Veeco Instruments Inc (VECO) 2003 Q4 法說會逐字稿

Good day everyone and welcome to the Veeco fourth quarter and year-end 2003 results conference call.

Today's call is being recorded.

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

Thank you, operator.

Welcome to our conference call reviewing Veeco's results for the fourth quarter and year ended December 31, 2003.

Joining me to them the call are Ed Braun, our Chairman and CEO and Jack Rein, our Chief Financial Officer.

Veeco announced our fourth quarter 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.

We have also prepared a presentation with financial highlights and have posted this on our website to help you follow along.

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

It cannot be recorded or broadcast without Veeco's expressed permission.

Your participation implies consent to our taping.

The extent of 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 uncertainties that could cause actual results to differ materially from the statements made.

These factors are discussed in the business description and management's discussions and analysis sections of the Company's report on form 10-K and (indiscernible) 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 or performance, is included in the press release and financial tables distributed this morning.

This information is available on our website.

This call is being broadcast live at Veeco.com Web site and will be available for replay and archive for future reference.

The Company does not plan to update information on this webcast once it has it archived.

I would like to the call over to Ed.

Thank you, Deb.

This morning, Veeco announced its financial results for Q4 and the 2003 year end.

Q4 included significant increases in orders, revenue and EBITDA compared to both the prior quarter and the prior year.

Q4 order strength reflects a broad industry upturn across all of our core markets in all geographic regions, our review revenue earnings and orders.

Veeco's fourth quarter 2003 sales were 77 million, up 22 percent sequentially and up 12 percent year-over-year and above our $73 million guidance.

Q4 sequential revenue increased in three of our four core markets.

Data storage was up 44 percent to 27.9 million, semiconductor was up 8 percent to 9.4 million, compound semiconductor was up 68 percent to 12.9 million, scientific research was down 3 percent to 26.7 million.

The total, again, 77 million, up 22 percent from 63 million in the prior quarter.

Note that our revenue market mix maintains roughly one-third data storage, one-third the combination of the semi and compound semi and one-third scientific research.

The Q4 number of 77 million included about 6 million in revenue from our two new divisions -- TurboDisc and AII -- both acquired in November.

Q4 orders were 97 million, up 51 percent and up 36 percent year-over-year, up in every Veeco market and up in every geographic region.

Our base business without the two November acquisitions was up 31 percent sequentially, a strong overall performance.

Q4 sequential order growth occurred in each of our markets.

Semiconductor was up 81 percent to 17 million with a book-to-bill of 1.8 to 1, data storage up 6 percent to 22.4 million with a book-to-bill of .8-to-1; compound semiconductor up 282 percent to 26.4 million with a 2-to-1 book-to-bill and scientific research up 17 percent to 31 million with a 1.16-to-1 book-to-bill.

This was the strongest overall order rate in 10 quarters.

We increased our backlog to $124 million.

We had automated AFM orders of about 11.8 million, which is a record level and was 54 percent sequentially from Q3.

Order strength was quite broad and Q4 orders increased in every geographic region.

North America was up 26 percent, Europe was up 88 percent, Japan up 69 percent and Asia-Pacific up 52 percent -- good penetration of worldwide markets with 67 percent of our sales coming from outside of North America.

Q4 earnings -- in Q4, our net loss was 4.8 million, or 16 cents per share compared to a net loss of 116.5 million, or $4 per share loss in the fourth quarter of 2002.

Excluding certain charges, fourth quarter earnings were positive 3 cents per diluted share prior to purchase accounting adjustments, compared to a loss of 11 cents per share in Q4 of 2002.

EPS was in line with the top end of our EPS guidance, which was 0 to 3 cents per share.

Q4 gross margin was up 4.4 percentage points to 44.5 percent, compared to 40 percent a year ago, again, before purchase accounting adjustments, which Jack will detail.

Q4 EBITA was $3.5 million, up 200 percent from a loss of 3.4 million a year ago.

For the quarter, we had an EBITA improvement of 6.9 million on 8.3 million of increased quarterly revenue, indicating the effectiveness of our cost reduction efforts.

To comment on the year end results, 2003 was a challenging year for the equipment industry and for our customers.

Veeco revenue was 279.3 million, down 7 percent from the prior year;

Veeco orders were 297.6 million, up 3 percent for the prior year.

Our cost reduction initiatives were effective in that our 2003 EBITA increased 900 percent to $13 million from $1.3 million a year ago.

