll return to address conditions in each of our core markets.

Jack

Thank you, Ed.

On our last conference call we outlined the significant cost reduction stats that Ed has noted resulted in $6m of quarterly savings and accumulative reduction in our worldwide workforce by 30%.

To give more insight, the $6m savings that had been achieved when compares our first quarter '03 plan to our third quarter '02 numbers, two-thirds of the savings is in the operating spending line, a third of the savings is at the cost of sales line.

These cost actions have reduced our break-even to approximately $60m on a EBITDA basis.

Most of these actions have taken place in our process equipment group in order to return this group to profitability.

As a result of these previously announced actions, we incurred restructuring charges of $23.2m directly related to these actions.

These charges are comprised of $15m of inventory write-down, $5.3m of fixed asset impairment and $2.9m of severance relocation and other costs.

The $15m inventory write-down was recorded in the process equipment group and is reflected in the fourth quarter cost of sales.

To assure profitability in this group in 2003, it was necessary to rationalize its product lines which requires the discontinue ways and modification of several products.

The effected product lines include IMB deposition to telecom, as well as certain slow-moving EBD products.

In addition to the climate in the telecom industry, the current general economic conditions have slowed technology spending have resulted in significant decline in overall capital spending, which has impacted these product lines.

As also noted in our last earnings call, we undertook the required review of goodwill in the fourth quarter of 2002 under the current accounting standard FSAS 142.

This requires that goodwill be reviewed for impairment at least annually.

We determined that due to the continued weakness in the telecommunications wireless industry and the uncertainty of the timing and speed of recovery, impairment indicators were present and $94.4m impairment of goodwill was recorded.

When impairment indicated the fair value of the unit must be re-determined.

We assess telecom group growth rate, forecast the revenues, profits, and related cash flows and determined that the goodwill of this group was significantly impaired.

Hence, the fourth quarter charge.

While it is believed it represents significant long-term opportunity, the current business environment and accounting standards has necessitated in this charge.

The merger and restructuring cost of $9.3m in fourth quarter 2002 includes the FEI merger related expenses.

Veeco incurred approximately $6.4m in deal costs related to the mutually terminated merger agreement with FEI.

These cost included legal, accounting, tax, banking, filing fees, and printing costs.

I will now discuss the standard business results for the quarter and full year.

For the three-month ended December 31, 2002, sales were $68.6m, represents a 30% decrease in the prior year.

The decrease is attributable to process equipment products which experience add 40% decline compared to the prior year's fourth quarter as well as decline in metrology sales, 14% from the prior year quarter.

The decrease in process equipment sales resulted in decline from sales from the data storage industry as well as a decrease in sales of optical filter deposition equipment to the telecommunications industry.

The decrease in metrology sales is primarily attributable to the decline in atomic force microscope sales in the semiconductor sector and in part, due to delay revenue of new products of approximately $1.8m.

It should be noted that metrology did have an increase in orders of 15% to $42m in the fourth quarter '02 versus the fourth quarter of '01.

Gross profit was $12.6m for the quarter or 18.3% of sales.

Compared to $26.9m or 27.6% of sales for the 2001 fourth quarter.

Excluding the fourth quarter inventory write-down on a non-GAAP basis, gross margin was 40.1% compared to 41.5% for the 2001 fourth quarter.

The decline in gross margin is attributable to a significance decrease in sales volume throughout the process equipment group as well as an unusually large SAB 101 revenue bifurcation and the related gross profit for tools resulting in a 2.6% gross margin impact for the process equipment group.

The result is the 26% equipment gross margin for the fourth quarter '02.

The decrease in gross margin is offset by a favorable mix of metrology products which had a 54% gross margin.

Clearly a focus in our cost reduction efforts was to reduce the overhead cost structure of the process equipment group which we accomplished in the fourth quarter.

As a result of these actions and improved product mix, we anticipate our equipment groups gross margins to improve by 10 to 12 margin points in 2003.

We anticipate overall gross margins should be in the mid 40% range in the first quarter of '03.

SG&A came in at $18.5m compared to $19.7m in the fourth quarter of '01.

