Veeco Instruments Inc (VECO) 2003 Q2 法說會逐字稿

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  • Operator

  • Good day everyone and welcome to the Veeco second-quarter 2003 earnings conference call.

  • Today's conference is being recorded.

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

  • Debra Wasser - VP of Investor Relations

  • Thank you.

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

  • Veeco announced their second quarter 2003 results at 7 AM eastern time this morning.

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

  • 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 or otherwise make statements about the future.

  • Such statements are forward-looking and are subject a number of risks and uncertainties that could cause actual results to differ materially from the statements made.

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

  • During this call, management may address non-GAAP financial measures.

  • Information regarding such non-GAAP financial measures, including reconciliation to GAAP measures of performances, is included in the press release and financial tables distributed this morning.

  • This call is being webcast live at the veeco.com Web site and will be available for replay and archive for future reference.

  • The company does not plan to update the information on this webcast once it has been archived.

  • Veeco will be hosting an analyst day in Santa Barbara, California on August 26.

  • Please call our office if you haven't received an invitation and are interested in attending this meeting.

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

  • Edward H. Braun - Chairman & CEO

  • Thank you, Deborah.

  • Good morning.

  • This morning, Veeco announced its financial results for the second quarter and six months ending June 30, 2003.

  • Veeco's second quarter 2003 sales were 73.4 million, above our April guidance and up 12 percent sequentially with sequential revenue increases in both process equipment and metrology.

  • Our Q2 revenue was down of 5 press year-over-year versus Q2 of '02.

  • In Q2, our net loss was 1.1 million, a loss of 4 cents per share on a GAAP basis, while earnings excluding certain charges, mainly amortization, were a positive 3 cents per diluted share, in line with guidance and up 7 percent sequentially and up 44 percent year-over-year.

  • Q2 orders -- the company's second-quarter bookings were 64 million, below our guidance, down 12 percent sequentially and down 18 percent year-over-year, reflecting Q2 order delays in both semiconductor and data storage as our customers continued to tightly manage capital spending.

  • We commented that despite a continued challenging business and CapX environment, we are pleased that Veeco's second quarter revenues exceeded our guidance and grew 12 percent sequentially with sequential revenue increases in both data storage, which was up 28 percent sequentially, and telecom wireless, up 99 percent sequentially, with a slight revenue sequential decline in semiconductor, down 5 percent.

  • In fact, Veeco's sequential revenue increase was broadly based across our entire product line, including increased revenue of 8 percent in metrology and 16 percent in equipment and regionally, up throughout the world -- U.S., Europe, Japan and APAC, APAC being the highest increase being up 38 percent in the quarter.

  • We met our plan to be profitable in both process equipment and metrology on EBITDA basis again in the second quarter.

  • Every Veeco business unit returned to profitability in the second quarter.

  • Veeco's second quarter 2003 EBITDA increased 44 percent, compared with the second quarter of 2002 and increased 7 percent sequentially from the first quarter of 2003.

  • Good confirmation that our cost reduction initiatives and our operating execution efforts are on track.

  • We are pleased that our focus on cash generation resulted in a positive cash flow of $1.8 million in the quarter, even after giving effect to the purchase of pro technology from NanoDevices and Veeco's inventories decreased 4.1 million in the quarter.

  • Accounts receivable decreased 10 days to 78 days.

  • Overall, a good improvement in operating metrics.

  • Our diverse market strategy continues to help offset individual segment volatility and Q2 revenue of 73.4 million reflected a mix of 33 percent data storage at 24.4 million, 32 percent for the combination of semi and wireless -- semi was 10.8 million and wireless was 12.3 million -- and a 35 percent distribution of revenue from scientific research at 26 million.

  • Veeco's second quarter bookings of 64 million were below our previous expectations and down 12 percent sequentially, reflecting order delays in both semiconductor and data storage.

  • Our scientific research bookings increased improve sequentially and was up 33 percent in the quarter.

  • Our book-to-bill ratio was .871 for the quarter and .98-to-1 for the six months.

  • We expect a 5-10 percent sequential order increase in the September quarter.

  • Our total bookings were likewise helped by market diversification with scientific research at 27.6 million, or 43 percent of our bookings; data storage, 19.4 million, or 30 percent of our total bookings; semiconductor at 7.3 million, or 12 percent of our bookings; wireless at 9.7 million, 15 percent of our bookings.

  • So the combination of semiconductor and wireless were 27 percent of our total bookings and the Q2 total, again, was 64 million.

  • Our customers continued to focus on must-have new technology buys.

  • Veeco introduced 9 new metrology and process products in the first half of 2003.

  • In process equipment, these included three new products being new ion beam deposition system, a new ion beam edge system and an atomic layer deposition system, all three for primarily for data storage applications.

  • And from metrology, there were three new AFMs.

  • One dimension X for semiconductor 90 nanometer and 65 nanometer edge applications; one VX340 for CNP inspection applications and a new research E-scope AFM allowing laboratory imaging of specimens in vacuum or elevated temperatures or immersed in liquids, and three optical metrology products for dynamic NEMS inspections and one life science and proteomics inspection system, in addition to an HD 8000, a general-purpose inferometer So a quite broad amount of new product offerings expected to increase revenue as we go forward.