Our balance sheet remains strong with $107 million in cash after the two recent acquisitions.

We generated $15 million of cash from operations in Q4, we reduced inventory by $4 million, excluding the acquisitions and our receivable days reduced from 77 days to 72 days, so improved overall operating results.

Commenting on overall market trends, clearly, a broad industry market improvement, which was quite dramatic in the fourth quarter.

And we appear to be at the start of a sustainable recovery cycle occurring after two years of historically low CapX investment by our customers and coinciding now with nine consecutive months of increased fab and factory utilization rates for the industry, and I think helped by stronger consumer demand for the combination of PCs, new wireless products, new products and with embedded data storage, more mobile handheld products with color displays, new microelectronic entertainment products, all of which are rich in semiconductor, compound semiconductor data storage and high brightness LED content.

Overall, we see the broad order growth achieved in Q4 continuing into Q1 as multiple Veeco markets are forecasted to experience growth through the quarter and through the 2004 period.

As a result, (indiscernible) needed capacity additions and investment in next-generation new technology, including emerging nanotechnology activity.

In addition, strong customer acceptance of Veeco's newly acquired TurboDisc Kenmore (ph) CVD equipment for high brightness LEDs, for color displays and keyboard backlighting and our AII precision lapping tools for next-generation higher density data storage thin film (ph) head manufacturing, will both add to our quarterly growth starting in Q1 of '04.

Veeco currently forecasts that the Q1 orders and revenue will increase approximately 10 percent with orders in the range of 105-109 million and Q1 revenue in the range of 84-88 million and the book-to-bill will remain above 1.2-to-1, gross margins will improve approximately 1 percent to about 45.5 percent.

The company forecasts that it will incur a net loss between 9 and 5 cents per share on a GAAP basis and will earn between 5 and 9 cents per share excluding amortization and using a 35 percent assumed tax rate.

Jack will make further financial, then I will come back to review individual market sectors.

Thank you, Ed, and good morning.

For the three months ending December 31, 2003, sales were 76.9 million, an increase of 12 percent versus the 2002 fourth quarter.

The increase is attributable to an increase of equipment sales of approximately 20 percent primarily due to the purchase of TurboDisc and AII during the quarter and a metrology sales increase of approximately 4 percent.

By market, sales from the prior year were up by 30 percent in data storage, 105 percent in telecom wireless, partially offset by sales increases of 11 percent in semiconductor and 12 percent in research.

Sequentially, Veeco sales increase 13.8 million, or approximately 22 percent from 63.1 million in the third quarter of 2003.

This sequential sales increase was mostly in processing equipment primarily due to the increase in New York equipment sales of $11.1 million, predominately to the data storage customers as well as the purchase of TurboDisc and AII during the quarter.

Excluding the fourth quarter acquisition-related sales, sequentially, sales increased $7.7 million, or approximately 12 percent.

As you are aware, Veeco completed two acquisitions during the fourth quarter -- Emcor's MOCVD business called TurboDisc and Advanced Imaging, we refer to as AII.

These acquisitions resulted in charges totaling $4.7 million pretax.

These charges included $1.7 million related to the capitalization of manufacturing profit for inventory and the elimination of certain sales under SAB 101, both described purchase accounting treatments.

These charges impacted gross profit.

Additionally, there was a $1.5 million in process R&D charge, as well as 900,000 incremental amortization charge and 600,000 of other merger-related costs.

The aggregate of these charges has a negative 10 cent per share impact earnings per share.

As we proceed to our discussion Veeco's financial performance, we will highlight the impact on reported GAAP earnings.

Gross margin was 42.5 percent in the fourth quarter of 2003 versus 18.3 percent in the fourth quarter of 2002 on a GAAP basis.

In 2003, the gross margin included the impact of $1.7 million as I've just illustrated of acquisition purchase accounting costs and in 2002, there was $50 million of inventory write-down related to our process equipment reorganization.

Excluding these items, gross margin improved to 44.5 percent in the fourth quarter of 2003 versus 40.1 percent for the fourth quarter of 2002 on a non-GAAP basis.

This improvement in gross margin from 40.1 percent to 44.5 percent was the result of process equipment gross margins increasing from 26 percent to 37.7 percent due to lower labor service and overhead spending as a result of site consolidations, as well as improved volume and mix.

Metrology gross margins were down slightly to 53 percent versus 54 percent in the fourth quarter of 2002 due to lower AFM sales volume and less favorable mix within research AFM.