The decrease was due to drop in selling and commission expense of $1.4m as a result of decreased sales volume.

Research and development expense totaled $12.7m, representing a decrease of $2.2m from the 2001 quarter.

The decline in R&D is related to spending cuts in all product areas with the exception of atomic force microscope products.

Amortization expense totaled $3.2m in the fourth quarter 2002 versus $6.1m in the fourth quarter 2001.

The decrease is due primarily to customer related intangible assets for acquisitions which had useful lives of less than one year and, thus, are fully amortized by the fourth quarter 2002.

Interest expense net is $1.7m compared to $900,000 comparable 2001 quarter.

The increase in interest expense is a result of the issuance of $220m of subordinate convertible notes which occurred in December 2001.

As provided in the third quarter earnings release, Veeco included a reconciliation of GAAP loss earnings to non-GAAP lost earnings.

The current earnings release Veeco included a table showing a reconciliation of GAAP earnings or loss to the lost earnings excluding certain charges.

EBITDA as presented in this reconciliation since management of the company evaluates and manages the performance of each of its business units based on this measure and, thus, believes this presentation provides useful information.

Veeco's fourth quarter 2002 EBITDA was a loss of $3.4m, compared to EBITDA of $5.7m in the fourth quarter of 2001.

Veeco's fourth quarter 2002 net loss was $116.5m, or $4.00 loss per share compared to a net loss of $14.4m or $.50 loss per share in 2001 fourth quarter.

Loss or earnings excluding certain charges per share in the fourth quarter was a loss of $.11 compared to $.11 earnings per diluted share in the fourth quarter of 2001.

Backlog at December 31, '02 was approximately $89m, which is net of approximately $4.9m of order cancellations primarily in the data storage market.

For the 12 month sales totaled $298.9m or 33% decrease compared to 2001 due primarily to the decrease of $130.5m sales of equipment products.

Gross margin, excluding the previously discussed inventory write-downs for the 12 months was 43.8% of sales compared to 45.1% in 2001, excluding a $13.5m inventory write-down.

The gross margin decline as related to the significant volume decrease as mentioned before in process equipment sales.

SG&A was $75.9m, down $6.5m from 2001 also due to decreased selling and commission expense response to the decreased sales volume as well as other cost reduction efforts.

R&D expense totaled $53.9m and decrease of $5.8m from 2001.

Amortization expense was $1.3m versus $9.5m in the comparable period.

The increase is due primarily to intangible assets in connection with the acquisition of PM microscopes and [inaudible] in July and September of 2001, respectively.

Other income expense net improved from $300,000 of income -- excuse me. $300,000 of income from $2.5m of expense due to the reduction of foreign currency exchange losses experienced in the first quarter of 2001.

Merger and restructuring costs of $11.2m include the $9.3m charges previously discussed as well as $2.8m of severance costs associated reduction of the workforce during the nine months ended September 30, 2002, offset by $800,000 of income related to a post retirement benefit plan in September.

Interest expense totaled $6m with [inaudible] of $600,000 in the comparable 2001 period.

The increase in interest expense results from the issuance of subordinated notes.

EBITDA, excluding certain charges, was $1.3m compared to $58m in 2001.

Veeco's 2002 net loss was $123.7m or $4.25 loss her share compared to net income of $10.3m or $.39 per diluted share in 2001.

Loss excluding certain charges per share for 2002 was $.10 per share compared with $1.44 per diluted share in 2001.

We are currently forecasting a first quarter '03 revenue in the range of $60m to $65m with forecast earnings $.00 to $.02 per share.

This excludes amortization expense and approximately $1m of severance and related charges from action that is were initiated in the fourth quarter '02 and utilized as a 35% tax rate.

With regard to the BS, cash equivalents total $214.3m at December 31.

We experienced positive cash flow of $6.7m during the fourth quarter of 2002.

We view this cash performance as note worthy in light of the reported GAAP loss.

This positive cash flow is attributable to operating cash flows offset by Capex and debt repayments.

While reported an aggregate fourth quarter charge of $124m, only $4.5m require current or future cash outlays.

Our primary source of cash was accounts receivable which decreased by $12.4m dollars.

