Veeco Instruments Inc (VECO) 2003 Q1 法說會逐字稿

Welcome to the Veeco first quarter 2003 earnings conference call.

Today's conference is being recorded.

For remarks and introductions, I would like to turn the call over to the Vice President of Investor Relations, Ms. Deborah Wasser.

Please go ahead, ma'am.

Thank you and welcome to our conference call reviewing Veeco's results for the first quarter ended March 31st, 2003.

Joining me for today's call are Ed Braun, our Chairman and CEO; and Jack Rein, our Chief Financial Officer.

Veeco announced their first quarter 2003 results at 7:00 a.m. eastern time this morning.

If you have not yet seen the press release, please visit the Veeco website or call 516-677-0200 extension 1403 to get a copy.

Please also visit our website in the next day or so to view an updated investor presentation which reviews Q1 results, current business environment and trends in our market.

Veeco will be attending several [indiscernible] investor conferences in New York and San Francisco in the next week.

So please visit our website to see the calendar of upcoming events.

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

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

Your participation implies consent to our taping.

To the extent that this call discusses expectations about market conditions, market acceptance and future sales of the company's products, future earnings, expectations, and 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 factor are discussed in the business description and management's discussion and analysis sections of the company's report on Form 10K and Annual Report to shareholders.

This call is being webcast live 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The company does not plan to update the information on this webcast once it has been archived.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 would now like to turn the all over to Ed.

Thank you, Deb.

Good morning all and welcome to our first quarter 2003 conference call.

In Q1, our sales were $65.8 million above our 60 to $65 million guidance, but down 18% year over year and down 4% sequentially to the last quarter of '02.

Bookings were $72 .7 million, again, above our 66 to $71 million dollars guidance and up 4% year over year and up 2% quarter over quarter.

Book bill increased to 1.11 to 1.

GAAP EPS was a loss of 6 cents per share compared to a loss of 12 cents per share one year ago.

EPS excluding certain charges which were primarily amortization of required assets were 3 cents per share above our 0 to 2 cents guidance.

So despite worldwide economic uncertainty, Veeco's higher order trend continued, indicating both improved stability in our serve market and a continued demand for our new technology products.

We are pleased that Veeco's bookings, revenue and earnings were all above our guidance.

We have met our plan to be profitable in both process equipment and metrology on an EBITDA basis in the first quarter of 2003, as a result of our significant cost reduction actions and we continue to expect to achieve GAAP profitability by year's end.

Implementation of our previously announced cost reduction efforts greatly improved our profitability in the first quarter.

EBITDA increased $6.4 million sequentially despite reduced revenue as a result of both significantly improved gross margins and reduced operating spending.

Gross margins improved to 47.4% in the first quarter of 2003 from 40.1% in the fourth quarter of 2002.

Gross margins improved in both process equipment, and metrology.

Operating expenses declined $2.1 million sequentially in the quarter.

Gross margins were up 7.3% sequentially and 5.3% year over year.

Again, despite revenue being down.

Evidence that our combined head reduction -- head count reductions and plant consolidations are, indeed, on track and our planned previously announced $24 million annual cost reduction is on track.

Equally important, Veeco increased bookings to $72.7 million up 4% year over year indicating both a stabilization of our served markets validation that our diversification strategy, and that is to have a broader market focus and a broader product mix, and therefore a broader customer base than most semiconductor equipment companies is again a positive, demonstrating that our mix of markets often counteract individual market volatility and typicality.

That positive influence of market mix is evident in our Q1 orders where data storage orders were $29.7 million, up 22% year over year and up 67% sequentially.

This very strong data storage order result is a 7-quarter high and includes multiple tool orders from three major data storage accounts.

Evident that the industry is proceeding with the introduction of higher density 80 gigabyte platters which are requiring both Veeco's new process equipment and metrology tools.

In addition, we are seeing initial interest in development of the next generation, 120 gigabyte media for introduction in 2004.

Semi-conductor orders were up $11.8 million up 26% year over year, down 22% sequentially.

Up year over year as a result of continued atomic force microscope adoption associated with .13 micron feature size, deep edge and CMP applications.