  • Reviewing our Q2 margins.

  • Q2 gross margins were 44.6 percent, down 9/10 of a point from the prior year and for the six months, were 46 percent, up 2.2 points for the first half of 2002, helped by previous cost reduction steps.

  • Q2 was impacted by unusually high SAB-101 margins deferrals and the sale of some low gross margin inventory, each having about a $1 million impact on our Q2 earnings.

  • Q2, we expect Q3 gross margins to increase to our Q1 margin levels.

  • Q2 operating spending was reduced by $3.7 million from Q2 '02 levels.

  • Our intent is to continue to deliver increased EBITDA over these next sequential quarters, even at current revenue levels.

  • And to that end, we will cut our operating spending 5 percent from the Q2 level of 29.6 million to below $28 million per quarter by the Q4-Q1 timeframe.

  • This requires another 45-50 person headcount reduction, largely in SG&A and continued reduced spending while having minimal intended impact on key product development programs.

  • Veeco currently forecasts that third-quarter 2003 bookings will be in a range of 67-70 million, up 5-10 percent, and that third-quarter 2003 sales will be in the range of 67-70 million.

  • The company currently forecasts that it will incur a net loss between 6 and 3 cents per share on a GAAP basis and will earn between 3 and 6 cents per share, excluding amortization of 3.4 million and a restructuring charge in Q3 anticipated at about $1 million, and all using a 35 percent tax rate.

  • Referring to market conditions in our major segments, starting with data storage I would comment that data storage continues to increase aerial density and is still ramping 80 GB hedge in production and beginning development of 120 gigabyte for the year 2004 production, providing Veeco with opportunities for upgrades and new equipment in both process equipment and metrology.

  • Positive customer response to our new product and technology instructions resulted in Q2 revenue increasing 28 percent sequentially to $24.4 million, including combinations of ion beam deposition, ion beam edge PVD, and DOC and metrology toolsets from four major data storage accounts in our Q2 revenue.

  • The recent news of Western Digital's successful bid for rewrites access is quite positive for Veeco as it provides us an additional worldwide head customer with a need for upgrading and replacing their capital equipment for the next generation heads, and Western Digital will be a fully integrated hard drive supplier.

  • And of course, it prevents Read-Write's equipment base from being available on the surplus market in the future.

  • In semiconductor, we introduced two new AFM systems at Semi West to significantly increase our future available market opportunity.

  • The VX 340 for CMP applications and the Dimension X for deep-edge at 90 and 65 nanometer feature sizes added to our previously introduced X3-D for photolithography, now bring our potential fab penetration to 10 AFMs per fab, a 2-$300 million Veeco opportunity over the next three years.

  • We are also pleased to report that the world's top 10 semiconductor device manufacturers now have at least one Veeco automated AFM in wafer fab or failure analysis use.

  • Q2 also included orders for our first $1 million dynamic optical MEMS inspection system in use at a major MEMS manufacture -- intended for use the in a major MEMS manufacturer for high-resolution inkjet printer applications.

  • In wireless telecommunications, the sector appears to have previously bottomed with Q2 revenues of 12.3 million, up 99 percent sequentially and up 16 percent year-over-year, including the combined use of IBD, IBE, PVD and molecular beam epitaxy systems for high frequency wireless devices, mobile cellphones, backlighting and optical laser applications.

  • In Q2, additional MBE production systems were installed at RFMD, Intel's Centrino partner, and we had continued growth in APAC at the Chinese Academy of Sciences.

  • The semiconductor ITRS roadmap now includes gallium arsenide and Indium technology, and that is a further indication that future wireless systems will represent the convergence of silicon and compound semiconductor devices, an opportunity to broaden our MBE and IBE-IBD sales to this sector.

  • Lastly in scientific research, our second quarter orders were up 33 percent sequentially to 27.6 million.

  • We shipped over 100 AFMs in the quarter for a multidisciplinary research, biological life science, pharmaceutical, genomic and material science applications.

  • This sector continues to be a quite profitable 40 percent of Veeco revenue as it was in the first six months in 2003.

  • I will pause here while Jack reviews financials, and we will come back to make some final statements before your questions.

  • Jack?

  • JOHN F. REIN - EVP, CFO, Secretary

  • Thank you, Ed.

  • For the three months ended June 30, 2003, sales were 73.4 million, a decrease of 5 percent versus the 2002 second quarter.

  • The decrease is attributable to a reduction of process equipment sales of 7 percent and metrology sales of 3 percent.

  • The sales decline resulted principally from a 19 percent decrease in sales for the data storage industry on prior year's sales.

  • Sequentially, however, Veeco's sales increased $7.7 million, or 12 percent from 65.8 million in the first quarter.

  • This sales increase was in both metrology and process equipment and by market or in data storage and telecom wireless industries.

  • Gross profit was 32.8 million for the quarter, or 44.6 percent of sales, compared to 35.2 million, or 45.5 percent of sales for the 2002 second quarter.

