Veeco Instruments Inc (VECO) 2003 Q3 法說會逐字稿

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  • Operator

  • Please stand by.

  • We are about to begin.

  • Good day everyone and welcome to this Veeco third 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 Vice President of investor relations Ms. Deborah Wasser.

  • Please go ahead.

  • Deborah Wasser - VP, IR

  • Thank you operator.

  • Good morning everyone.

  • Welcome to our conference call reviewing Veeco's results for the third quarter ended September 30th, 2003.

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

  • Veeco announced our third quarter 2003 results at 7:30 a.m. this morning.

  • If you haven't yet seen the press release please visit the veeco.com Website 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 expressed 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 projections or other expectations and otherwise makes 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 and analysis sections of the company's report on 10-K and annual report to shareholders.

  • During this call management may address nonGAAP financial measures information regarding such nonGAAP financial measures, including reconciliation to GAAP measures of performance, is included in the press release and financial tables distributed this morning.

  • This information is also available on our Website.

  • This call is being webcast life 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  • The company does not plan to update the information on this webcast once it has been archived.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 conference over to Ed.

  • Ed Braun - Chairman, CEO

  • Thank you.

  • This morning Veeco announced its financial results for third quarter and nine months ending September 30, 2003.

  • I'll review revenue earnings and orders.

  • In revenue Veeco’s third quarter sales were $63.1 million down 14% sequentially, 13% below prior year and below our July guidance of $67 million to $70 million, a result of approximately $6.3 million of data storage process equipment tools being delayed from Q3 to Q4, of which approximately half, $3.1 million were a result of customer-caused facility delays, and the other half, $3.2 million, a result of Veeco manufacturing delays largely caused by receiving purchase orders late in the prior quarter.

  • Certainly disturbing to the quarter and suggesting the need for improved and more conservative scheduling going forward but not to be considered a recurring long term product or customer difficulty.

  • Earnings.

  • In Q3 our net loss was $2.1 million, a loss of 7 cents per share on a GAAP basis, while earnings excluding certain charges were a positive 3 cents per share, in line with our guidance, and up from zero in the prior year.

  • Gross margins were 48%, up sequentially from 44.6%, and up year-over-year from 47.2% despite less revenue.

  • EBITDA was $3.3 million, up 3% sequentially, and up 171% from prior year.

  • Operating expenses were down approximately $2.6 million sequentially, and down $6.1 million from prior year.

  • Indicating that our spending reductions remain on track.

  • Cash flow for the quarter was a positive $5 million.

  • Our balance sheet remains strong with $215 million in cash.

  • In all, good operational execution, despite lower revenue.

  • Q3 orders, Q3 bookings were $64 million, with a Veeco book-to-bill of 1.01 to 1--flat sequentially but with strong market sector performance from both semiconductor, which was up 30% from prior quarter.

  • In fact within that automated AFM bookings were up 170% sequentially.

  • Data storage as a sector was up 10%, while telecom wireless was down 29%, as one large $2 million Asian order moved from Q3 to Q4.

  • And scientific research down 4%, which can be expected to show seasonal fourth quarter improvement.

  • Worldwide geographic penetration remains strong with 60% of our Q3 orders outside of North America.

  • North America contributed 40% of the orders, APAC 25%, Europe 18%, Japan 17%.

  • Of significance our APAC orders in Q3 were up 49% in the quarter.

  • In total bookings were 8% below prior year.

  • And below our $67 million to $70 million July guidance.

  • As customers continue to tightly manage capital spending, and quarters continue to be back-end loaded.

  • Our backlog increased to $81.1 million.

  • There were no net cancellations in the quarter.

  • The capital equipment market remains difficult, with mixed signals.

  • The tone of our Q4 and 2004 outlook, and our internal booking forecast continues to improve.

  • And the positive signs are that customers continue to emphasize production of next generation devices, both in semiconductor, 130 nanometer and 90 nanometer devices and in data storage where 80 gigabyte platters and thin film heads are ramping, and they're beginning development of 120 gigabyte thin film heads for next year.

  • This has driven increased factory utilization rates to a point where capacity would normally be added.

  • And in fact, we realized four multiple tool orders for AFM and for ion beam etch and deposition in our Q3 semiconductor and data storage results.

  • In metrology, two customers placed multiple orders for production AFMs, one for a semiconductor application and one for data storage and in process equipment two customers placed multiple tools ion beam and PVD orders both in data storage.

  • Continuing the positive signs, industry factory utilization rates in Semi have now increased for six consecutive months and currently are over 95% for 90 and 130 nanometer nodes.

  • In another measure the industry capex to revenue ratio is at an all time low at about 15% versus its historic 20% to 30% levels.

  • All suggesting that industry underinvestment may be coming to an end.

  • Offsetting these combined positive indicators, is the fact the quarters remain terribly back-end loaded, customers are demanding higher capital equipment productivity and efficiencies, and continue to tightly manage cash, and to demand a heightened proof of device level yield or cost of ownership benefit demonstrated repeatedly before they buy.

  • So the buy cycle has been lengthened.

  • Having said all of that, the tone and the depth, that is the dollar amount of forecasted opportunities, has clearly increased, and we expect order improvement in Q4 followed by a broader recovery in 2004.

  • Veeco currently forecast that fourth quarter 2003 bookings will be in the range of $64 million to $70 million.

  • And that fourth quarter sales will be in the range of $64 million to $70 million.

  • And the company currently forecast that it will incur a net lost between 8 cents and 4 cents per share on a GAAP basis, and will earn between a penny and five cents per share excluding amortization of $3.3 million and restructuring charges of approximately $750,000 using a 35% tax rate.

  • Addressing our individual markets, first data storage, I would say that data storage continues to increase aerial density and is still ramping 80 gigabyte platters in production.

  • While beginning development of 120 gigabyte for 2004-2005 introduction.