We are seeing higher fab utilization rates and unfortunately for the industry, lower yields at .13 micron which continue to drive AFM technology buys from inline, infab, AFM users.

In Q1 we received orders for seven automated AFMs including another new dimension X3D our new product for advanced photolithography applications.

We completed our first X3D AFM acceptance at Sematech in the quarter and installations are proceedings at four major semiconductor accounts.

Semi tool orders were down sequentially due to the lack of an IBM deposition tool for an advanced photomask in this quarter.

This a new emerging product at about 3 to $4 million, expected to reach 3 to five systems per year but not necessarily in every quarter.

Wireless orders were $10.5 million, down 31% year over year but up sequentially.

Wireless telecom appears to have been bottomed.

Growing again on the basis of high frequency wireless devices, mobile cell phones and solid state back lighting device applications.

Our scientific research orders were $20 .7 million, down 3% year over year and down 31% quarter over quarter, related to the expected seasonality in government budget cycles but reflect the continued use of our research AFM product as the industry standard.

We opened a second China office in Shanghai in March to serve the growing opportunity in China.

Q1 orders by market were data storage, 41%, semiconductor wireless combined were 30%, scientific research 29%.

I think a useable long term Veeco market diversification model is 1/3 data storage 1/3 combined semiconductor wireless and 1/3 scientific research.

Having the continued benefit often offsetting each other's individual market volatility.

In addition to our diverse market mix and our diverse product mix contributing to Q1 profitability, our higher margin metrology sales increased to 55% of our total revenue while equipment was 45% of sales.

It is likely that higher margin metrology sales will remain above 50% of our mix throughout the year.

It is also significant that process equipment has returned to profitability at the EBITDA line with a significant improvement in gross margin.

You will recall that a majority of our cost reduction actions were taken in the equipment group.

As a result, our process equipment group achieved a 12-point improvement in gross margin in Q1 to a 39% gross margin.

We will make further improvements in gross margin in Q2 and Q3 in this group.

So our Q1 profitability improvement was company wide across both equipment and metrology businesses.

The last leg of our diversification strategy in addition to market mix and product mix is the benefit of geographic mix so as to optimize worldwide market penetration.

In Q1, we achieved revenue growth in Japan, A-Pac and in Europe.

Q1, geographic revenue mix was North America 38%, Japan 24%, Asia Pacific 20%, and Europe 18% with growth in all of the international markets, both year over year and quarter over quarter reflecting very strong international presence.

I'll pause here while Jack reviews Q1 financials.

For the three months ended March 31, 2003, sales were $65.8 million representing an 18% decrease from the first quarter 2002.

The decrease was attributable to the process equipment products which experienced a 34% decline due to lower sales in the data storage industry and optical filter deposition equipment to the telecom industry.

Revenues declined 4% sequentially from the fourth quarter 2002, also due to lower data storage sales.

First quarter 2003 orders improved to $72 .7 million up 4% from the first quarter of 2002 and 2% sequentially from the fourth quarter of 2002.

It should be noted that had while data storage sales declined during the quarter, orders for data storage increased 22% compared to the prior year quarter and 67% sequentially from the fourth quarter of '02.

Gross profit was $31 .2 million for the quarter or 47.4% of sales compared to $33.7 million of 42.1% of sales in the first quarter of 2002.

The margin improvement was mostly in the product equipment group and as a result of $1.8 million lower cost structure in the current year quarter.

Compared to the fourth quarter of 2002, margins have improved from 40.1% of sales, exclusive of the fourth quarter of '02 inventory writedown.

As Ed has indicated, our cost reduction and restructuring efforts has been successful in providing significant improvement and profitability.

As you may recall, this initiative included the consolidation of operating sites, sale of excess assets and reduction in work force by more than 200 people from fourth quarter levels.

We are continuing to work on cost structure to enhance our profitability and efficiency to a number of operating initiatives focused on continuous process improvements.

Operating expenses exclusive of $873,000 of other income was $3.3 million lower than the first quarter of '02 and $2.1 million lower than the fourth quarter of '02.

SG&A was $17.6 million compared to $19 million in the first quarter of 2002.