  • In addition to a $1.7 million negative margin impact from the lower sales volume, gross margins were weaker due to a $1.1 million effect of bifurcated sales under SAB-101 and a $1 million effect from the sale of inventory.

  • Mix and other factors also accounted for a partial part of this decrease.

  • Partially offsetting these items was a $2.4 million overhead and labor reduction resulting from plant consolidations initiated in the fourth quarter of '02.

  • Sequentially, gross margins declined 2.8 percent from 47.4 percent in the first quarter of 2003, principally again due to the impact of SAB-101 and other mixed variances in the metrology group.

  • Operating expenses, exclusive of other income, were 29.6 million, or 40.3 percent of sales, down 3.7 million from the second quarter of 2002.

  • The decrease was attributable to the cost-cutting measures enacted at the end of 2002.

  • SG&A was 18.6 million, compared to 19.3 in 2002's second quarter.

  • The decrease was due to cost-cutting measures partially offset by increases in commissions due to higher volume of sales to distributor-based customers and an allowance for accounts charge.

  • Operating expenses were up sequentially at $0.5 million from the first quarter due to higher selling expense related to $6 million -- sorry -- 600,000 allowance for doubtful accounts.

  • R&D expense totaled 11 million, a reduction of 2.9 million from the 13.9 in the second quarter of 2002 and down sequentially $0.5 million from the first quarter of 2003.

  • A decline in R&D was from 2002 is related to spending reductions, principally in the process equipment group.

  • Amortization expenses totaled 3.2 million in the second quarter of 2003 flat through the second quarter of 2002.

  • Restructuring costs of 800,000 during the second quarter 2003 include severance expenses related to the cost reduction programs announced and initiated in the fourth quarter of 2002.

  • While the actions were planned and initiated in the fourth quarter, current accounting guidelines require that associated charges be recorded when the actions are actually completed.

  • Net interest expense totaled 1.9 million, as compared to net interest expense of 1.5 million in the comparable 2002 quarter.

  • The increase is principally due to a reduction in interest income on short-term investments as a result of the lower interest rates.

  • Second quarter earnings before interest, taxes and amortization totaled 3.2 million, compared with 2.2 million in 2002.

  • Veeco's second quarter net loss was 1.1 million, or 4 cents per share, compared to a net loss of 1.6 million, or 6 cents per share in the second quarter of 2002 on a GAAP basis.

  • Pro forma EPS for the second quarter was 3 cents, using a 35 percent tax rate and excluding the restructuring and amortization charges.

  • This is compared to 2 cents for the second quarter of 2002.

  • For the first six months of 2003, sales totaled 139.2 million, or a 12 percent decrease from the 2002 period.

  • Due primarily to a decrease of 17.9 million in process equipment sales to the data storage industry.

  • Gross profit for the six months was 46 percent of sales, compared to 43.8 percent in 2002.

  • The gross margin improvement is primarily in the process equipment area due to cost savings that resulted from plant consolidations and other overhead reduction efforts.

  • SG&A was $36.2 million, down 2.2 million from 2002.

  • Decrease in SG&A is due to decreased selling expense in response to lower sales volume resulting from the resizing of our sales and marketing spending.

  • R&D expense totaled 22.5 million, a decrease of 4.7 million from 2002.

  • This decrease relates to the spending reductions principally in our New York equipment group as a result of site consolidation.

  • Amortization expense totaled 6.3 million for the first six months of 2003 versus 6.9 million in the 2002 comparable period.

  • The decrease was due primarily to certain intangible assets from acquisitions which were fully amortized by the second quarter of 2002.

  • Other income of 900,000 was mostly due to a gain of 700,000 realized in the first quarter of '03 for the sale of process equipment tool, which had been used as a laboratory tool.

  • There was also 200,000 in foreign exchange gains in the 2003 six-month period.

  • This compares to income of 200,000 in the first half of 2002, again, due to foreign exchange.

  • Restructuring costs of 1.5 million were primarily due to severance for layoffs that related to actions announced in the fourth quarter of 2002.

  • As previously indicated, current accounting rules require that companies must follow a pay-as-you-go approach to severance.

  • Net interest expense of 3.7 million compared to 3 million in the comparable 2002 period increased principally due to a reduction in interest income on short-term investments as a result of the lower interest rates as previously indicated.

  • Earnings before interest, taxes and amortization was 6.2 million compared to 3.5 million in the first half of 2002.

  • Because the six month 2003, net loss was 2.8 million, or 10 cents per share compared to a net loss of 5.1 million, or 18 cents per share in the first half of 2002.

  • Earnings per share, excluding certain charges the first half of 2003, was 6 cents compared to 1 cent in the first half of 2002.

  • The charges excluded from this calculation are amortization and restructuring costs.

  • Backlog at June 30th, 2003 was approximately 79 million net of approximately $2 million in cancellations for the second quarter of 2003.

  • Cancellation was at the lowest level in headquarters.

  • As Ed indicated with regard to the outlook, we're currently forecasting third-quarter orders and revenues in the range of 67-70 million for the forecasted GAAP loss per share in the range of 3 cents to 6 cents, or earnings per share in the range of 3 cents to 6 cents, excluding amortization and restructuring costs of $1 million related to the Q4 restructuring plan.