DSO were 90 days which is up 2 days.

The decrease in DSO is due to a back end loading of shipments as well as general slowdown of customer payment practices and the significant shift from domestic to international.

Inventory declined to $86.3m at December '31, 02.

This drop represented a cash reduction of approximately $5.2m in the fourth quarter in addition to the $15m inventory write-down that was previously discussed.

The decline resulted in an increase in inventory turnover from what had been 1.4 times to 1.6 times.

Capex was $8.6m for the full year 2002.

Depreciation expense totaled $14.6m for the year.

A BS and cash position of $214m remains quite strong.

At this point we will return to Ed for some additional comments and your questions.

Thank you, Jack.

To review our major customer list and make some comments on markets before your questions, I would comment that our top five customers for 2002 were SeaGate(ph), IBM, Headway TBK, Alps and Fujisu.

Of the top 12, five were in data storage, five are in semiconductor and two in research.

No single customer accounts for more than 15% of our revenue.

SeaGate was about $39.5m and IBM, the second, was just short of $20m.

To review revenue by geographic region, North American sales for 2002 were 47% of our total, Europe, 17%, Asia Pacific, 18%, and Japan 18%.

It's note worthy that we had a 43% growth in the Asia Pacific region when compared to prior year.

To review our core markets, semiconductor Q4 orders, as I commented, were up 44% sequential and up 102% from prior year.

The result of a combination of metrology AFM buys in the quarter and process equipment, ion beam deposition purchases for advanced EUV photomask applications.

The current low semiconductor yields in .13 and 300 millimeter activity involving etch CPM and now lithography require our advanced AFM metrology tools.

In Q4 we received nine automated AFM orders, including two dimension X3D AFM tools for advanced total lithography applications.

This new tool increases our available market opportunity in photolithography.

We received our first Chinese semiconductor customer orders for two VX AFM tools from SMIC for about $1.5m.

As mentioned, Veeco process equipment announced the joint development agreement with international semiconductor for EUV photomask technology application that included the purchase of a $4m Veeco ion beam deposition tool, which will be the first system delivered to the University of Albany new nanotechnology center.

In the wireless segment, our Q4 orders were up 11% sequentially.

This sector appears to have bottomed.

Our Q4 orders were included.

A second MBE system for RFMD for high frequency ITs, and power amplifiers for use in cellular phones.

And continued activity from APAC(ph) namely Chinese research labs doing wireless research applications.

We expect Veeco's wireless telecom equipment revenues to be profitable in 2003.

Which include our MBE equipment in Veeco St. Paul for 35 compound semiconductor and ion source in optical coating business with manufacturing transferred from Ft. Collins to Veeco Plainview in the next two or three months.

In data storage, we see technology advances and hope for some modest growth in 2003.

Data storage aerial density continues to grow at 60% per year.

That's down a little bit from 100% in aerial density the last couple of years.

This requires advanced GMR and TMR head development, prompting technology equipment purchases of combined Veeco ion beam deposition, ion beach etch and PVD tools.

Veeco's fourth quarter orders of $18m included combinations of IBD, IBE, IBO, and ALD process equipment and metrology buys for smaller size, phento(ph) scale thin film magnetic heads.

Veeco announced a joint development agreement with two Japanese manufacturers for a new PVD development of advanced GMR and TMR thin film heads.

This is important for our PVD growth in '03 and '04.

Despite growth in total worldwide store data, declining data storage hard drive prices have caused industry revenue and Capex spend to decline in 2002 in the industry.

We do currently see enterprise and server market showing some signs of modest growth for 2003, and thin film head production is forecasted to grow 7% in 2003, and most manufacturers are on a path to continue introducing 80 gigabyte platters during the second half of 2003.

Micro drives for digital cameras, games, GPS navigation systems and consumer products gained volume.

We think Veeco's unique strength and broad line of technology across the process equipment and metrology within data storage and Veeco having the industry largest installed base with over 2,000 systems in the field will help you see some growth in data storage in '03.

As a research market, 2002 orders were $115m, up 19% from prior year.

Q4 orders were flat at $30m for the quarter.