  • As well as the beginning of development of perpendicular recording heads likely to be required for aerial density requirements in 2005 and 2006.

  • And these prompt a next generation of equipment in metrology being developed now.

  • Thin film head film stack complexities, dimension tolerances, smaller feature size, reduced fly height all continue to provide Veeco growth opportunities in both process equipment and Metrology.

  • The current industry forecast for hard disk drive unit growth is a compounded 10% growth to 325 million drives, which will – a forecast is being required in 2006, up from about 200 million drives today.

  • With growth in mobile and notebook applications, and new consumer applications, outpacing desktop and PCs.

  • We are currently seeing the start of capacity increases from our vertically integrated hard drive customers who are ramping their 80 gigabyte platter size and gaining market share.

  • In the semiconductor sector we booked 9 automated AFMs in Q3 for in line fab applications mostly 300 millimeter and CMP applications with significant APAC and Japan concentrations and we received an order for our first Vx 340 higher through put CMP AFM tool.

  • Bookings were up 30% sequentially in this sector and will likely increase in Q4.

  • In wireless Telecom we had a weak quarter with a major Chinese molecular beam epitaxy system purchase being delayed to Q4.

  • So we expect an uptick in orders from a disappointing Q3 in wireless in Q4.

  • In scientific research we continue to sell approximately 100 high gross margin AFMs a quarter.

  • Sales mix in this quarter favored some lower ASP models resulting in a slight 4% dollar decline in the order rate.

  • Our new broader line of research AFM products continue to be well accepted and we expect some seasonal order growth in this sector in Q4.

  • I will pause here and Jack will review financials.

  • Jack Rein - EVP, CFO

  • Thank you Ed.

  • The three months ended September 30, 2003, sales were $63.1 million a decrease of 13% versus the 2002 third quarter.

  • The decrease is attributable to a reduction of process equipment sales of 18% and metrology sales of 9%.

  • By market, sales from the prior year were down 20% in research, 33% in semiconductor, 18% in telecom wireless.

  • Partially offset by an increase in sales of data storage of 19%.

  • Sequentially Veeco sales decreased $10.3 million or 14% from $73.4 million in the second quarter.

  • The sequential sales decrease is mostly in process equipment and by market was primarily in data storage and telecom wireless industries.

  • Gross margin improved 48% despite a $9.6 million sales volume decrease as a result of -- the improvements is a result of the higher concentration of Metrology sales as well as improved overhead structure in process equipment resulting from the plant consolidations and headcount reductions undertaken in the fourth quarter of 2002.

  • Processing equipment gross margin percentage improved from 31% to 40% during the quarter.

  • Operating expenses $26.9 million, or 42.7% of sales down 6.1% from the third quarter of 2002.

  • The decrease was due to cost cutting and consolidation measures enacted at the end of 2002.

  • Sequentially operating expenses were down $2.6 million from the second quarter.

  • Principally due to lower selling expenses and lower compensation costs in administration.

  • R&D expense totaled $11 million or 17.4% of sales, which was the same dollar level as the second quarter of 2003.

  • Amortization expense totaled $3.3 million in the third quarter of 2003, remaining at a comparable level to the third quarter of 2002.

  • Restructuring costs of $1.8 million during the third quarter of 2003 included severance expenses, related to the cost reduction programs announced and initiated in the fourth quarter of 2002, the charges principally related to the relocation of our Sunnyvale California AFM business to Santa Barbara, while the actions were planned and initiated in the fourth quarter of 2002, (inaudible) accounting guidelines require that associated charges be reported when the actions are actually completed.

  • Net interest expense totaled $2.1 million compared to net interest expense of $1.4 million in the comparable 2002 quarter, the increase is principally due to interest income on short term investments as a result of lower rates.

  • Third quarter 2003 net loss was $2.1 million or 7 cents per share equal to the net loss of $2.1 million or seven cents a share in the third quarter of 2002.

  • Third quarter EBITDA totaled $3.3 million, compared with $1.2 million in 2002.

  • EPS for the quarter was 3 cents on this basis, using a 35% tax rate excluding restructuring and amortization expenses.

  • This compares to a break-even EPS excluding certain charges in 2002 third quarter.

  • For the 9 months of 2003 sales totaled $202.4 million, or a 12% decrease from 2002.

  • Due primarily to a decrease of $23.5 million in process equipment sales for the data storage industry.

  • We are however encouraged that the third quarter of '03 orders to this sector are up compared to both prior year and sequential quarters.

  • Gross profit for the 9 months was 46.6% of sales compared to 44.9% in 2002.

  • The gross margin improvement is due to a 5.4 percentage point improvement in process equipment gross margins, resulting again from cost savings attributable to plant consolidations and other overhead reduction measures, as well as proportionately more Metrology sales that have higher average gross margins.

  • SG&A was $52 million down $5.4 million from 2002 levels.

  • The decrease in SG&A is due principally to a decrease in selling expense, resulting from reduced personnel occupancy and advertising spending.

  • R&D expense totaled $33.5 million or 16.6% of sales, which is our targeted level at the current sales volume.

  • This level of spending ensures a vibrant level of product and technology development.

  • Compared to the prior year period there was a $7.7 million decrease in spending resulting from the efficiencies achieved to the site consolidations in process equipment in the fourth quarter of 2002.

  • Amortization expense totaled $9.6 million in the first nine months of 2003 versus $10.1 million in the 2002 comparable period.

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

  • Construction costs of $3.3 million for the 9 months were due to severance and (inaudible) related to the restructuring measures announced in the fourth quarter of 2002.

  • Net interest expense of $5.7 million compared to $4.4 million in the comparable 2002, 9 month period.

  • Again the increase is due to reduction interest income on short term investments resulting from low interest rates.