  • Our balance sheet, cash and equivalents totaled 210 million at June 30th.

  • We're pleased to have generated 1.8 million in cash for the second quarter, despite an $11 million cash outlay for the purchase of AFM pro technology and NanoDevices, as well as certain other non-recurring costs, which include fuel costs related to prior M&A activity and the settlement of a litigation case.

  • Accounts receivable was 69.3 million, with DSOs of 78 days, which was down from 74.8 million, or 88 days in the prior quarter, first quarter of '03.

  • Inventory decreased to 84.5 million at June 30th, down from 88.6 million at the March 2003 quarter end.

  • CapX for the quarter was 2.8 million and was 4.7 million in the six-month period of 2003.

  • Depreciation expense totaled 2.5 million in the second quarter of 2003 and 5.1 million for the first half.

  • Our balance sheet and cash position of over $210 million remains quite strong.

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

  • Edward H. Braun - Chairman & CEO

  • Thank you, Jack.

  • Looking forward, we're encouraged that the worldwide factory utilization rates for our customers' next-generation devices have continued to increase, including semiconductor, 130 nanometer and 90 nanometer devices, as well as data storage 80 gigabytes infill magnetic heads and wireless telecom Wi-Fi high frequency devices.

  • In addition, worldwide nanotechnology funding initiatives continued to support our AFM growth in the scientific research sector.

  • For the moment, our production customers continued to under invest compared to historic multiyear CapX spending ratios while their factory utilization rates for their newer growth technologies are clearly increasing.

  • As a result, we anticipate that they will add to their 2004 capacity for their next-generation products.

  • We have maintained Veeco's emphasis on delivering new products that address our customers' next generation technology requirements and expand Veeco's market opportunities.

  • We believe that we are positioned for a modest improvement in third-quarter orders and growth in revenues in 2004 and we are focused on delivering significantly improved earnings in 2003, compared to 2002, and we remain on track to achieve that goal.

  • Operator, we would be pleased to answer any questions.

  • Operator

  • (Caller Instructions).

  • Mark Miller, Hoefer & Arnett.

  • Mark Miller - Analyst

  • The news that Digital was going to resurrect Read-Write's has got to be good new for you because of the historically Read-write was always one of your largest customers and they really have not spent a lot over the last 18 months on equipment.

  • I am just wondering -- can you give us any magnitude in terms of possible orders over the next 18-24 months, should expect to see them because they have to upgrade?

  • UNIDENTIFIED CORPORATE PARTICIPANT

  • It is very good news.

  • It is hard to quantify -- and you are right that the fleet of equipment at Read-write is aged.

  • They have not really bought any new equipment for almost two years.

  • And Read-write at one point was something around probably $12-$15 million a year customer.

  • And I would think that Western Digital, keeping themselves active in 80 GB, 120 GB activity, would be in that same range of revenue within Veeco.

  • Mark Miller,: I'm wondering, Ed, what were your sales attributed to nanotechnology?

  • Edward H. Braun - Chairman & CEO

  • In the research sector, we had revenue in the quarter of 26 million, scientific research -- of our $73.5 million quarter, 26 million was scientific research and nanotech has been running about 20 percent of that number.

  • Mark Miller,: So around 5 million?

  • UNIDENTIFIED CORPORATE PARTICIPANT

  • Yes.

  • Mark Miller,: Thank you.

  • Operator

  • Brett Hodess, Merrill Lynch & Co.

  • Brett Hodess - Analyst

  • A couple of questions.

  • First, on the gross margin decline, part of it was due to you said a mix shift in metrology.

  • Can you tell us what that mix shift was and the current level of bookings -- is the mix shifting back to a more favorable product line mix?

  • UNIDENTIFIED CORPORATE PARTICIPANT

  • Yes.

  • I think it was an anomaly in the quarter.

  • It had to do with some geographic and some lower-end product.

  • We do see, in terms of our the orderbook that we have, we do see a better mix of margin.

  • So we believe that the gross margin impact in this quarter was an anomaly and we'd expect to improve by a couple of points in the third and fourth quarters.

  • Brett Hodess - Analyst

  • The revenue upside in the quarter, that was -- was that just earlier recognition of stuff that was shipped under SAB-101?

  • It looks like on the process tools side by the looks of the mix in the quarter, or was that shipments of product that -- new shipments of product that got recognized?

  • UNIDENTIFIED CORPORATE PARTICIPANT

  • Probably it was a combination of some higher SAB-101 revenue making it into the quarter and probably a little higher service and parts business.

  • Brett Hodess - Analyst

  • So would that SAB pulling into this quarter, is that why we have the flatter outlook or the slightly down outlook for revenues in the next quarter, Ed?

  • Edward H. Braun - Chairman & CEO

  • Yes.

  • Brett Hodess - Analyst

  • Versus -- before, we had thought that some of that stuff would not get accepted as quickly?

  • Edward H. Braun - Chairman & CEO

  • Yes, but of the shipments that we made in Q2, there was an unusual amount of SAB-101 deferred in some of the product areas, which should help the earnings in Q3.