The decrease was due to cost-cutting measures and reduction in commission expense due to the lower sales volume.

SG&A was down $900,000 sequentially.

R&D expense totalled $11.5 million, a reduction from $1.8 million from $13.3 million in the first quarter 2002.

The decline in R&D is related to the spending reductions in all areas with the exception of atomic force microscopy and MBE products.

While we have reduced absolute spending in R&D in light of the weak business conditions, R&D in Q1 was 17.5% of sales, Q1 2002 that is, versus 16 .6% in Q1 -- I'm sorry.

That first one was 17.5% 2003 and 16.6% in 2002.

Amortization expense totalled $3 .1 million in the first quarter of 2003 versus $3.7 million in the first quarter of 2002.

The decrease is due primarily to certain intangible assets which were fully amortized by the second quarter of 2002.

Other income for the first quarter was $873,000 and was due to a gain of [indiscernible] realized principally from the sale of a process equipment tool which had been used as a laboratory tool.

There were also other items including a foreign exchange gain totaling $161,000.

Restructuring expenses in the first quarter were $668,000, primarily due to severance, layoffs that were related to the actions in the fourth quarter of 2003.

As you know, accounting regulations state that companies must follow a pay as you go approach to severance.

Net interest expense was $1 .8 million compared to $1.5 million first quarter of 2002, change due to reduction in interest income on short term investments which is a result of lower rates.

First quarter 2003 EBITDA was $3 million compared to $1.3 million in the first quarter of 2002.

Veeco's first quarter 2003 net loss was $1.7 million was six cents loss per share compared to a net loss of $3.5 million or 12 cent loss per share in the first quarter of 2002.

Earnings per share excluding certain charges for the first quarter of 2003 was 3 cents compared to flat earnings per share in the first quarter of 2002.

The charge is excluding from this calculation an amortization and restructuring cost.

Backlog at March 31 was approximately $90 million, net of approximately $4.2 million of order cancellations.

We are currently forecasting second quarter revenues in the range of 64 to $67 million with forecasted GAAP loss per share in the range of 4 to 7 cents.

Earnings per share of 1 to 4 cents excluding amortization and restructuring costs of approximately $700,000 related to our fourth quarter restructuring program.

Balance sheet, cash and equivalence total $208.6 million at March 31.

We used $5.7 million of cash during the first quarter.

Accounts receivable increased by $6.1 million from December of 2002.

Dollar increases due to further shifts in our receivables from domestic and international where our payment terms are traditionally longer.

However, DSOs were 88 days, down 3 days as late shipping activity increased the receivables without fully impacting the DSO calculations.

Inventory increased to $88.6 million from $86.3 million at December 2002.

Cap Ex was $1.8 million for the first quarter.

Depreciation expense totalled $2.6 million.

Our balance sheet cash position of over $280 million remains quite strong.

At this time, we'll return to Ed for addition comments and your questions.

Thank you, Jack.

In summary, I would say the tone of our markets and the tone of our order trends have improved in this past quarter.

And utilization rates for leading edge devices like 80 gigabyte platters in data storage or .13 micron semiconductor devices and wireless high frequency devices are all increasing in utilization.

And as a result, we continue to see strong customer interest in our new technology products, particularly in data storage where our Imb deposition, Imb [indiscernible] product and our Dimension X3D -- I'm sorry, our AFMs and data storage are being increasingly called for.

We see Dimension X3D AFM interest in advanced semiconductor and photomask applications and our molecular beam [indiscernible] tools for wireless applications.

And we continue to see new nano tech AFM products being well accepted.

So, across all market, there is still a technology-driven economy with very few capacity buys.

Veeco remains focused on technology buys and in delivering improved earnings in 2003.

Our diversification of markets and new technology product strategy will continue to be a benefit in this challenging Cap Ex environment.

Our positive book to build ratio for the last two quarters should translate into increased revenue as we proceed through 2003.

We will continue to implement our cost reduction program while investing in Veeco's core leadership products to meet our customers' next generation product road maps.

As Jack mentioned, Veeco currently forecasts the second quarter 2003 bookings will be in the range of 68 to $73 million and that second quarter 2003 sales will be in the range of 64 to $67 million.