  • Veeco's nine months 2003 net loss was $4.9 million or 17 cents per share compared to a net less of $7.2 million or 25 cents per share in the first nine months of 2002.

  • Approximately $28 million of (inaudible) sales, EBITDA increased $4.7 million to $9.5 million in the current 9 month period compared to 4.8 million in the first 9 months of 2002.

  • Earnings per share excluding certain charges for the first nine months of 2003 were 8 cents compared to 1 cent in the comparable 2002 period.

  • The charges excluded from this calculation are amortization and restructuring cost and assume a 35% tax rate.

  • Backlog at September 30th was approximately $81 million.

  • With regard to outlook we are currently forecasting third quarter orders and revenues as Ed indicated in the range of $64 million to $70 million with a forecasted GAAP loss per share in the range of 8 cents to 4 cents, or earnings per share in the range of 1 cent to 5 cents excluding amortization and restructuring costs.

  • We expect approximately $750,000 of restructuring cost in the fourth quarter.

  • We believe these are the last restructuring charges related to our consolidation plan.

  • We anticipate gross margin to be in the range of the first nine months since there will be a higher concentration of process equipment sales in Q4 than in Q3.

  • We also expect operating expenses to be in the range of the (inaudible) month quarterly average of about $28.3 million.

  • The balance sheet, we look at cash and equivalents totaling $215 million, at September 30th.

  • We are pleased to have generated $4.8 million in cash for the third quarter.

  • Accounts receivables were $62.9 million down from $69.3 million in the June 2003 quarter.

  • DSOs were 79 days.

  • Inventory increased to $86.1 million at September 30, up from $84.5 million at June 30, 2003 due to delayed process equipment revenues as indicated of approximately $6 million.

  • Had it not been for these delays inventory would have been reduced on a sequential basis.

  • Inventory turnover was 1.5 times.

  • Capital expenditures were $1.8 million for the third quarter of 2003 and $6.5 million in the nine months.

  • Depreciation expense totaled $2.5 million in the third quarter of 2003 and $7.6 million for the nine-month period.

  • Shareholders’ equity totaled $306 million at September 30th, thus our balance sheet remains quite strong.

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

  • Ed Braun - Chairman, CEO

  • Thank you Jack.

  • So in all, a difficult Q3 but looking forward, we are encouraged by our semiconductor and data storage order strength in this quarter, and we feel cautiously optimistic that rising industry utilization rates and unprecedented low levels of capex to revenue ratios are in fact indicators of a slowly improving capital equipment environment.

  • Our Q3 operating results and our reduced operating spending levels reaffirm the positive earnings leverage that can be expected with modest growth in revenue.

  • The difficult but necessary spending cuts are now behind us.

  • The factory consolidations were well executed in both our metrology and our equipment groups, and our focus is now on new product technology and I think that will be rewarded by a stronger '04 growth opportunity.

  • We've maintained our leadership market share positions, and we continue to fund our critical new product development programs.

  • Operator, we'd be pleased at this point to take some questions.

  • Operator

  • Thank you. (Operator’s instructions) Stuart Muter with Adams, Harness and Hill.

  • Go ahead please.

  • Stuart Muter - Analyst

  • Good morning a couple of questions for Ed.

  • The Chinese MBE tool, was that expected to be booked and shipped in Q3.

  • Ed Braun - Chairman, CEO

  • it was just expected to be booked in Q3.

  • It just -- it has taken longer to get all the signatures and it will be booked in Q4.

  • Stuart Muter - Analyst

  • Okay.

  • And on the -- the Semi AFM you mentioned one customer came back and had a I think it was a repeat order for AFMs.

  • Could you elaborate on how the penetration for in-line is going in the fabs, are you getting multiple tools in the same installations at this point?

  • Ed Braun - Chairman, CEO

  • Yeah, I think we're -- you know, in a difficult quarter, a bright sign, if you will, was the fact that there were multiple orders both in equipment and in AFMs.

  • In AFMs, we had a multiple order from an in-line semiconductor application and a multiple order from a data storage application.

  • And those were both repeat customers who are now increasing the number of AFMs in their fab.

  • But the multiple orders I think are of value because, you know, we've had a string of quarters in this last year that were technology-only buys.

  • And now we're at least seeing the beginning of some capacity spending.

  • Stuart Muter - Analyst

  • Thanks, Ed.

  • And a quick question for Jack.

  • In terms of your GAAP break-even, where do you see that based on, you know, revenue level, approximately?

  • Jack Rein - EVP, CFO

  • I guess we'd look at a break-even of about $70 million for that.

  • Stuart Muter - Analyst

  • Okay, thank you.

  • Operator

  • And our next question comes from Glen Yeung with Smith Barney.

  • Please go ahead.

  • Glen Yeung - Analyst

  • Just a point of clarification, so the order that was pushed out was something like $2 million?

  • Is that right?

  • Ed Braun - Chairman, CEO

  • Yes.

  • Glen Yeung - Analyst

  • And the $6.3 you talked about that was a shipment delay, is that correct?

  • Ed Braun - Chairman, CEO

  • Yes, $6.3 million missed if you will from revenue, was sort of half-caused by customer facility delays and half-caused by manufacturing delays having gotten those orders very late in the prior quarter.

  • Glen Yeung - Analyst

  • Okay.

  • So if I were --

  • Ed Braun - Chairman, CEO

  • And those were all process equipment data storage applications.

  • Glen Yeung - Analyst

  • Okay.

  • If I were to look at your order guidance, then, of $64 million to $70 million, given that you're going to pick up a couple of million in orders that were delayed from Q3 and you should see a sequential increase in industrial, where should I expect to see decline?

  • Ed Braun - Chairman, CEO

  • I think you're going to see 1 or $2 million increases in each sector.

  • I think data storage will go up a couple of million, semiconductor will go up at least $1 million.