The worldwide nanotech funding exceeded $2b in 2002, up considerably from $100m nanotech funding of a few years ago in 1999.

There are now hundreds of multi-disciplinary nanotech centers in North America, Japan, Europe, and China.

These are combinations of government, academic, and industry researchers with some early venture capital now appearing.

Precedent Bush's nanotechnology initiative will fund $780m in the U.S. nanotech research grants coming from numerous federal agencies.

Nanotech centers pursuing research in biology and life sciences, along with material science, pharmaceutical and information technology all require enabling atomic and molecular imaging tools and Veeco's high resolution atomic force microscopes and new scanning probe microscopes have become the research standard for atomic imaging, molecular measurements and now nanotechnology manipulation.

This research market has been far less volatile than semiconductor data storage of telecom and these state of the art Veeco research products have high gross margins.

This remains an attractive growth area looking forward.

Scientific research now represents 40% of Veeco's revenue.

Our Q4 orders included 110 Veeco research AFMs reflecting the breath of this market.

The research AFMs are priced between $100,000 and $300,000 each.

We have a dedicated business unit within Veeco's metrology group focused on new product AFM and SPM launches scheduled for 2003.

Within our scientific research market the segment includes about 60% of material science, 20% life science, and 20% nanotechnology.

That's all within the scientific research Veeco market segment, and within the segment life sciences grew over 100% last year.

Nanotechnology grew 200% last year, and material science declined about 20% in 2002.

This is a valuable sector for us for this year and the future.

Operator at this point we would be pleased to take questions.

Thank you, sir.

Today's question-and-answer session will be conducted electronically.

If you would like to signal for a question, you may do so by pressing the star key, followed by the digit one on your touchtone phone.

If you are using a speaker phone, please make sure your mute function is turned off to allow your signal to reach our equipment.

Please press star 1 at this time.

Our first question comes from Brett Hodess at Merrill Lynch.

Hi, Ed.

A couple questions.

First, on the data storage side, you talked about some of the drivers there and you thought you would see some growth this year.

Are you actually starting to see visibility for orders coming in for production quantities of the process tools or metrology tools on that side, or do you think that's something that's going to happen toward the latter part of the year?

Brett, we have visibility in Q1 to -- additional technology buys for IBD, IBE and two PVD orders from Japan and some metrology buys.

I think we will see an up tick -- slight up tick in data storage order activity in Q1 and Q2 and, hopefully, some capacity buys as 80 gigabyte platters reach their way into manufacturing in Q3 and Q4.

Probably we'll start with pretty low yields.

So there might be some capacity required to offset disappointing yields.

The second question is the same kind of question on the semi-side.

You had a very good quarter in year and pick-up in the semi-product lines.

As we see some of the 90-meter being done, do you know the AFM on the semi-side and for photomask will continue to see growth or do we get a pause in the first quarter before we get back to growth there?

The fourth quarter up 44% was unusually strong having the combination of a high priced IBD tool and 9 AFM tools.

I think what we will see in Q1 are more AFM tools, another nine or ten AFM tools by early adopters and yield solving tasks.

So, you know, sort of a flat semiconductor activity in Q1 and Q2 and, hopefully, some pickup in Q3 and Q4.

A final question.

With the reduced cost structure you have at this stage of the game and a break-even around $60m, which is, you know, a break-even level that's actually lower than your relieve news have hit this cycle.

You're pretty much set at this stage of the game, it seems like, to move forward without too many more restructuring charges assuming the orders stay in the ballpark you're talking about.

Is that a fair assumption?

That's true.

I'll let Jack comment and come back.

Brett, we are -- because it is a pay as we go on severance, we have some detail on severance.

We have about $1m charge in the first quarter and probably through the year another $.5m.

That should be the extent of it.

So we see no major restructuring charges.

We would like to reduce the headcount modestly as we go through the year.

You are correct.

Our recent order rates, $71m, $72m have been well above the break-even of the $60m.

We'll start to see revenue improvement quarter upon quarter.

The hope is at the EBITDA line to be profitable throughout Veeco and be profitable in each Veeco businesses in the Q1, Q2 time frame.

Very good.

Thank you.