We expect gross margin to gradually increase from the current level of 44.5 percent.

We anticipate a 1 percent increase in the first quarter of '04.

Our target model with our current business mix is 49 percent with a target of 57 percent gross margin in metrology and 44 percent gross margin in process equipment.

This target should be achievable at a $125 million quarterly run rate.

We are targeting 18 percent SG&A and 13 percent R&D.

This target model will yield an earnings (indiscernible) before interest, taxes and amortization of 18 percent.

Again, depending upon product mix and business mix, we expect to be able to reach this profit level at a $500 million annual sales run rate.

Returning to the fourth quarter of 2003, SG&A expense for the quarter was $18 million, or 23.4 percent of sales versus 18.5 million, or 26.9 percent of sales in the fourth quarter of '02.

This decrease in SG&A expense as a percentage of sales is a direct result of improved sales levels and continuing to realize the efficiencies from cost-cutting consolidation measures enacted at the end of 2002.

This was offset in part by a $1.2 million increase in related SG&A charges from the TurboDisc and AII acquisitions.

R&D expense totaled $13.4 million, or 17.4 percent of sales, an increase of $600,000 from the fourth quarter of 2002.

The increase was attributable to $900,000 of additional costs related to TurboDisc and AII, partially offset by cost decreases in other business units.

Amortization expense increased to 4.2 million in the fourth quarter of 2003 from 3.2 million in the comparable prior year period.

This was the result of approximately $1 million of amortization expense related to the recording of intangible assets associated with the acquisitions with definitive lives (ph) ranging from less than one year to 13 years.

Restructuring costs of 2.1 million during the fourth quarter of 2003 primarily were comprised of 1.5 million of severance and business relocation expenses related to the cost reduction program announced and initiated in the fourth quarter of 2002 and 600,000 of other merger and acquisition costs.

The severance and business relocation costs include our relocation of our Sunnyvale, California (indiscernible) microscope business in Santa Barbara, California and severance costs associated with certain process equipment employees.

While the actions were planned and initiated in the fourth quarter of 2002, current accounting guidelines require these charges to be recorded when the actions are actually completed.

We would anticipate no further restructuring costs in 2004 at this point.

Net interest expense totaled 2.1 million compared to 1.7 million in the comparable 2002 quarter.

The increase is principally due to the reduction in interest income and short-term investments as a result of lower interest rates and lower cash balance as a result of the acquisitions completed during the fourth quarter.

In the Q4 earnings release, Veeco included a table showing the reconciliation of GAAP loss to earnings, including certain charges.

EBITA is presented in this reconciliation since management of the Company evaluates and manages the performance of each of its business units based upon this measure and thus believes that this presentation provides useful information.

Veeco's fourth quarter 2003 net loss was 4.8 million, or 16 cents per share, significantly lower than the net loss of 116.5 million, or $4 a share in the fourth quarter of 2002.

On a non-GAAP basis, fourth quarter EBITA totaled 3.5 million compared with a loss of 3.4 million in 2002.

EPS for the quarter using a 35 percent tax rate excluding acquisition-related and restructuring costs was 3 cents.

This compares to a loss of 11 cents excluding certain charges in 2002's fourth quarter.

For the full-year 2003, sales totaled 279.3 million, a 6.5 percent decrease from 2002 due primarily to a reduction of 16.5 million in process equipment sales predominately to data storage.

We are encouraged, however, that the fourth quarter '03 orders are up overall and the data storage sector is up compared to both prior year and sequential quarters.

Excluding the acquisition adjustments that were approximately 1.7 million as previously discussed, gross margin improved to 46 percent for the full-year.

The 2002 gross margin was 43.8 percent, excluding the $15 million inventory write-down as previously noted.

The improvement in gross margin of 2.2 percentage point was the results of the increase in process equipment gross margin from 32 percent in 2002 to 38.8 percent in 2003, largely due to the plant and personnel consolidations implemented in 2002.

Metrology gross margins went from 54.8 percent in 2002 to 52.8 percent in 2003, due principally to (indiscernible) volume decreases in automated (indiscernible) microscopes and (indiscernible) metrology resulting from the challenging semiconductor and data storage year.

SG&A expense was $68 million, down 7.9 million, or 10.4 percent in 2002.

The decrease in SG&A is principally due to the decrease in selling expense resulting from reduced personnel occupancy and advertising spending, as well as a decrease in administrative costs resulting from realized cost efficiencies.