  • Telecom wireless you've just spoken of and scientific research will go up a couple million likely because it is a seasonal business that usually benefits in the December quarter.

  • So I see a sort of across the board modest increase of $6 million or $7 million that would at the top end of the guidance get you to $70 million.

  • Glen Yeung - Analyst

  • Right, okay.

  • And what's your level of confidence there given that your range is $64 million to $70 million but your expectation is $70 million or $71 Million?

  • Ed Braun - Chairman, CEO

  • My level of confidence is very high.

  • My level of previous accuracy is terrible.

  • Glen Yeung - Analyst

  • What about on the revenue side, same kind of issue, we're talking about a $6 million increase that was pushed out from Q3 and yet the guidance is for it to look pretty flat.

  • Ed Braun - Chairman, CEO

  • Yeah, again, I think you know, the optimism within the company is that we can be near the high end of that range.

  • You know we have taken steps to have a more conservative manufacturing forecast in the quarter, to you know, create sort of an artificial fence so we get things done by the middle of December and not by the end of December.

  • You know, on the equipment side all of the shipments are of course in the backlog.

  • So I mean, you know, we have -- we think we're being conservative in sizing revenue in Q4.

  • Glen Yeung - Analyst

  • Okay.

  • And then Jack a question on gross margin.

  • I think I heard you say it could be down a little bit because of mix issues in the fourth quarter.

  • I wonder if you could just give a little more detail there.

  • Jack Rein - EVP, CFO

  • I think it's more mix issues in the third quarter.

  • I think our third quarter 48% was I guess favorably impacted by the fact that we had a much higher concentration of Metrology sales in the quarter than process equipment.

  • And we expect to see it pick up in Process Equipment sales, which have lower gross margin than the metrology sales.

  • Glen Yeung - Analyst

  • Maybe something in between what we saw in the second and the third quarter?

  • Jack Rein - EVP, CFO

  • Yes, that is what I said, this is sort of an average.

  • It would be exactly that, and you get to that same sort of point if you just use the nine month average in the gross margin.

  • Glen Yeung - Analyst

  • Okay thanks.

  • Operator

  • Our next question comes from David Duley with Wells Fargo Security, go ahead please.

  • Dave Duley - Analyst

  • Could you talk a little bit, you mentioned how your quarters were back-end weighted, and I thought that was typical for your industry.

  • So could you differentiate this quarter from previous quarters?

  • Also I was wondering if you might speak about, have you seen any activity from the upgrading of the Read-Write assets?

  • Ed Braun - Chairman, CEO

  • Second question first.

  • We've gotten some orders from Western Digital, slowly.

  • I mean, they are finally, in fact there is some activity even in this quarter as well.

  • Western Digital is upgrading the Read-Write assets and, as I'm sure you have followed, they have started to produce a couple million heads.

  • So I think Western Digital will be -- they were a customer in Q3, we did get orders from them, and I think we will get orders in both Q4 and the first quarter.

  • And they'll be a higher producer of heads in the next 6 months.

  • And need to do some work to, you know, sort of regain strength in 80 gigabytes and begin to have a process development program for next generation 120 gigabytes.

  • On the back end on your earlier question, you're correct in saying gee, all of the quarters have been back-end loaded in the last five or six quarters.

  • Why was this quarter different?

  • You know, in fact, they're all sort of a horserace while they continue to be this back-end loaded and you're booking $2 million tools that are frequently delivered the last ten days of the quarter, you're continuously running this risk of either us delaying or the customer delaying a quarterly shipment.

  • And it's not a fact that the order pattern has changed.

  • It's that we got caught in this quarter not being able to leap tall buildings with a compressed delivery schedule.

  • And so I think we're just going to be a little more conservative in not scheduling Herculean efforts in the last three weeks of the quarter.

  • Dave Duley - Analyst

  • Now at one point or another Read-Write I think was spending $15 million to $20 million annually.

  • When would you say that they would get on to that pace on a quarterly basis?

  • Ed Braun - Chairman, CEO

  • That was quite a while ago.

  • I think Western could be probably in the next 18 months could be back to that level but they will ramp to that level.

  • I think they would start by spending at half that rate in the next two or three quarters.

  • You know, on an annual basis and then ramp to that.

  • Dave Duley - Analyst

  • Then finally one last question from me.

  • On listening to the Seagate folks, it sounds like a large percentage of their drives this Christmas will be 80 gigabyte and they even talked about introducing, I think, some 100 gig Product.

  • When the big upgrade cycle for you occurs at 100 and 120, when would we see in your opinion kind of the first signs of more capacity-oriented purchases for 100 and 120?

  • Ed Braun - Chairman, CEO

  • Well, I see-- that's probably six to nine months.

  • But earlier than that, we're going to see some benefit by another -- by the fact that Seagate is gaining market share.

  • Seagate is really doing a nice job on 80 gigabyte.

  • And the forecast list for our Q4-Q1 order rate has a lot of Seagate in it, a large of which is just capacity on 80 gigabyte.

  • So I think we'll see a healthy Seagate in our order book in Q4 and Q1 on capacity and then we will see some 120 gigabyte work probably Q2.

  • Dave Duley - Analyst

  • Would it be correct to assume that kind of Western Dig and Seagate are the swing factors in your order book over the next couple of quarters?

  • Ed Braun - Chairman, CEO

  • It's broader than that.

  • Every one of the vertically integrated drive manufacturers are seeing pickups in mobile, in nonPC applications, you know, consumer applications, good success in 80 gigabyte.

  • I think we're going to see good order strength coming from data storage throughout our entire customer list.

  • Dave Duley - Analyst

  • Thank you.

  • Operator

  • Our next question comes from Robert Maire (ph) with Semiconductor equipment.com.

  • Go ahead please.