  • JOHN F. REIN - EVP, CFO, Secretary

  • There was also some inventory that we sold down in the fourth quarter that we don't necessarily expect a recurrence of going forward.

  • Brett Hodess - Analyst

  • Got it.

  • When you look in the data storage part of the business, Ed, we continue to hear about yields improving, but still not maybe being right at the level people want on my 80 gig and then the 120 development work is beginning and it looks like very difficult with load yields.

  • So would you expect that, even though they are cautious on capacity spending now, would you expect at some point they're going to have to pick up their metrology spending, may offset some of the weaker capacity spending?

  • Edward H. Braun - Chairman & CEO

  • I think so.

  • In fact, if you look at the last year at $100 million of Veeco total equipment sold into data storage, over 20 percent of it, or 25 percent of it was metrology.

  • And certainly at 80 and 120 GB, they have clearly started to exceed the SIA roadmap for CD and thickness and roughness measurements and, clearly, they are now more actively looking at Veeco metrology to for inspection and yield at these reduced CDs.

  • There are many films now that are 10 and 20 nanometer films and they have -- and CDs are below 60 nanometers.

  • Brett Hodess - Analyst

  • If you look at the earlier recognition of some of the SAB revenue in the quarter versus in the out quarter, is that actually a good thing, meaning that your products, or new products are getting accepted faster at the customers?

  • UNIDENTIFIED CORPORATE PARTICIPANT

  • I think that is true and I think you're seeing that in the reduction of receivables, receivable days.

  • We are reaching final acceptance of the customer on the new tools more rapidly.

  • Operator

  • Jerry Fleming , Fawn Stock.

  • Jerry Fleming - Analyst

  • Could you give us a little bit of an update on the competitive landscape in the metrology business?

  • Are you seeing intense fight competition in AFMs?

  • And as you look at this bigger opportunity in the data storage market, what KLA making a bigger push in that area than they have historically?

  • UNIDENTIFIED CORPORATE PARTICIPANT

  • KLA's impact on data storage has been pretty minimal.

  • They have not been introducing products or creating software to make their products usable in data storage.

  • We always have anticipated that we would at some point see them in AFM.

  • They did not introduce a product at Semi West We continue to hear that maybe they will introduce a product at Semi Japan.

  • But the current order rate isn't impacted by very much of a change in the competitive landscape at all, it is more impacted by people just wanting to delay their spending and moving things from quarter to quarter.

  • Jerry Fleming - Analyst

  • Okay, thanks.

  • Operator

  • Glen Young, Smith Barney.

  • Jerry Fleming - Analyst

  • When you look out into your third quarter outlook, just a couple of questions.

  • One is -- can you give us a breakout as to where you see the relative strength coming?

  • I'm curious on data storage, because if we look back over the last three years, the only quarter that was ever up for data storage was the first one.

  • Then saw a sequential declines the rest of the year, I wonder if that's something you're looking for as well in '03?

  • UNIDENTIFIED CORPORATE PARTICIPANT

  • The Q3 orders of 64 million, when I go back and look at the prospect list at the beginning of the quarter, which was close to almost 80 million, we could identify some $15 million of activity that was postponed from Q2 to Q3 and Q4; about 9 million of it is in Japan.

  • And it's about -- of the 15 million, there's about 9 million that was data storage and about 6 million that was semiconductor.

  • All are identifiable projects that will fall into Q3 or Q4.

  • So we have good reason to be able to identify the increase that will occur in Q3 in bookings.

  • Relating to your comment on the trends in data storage, I am not sure that I would say that that is a traditional, historic, forever trend.

  • I thank data and storage is more influenced by where they are in introducing new technology and ramping up the capacity of their next generation head.

  • Jerry Fleming - Analyst

  • So really nothing seasonal there, just the down cycle tends to make orders all over the place but.

  • UNIDENTIFIED CORPORATE PARTICIPANT

  • Yes.

  • I think it is lumpy because the orders are big, and there's four or five players and they move their projects around.

  • And right now, I would -- it looks like they're going to have a stronger Q4.

  • Jerry Fleming - Analyst

  • Within data storage, can you give us a sense us how much of that is PVD at this point?

  • UNIDENTIFIED CORPORATE PARTICIPANT

  • Very little.

  • When I look at the orders that were postponed from Q2, IDD, IBE, ALD, IBE, there was no PVD.

  • Jerry Fleming - Analyst

  • Good, thank you.

  • Operator

  • David Duley, Wells Fargo Security.

  • David Duley - Analyst

  • One quick clarification.

  • Jack, could you just go over the reasons why margins were down sequentially and perhaps in the order of magnitude?

  • I think you gave several reasons and I'm just a little confused as to which exactly were sequential.

  • JOHN F. REIN - EVP, CFO, Secretary

  • Actually announced like was relative to the prior quarter.

  • I could walk through that again.

  • That was the sequential -- that was the comparison I gave.

  • And we had a $1.7 million negative margin impact from lower sales volume gross margin to $1.1 million effect of bifurcated sales under SAB-101 and $1 million effect of sales of inventory.

  • And then we had a $900,000 mix and some other factors, such as inventory write-down.