Likely another book to build quarter and we will lose between 7 and 4 cents per share on a GAAP basis and Veeco currently estimates that it will earn between one penny and 4 cents per share excluding amortization of $3 .1 million and charges of approximately $700,000 will be principally severance related to the company's previously announced restructuring initiatives.

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

Thank you, sir.

The question and answer session will be conducted electronically.

If you would like to ask a question, please do so by pressing the star followed by the -- the 1 followed by the star key.

Once again, please press star-1.

We'll go first to Robert Maire of Semiconductor Equipment.com.

Hi.

Congratulations on the progress.

A couple of questions.

Number 1, could you tell us approximately when you expect the restructuring to be over with more or less or primarily completed and we won't see any more charges, and can you also fill us in as to your exposure, no pun intended, to the S.A.R.S. virus and issues in Asia particularly with respect to the data storage which is somewhat central to that area and a little bit on the semi side?

I will respond to S.A.R.S. and Jack will respond to restructuring.

Robert, you know, we continue to travel to China and A-Pac.

We continue to pay attention to, you know, the travel patterns of our employees.

We are concerned with their welfare.

We continue to look at the warnings from the various health organizations.

I was in China two weeks ago myself.

We opened an office in Shanghai.

I don't think that S.A.R.S. is a long-term difficulty but we will continue to monitor it.

And, as you are indicating, you know, not only data storage but semi-conductor and research as well, China and A-Pac markets are important to us.

Jack?

Yes, Robert, with respect to restructuring, we had additional actions which really relate to the fourth quarter announcement.

There's probably a million and a half of additional charges principally in the second and third quarter.

Just to clarify the thing on S.A.R.S., you have not seen any change in bookings velocity or any other change in terms of shipments or other things related to concerns in Asia?

No, I certainly have not seen any change to order interest or their Cap Ex programs.

What one does see, you know, installation of equipment needs to be more carefully scheduled to, you know, make sure that one -- service people can come and go.

Great, thank you.

And we'll take our next question from David Duley, Wells Fargo Securities.

Can you talk in more detail about the strength behind your disk drive business and maybe talk about how long and sustainable you think this trend is and then I think that will be the key question.

Thanks.

Okay.

I think we are, you know, we will see continued strength over the next couple of years due to the fact that people are now still ramping up their 80 gigabyte platters. 80 gigabyte is probably 20 to 30% of their production volume right now.

By the end of the year, it will be about 80%.

We have multiple orders in this quarter from three different data storage accounts that were combinations of IBD, ID, PVD and metrology tools.

We are also beginning to see initial interest in 120 gigabyte will be in modest production by the end of '04 and will need a more advanced tool set.

And the industry itself has forecasted this year, 2003, to be an increase in head volume.

The heads per drive have stabilized.

There is growth in server.

There is a lot of TIVO -- lot of consumer electronic gains being made in micro drives and embedded electronics and audio-video TV recording, GPS systems.

I think we are in for a healthier next couple of years in data storage and we will benefit by that.

Is there any timing right now with the key people that you see spending money between metrology and process equipment, and then, could you just give us an outlook on -- regarding your guidance, what do you think your research business is going to do in the second quarter?

Well, research is easy to say that research will be up, you know, because it had such a seasonal decline in the March quarter and we are already seeing restoration of the research AFMs for the scientific research business that occurred even in the first months of the quarter.

So research will be up, you know, millions of dollars this quarter.

I'm sorry.

The other question?

The difference in timing.

Oh, the metrology versus equipment?

Yes.

The equipment, you know, in a $30 million quarter, it's still more equipment than it is metrology but we did get a lot of multiple buys in metrology as well.

The other thing that I think is not in anybody's model is that as people introduce the 80 gigabyte -- as a ramp-up in the 80 gigabyte because it is still a new media disk with lower yield.

I think there is going to a capacity requirement associated with the fact that the yields are lower.

That's probably not in their current Cap Ex plan and so when you talk to all of them, you know, they are pretty bullish about getting yields up and if the yields come up more slowly than they imagine, than even for etch and deposition and metrology tools, they're going to need a little capacity upgrade to be able to ship the 80 gigabyte platters.