Such decreases were partially offset by incremental SG&A costs of 1.2 million attributable to the operations of the companies acquired in 2003.

R&D expense totaled $48.9 million, or 17.5 percent of sales in 2003 compared with 53.9 million, or 18 percent of sales in 2002.

This $5 million decrease in spending resulted from the efficiencies achieved (indiscernible) consolidations and process equipment in the fourth quarter of 2002.

This decrease was partially offset by $900,000 of incremental costs attributed to the acquisition company.

Amortization expense totaled 13.8 million for the twelve months of 2003, versus 13.3 million in 2002.

This $500,000 increase is due to the addition of acquisition-related intangible assets in 2003, offset by certain intangible assets from prior year acquisitions which became fully amortized in 2002.

Restructuring costs of 5.4 million in 2003 resulted principally from severance and business relocation expenses related to the cost reduction programs announced and initiated in the fourth quarter of 2002.

These included the transfer of Sunnyvale, (indiscernible) microscope business, as well as severance costs incurred in the consolidation of our process equipment group.

Net interest expense totaled $7.8 million compared to 6 million in the comparable 2002 period.

Again, the increase is due to a reduction in interest income on short-term investments as a result of the lower interest rate.

EBITAR (ph), excluding certain charges as was previously outlined, was $13 million for 2003, compared with 1.3 million in 2002 on approximately 19.6 million lower sales in 2003.

So a strong profitability improvement on lower sales during the year.

Veeco's 2003 net loss was 9.7 million, or 33 cents loss per share compared to a net loss of 123.7 million, or $4.25 loss per share in 2002.

Excluding acquisition, restructuring and amortization charges, non-GAAP net earnings for 2003 were 11 cents per share compared to net loss of 10 cents per share in 2002.

Backlog at December 31, 2003 was approximately 124 million.

This positions us well for the 2004 revenue planned growth.

We are currently forecasting first quarter '04 revenues of approximately up (ph) 10 percent in the range of $84-$88 million, as Ed indicated, with forecasted GAAP loss in the range of 9 cents to 5 cents per share, respectively.

Excluding amortization expenses of $5 million in purchase accounting adjustments of 1.9 million for the first quarter, we have forecasted earnings per share in the range of 5 cents to 9 cents per share on a non-GAAP basis, assuming a 35 percent tax rate.

With regards to cash, cash and cash equivalents totaled 106.8 million at December 31, 2003.

From a cash flow perspective, Veeco used 131 million on the three acquisitions completed in 2003.

Cash flow exclusive of these acquisitions was a positive $23.6 million for 2003, which was on plan.

For the full-year, cash was generated by a reduction of both accounts receivable with 13.3 million and a reduction of inventory of 8.1 million for the historic Veeco-based businesses.

However, the acquisitions caused a $7.8 million increase in accounts receivable to $70 million.

DSOs including the acquisitions were 72 days, which is a five-day improvement from the third quarter of '03 and a 13-day improvement from the fourth quarter of '02.

Including the impact of the acquisitions, inventories increased to 97.6 million at December 31, up from 86.1 million at September 30, 2003.

Inventory turnover was an improved 2.2 turns, up from a 1.5 times turns in the fourth quarter of '03.

CapX was 1.6 million for the fourth quarter of 2003 and 8.1 million for the full year.

Depreciation expense totaled 3.5 million for the fourth quarter and 11.1 million for the full year.

Shareholders equity totaled approximately 306 million at December 31, 2003; thus our balance sheet remains quite strong.

We will return to Ed and at this point for some additional comments and then your questions.

Thank you, Jack.

Just reflecting on the apparent trends in each of our core markets and then we will take your questions.

Starting with semiconductor where in Q4, we had an 81 percent sequential order increase to 17 million with recorded automated AFM order levels, which included 10 automated AFM tools in the quarter, one multiple order, orders for our 3-D AFM for 65 nanometer advanced process development.

We had some follow-up orders, Asian orders for CMP (ph) production applications and our first 300 millimeter AFM order for a Chinese foundry.

Clearly, the smaller feature size, sub-90 nanometer and advanced practice requirements in etch, CMP and photolithography continue to drive interest in Veeco's family of nonrestrictive 3-D AFM products.

We continue our efforts in AFM tip (ph) development and our strategic partnering with key customers so that we may stay ahead of their critical dimension roadmaps.