We'll go to Glen Yeung of Salomon Smith Barney.

To be perfectly clear.

When you talk about the cost we're looking at for the first quarter and you talk about two-thirds in op ex-, are we talking a full $6m difference from where we were in the fourth quarter?

Yes.

That was the third quarter comparison.

When we look -- that was what we saw in the fourth quarter and we should be on the run rate the first quarter?

Right.

In terms of the ten target PVD tool, recognizing you have an announcement of that going forward, can you tell me what that represents of your process equipment orders?

I don't know whether we break down.

PVD, this year we're -- I'll give you a rule of thumb.

In this year where Plainview will probably be about $80m to $90m, it's pretty evenly distributed among PVD, IBD and IBE.

Fair enough.

You gave sort of an order outlook for the data storage being slightly up, semi is looking flat.

It would imply that both research and telecom is expected to be down.

Given research is flat, is it your expectation that we'll see a larger percent decline in the telecom business in the March quarter?

No.

I think the telecom business will be start of the flat to Q4.

The Q4 order rate will be repeated, I think, in Q1.

Research tends to have a slow Q1.

It is a seasonal impact of budgeting.

Glen Yeung Right.

Okay.

Fair enough.

That's a normal seasonal pattern.

Lastly, Jack, on the deferred revenue line.

You suggested you had some deferred revenues in the quarter.

Can you give us a sense where the total balance of deferred revenues sits today?

Let's see.

I think it's probably in the $8m to $10m range.

Sorry. $7m.

Are you running at the $2m a quarter kind of run rate for a deferred revenue?

Yeah.

I mean, you notice that our orders have been higher than our revenue and our revenue projections in these recent quarters.

Right.

.

Really because of the amount of new product that's coming out which has SAB101 deferral attached to it. [inaudible] The good news is there's a very heavy flow of new products, both in equipment and metrology, but we'll see a few quarters are deferred revenue as it is introduced into the market.

Great.

Thank you.

Next is Jack Mellen of RBC Capital Markets.

Sorry.

Could I get the cancellation and adjustments for the quarter?

4.9m

Can you go through the cash flow from ops, depreciation and amortization and cap ex again?

For the year or quarter?

For the quarter.

The cash flow from operations was $11.4m.

Capex is $2.4m.

Depreciation and amortization totaled $6.8m.

Great.

Thanks.

Our next question comes from Gregory P. Konezny from Piper Jaffray.

Hi.

Thank you.

A couple questions.

First is for the break-even roughly for Q1, I don't know if you talked about this on the call.

For process equipment versus metrology in terms of profitability, is metrology going to be profitable and process equipment still losing money, or what's the submit look like there?

No.

What we said was that we -- the cost reductions we took in Q4, the majority of them were in the process equipment group, and so the guidance was we wanted the process equipment group to be profitable in the first quarter.

The metrology group has been, you know, quite profitable throughout the cycle and will continue to be profitable in Q1, but the equipment group, which has been losing $3m or $4m or $5m per quarter will be profitable in the first quarter.

Okay.

Good.

And on the AFM business for semiconductor, where are we now with customers in terms of adoption per fab?

Are you seeing customers up to 3, 4, 5 AFMs per fab?

If so, how many?

A little more color on the adoption there.

There are probably four or five customers who have multiple AFMs, like, two, three, four, per fab.

We have broadened the market considerably by having this Dimension X3D which is a photolithography so we could look at resist as well as mask.

That probably doubles our total market and gets us to the point where, at some point in life, there could be seven AFMs per fab going forward.

Of the 30 or 40 major wafer fab sites in the world going forward, only three or four of them have multiple AFMs.

There's still a pretty good play from early adopters using multiple AFMs in the field.

We have a total of probably over 100 AFMs in fabs, but many of them are sprinkled one or two per fab.

What's the ASP of the X3D?

Short of $2m, about $1.8m.

Last question, on the research side, you mentioned that the material science for AFM actually showed a decline in '02.

Anything to read into that in terms of weakness of that sector continuing, or is it a timing issue or any commentary there?

I didn't say it was AFM that declined.

AFMs hasn't declined almost anywhere.