Thank you.

We will take the next question from [indiscernible] with JP Morgan.

In terms of quarter activity, I wonder if you could comment on when you saw that either pick up or taper off and if you could break that down by segment; and second question, if you could provide color on cancellation.

Was that from one customer or more broad base?

No, the cancellations first.

The cancellations were 4, $4.5 million in each of the last two quarters and, frankly, they were older orders that were in the backlog that we were attempting to reschedule and we finally just pulled the plug and said let's just take the cancellation.

In some cases, there were cancellation charges.

It wasn't new orders.

And it was about -- it was part storage and part telecom and not all from one customer.

I would expect that the cancellation notice for the June quarter would be less because we now had two back-to-back quarters of cleansing the backlog.

The order trends are positive really in every sector.

We publish internally a sales prospect book every week .

It's been increasing by a million or two weekly in prospects.

Qualified prospects over the last six or seven weeks.

So, we are seeing improvement in data storage, improvement in the scientific research, wireless is coming back and semi-conductor is at least stable currently.

Great, thanks.

And our next question comes from Mark Fitzgerald, Banc of America Securities.

Thank you.

Given your last comment, why the guidance of flat to down bookings here, if every segment is coming back and scientific is expected to kind of snap back here.

That was an answer to order interest rate.

And quotes.

Definitely the quote book is bigger and the prospect suspect book is bigger.

But this is still, you know, a Cap Ex challenged environment, as you know, so there are still people who, across the board would really like to watch their cash and would like to watch their Cap Ex spending and make existing tools go longer and so we are being conservative.

It's a different difficult cap ex market as you know.

When you look at the disk drive business here and break into three segments, IM D, deposition, etch and the AFM, are there similar margins in this business, is the disk drive a lower business other segments such as the R&D and the semiconductor business?

Well, the newer tools, in total, it probably is slightly lower in margin, Mark, because you got a combination of old tools and new tools and process equipment.

You know, so it follows the mix of metrology and equipment content in data storage.

It is very different in terms of gross margin.

Our processed equipment has margins more in the 40% gross margin range and our metrology gross margins are over 50%.

The newer -- but I would say the newer IBD, IV and PVD deposition tools will have gross margins well above 45%.

So, it's modestly less than some because it's got some older tools in it but the margins are improving in data storage.

And on the AFM sales into disk drive, are those comparable to the scientific margin?

Yes.

Okay.

Thank you.

We'll go next to Mike O'Brian with Soundview Technology Group.

Good morning.

Could you give me more of an idea on what's happening in the wireless communications side?

Is it all the MBE tools or are you seeing some photonic stuff come back?

It's mostly molecular beam epitaxy.

We have announced we sold multiple tools to RFMD, a wireless device provider for Intel.

And we are seeing both wireless -- power amplifiers, RF devices, some backlighting applications for small panels, handheld devices and we are even beginning to see some data storage, very early data storage interest in molecular beam epitaxy on next generation heads.

Mostly it's wireless and not optical telecom.

And that activity has helped held pretty good for the start of this quarter?

Yes.

Just going back to your comments once again on quote activity and then flat to down order environment, what are you looking for, for what signs do you think your customers need to take those -- that quote activity and put out some PO's?

My conservatism didn't include the flat to down order.

The top range that I -- you know, we did $72 million and I'm saying there is a range that could go as high as $73 million so it is not my expectation that orders are coming down.

It is my expectation that our order trends will continue to increase.

But this is a very difficult Cap Ex market.

These quarters are still significantly backend loaded which is a reflection that people hesitate making the Cap Ex buys as long as they feel they can and it's mostly technology buys.

It's clearly a healthier environment but it is not a day at the beach yet and, you know, I think orders are going to continue to improve in a troubled Cap Ex environment.

In terms of what has to happen, you know, end markets have to get better, but Veeco can make an improvement in its earnings just on technology buys because Veeco is a modest size.

So you think you can at least bounce on the bottom if end markets don't pick up.

Just because of the technology buys?

Exactly, our internal business model for '03, you know; a flat revenue year with increased earnings based on a steady trickle of technology buys that we have been seeing.