Veeco AFMs are now used by all of the top 10 semiconductor device manufacturers worldwide with a current installed base of over 120 Veeco automated AFM systems.

High fab utilization rates at 90 nanometer feature sizes will likely keep AFM orders at high levels going forward.

In data storage where orders increased 6 percent sequentially to 22.4 million and included multiple tool orders from four major data storage thin film head manufacturers for combinations of Veeco's ion beam etch, ion beam deposition, PVD, diamond-like carbon deposition, atomic layer deposition, as well as optical and atomic force microscopy metrology.

In November, we added precision lapping with the acquisition of AII to further extend our very broad product line of process equipment and metrology tools, providing advanced solutions now at every step of thin film head manufacturing at wafer, slider test levels.

Our Q1 results will include receipt of our first Veeco AII orders which will be received by Veeco.

The industry continues to increase aerial (ph) density at about 50 percent per year requiring smaller critical dimension, tighter tolerances, thinner film thicknesses, reduced fly heights (ph), better interface controls between films and the use of new magnetic materials.

We currently see increased capacity requirements for the continued 80 gigabyte production ramp, accompanied by new technology investment in the development of 120 and 160 gigabyte GMR and TMR heads and we see early funding for the development of perpendicular heads required at about 200 gigabyte for the 2005-2006 timeframe.

Industry forecasts continue to show a 10 percent compound growth rate for drives and about a 7 percent compound growth rate for heads over the next three years, with higher growth rates coming from embedded drives and consumer products including video game boxes, TiVo, personal video recorders, digital cameras, GPS navigation systems, automotive and home entertainment centers.

The growth of the smaller, lower cost consumer product drives will create a need for additional factory automation in wafers and slider fabs to improve yields and to lower their drive costs.

Veeco's unique aggressive technology and our large installed base and now the automation capabilities of Veeco AII provide us with an opportunity to partner with our data storage accounts to improve their equipment cost of ownership.

In compound semiconductor, our Q4 orders increased 282 percent sequentially to a record level of $26.5 million, reflecting the first partial quarter of the TurboDisc MOCVD acquisition completed in November with a book-to-bill ratio in the sector of 2-to-1.

Veeco is now the only provider of both critical MBE and MOCVD epitaxial deposition equipment for advanced compound semiconductor materials, such as gallium arsenide and gallium nitride for high brightness LED and wireless RF device fabrication.

These devices are required for mobile wireless cellphones, color displays, keyword lighting and now automotive lighting applications.

New cellphones contain approximately 20 gallium arsenide and gallium nitride chips in each phone.

Q4 results included orders for ten epitaxial deposition systems, 7 MOCVD systems and three MBE systems from seven worldwide Veeco customers.

Industry compound semiconductor growth is forecasted to be 12 percent per year to a $14 billion size in 2006 while the gallium nitride device growth market largely based on blue green and white high brightness LEDs is forecasted to grow at nearly twice that rate, about 24 percent a year to about a $3.6 billion size in 2006.

Wi-Fi and now longer range Wi-Max and Centrino and fully featured Internet connected 3G cellphones, along with PDAs and backlighting of larger color displays will be the drivers for growth in this sector.

Lastly, in our scientific research sector Q4 orders increased 17 percent to 31 million, reflecting the growth in materials science, life science and nanotechnology sections.

Here, our atomic force microscope and our scanning probe microscopes continue to be the industry standard for atomic imaging and molecular manipulation and our Q4 results included orders for 90 research AFMs in the quarter.

President Bush signed a $3.5 billion nanotech initiative to continue the support of multidisciplinary research involving material science, life science, pharmaceutical and genomic research nanotech collaborations.

Long-term, nanotech continues to be a rich, disruptive technology currently at the R&D phase with an ability to be $1 trillion in size by 2015 and to impact all of industry and life science and to be as ubiquitous as today's transistor.

NanoTech is a large multi-year opportunity still at a very early development stage.

So all told, 2004 with our two new divisions appears to be a significant revenue and earnings growth opportunity for Veeco while maintaining our market diversity strategy of being one-third data storage, one-third the combination of semi and compound semi and one-third scientific research.

Operator, we would be pleased to take questions.

(Operator Instructions).

Stewart Muter, Adams, Harkness & Hill.

A couple of questions.

First for Ed.

With the bookings growth, which segments of your business do you see growing in terms of bookings?

Do you mean in Q1?