  • Robert Maire - Analyst

  • Just talking about the order patterns and such, you heard from ASML that they got 50% of their orders in the last two weeks of the quarters, and obviously this seems to be an increasing trend.

  • Aside from being more conservative on the guidance is there anything else that you're thinking of doing such as pricing or other things with your customers to try and sort of smooth out the quarter, and you know in relation to this quarter I'm guessing that perhaps more of a hockey stick than previous quarters.

  • But aside from just the guidance anything else you think you can do?

  • Ed Braun - Chairman, CEO

  • Well, you know, we've begun working with our major accounts in terms of account management teams sort of trying to educate those accounts as to the jeopardy they, in fact, put themselves in, if they back-end load quarters, and still demand that the product be shipped to them three months later, they put at risk their own ramp.

  • So we have begun having deeper conversations with our major accounts about letting us do some of the demonstration and the sample work earlier than they might normally let us so that orders could be more linear in the quarter, and in the end shipments to them more linear, and more satisfy their production ramps.

  • So we are taking steps to sort of share the burden with them and see if they can understand the benefit of not being so back-end loaded.

  • Robert Maire - Analyst

  • Okay.

  • And one last thing, given the lumpiness and customers waiting til very high utilization rates is there any more risk in terms of potential future cancellation, as we had seen a couple of years ago where we had orders in the last half and pull-backs in the first half, does their ordering pattern give you any cause for that type of concern?

  • Ed Braun - Chairman, CEO

  • No, these are pretty meager orders that we're getting.

  • And you know the backlog is $81 million.

  • There are shipment dates on everything.

  • We're not seeing, you know, this is the first quarter in probably four or five or six quarters that there have been multiple orders but they are two-piece multiple orders.

  • So no, I think we're a considerable distance from the fear of over-ordering.

  • Ed Braun - Chairman, CEO

  • Okay.

  • Thank Thanks.

  • Operator

  • Next question comments from Brett Hodess with Merrill Lynch.

  • Go ahead please.

  • Brett Hodess - Analyst

  • In the research side, I noted that normally you would get the seasonal uptick in the fourth quarter and we usually get a little seasonal down tick, if I remember correctly, in the first quarter.

  • The nanotech portion of the research has been growing.

  • Does that see the seasonal pattern and can you give us an update on how much of the business is nanotech at this point?

  • Ed Braun - Chairman, CEO

  • Nanotech is still about -- if I combine nanotech and life sciences, and it is getting hard to draw this line because as nano succeeds, it sort of impacts material science, life science, all of the scientific research elements, but I would guess that it's – the last time we sampled it, it was 40% to 50% of our scientific research activity.

  • And I think it's still in that range.

  • And I think we are -- you know, some of the pause that we saw in the third quarter is probably attributable to, you know, state budgets, are somewhat damaged and even though this is federal money it has to flow through state sites.

  • And so we saw, you know, sort of a modest Q3 that I think will be increased in Q4.

  • Brett Hodess - Analyst

  • Okay.

  • And do you think that research will be as seasonal when you go out of Q4 into Q1 as it normally is at this point?

  • Ed Braun - Chairman, CEO

  • I have no reason to think otherwise.

  • Brett Hodess - Analyst

  • Okay.

  • And then the other question I had was for Jack.

  • On the operating expenses I think you said that they would go back up into the sort of the average of the first three quarters in the 28, 28.3 range.

  • Other than the fact that the sales are rising some, is there something else going on in the operating expenses to make them move up fairly largely from where you were at in September?

  • Jack Rein - EVP, CFO

  • Well, we did -- we did have a recovery of a written-off receivable in the quarter that was recognized in the operating spending line.

  • So that will not recur in the fourth quarter.

  • Ed Braun - Chairman, CEO

  • And the -- Brett, the first two quarters were at a little over $29 million.

  • And I looked at some of Jack and I -- my earlier notes, we said that we would like to have ended the year on about a $28 million spending level.

  • And that's exactly where we are.

  • Brett Hodess - Analyst

  • Okay very good thank you.

  • Operator

  • And our next question comes from Mike O'Brien with SoundView Technology Group.

  • Go ahead please.

  • Mike O Brien - Analyst

  • Good morning.

  • Maybe starting out on that first receivable that you got this quarter, could you quantify that for us?

  • Jack Rein - EVP, CFO

  • In the range of about $900,000.

  • Mike O Brien - Analyst

  • About $900,000.

  • Now, I thought that you had expected research to be up in the third quarter.

  • Is it just really again just because of the budgets and some of the tight state budgets on why it wasn't up this quarter?

  • Ed Braun - Chairman, CEO

  • Yes, and you know the swing in research was pretty small.

  • It was down 4%.

  • So yes, we expected it to be up a million or so and it was down 4%.

  • It sort of you know, could equally be described as being flat.

  • Mike O Brien - Analyst

  • Okay.

  • And I guess maybe going back to the order picture and the outlook for December and maybe the conservatism, you know, it seems with some of the push-outs, you know, I am kind of just a little bit surprised at the bottom end of the conservatism is flat.

  • If all the businesses seem to be getting a little bit better, you know, what -- and we're assuming we would be at a higher level without that push-out.

  • Why put a conservative number of flat out there on the bottom end?

  • Ed Braun - Chairman, CEO

  • I think it's a -- you know it's sort of an indication of the times.

  • There are a lot of mixed signals.

  • On one hand, you're absolutely right.

  • There are these very positive signs, that you know, we can identify orders that slipped out of Q3 that are going into Q4, you and I have never seen capitalization ratios this low.

  • Utilization rates are you know at very high levels.

  • You know, but I -- I kind of said the same thing at the end of Q2, when we were sitting here talking about a disappointing $63 million or $64 million of orders, and I remember saying I could name $10 million worth of orders that slipped from Q2 into Q3.