  • Offsetting that was the cost reductions as a result of plant consolidations, which impacted overhead and direct labor, and that totaled 2.4 million.

  • So that was a favorable impact.

  • David Duley - Analyst

  • That was year-over-year.

  • Sequentially, you're down like 3 percentage points.

  • What were the key magnitude?

  • UNIDENTIFIED CORPORATE PARTICIPANT

  • The key one again was SAB-101, which is a million and the inventory, which is a million, so those are the two factors I would say are the single largest elements in the sequential comparison.

  • David Duley - Analyst

  • When you look at your order rates versus your expectations, you kind of mentioned -- could you give us a little bit more clarity where you thought the miss came from?

  • I guess you said Japan was lower and semi and data storage were both lower.

  • Is that the key explanations behind your order expectations?

  • UNIDENTIFIED CORPORATE PARTICIPANT

  • I will repeat that.

  • When I look at the original prospect list, which was a little above the guidance, and I look at the actual experience of Q2, there is -- we missed about $15 million in orders that, none of which were lost, that were postponed from Q2 to what are now being described by those same customers as Q3, Q4.

  • And of that 15 million, 9 million relates to three customers in data storage, 6 million relates to 3 customers in semiconductor and of that 15 million, 9 million is in Japan.

  • David Duley - Analyst

  • Thank you for the clarification.

  • One final question from me.

  • You certainly talked about more recently increasing number of AFMs per fab.

  • Could you just walk us through why you think that number has gone?

  • I think it used to be going from 2 to 5 and now you seem to be talking about going from two to many more units.

  • Explain the delta there.

  • UNIDENTIFIED CORPORATE PARTICIPANT

  • The difference there is really the introduction now of more dedicated AFMs relating to etch CMT, mask and photo resist applications.

  • And so it is now clear that people will populate their fabs at edge with edge-only AFMs for 90 and 65 nanometers.

  • They will dedicate AFMs entirely to CMP inspection.

  • Likewise, photo resist will have its own AFM, as will masks.

  • So a year ago where we only had really the X3D, today, Veeco sells the X3D, the dimension X, the VX340 in combination.

  • Broader toolsets with more capability and dedicated process steps, bringing the potential from, as you said, what was once a 3-5 per fab to now 7-10 per fab.

  • And we have -- the other good news is that I mentioned the top 10 semiconductor device people all now have production Veeco AFMs in either failure analysis or the fab.

  • Actually, 9 out of the 10 have them in fabs, one has them in failure analysis, and there are now two or three customers that have exceeded five AFMs per fab.

  • So giving us more confidence that the 7-10 number is achievable.

  • David Duley - Analyst

  • Of the ones that have the higher unit counts, are they in a specific type of manufacturing, or is there any commonality amongst them?

  • UNIDENTIFIED CORPORATE PARTICIPANT

  • No, they're both foundry and device manufacturers.

  • David Duley - Analyst

  • Thank you.

  • Operator

  • Jay Mellon, RBC Capital Markets.

  • Jay Mellon - Analyst

  • Thank you.

  • A couple of quick questions.

  • First, can you go through cash flow from ops and deferred revenue?

  • And can you give a little bit more detail on the bookings mix that you expect next quarter?

  • Edward H. Braun - Chairman & CEO

  • Jack will take the first part.

  • JOHN F. REIN - EVP, CFO, Secretary

  • Sure.

  • I will walk you through the components of cash flow.

  • We had cash flow from operations of $6.4 million for the quarter.

  • We had CapX of 2.8, as I mentioned before.

  • And then included in investing activities in addition to CapX, there was a purchase of a new product line.

  • So that the net number for investing activities was a use of 4.4 million, and then finance activities was $200,000 income.

  • So the net cash flow was a positive 1.8 million for the quarter.

  • Jay Mellon - Analyst

  • Great.

  • Edward H. Braun - Chairman & CEO

  • On the bookings question, if you look at our distribution of bookings and the 64 million and you take my comments about the mix from specific projects in data storage and semiconductor, and the guidance being -- let me take the guidance as 67-70 million.

  • So at a $70 million bookings number for Q3, the top end of that range, you would probably be adding $3 million to data storage and $3 million to semiconductor in going from 64 to 70 million Q2 to Q3.

  • Jay Mellon - Analyst

  • Great.

  • And deferred revenue, again?

  • UNIDENTIFIED CORPORATE PARTICIPANT

  • Revenue, we also said was 67-70 million.

  • Jay Mellon - Analyst

  • the revenue deferred revenue that you ended with?

  • UNIDENTIFIED CORPORATE PARTICIPANT

  • It was mostly wireless.

  • Jay Mellon - Analyst

  • Do you have the number, though?

  • UNIDENTIFIED CORPORATE PARTICIPANT

  • We have a number for the deferred profit, which was 3.2 million.

  • Jay Mellon - Analyst

  • You're not reporting it for revenue?

  • UNIDENTIFIED CORPORATE PARTICIPANT

  • No.

  • Jay Mellon - Analyst

  • Okay, thanks.

  • Operator

  • Mike O'Brien, SoundView Technology Group.