Yes, in Q1 sequentially relative to Q4?

I think data storage probably semi and compound semiconductor will continue to grow.

Okay.

Along the lines of data storage, some of your customers have talked about excess inventory in the channel.

Are you seeing any impacts from that?

What are your customers telling you on that front?

As I commented, Q4 despite the inventory discussions that we reflect on, the production ramp of 80 gigabytes has required them adding more capacity and so we had multiple orders from four data storage thin film head manufacturers in the December quarter and in January, we had multiple orders from two or three additional thin film head manufacturers for the 80 gigabyte ramp and some modest spending for the 160 gigabyte development along with some very, very early funding for perpendicular heads.

So I think the fact that heads per drive have stabilized and are increasing, the number of drives, the number of heads per year are growing.

And there is continued transition in technology, we see that sector as being quite strong in the next couple of quarters.

Okay and a quick question for Jack.

Do you still see GAAP break even at 90 million?

Yes.

Excellent, thank you.

Brett Hodess, Merrill Lynch & Co.

Good morning.

Given the resurgence in the data storage equipment side, process equipment side as well some of the compound semiconductor side, I wonder if you can give us an update on the profitability levels in the process equipment at this point and how you see them progressing going forward in terms of gross margins?

Sure.

I think as Jack indicated, the target model going forward of bringing the Company up to about an 18 percent EBITA level is based built around process equipment going from sort of its current 39 percent gross margin to about a 44 percent gross margin and metrology going from its current 53 percent gross margin to about a 56 or 57 percent growth margin while we keep spending about 13 percent in R&D, and that gives us an 18 percent EBITA target going forward on a mix of margins that come in around 49 to 50 percent.

In terms of the improvement in the process equipment area, is that mostly coming from the volume pickup or are there still programs going on to cost reduce them as well?

Certainly compared to the prior year, the improvement was largely related to the cost reductions -- consolidation of plants, reduction of personnel.

But we have seen on a sequential basis, we have seen improvements in areas of margin that are related to better material content, better selling prices.

We're also currently -- these multiple tool orders that I have spoken about reflect acceptance of our new NEXUS ion beam etch and ion beam deposition product line which gives people a more colonnaded larger beam and higher throughput for these smaller feature sizes, and the margins in the NEXUS platform are higher than the legacy tools.

My second question was -- on the rollout of the (indiscernible) AFMs into the semiconductor market, obviously good orders, 10 units there this quarter.

With the multiple unit order, was that multiple units for a single fab, or was that multiple units by a customer across their fabs?

It was a single fab.

So you are starting to see the sort of production use of the product pickup at this point?

We're beginning to see, as people more fully populate their 300 millimeter fab, a dedicated total at CMT separate from a dedicated tool at etch and photolithography.

So the model which -- a number of customers now have three or for AFMs per fab and are targeted to get to 10 per fab at some sites.

When they get to 10 per fab, is that because as the volume rises, they need more to keep up with the throughput, or do you expect expansion of applications?

I think it is expansion of applications and certainly below -- at 90 nanometers and below, 65 nanometers, the metrology content as you are aware increases.

And so they just simply need more inspection at etch, at CMT and at photolithography.

Great, thank you.

Mark Miller, Hoefer & Arnett.

Congratulations on the strong uptick in orders.

I'm just wondering we've heard a lot about nanotechnology.

Can you give us an estimate for what percent of sales are for nanotechnology?

It's currently -- I'm hesitating because sub-hundred nanometer work now exists not only in our life science and the NanoTech sensors (ph), but in data storage and as you are aware -- as you're aware, all of the GMR work, a lot of it now is 20 and 30 nanometers.

And clearly semiconductor is below 90 nanometers.

So the scientific research portion of NanoTech is probably 40 or $50 million a year.

But one could argue that there's probably another 40 or $50 million of process equipment and metrology in the information technology portion of the Veeco where the dimensions have now gone below 100 nanometers.

It was reported that (indiscernible) made another inroad in terms of a (indiscernible).

Are you seeing any -- is this -- are they getting many sales for pricing pressure or are they getting any sales through equipment superiority?

(indiscernible) one area of deposition, etch and deposition where we share the market is really in TVD where Nova (ph) has made some inroads in market penetration which we think have peaked.

They had some very large orders in 2001-2002, which we did not see continuing into 2003.

Thank you.

Michael O'Brien, SoundView Technology Group.

Two questions, one on data storage.