  • But they -- you know, stuff keeps slipping, and so offsetting all these positives continues to be the fact that people have gotten very good at increasing the efficiency and productivity of the capital that they buy, and buying as slowly as they can buy, you know, until they hit utilization rates and capex ratios that are undeniable.

  • And I don't know whether we're exactly there yet.

  • So I mean you've heard this I'm sure from lots of CEOs, there are some very strong good growth signs in a market that's still on a day-to-day, week-to-week basis very difficult.

  • Mike O Brien - Analyst

  • Okay, thank you.

  • Operator

  • And our next question comes from Mark Miller with Hoeffer & Arnett.

  • Go ahead sir.

  • Mark Miller - Analyst

  • Ed, I just wanted to get your feelings for the progression on data storage.

  • The 100 to 120, it is my belief and I don’t think you would disagree, that (indiscernable) perpendicular, is that your belief that is essentially what they're doing now?

  • Ed Braun - Chairman, CEO

  • It will not be perpendicular you are saying?

  • Mark Miller - Analyst

  • It will not be perpendicular.

  • Ed Braun - Chairman, CEO

  • Yes, I agree.

  • I think when we hear people on technology road maps discuss perpendicular, let me slip for a minute to aerial density.

  • It is usually 130, 140 gigabits per square inch is where they say they have to go to aerial to perpendicular recording.

  • So I really look upon that as sort of an '05-'06 event.

  • And I think they will just keep tweaking in-plane TMR-GMR heads to get to 100 and probably 120 gigabyte platters before they have to put into production perpendicular recording.

  • But they'll start to spend money in perpendicular recording R&D and process development certainly in the next 12 months.

  • Mark Miller - Analyst

  • As far as Western Digital you mentioned you thought that they still hadn't got their plan together for 100, 120 and they'll need to add for that and that's exclusive from perpendicular is that correct?

  • Ed Braun - Chairman, CEO

  • They're doing a lot of positive things you know starting from what was a cold factory and turning it back on and they've had a lot of success now in making heads.

  • But I would expect to see orders from them for the more advanced equipment somewhat delayed compared to some of the other larger data storage houses.

  • But they will participate in those next-generation heads.

  • Mark Miller - Analyst

  • And the Innova equipment that Seagate put in, do you have any idea, is that just all for advanced programs or is that going to cut in for some 100, 120?

  • Ed Braun - Chairman, CEO

  • That equipment was mostly utilized at 80.

  • I think Seagate and others will look for different solutions for 120.

  • Mark Miller - Analyst

  • Thank you.

  • Operator

  • Our next question comes from Matt Petkun with D. A. Davidson and company.

  • Go ahead please.

  • Matt Petkun - Analyst

  • Most of my questions have been answered.

  • But Ed could you comment at least briefly on what your lead times are on the process equipment side and what they are today and what you expect them to be going forward?

  • Ed Braun - Chairman, CEO

  • They are probably 14 to 16 weeks, which is why we have this difficulty when we get orders at the tail end of the quarter.

  • We probably would like to reduce them by three or four weeks.

  • We've done a very good job of compressing manufacturing cycles in the Metrology side and we need to do that now in Equipment, because I think people are going to be -- they're going to buy at the last minute and even in this buildup.

  • So we'd like to take sort of 14 to 16-week build cycles down to -- by two weeks.

  • Matt Petkun - Analyst

  • With that in mind, are you seeing any opportunity or maybe not for price increases but for some stabilization of pricing in that market?

  • Ed Braun - Chairman, CEO

  • Yes, you know, we haven't seen terrible ASP erosion or price erosion.

  • What we've seen is just more demand for support, and process support, and service support at the -- at the right -- at ASPs at our published ASPs.

  • Matt Petkun - Analyst

  • On the sputtering side, competitively with Innova is pricing stable?

  • Ed Braun - Chairman, CEO

  • Yes.

  • And then finally, you had commented about the $10 million push out from last quarter, I recall that was $10 million to $15, I can't recall exactly.

  • Ed Braun - Chairman, CEO

  • Exactly.

  • And half of it was achieved in this quarter.

  • Matt Petkun - Analyst

  • So about half of it was achieved in this quarter and would you say that other half was pushed out again or has maybe kind of evaporated?

  • Ed Braun - Chairman, CEO

  • No, it has not evaporated.

  • But now people have put later dates on those ramps.

  • Matt Petkun - Analyst

  • Okay.

  • It was a portion of that the push outs you've spoken about this quarter then, the $2 million in the telcom wireless kind of the business and then to data storage?

  • Ed Braun - Chairman, CEO

  • Right.

  • Matt Petkun - Analyst

  • Okay.

  • Ed Braun - Chairman, CEO

  • In fact I remember, I think it was Needham on that last call, the same discussion, of people saying, my God, how could you be so conservative in your order forecast when you can name $10 or $15 million worth of stuff that slipped that you feel you're going to get in this quarter, And as part of my answer I said, it could be that $10 or $15 million of new (inaudible) will slip.

  • And that's exactly what's happening.

  • People are just taking a longer period of time to make purchase decisions based on their belief that they want capital efficiency to be very, very high and they want you to run lots of wafers and they even wait until they turn those wafers into devices and measure yields, and measure magnetic properties to be sure that the equipment is going to ramp.

  • They've gotten so good at that that even as economic times improve, I don't think they're going to lose that.

  • I think they are going to retain that as part of their capital utilization programs, they are just going to be demanding and we're going to have to work that into how you get orders.

  • Matt Petkun - Analyst

  • So it sounds like then at least your discussions with customers have very, very long lead times in terms of your visibility into what their hopes and intents would be for the next nine months?

  • Ed Braun - Chairman, CEO

  • What I said earlier was that they're becoming more open to a discussion about the difficulty of giving people -- many of them now know that they give us orders and make -- and demand manufacturing in lead times that are shorter than our manufacturing cycle.