We sell optical metrology as well as AFM.

The material sector includes industry.

So you have some basic industry research activity that slowed down last year.

Okay.

All right.

Thanks a lot.

We'll go next to Mark S. Miller of Hoefer & Arnett.

Hi, Ed.

Had I a couple questions about competitors penetrating certain markets.

First is Anulva(ph).

Have you seeing multi customer penetration of Anulva in data storage.

We have commented on previous calls there was no competition to Veeco in PVD.

Anulva, last year, announced they took orders from two or three sites and caused us to, really, lose share in PVD during the second and third quarter of 2002.

We're happy to report that we've improved the magnetic properties of our film, probably tripled the delta r over r were getting now compared to six months ago.

In recent buys, like the two Japanese buys, we are on a par with or exceeding Anulva performance.

We expect to take market share back with our new process development and a new PVD tool that will come out of this development activity that we'll introduce probably midyear of '03.

Do you know if the Anulva tools were aimed at 80 or 120 type applications?

I think a little of both.

Some people are doing research at 120.

Some people are trying to introduce platters at 80 gigabyte.

The other thing, Hitachi came out with a wide scan AFM.

Are you seeing competition there?

Is it staring to heat up?

No.

Hitachi has traditionally sold that in Japan.

We have seen some competitive effort in Japan.

We never have seen competitive activity in the United States.

It doesn't have the features that our AFM, that are Veeco's AFM have.

It is a more limited AFM in terms of its ability to do both contact and non-contact and doesn't have all of the benefits the Veeco AFM has.

We don't see it competing heavily in North America.

Final question.

You mentioned, I thought you said, that sales to NANO customers were 20% of science research sales.

That puts last quarter sales for nanotechnology around $6m.

Is that correct?

Yes.

It has a very high growth ahead of it.

Thank you.

The other comment I should make in your reference to Anulva question, Anulva only competes with Veeco in PVD.

Remember, Veeco has a combination of Ion Beam Deposition [inaudible] which we think it is very important for TMR and perpendicular recording heads going forward.

That's part of the reason we're being selected compared to Anulva by some of the leading head manufacturers.

We did lose share.

We think we are regaining it.

Our next question calms from Stuart Muter from Adams Harkness and Hill.

Good morning.

A couple questions.

First, in terms of telecom wireless, Ed, what are you hearing from your customers?

Is this second half recovery in that market, or is it more like next year?

I think it's more like next year.

Sometimes we've been saying real recovery in wireless is an '04,-'05 event.

We are seeing stability.

We are seeing people buying MBE for cell phone applications where they're making 35 special semiconductor, power amplifier or RFICs.

The Q4 rate, I would expect, would continue through the next two or three quarters, up a little bit from Q3 and sort of stable but fuller recovery really being an '04-'05 event when one can see more impact from the next generation of cell phones.

Okay.

One more question.

If one assumes that the June quarter is flat in terms of revenues relative to March, would the bottom line improve modestly?

We've not given any guidance beyond March.

I'm just saying based on that assumption.

If it were flat, the $6m savings per quarter is pretty linear during the year.

Okay.

Thank you.

We'll now take a question from Mark Fitzgerald from Banc of America Securities.

Hi, Jack.

My question is, can you explain a little bit of the gross margin again?

Are you seeing a lot of the ASB price pressure or is this coming from metrology?

I'm trying to understand.

It looks like metrology was cyclical -- significantly higher than process equipment.

Repeat that last part again.

Metrology was --

Metrology of sales was higher than equipment so just looking sequentially, what's the main impact there?

I thought metrology gross margin tends to be much higher.

I'm trying to understand the sequential change, the significant drop in gross margins.

Your statement is correct that metrology has a higher gross margin than equipment.

That's very true.

In the fourth quarter, where the total revenue was $68.6m, metrology was $34.2m, down from $42m in the prior quarter.

You had a revenue fall-off of metrology in the fourth quarter and a 4% decline in gross margin associated with the revenue decline.

Okay.

All right.

I was looking at orders.

Sorry.

Next is Christina Osmena of Needham & Company.

Hi, Ed.

If you could go back to the semiconductor AFM market.