You expect obviously revenue growth the next couple of quarters.

Do you also expect that orders will continue to grow for the 80-gig production ramp?

Yes.

Frankly, we are a little surprised with the strength of the capacity additions that seem to be continuing.

I think it is because they keep tuning their 80 gigabyte head and wanting to improve the performance of that head.

So they are ramping production, but they are buying these NEXUS platform better colonnaded ion beam etch and ion beam deposition tools and diamond-like carbon.

They are continuing to tweak their fly height, their (indiscernible) coatings, so we're seeing a combination of capacity and technology which has been strong all the way through January and will be strong through the March quarter.

It sounds like the technology may be driving a little bit more.

Would you say that, typically, it would have already been a lot of the production ramp in other changes or other ramps would have already been done at this point in the cycle?

I think what is happening is as they finish the characterization of a new head, they may, to the extent that it's higher performance and lower cost, they may still put a newer head into an 80 gigabyte configuration.

So it looks like they're staying at 80 gigabytes but they are increasing the strength of the components within the 80 gigabyte solution that requires upgrading some of the equipment.

So we see it as -- it is a combination of capacity and technology.

Okay, thank you.

Graham Tanaka (ph), Tanaka Capital Management.

Hi, guys.

I wonder if you could talk a little bit about what the growth in revenues might be by the category for the first quarter?

You indicated what you thought was the direction of orders, which groups would be up.

But roughly, what kind of growth are you seeing by category?

We said we thought that revenue would be up 10 percent and orders would be up by 10 percent.

By category, I think we will see an increase in data storage and compound semiconductor and semiconductor.

So you don't wish to embellish on that which will be the strongest and the weakest?

I think probably compound, semiconductor and semiconductor would be a little stronger.

What do you see, Ed, for the ramps for compound semiconductor and semiconductor for the next four quarters or the quarters of this year?

You have mentioned early on that you thought you were looking for a good '04, but what do you see as the kind of the growth rate and sort of the angle of the ramp?

I hesitate to give to return to giving guidance more than a quarter at a time.

But certainly, I would comment that we agree with the fact that most market research firms think the equipment business in '04 will probably be 20 or 30 percent better than '03.

So I would put high likelihood on the 20-25 percent end of that.

Thank you very much.

Mark Fitzgerald, Bank of America Securities.

Thank you.

Jack, on the outlook for expenses for the first quarter, is R&D actually going to be down like in this 13 percent that you talked about?

It should be down as a percentage, but probably be up.

We did not have a full quarter of the acquisition company in the fourth quarter, so our actual spending numbers should be slightly higher in absolute dollars.

So someone I think Ed threw out the 13 percent -- is that a longer-term goal?

Yes.

That is our target market model goal.

Can you give us an idea on the SG&A for the first quarter here, kind of what you're thinking in terms of trends?

Again, SG&A will probably be slightly higher, again, for the same reason that our acquisition companies were not in for a full quarter, but that we expect it to be down as a percentage of sales.

As you get these things welded into the organization, are there efficiencies here where you can -- will that drop quicker, the percentage come down quicker as we get into the June quarter?

I would think so, I would think that is correct, that there are synergies that we should see.

Then just quickly on the balance sheet here -- can you give me a quick breakout of long-term debt, what is comprised there of the (indiscernible)?

We have a $220 million convertible security, which is due in 2008.

That is predominant.

The rest of is mortgages on facilities.

Okay, thank you.

Chen-Ley Ong, Bank of America Securities.

Hi.

Jack, on the gross margin side for the aim of the metrology going to 67 and equipment going to about 44, can you give us a timeline for that?

Thank you.

I indicated that that's probably at 125 million quarterly run rate or a $500 million annual run rate.

So you can take a look at our booking rate and what our forecasted first-quarter rate is and kind of come up with your own assumptions but it is probably towards the tail end of 2004.

Okay.

Second question Ed, from the previous guidance for '04, orders for the two acquisitions, you were looking about 25 million.

Can you give us a comment on how come it is only about 13 million?

That's a good question.

It was 25 million, but we only owned them.

The 97 million of orders that we're reflecting shows only those bookings that occurred post-acquisition, whereas the $25 million guidance when we made the acquisitions referred to a full quarter of activity from those two sites.

So you're absolutely right.

Those two sites did achieved in excess of $25 million in orders, but only 13 million of that fell onto Veeco's books because we closed the deal in November.

Okay, thank you.