  • And so those discussions are occurring to, you know, to strike some accord where we'll bring our manufacturing times down but they need to give us more lead time in new order placement.

  • And I think that will happen.

  • Matt Petkun - Analyst

  • Okay.

  • Thank you.

  • Operator

  • Our next question comes from Jay Mellen with RBC Capital Markets.

  • Jay Mellen Do you have an estimate for shipments this last quarter and what do you think they'll be for the December quarter, and then the deferred revenue for the quarter?

  • Ed Braun - Chairman, CEO

  • I'll let Jack do that.

  • Jack Rein - EVP, CFO

  • It was about a $600,000 difference between revenues and shipments.

  • So our shipments were $600,000 less than revenues in the quarter.

  • And deferred profit is $2.4 million.

  • Jay Mellen - Analyst

  • $2.4?

  • Jack Rein - EVP, CFO

  • Yeah.

  • Jay Mellen - Analyst

  • And do you have an estimate for shipments next quarter?

  • Jack Rein - EVP, CFO

  • We think that they will be pretty equivalent to revenues.

  • Jay Mellen - Analyst

  • Okay.

  • Thanks.

  • Operator

  • And our next question comes from Byron Walker with UBS.

  • Go ahead please.

  • Byron Walker - Analyst

  • Good morning.

  • Any nonrecurring items in gross margins other than the previously written off receivable?

  • Jack Rein - EVP, CFO

  • That wasn't in gross margin it was in operating --

  • Ed Braun - Chairman, CEO

  • It was in spending, Byron.

  • Byron Walker - Analyst

  • I'm sorry?

  • Ed Braun - Chairman, CEO

  • That was in operating spending.

  • Byron Walker - Analyst

  • That was in operating.

  • What's the math on the receivable then how does that flow down to earnings?

  • Ed Braun - Chairman, CEO

  • How does it flow down?

  • It's a selling expense.

  • Byron Walker - Analyst

  • Okay, so it all goes into selling expense?

  • Ed Braun - Chairman, CEO

  • Yes.

  • Byron Walker - Analyst

  • What was the earnings impact?

  • Ed Braun - Chairman, CEO

  • It was about $900,000.

  • Byron Walker - Analyst

  • On a --

  • Ed Braun - Chairman, CEO

  • Pretax.

  • Byron Walker - Analyst

  • -- pretax, okay.

  • Pretax.

  • Ed Braun - Chairman, CEO

  • We blame the sales force for not being able to collect the receivable.

  • Byron Walker - Analyst

  • I can imagine the heat.

  • And we've talked before about inventories, they remain stubbornly high and obviously part of this is getting ready for a ramp and what to do.

  • But do you have some internal targets of where you'd like to see that number?

  • Ed Braun - Chairman, CEO

  • As I said in my opening comments, had it not been for the $6 million of process equipment revenues, we would have seen a decline quarter to quarter.

  • And we did have a decline in the June quarter.

  • So we are making progress in inventories.

  • Our raw materials are actually down quarter to quarter and year-to-date.

  • So it's a matter of making sure the shipments happen on a timely basis.

  • But we do -- we have targeted a several million dollars reduction in Q4.

  • Byron Walker - Analyst

  • And then just a question for Ed is, it looks like the mobile PCs are far exceeding desktops.

  • Does that indicate that the 80 gig generation will have an extended life to it?

  • Ed Braun - Chairman, CEO

  • I think so, because, most of our customers, once they have introduced the 80 gigabyte head, would like to use it in more of their product line.

  • And so I think it will have impact in the non-PC, the mobile and the consumer electronic markets.

  • Byron Walker - Analyst

  • That mean maybe they get a little better return on their investments?

  • Ed Braun - Chairman, CEO

  • Yes.

  • Byron Walker - Analyst

  • That ultimately flows back to capital spending, we hope?

  • Ed Braun - Chairman, CEO

  • Yeah.

  • And they've been, you know, certainly the last six months has been an improved time for disk drive manufacturers in terms of their own operating performance improving, their own balance sheets getting better.

  • And to the investor, the investor is probably happy that they've tightened up on capital spending.

  • But I think we certainly see encouragement from our own investment community as to the growth opportunities of Veeco in data storage.

  • It's not that it's not looked at as my God, those customers are going to go away, they aren't going to have balance sheets, they're not going to pay you.

  • I think they're a genuine growth opportunity.

  • People today talk about going from 200 million drives a year to 400 and 500 million drives a year.

  • And in these applications where magnetic media has continued to be a very good price performance answer for storage.

  • Byron Walker - Analyst

  • I'm surprised actually you didn't talk a little bit more about PVR.

  • That looks like a pretty explosive opportunity.

  • Ed Braun - Chairman, CEO

  • No, there -- and although they're starting from very small numbers the growth rate in consumer electronics, you know, drives in your living room, so to speak, are 40 and 50% growth rates, you know, from small numbers.

  • Byron Walker - Analyst

  • And then, any view on when Telecom comes back?

  • Ed Braun - Chairman, CEO

  • '05.

  • Byron Walker - Analyst

  • '05, okay.

  • Good, thanks.

  • Operator

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

  • Go ahead please.

  • Mark Fitzgerald - Analyst

  • Ed, when you look out into next year is it basically disk drive that's the big growth opportunity for you?

  • Ed Braun - Chairman, CEO

  • No, I think when you and I read all of the current forecast for semiconductor after three years of decline and with these very low capex ratios, and good growth in 90 nanometer and 130 nanometer, I think there's growth both in semiconductor and data storage for Veeco in '04.

  • Mark Fitzgerald - Analyst

  • Would you expect the mix to shift then towards those, higher than what we got this year for semis and disk drives for your own business?

  • Ed Braun - Chairman, CEO

  • Yeah, perhaps a little.