You know, hopefully we'll see some capacity buy as we get into 2004.

Great, thank you.

And we'll now go to Mark Miller, Hoefer & Arnett.

I wonder if you could give me the amount of sales to nano technology type customers?

The -- in scientific research, that sector continues to be about 60% -- this is within scientific research which is about a third our business or a little higher.

That sector is 60% materials science, 20 percent life science and 20% nano tech and the nano tech continues to grow -- you know, it grew very little this quarter because that sector was down.

I'm trying to reconcile, Ed, you know, on these data storage orders, especially if you give me any help, is the tool set similar for 80, 120?

Are we talking about perpendicular or are we going to see a change in tool set when we go from 80 to 120 perpendicular.

I think we will.

You are very well aware of that market.

The 80 gigabyte tools are a combination of PVD, IVD, IVE, and about 8 or 9 materials and about 12 layers.

The 120-gigabyte are two or three more materials and three or four more layers, so it is similar tools in that it is still a cluster, but it has more elements of PVD, IBD, IVE mix together.

It's really above 130 and 140 gigabytes that people will start to spend for development a perpendicular recording.

Thank you.

We'll go next to Stuart Muter with Adams Harkness.

First question for Ed.

You mentioned semi was down because of a photomask tool was not shipped.

No, wasn't booked.

Sorry, wasn't booked.

What's the outlook for booking in Q2.

Do you think you'll book a photomask tool in Q2 and do you think AFMs will be steady in bookings.

AFMs will be steady in bookings as they have been in these last couple of quarters but as I commented, I don't think I want to start trying to forecast the timing of IBD photomask orders because they're like 3 and a half or $4 million.

I will tell you that there's a couple on the prospect list for this quarter and one could likely happen.

But I think until that business is a little larger, let's treat it as a -- something that's difficult to forecast.

There are a couple on our prospect list.

Fair enough and Jack, do you think that gross margin will be flat in Q2?

We continue to take our cost structure down and it's somewhat mix dependant but we think that -- we would like to continue to make progress through the year but the second quarter will probably be close to what the first quarter level was.

Thanks very much.

Our next question comes from Brett Hodess with Merrill Lynch.

Just a quick question, Ed.

When you look at the semiconductor side of the business at this point and move of the atomic force microscope into some of the inline applications, can you give us a feel for how many customers are using multiple systems and what are the process areas they are using them in.

And do you think this will -- how long do you think it will take until that [indiscernible] is spread out to more customers?

Of the 30 or so 300 millimeter fabs in the world, we probably have multiple AFMs and multiple means one -- or two in five or six of those fabs.

So there is still a lot of growth in those fabs reaching out for second, third, fourth -- they've each modeled that they would be a 3 to 5 -- 5 to 7, I'm sorry, because you need to include the X3D.

At 5 to 7 AFMs inline in those fabs when they fully populate those fabs.

So the early users are concentrating on etch, on deep etch, on CMT, planerization for AFM and of course .13 micron and below feature size measurements.

The X3D tools open up the market to photoresist and to mask applications and that allows us to go from maybe 3 to 5 to 5 to 7 AFMs per fab when we are selling Bose X3D and the VX product to the combination of .13, etch, CMT and resist and photomask applications.

And these are all automated tools so they are on the higher end of the scale?

The VX sells for 1 million to about $1.4 million.

The X3D sells for about 1 million 6 to $1.8 so the AFBs have been increasing as we have been introducing new features on automated AFMs.

Very good.

Thank you.

We will now take a question from Byron Walker from UBS Warburg.

The rumours du jour, I think the last call was the Ulvac [ph] market share shifts with you guys and it seems this time around there's a buzz that there are some pending new competitors coming into the AFM market.

Can you give us some color on both of those issues and some updates?

Sure, I don't think you meant Ulvak [ph].

I think you meant Inelva [ph].

Inelva [ph] I'm sorry.

Not that I want to highlight any of our Japanese competition.

A year go, if you remember, Inelva [ph] did indeed take some PVD business from us, one or two accounts.

They had a newer -- they introduced a new PVD deck.