Could you tell us about the competing technologies you're seeing out there.

Such as the AFM.

The AFM, Christina, pretty much remains in a niche.

For a long time we look that there might be competition from CD SIMMS or from the new optical scattering techniques.

Neither of them really covered this niche of side wall control, deep etch high aspect ratio that you can do within AFM.

You can use an AFM tip on real dye as opposed to the optical techniques you are looking at some test patterns.

From those test patterns you're trying to imagine what the real dye are looking like.

Where as, with AFM, you can go to real dye.

It is a niche product that really doesn't have a competitive technique other than breaking wafers and cross sectioning them.

Okay.

Would it be safe to say AFMs are $30m in the quarter and optical was $4.2m of revenue in the quarter?

What was the revenue breakout in metrology.

Of the $68.6m, you're not far off.

The AFMs were about $27m, and optical was about $7.4m.

And, I'm sorry if I missed this earlier.

I thought I might have heard you say that nanotechnology research was about $6m in the quarter.

Is that correct?

Let me go back to -- a question you've asked in a number of recent calls.

That is for us to break down the research market, the scientific research market into pieces, we've addressed that.

Let me go through that again.

What I was saying was, I went back, Christina, and I examined the $115m scientific research market that Veeco -- that's part of our sales.

I broke it in three pieces. 60% material science, 20% life science and 20% nanotechnology.

Yes, about $6m per quarter in nanotechnology or $23m, $24m for the year.

But that sector grew by 200% in '02 versus '01.

Sorry about that.

Thank you, Ed.

Thank you.

Now we'll go to David A. Duley of Wells Fargo Securities LLC.

This is (inaudible) for Dave.

I have a question.

On the AFM you have nine orders.

Do you have any orders from IC manufacturers for dimension X3D?

Two.

Two.

That's for only two applications, right?

Right.

We introduced that product in the July, August time frame.

It's been running two or three orders per quarter sense the introduction.

Okay.

And do you still see that -- in comparison to PX, AFM, how much does your customer need comparing Dimension X3D?

Per fab.

Well, if we model -- we said earlier that in three or four or five sites we've gotten up to four or five AFMs per fab, but, for the most part, we're one or two in the majority of the fabs.

We have -- some customers have helped us model a fully populated fab with AFMs and come to the conclusion they could use seven AFMs in the fab.

Of those seven, two are in photolithography.

On the telecom wireless business, how much is the optical?

The -- very little.

The optical is down to one or two used specter systems per quarter, which are about $1m and, probably, $3m or $4m of ion sources and power supplies.

So that business is now about, in total, $20m business with all of the manufacturing being transferred to Plainview, New York, and Ft. Collins remaining as a technology center for future ion source development.

And the manufacturing in Plainview, is it now they're kind of like profitable?

Not kind of like profitable, but profitable.

So, you know, a very big impact of all the restructuring we've done is to have both our telecom optical $20m business and our St. Paul maybe $30m business both profitable in '03.

Thank you.

Our next question comes from Gerald S. Fleming of Fahnestock & Company.

Yes.

Good morning.

Several questions.

First of all, I'd like to try to reconcile your guidance on equipment and metrology and the -- in the first quarter versus the total numbers.

You said your goal is to have equipment profitable in the first quarter, yet you said metrology has been very profitable and, yet, your guidance for the first quarter is, essentially, break-even on an EBITDA basis.

What am I missing?

Well, when you compare to fourth quarter -- remember, you can't add that statement to the $6m savings on top of it.

In the fourth quarter we had a loss at the EBITDA line of $3.4m on nearly $69m of revenue, Gerry.

What we're saying is we're improving our spending by $6m.

Gerald S. Fleming Yeah.

I'm not talking about the delta versus the fourth quarter.

I'm talking about your absolute guidance on the first quarter.

I mean, is metrology going to be around break-even as well?

No.

There's also unabsorbed corporate cost that is have to be added in, including interest expense, Gerry.

Okay.

Because I thought you were talking about an EBITDA basis which I thought took care of the interest.

Well, no.

In the earnings per share that we calculate, we include interest expense.

We don't include amortization.