  • I mean, we still -- we still maintain this pretty good third data storage, third scientific, little more in the third scientific research and a third the combination of semiconductor and telecom and wireless.

  • It could -- you know, I see that sort of continuing.

  • But it is easier today to see '04 growth in data storage and in semiconductor than it is in semiconductor -- in wireless or Telecom.

  • Mark Fitzgerald - Analyst

  • Okay.

  • And just given that view, how would you think about your (inaudible) margins into next year?

  • Is high 40s where you'd expect to be for most of the year if that unfolds?

  • Ed Braun - Chairman, CEO

  • I think you know important to the gross margins are maintaining the balance of Metrology and equipment.

  • And so I see you know, and we've taken -- we've been very effective in plant consolidations and taking operating spending down by I mean essentially $6 million a quarter from a year ago.

  • And so I think the leverage is pretty high.

  • If we could start to see 5 or $10 million revenue increases per quarter, our margins -- our gross margins and our operating margins would benefit a lot.

  • Mark Fitzgerald - Analyst

  • I mean, if -- on a 20% growth in revenues could you break 50% gross margins year over year?

  • Ed Braun - Chairman, CEO

  • Well, Jack has always said, in the one on ones that the 50 or 51% gross margin is somewhere around a $90 million quarter.

  • Mark Fitzgerald - Analyst

  • Okay.

  • All right.

  • Thank you.

  • Operator

  • And once again, as a reminder, if you have a question or a follow-up please press star-one on your phone.

  • We will take our next question from Chris Osmena from Needham.

  • Christina Osmena - Analyst

  • Hi Ed, could you tell us what the ASM revenues were in the quarter and what the split up between scientific research and semiconductors?

  • Ed Braun - Chairman, CEO

  • For orders, let me just run down those numbers.

  • Hang on.

  • Christina Osmena - Analyst

  • And revenue as well.

  • Ed Braun - Chairman, CEO

  • Okay.

  • Okay.

  • Orders were $64 million, and I'll break that down by the four pieces.

  • Data storage was $21.2 million, semiconductor was $9.4 million.

  • So those two were up sequentially.

  • Telecom wireless was $6.9 million and scientific research was $26.5 million.

  • So those four add to $64 million (ph) compared to $64 million in the prior quarter.

  • But with data storage up 9% and semiconductor up 30%.

  • So semiconductor, Christina, went from $7.3 million to $9.4 million.

  • On the revenue front, the revenue was down 14% and the pieces of the revenue were $19.3 million in data storage, $8.7 million in semiconductor $7.7 in telecom wireless and $27.4 in scientific research.

  • So positive book-to-bill in data storage and in semiconductor.

  • Christina Osmena - Analyst

  • Okay.

  • What about the AFM component if you just split out, if you took out the AFMs, what were the revenues for AFMs?

  • Ed Braun - Chairman, CEO

  • If you combine research and semiconductor, we booked total Veeco you mean, is that what you mean?

  • Christina Osmena - Analyst

  • Yes.

  • Ed Braun - Chairman, CEO

  • Total Veeco AFM was -- hang on.

  • In orders, total Veeco AFM was $27.3 million compared to a prior quarter of $24.9 million, with an increase in the order made at AFM, and a decrease in research AFM.

  • Christina Osmena - Analyst

  • Okay.

  • Ed Braun - Chairman, CEO

  • And in revenue, total AFM was $25 million, you know, down from $28 million.

  • Christina Osmena - Analyst

  • Okay.

  • Now, could you tell us a little bit more about the penetration of the AFMs for in-line applications?

  • You mentioned it cursory at the beginning of the call.

  • What applications you said there was some CMP applications that you --.

  • Ed Braun - Chairman, CEO

  • We sold nine automated AFMs, took orders for nine automated AFMs.

  • Some 200 -- largely 300 millimeter CMP and etch.

  • They included a large number of repeat customers, I think they were all repeat customers.

  • And there were a couple of multiple orders, two-piece multiple orders in that mix.

  • One in semiconductor and separately there was one in data storage.

  • So we're now -- we continue to populate the fabs.

  • There are probably now about 120 Veeco in-line AFMs in the fab, and probably now, a large -- certainly all of the top ten semiconductor manufacturers have at least one, and there are -- and many have now three to five AFMs.

  • And if you remember, the goal is, you know, seven to ten.

  • So there's another clearly 100 AFMs to go.

  • Christina Osmena - Analyst

  • Okay, so it sounds to me from your description of this kind of order activity that companies are actually populating their facilities with more AFMs after they finished the yield ramping stage, is that correct?

  • Ed Braun - Chairman, CEO

  • Yes.

  • Partly as a result of improving yields and partly as a result of the utilization now at 90 and 130 nanometers is over 35%.

  • Christina Osmena - Analyst

  • Okay.

  • So these are being used for process monitoring now?

  • Ed Braun - Chairman, CEO

  • Yes, in line process monitoring, after etch and CMP and lithography, yes.

  • Christina Osmena - Analyst

  • Okay.

  • Also a quick question here, why did the interest expense go up so much?

  • Jack Rein - EVP, CFO

  • I indicated in my comments that it's a result of the interest income that we receive on our invested cash being down as a result of interest rates going down, almost a full point from prior year.

  • Christina Osmena - Analyst

  • Sorry I missed that, thank you.

  • Ed Braun - Chairman, CEO

  • Operator, I think we will take the last question.

  • Operator

  • We have no further questions.

  • Ed Braun - Chairman, CEO

  • Good timing.

  • Operator

  • Mr. Braun, I'll turn the call back to you for additional or closing remarks.

  • Ed Braun - Chairman, CEO

  • Thank you all for your attention.

  • We look forward to talking to you in the fourth quarter.

  • Thank you.

  • Operator

  • Thank you.

  • And that does conclude today's conference.

  • We do appreciate your participation.

  • You may now disconnect.