  • Mike O'Brien - Analyst

  • Hi.

  • Good morning.

  • Could you give us a little bit more detail on some of the reasons for the strength in the wireless telecom?

  • I know coming from a low base, but is it just RFMD, or was there some other things that were really driving it?

  • UNIDENTIFIED CORPORATE PARTICIPANT

  • It has been like 3-5 major orders per quarter that have continued.

  • China, Japan has gotten more active, China and Korea have been active, Japan has now come on-stream in NBE.

  • We continue to sell both laboratory and production systems to Wi-Fi applications in the United States.

  • I think we have seen a bottom and we are just now seeing more Wi-Fi applications being funded.

  • Mike O'Brien - Analyst

  • One other question.

  • Can you talk, Ed, on the maybe a request for quotes from semi area or really as from all of your segments, how has that been improving?

  • Is it still getting better, maybe just give us a little flavor on how the fourth quarter could shape up?

  • Edward H. Braun - Chairman & CEO

  • There has been a steady improvement, because we have driven by 9 new product introductions, the request for quote and the sample activity has remained strong in each of the last two or three quarters and has strengthened.

  • I think what has changed, though, in a world where people are just trying to tightly manage CapX and cash is that they have added steps to the purchase process.

  • They have added -- tail end of the purchase process, not the beginning end.

  • The beginning, the funnel and the pipeline at the beginning of managing quarter flow looks quite prosperous.

  • But these delay in orders are an indication that people are wringing out every last bit of information before they approve capital spending, having to do with -- they are looking at more economic considerations, mean time between failure, operating costs of the equipment and making sure that they run samples, not just on blanket films, but on their devices as well.

  • So customers, good customers, have added steps to the purchase process that are tending to move around their projects from one quarter to another quarter.

  • Mike O'Brien - Analyst

  • Great.

  • Thank you.

  • Operator

  • Graham Tanaka , Tanaka Capital Management.

  • Graham Tanaka - Analyst

  • Hi, Ed.

  • Just a couple of bookkeeping things.

  • Were there any cancellations -- you were saying they were pushed out, so were there any cancellations?

  • It sounds like not.

  • And were there any pull-ins?

  • UNIDENTIFIED CORPORATE PARTICIPANT

  • There was $2 million in cancellation, Graham, that I indicated earlier.

  • The lowest level of cancellations in the last 10 quarters.

  • These were really more backlog adjustments.

  • There were cancellations, but they were very modest compared to prior history.

  • Graham Tanaka - Analyst

  • There were no pull-ins, right?

  • UNIDENTIFIED CORPORATE PARTICIPANT

  • No.

  • Graham Tanaka - Analyst

  • SAB-101 effects -- what is your best guess for the third quarter effect, third and fourth quarter?

  • UNIDENTIFIED CORPORATE PARTICIPANT

  • I think that we will return to a more normal environment.

  • On a comparative basis, just to give you a flavor for the impact of SAB-101 in the second quarter, metrology group, we had $1.7 million of almost full profit that came through on the bifurcated second part of the bifurcated sale.

  • In this second quarter, we only had 100,000.

  • So there was a significant difference I think we will return to more normal levels in the third quarter.

  • Graham Tanaka - Analyst

  • 1.7 million was in what period?

  • UNIDENTIFIED CORPORATE PARTICIPANT

  • In the second quarter of '02.

  • So comparing '02 -- yes -- second quarter for the prior year, that was the impact.

  • I do not have specific notes for the third quarter, but I do believe we will get back to normal levels of SAB-101 activity.

  • Also remember that at a time when people are buying only new technology and at a time when Veeco is getting a lot of bang for its buck in R&D and introducing 9 products in the last 6 months, which is a healthy thing.

  • But the side effects of introducing a lot of new products is that you're going to have volatility quarter to quarter and SAB-101 recognition of new products.

  • So I don't think you want to aim for smoothness in SAB-101.

  • I think what you would really like to see is as many new products introduced as possible that is the most healthy condition and with the understanding that from quarter to quarter you are going to have wrinkles in SAB-101 content.

  • Graham Tanaka - Analyst

  • Right.

  • ASBs -- how are ASB trends, particularly on AFMs, given that you're having more dedicated AFMs?

  • UNIDENTIFIED CORPORATE PARTICIPANT

  • They were confined to just AFM in molecular B methotaxy (.

  • We're now shifting to more standard recognition of those products, so there is a change there.

  • Anywhere where we have these multi-million dollar new products, the first couple that you ship, you defer the revenue entirely, and then you take a bifurcation approach as you are up to serial number 4 and 5.

  • And so you have bifurcations occurring in the transition of new products getting into latest serial number.

  • Graham Tanaka - Analyst

  • I was wondering, in terms of the revenue effect of average selling prices?

  • What is happening there?

  • UNIDENTIFIED CORPORATE PARTICIPANT

  • The revenue effect of average selling prices?

  • Graham Tanaka - Analyst

  • Yes -- what has been happening with average selling prices?

  • Going up or down?

  • UNIDENTIFIED CORPORATE PARTICIPANT

  • They have probably been creeping up.