Okay.

Gotcha.

The other question is, what are your total capitalized items these days?

I saw the goodwill dropped dramatically because of the write-off?

That's about $30m.

There is are other amortizable intangibles of $45m.

What happens to that $3m amortization figure after the first quarter?

It stays pretty flat to 2003.

Okay.

Thank you very much.

You're welcome.

We'll now go to Robert G. Maire of Bear, Stearns & Company.

Hi.

Two quick questions.

When you take the $4.9m in terms of cancellation for the fourth quarter, Ed, does that mean your net bookings were close to $66m?

I just want to understand, or is it 71.3?

I'm still not sure.

The new bookings are $71m.

No.

I'm saying, for the fourth quarter, were the net bookings --

Bob, you're right.

If you want to net out the cancellations.

Not in the same time period.

Okay.

The second question is, when you look at your orders, I'm just curious.

A lot of the guys in other businesses -- I mean, in the capital equipment businesses -- again, you might have said this on the call.

I was in and out.

Did a lot of business with the Dram businesses in the fourth quarter.

Were a lot of your semiconductor businesses with Dram guys or more spread out with foundry, et cetera, or was it more Dram?

It is spread out.

Our AFM is broadly used by a combination of foundry and device makers.

The orders you got were more spread out, they weren't Dram centric, right?

They were spread out.

Last question.

I read the first quarter guidance.

If you had to look for the year, would you suggest your top line -- I'm not talking about profits.

Your top line would be up over this year, or would you say flat or you don't want to go that far?

I'll give you an out, if you want it?

The industry research analysts has semiconductor equipment somewhere between down a few percent and up 5% for the year.

Does that feel right?

I think we feel we're in that window.

Okay.

Thanks for your help, Ed.

That is star one for questions.

We'll go next to Matt Petkun of DA Davidson and Company.

Yes.

Hello.

With 40% of sales coming from research, Ed, could you give us more of a sense of what your expectations are year-over-year for growth in that business?

You had mentioned that -- I think it was roughly $780m in federal spending on nanotechnology research for 2003.

Do you have that number for 2002?

We can get it.

It was a little less.

What bush did.

It was in the Times yesterday, New York Times yesterday, commenting that Bush has protected his nanotechnology initiative in today's budget.

Most nanotechnologists are taking delighted that state federal budgets and federal budgets, nanotechnology is receiving the funding it got the prior year.

The research market to your other question, which increased some 15% for us in the '02 year -- I'm sorry. 19% for us in the '02 year.

I would expect also maybe not at that same level, but the double digit growth opportunity for us in '03.

Okay.

Then turning to a market that's not exactly running at full steam but may be some day.

What are you seeing in terms of trends in gallium arsenide on silicon?

I know Motorola closed their thought beam unit which was consuming some wafers from IQE who has done some restructuring of their own.

What are you seeing in that market?

What are your hopes for your MBE, systems?

We are seeing more gallium arsenide on gallium arsenide.

You are correctly stating the gallium arsenide on silicon on Motorola has been forced back into the laboratory, isn't thought to be a production technique for '03 or '04.

I think the growth for us in market beam involving gallium arsenide will be in cellular phones needing more powerful amplifiers and ICs as next generation cell phones are introduced.

It will be traditional, so to speak, traditional gallium arsenide rather than gallium arsenide on silicon.

Okay.

Thanks.

We have a follow up from Mark Fitzgerald.

Hi, Jack.

Just a quick question.

On intangibles, would you give us the breakdown for fourth quarter, please.

Thanks.

On the amortization of intangibles?

Yes.

Okay.

Intangibles including goodwill.

Goodwill is not amortized.

To give you the actual amortization expense, I can do that.

It is $3.2m in the fourth quarter.

What about the intangibles in the budget?

We answered that question before.

There's $30m of goodwill and about $45m of other amortizable intangibles.

Sorry.

I missed that.

Operator, we'll take one or me.

Actually, sir, we have no further questions.

Perfect timing.

Thank you.

Thank you all.

We look forward to speaking to you again reporting the first quarter.

Thank you.

Once again, that does conclude today's conference.

You may disconnect at this time.