They are pretty much PVD only so that we have a much broader product line and that helps us sell combinations of IVD, IV and PVD across the board.

We put a big strength in increasing the magnetic performance of the films we produced with Veeco's multiple target PVD tools and I would say today, we've gone from what was just -- just to give you a magnetic performance factor, 5% delta R over R to over 20% delta.

So we have increased by a factor of 4 our magnetic film properties compared to Inelva [ph].

So I would say, today, someone who makes a decision to buy a new PVD tool would likely buy a Veeco tool.

So the Inelva [ph] threat I think is in our history.

On the AFM front -- and just to finish that, we continue to, I think, benefit by the fact that unlike Inelva [ph], we can provide combinations of IMB and deposition, IMB etch, TVD cluster tools and now there;s an interest in the molecular beam epitaxy from some leading data storage houses and Inelva [ph] does not have an answer to that process technology.

So we have a broader, deeper technology base that I think will serve us well over the next few years in data storage.

But, as you say, there are and continue to be competitors.

There has also been consolidation both among the customer base and supplier base.

There are a couple of -- I won't honor them by naming them but there have been a couple of smaller equipment houses that have pretty much disappeared from the IBD, IBE arena in the last six months.

So Veeco's market share overall increases in data storage.

In AFM, where we've had a dominant position for a long time and hold a lot of intellectual property, there are now probably 5 to 7 small AFM companies around the world who sell, you know, to 3, 4, $5 million of AFM a year.

So while they are individually fairly dismissable, collectively, they are an event.

And we will continue to press our intellectual property advantage and we will continue to broaden our product line, both in AFM research and in AFM automated product.

And we are doing that now.

We are introducing a lot of scanning probe my cross copy, environmental, meaning we offer more temperature and vacuum capability associated with our AFM and research tools.

So we are responds to an increase in the small number of AFM suppliers by broadening our product line.

Thanks.

Next.

Next is Kevin Vassily, Thomas Weisel Partners.

Yes, hi.

Quick question on guidance.

As you look at your revenue expectations for Q2.

How do you expect contribution to break out by geography relative to the contribution this quarter?

Thanks.

Fairly similar.

You know, if you look -- the best indicator of that is the order rate and the order rate in the last months have continued to be 60% international and 40% domestic, so I think we'll continue to see that spread of revenue going forward.

Okay, thank you.

We'll now go to Matt Peckman with D.A.

Davidson Company.

Ed, can you make any comments regarding pricing across the business and especially with the new systems being booked in data storage, how pricing looks there?

Yes, I think it's interesting that at a time when Cap Ex is difficult, we have not seen increased pressure on sales price.

You know, we have seen -- and partly it's because the business that we are getting are all largely in our new technology products that are brand new with -- with lots of features and so, they, defend quite nicely their ASP.

We do continue to see pressure on support, process support, increased amounts of process support, increased amount of service and installation resources to get these tools up as rapidly as possible.

So while we control that spending, that's an increased part of our business as we go forward.

But I can't say that we are seeing big discount pressure and big competitive pricing pressure.

And you have discussed the fact that this is a Cap Ex challenged year.

Would you say the same thing for your research market and specifically the academic portion of that research market?

Well, the flavor for the research market is that, to the extent states and federal governments are just more tightly controlling and more slowly releasing grants and budgets, we will see that in our scientific research business.

Clearly, the nano tech, the worldwide nano tech initiative which is now some -- over $2 billion worldwide and approaching almost a billion dollars in the U.S. alone and has been a part of Bush's budget that he continues to protect is quite strong.

But, as we saw in the first quarter, states are releasing those funds more slowly than they were six months or nine months ago.

We expect to see an increase this quarter.

That's the seasonal impact of the June quarter is typically better than the March quarter but that sector does not entirely escape sort of a weak capital spending environment.

Okay.

And then you had made a brief comment about solid state lighting.

What are you seeing there?

Is that just small and looking to pick up or what types of systems are what types of systems are you selling there?

That's PVD and MBE equipment going to laser devices for backlighting.

You know, that continues to be there.

A couple of systems every quarter.

And we have been selling 6 to 8 systems a quarter and that's continued.