  • Graham Tanaka - Analyst

  • Creeping up because of the mix or because of -- you're able to get -- ?

  • UNIDENTIFIED CORPORATE PARTICIPANT

  • No, as you automate your AFMs and as you cluster more process equipment in etch and deposition, you bring more features to the product and it has a higher ASB.

  • Graham Tanaka - Analyst

  • Great, thank you kindly.

  • Operator

  • Christina Osmena, Needham & Company.

  • Christina Osmena - Analyst

  • Quick question, Ed.

  • If we took those -- if those orders that were pushed out of the quarter were actually booked in the quarter, would your orders in Q3 be down, or how should we be looking at that, and why would they be down?

  • Edward H. Braun - Chairman & CEO

  • If we had gotten all of those projects into Q2, I guess you would have -- we would probably be more saying that you had two flat $65-$70 million quarters back-to-back.

  • It's hard to answer that question because you don't know -- it is hard to say that the delays we experienced in Q2 are unique to Q2, because I really think that what we're really all hearing is that people are putting new criteria in the purchase process of new equipment and I don't think that is going to go away in Q3 and Q4.

  • So I think all of us are seeing delays in major projects that will occur again in Q3, Q4 and Q1 going forward.

  • I am not sure that you can sort of harmonize all of those things into building a pro forma Q2 and Q3.

  • What is clear is that Q3 will benefit by the difficulties of Q2, because we have an unusual number of large programs that did not complete their order process in Q2.

  • That is $15 million of very identifiable activity, none of which was lost and none of which was canceled, but postponed.

  • Christina Osmena - Analyst

  • And so the delta that you're giving us to Q3 orders is pretty modest.

  • Compared to the magnitude of the pushouts, are most of those pushouts landing in Q4?

  • UNIDENTIFIED CORPORATE PARTICIPANT

  • No, most of them are reportedly being in Q3 activity.

  • But the other comment I've made in the last couple of quarters, and it was true again for Q2, is these quarters, current quarters for everybody, are very back-end loaded.

  • We're still living in a world where all of the equipment companies have an experience that they make their quarter with over 60 percent of the activity occurring in the third month of the quarter.

  • And while that continues, it sort of speaks to the lumpiness of capital spending.

  • And if there were a more genuine increase quarter-to-quarter, you would start to see some linear performance in the quarters.

  • And I don't know of anybody who is yet seeing linear performance in the quarters.

  • So that makes it difficult again to speak very, very precisely about a Q3, Q4 booking rate.

  • That's why think the range is required.

  • But it is very unusual that that large amount of projects were postponed from Q2 to Q3, and that gives us some confidence that Q3 will be this 5-10 percent higher number.

  • Christina Osmena - Analyst

  • Okay, thank you.

  • Operator

  • (Caller Instructions).

  • Glen Young, Smith Barney.

  • Glen Young - Analyst

  • A couple of questions here.

  • If I had 3 million to your semiconductor orders from the second quarter, I'm getting something like a 40 percent increase.

  • And while you're awful base, I just wanted to make sure I'm doing that right.

  • UNIDENTIFIED CORPORATE PARTICIPANT

  • If you added 3 million to semiconductor -- let do that with you -- you would have 7.3 and 3, divided by 70, you would have 15 percent of your business being in semi .

  • Glen Young - Analyst

  • Right, but it's a sequential increase of 40 percent?

  • UNIDENTIFIED CORPORATE PARTICIPANT

  • Yes.

  • Glen Young - Analyst

  • But just want to be sure -- you've done that in the past?

  • UNIDENTIFIED CORPORATE PARTICIPANT

  • Yes, you're doing that correctly.

  • Glen Young - Analyst

  • The other thought is on the SG&A .

  • UNIDENTIFIED CORPORATE PARTICIPANT

  • small numbers, Glen.

  • Glen Young - Analyst

  • I just wanted to ask Jack on the SG&A line, you suggested that there is a small risk coming.

  • When do you think we will start to see the benefit of that, and what was headcount at the end of the second quarter?

  • UNIDENTIFIED CORPORATE PARTICIPANT

  • We were at about 1060 at the end of the second quarter, in terms of headcount.

  • We should start seeing the benefit -- we should see sequentially down SG&A in Q3 and Q4.

  • Glen Young - Analyst

  • Great, thanks.

  • UNIDENTIFIED CORPORATE PARTICIPANT

  • So if you take my comments on reduction, we expect to be closer to something a little over 1000 people by the end of the year.

  • Glen Young - Analyst

  • Great, thank you.

  • Operator

  • (Caller Instructions).

  • It appears there are no further questions at this time.

  • I would like to turn the conference over to the speakers for any additional or closing remarks.

  • UNIDENTIFIED CORPORATE PARTICIPANT

  • Thank you, operator, and thank you all for your attention.

  • Again, we feel confident that we will see some increase in bookings as we have described in the Q3 timeframe and that you will continue to see earnings growth in the company going forward.

  • Thank you all and we will speak to you soon.

  • Operator

  • That does conclude today's presentation.

  • We thank you for your participation and you may disconnect at this time.

  • (CONFERENCE CALL CONCLUDED)