Maybe 5 of which as MBE and the remainder are PVD for compound semi-conductor activity for both wireless, backlighting and F-bars.

Okay, thanks a lot.

Just a reminder for everyone, star 1 to ask your question.

We'll go next to Christina Osmena with Needham Company.

Hi, Ed.

Given that the states and the governments are tightening their belts a little bit on their budgets.

How sustainable do you think this nano technology is into 2004?

Well, you know, we've got 8 or 9 quarters of history that are pretty good.

I think that we'll continue to see.

I mean, it is still early for nano tech and, you know, half of the buildings worldwide -- there's 100 nano tech centers now around the world.

Probably 30 of them are still empty shells that have just recently been built.

And, so, you know, we will see, over the next two or three years the continued funding of people putting instruments into those centers.

I don't have any fear that we are near the -- anywhere near, you know, the end of nano tech instrument funding to complete those centers.

And they are so multi disciplinarian.

They have a combination of life science, pharmaceutical, information technology, you know, very active areas and I think we will just continue to see growth.

Remember, you know, it's 20% of our -- 40%, you know.

It is not a very big number yet.

Okay.

And moving on to, I guess, you know, your infrastructure as it stands now, you have spent a number of quarters sort of restructuring your facilities to align the business, I would think, more with the metrology side.

Now that the business is shifting back towards data storage, are we going to see some more expenditures on realigning your infrastructure with that new business?

The restructuring changes, were almost entirely made in equipment.

That's where we saw tremendous increases, 12% improvement in gross margin and going from a loss in equipment to profit in equipment in this quarter was pretty remarkable.

Rather than -- and I hope one of the struggles that we have in these calls is although we give data per market, there is a tendency to sort of think of us as dominating in one market.

That's why I mention, I think I -- the diversification model that I think works best for Veeco is to think of Veeco as one third data storage, one third semi-conductor wireless combined and one third scientific research.

And if you use that model, then you are not terribly disturbed by some individual quarter where one of those pieces gets to be 40%.

I think longer term, they're going to be 1/3, 1/3, 1/3.

They offer great protection and counteract each other's volatility.

But we're not attempting to make the company either all nano tech, or all data storage, of all semiconductor.

We really would love this blend to continue.

And the blend between equipment and metrology is also about 50/50 and that's very healthy.

So I don't think you are about to see a very big swing in Q2, 3 or 4 among these sectors and I think they will all be profitable for the rest of the year.

Christina, the other point is that our capital -- our facilities are adequate for, you know, 2 to 2 1/2 times of current volume levels so we don't anticipate major capital requirements for facilities or anything of that nature in the near future.

And the restructuring, Christina, that you speak of, was largely to end up with end up with two major sites in equipment and two major sites in metrology and maybe one or two satellite sites would remain.

But pretty much, you know, this tremendous benefit that we are seeing in the cost reduction program comes from just the -- you know, the early stages of getting down to two major sites in equipment and two major sites in metrology and, you know, as Jack mentioned, our tool equipment sites could shift probably $200 million of revenue of equipment and, this year, that business will do well under $150 million.

So we had some very good expansion capability and equipment as well metrology .

Okay.

Thank you.

And we do have a follow-up question, Mark Fitzgerald with Banc of America Securities.

Can you give us an outlook for semi-conductors in the next quarter?

We continue to see -- there again, the prospect list is healthier.

We have been booking about 7 automated AFMs per quarter Mark.

I think this next quarter, we'll be equal to that amount or 1 or 2 automated AFMs higher.

Any big change in terms of the customer mix there in terms of the outlook?

No, it's major semi-conductor houses with some representation of Japan and A-Pac and some new activity for us based on photo resist and mask.

Okay, thank you.

And there are no further questions at this time.

I would like to turn the conference back to you, Mr. Braun, for any additional closing comments.

Operator, thank you and thank you all for your participation .

As Deborah mentioned, we look forward to seeing you at some of the conferences this next month and we look forward to reporting on our Q3 earnings.

Thank you all.

Thank you, once again, that does conclude today's teleconference.

We appreciate your participation.

You may disconnect at this time