David Duley, Wells Fargo Securities.

A couple of questions.

You had big expansion on the gross margins this quarter and you guided for up I guess 1 percent going forward.

Throughout the year on incremental revenue growth, what sort of drop rates should we be expecting?

And then, did you give a shipment number and a deferred revenue balance?

I think what you're asking is what is the fall-through for each dollar of sales at the gross margin line?

Yes, incrementally.

It depends upon, as you know we have a difference between metrology gross margin and process equipment, gross margin.

So on the metrology line, we would expect like a 60 or 62 percent incremental profit.

On the process equipment line, you'd probably expect more like a 45 percent incremental profit.

The blended number I would tend to use is sort of -- and Jack is the same way -- sort of 50 cents on the dollar at the gross margin line and 25 cents of a dollar at the EBITA line.

And those shipment and revenue numbers, and deferred revenue numbers?

Deferred profit number was $2.1 million.

I don't have the shipment number off-hand;

I can get back to you with that. (multiple speakers).

(indiscernible) profit was 2.1 million, can you give me the associated deferred revenue?

I don't have that number handy, but it is probably in the range of $4-$5 million, but I will check that number for you.

Back at SAB 101, we stopped giving shipments and while we give revenue and bookings.

Okay.

Can you remind us of what was your margin peak in the last cycle?

And I'm not quite sure if you were above 50 or what, but it seems like you've got your business costs aligned to get right back into that range again?

I think our highest was about a 49 percent gross margin, and that was before one of the acquisitions, but it was a 49 percent gross margin, and operating profits were in 17-18 percent ranges, (indiscernible).

The hope here David is that Veeco as a company would be able to early in this recovery cycle as Jack indicated maybe end of '04, early '05, wherever the $125 million quarters occur, would be reaching new revenue and margin highs compared to the prior peak.

And then let's just say that this thing continues to go on throughout '05 above 125 million, does the margin kind of tail off, or could we still have that same sort of drop rate?

I think that drop rate is usable in a prolonged recovery -- bless you, my son.

Thank you, have a good day.

Byron Walker, UBS Warburg.

Hi, a couple of questions.

Ed, given your strong order performance in the reported quarter, can I characterize your guidance for the March quarter as perhaps you being very comfortable with that guidance?

I would say that it is perhaps conservative.

It is good guidance.

There is some conservatism in it and clearly, we're seeing very strong orders.

Even January, the order rate in January was twice the orders of the first, the opening month of any quarter in the last four or five quarters.

So we're continuing to see some momentum, it is clearly carrying into this quarter and we also have the upside of these two new divisions that were only fractionally included in Q4.

So I would say, yes, there is some conservatism in these numbers.

As you referenced the January month, was there in terms of strength, was there any noticeable changes in what end markets were showing the strength?

In this particular quarter, data storage voted (ph) early.

We had some nice data storage orders, but they were only up I think 6 percent in the prior quarter, so some of that was probably just the amount of time its takes them to get through their capital review process.

And data storage, is that just moving to next-generation product, or is that also capacity?

They describe it, as Mike (indiscernible), they describe it as capacity.

But when you delve into it, turns out that -- in that it's still their 80 gigabyte line that they're ramping, but I think they're tuning their 80 gigabyte line as they ramp it, and so they're putting some new equipment into that line and higher performance and lower cost heads onto their 80 GB drives.

So at this point, you're getting 120 gig R&D buys, is that correct?

Yes.

And beginning to see the very early funding of perpendicular heads, which will be required in '05 and '06.

My other question is -- can you give us an update on the M&A environment?

Has industry activity stayed the same or changed?

And if it has changed, how has it changed?

Certainly, the recognition of that critical mass is important, continues to build.

And so we continue to see a lot of smallish size technology companies understand that earlier in life, they have to do something about their critical mass.

And I don't know whether the IPO window, you would be better able to comment on whether the IPO window for small equipment companies will exist in this cycle.

But I think there will be a continuation of M&A based largely on the fact that people recognize critical mass in building their total companies is important.

Thanks.

Christina Osmena, Needham.

First on these extraordinary charges, could you give us an idea of what portion was cash and what was non-cash?

Yes.

Certainly, in-process R&D was non-cash; that is an intangible write-down.

What else do we have here that we can quickly identify?

Merger restructuring expenses for the most part were cash.

And of course, the capitalization of them really was (ph) non-cash.

So there is about 1.7 million in the capitalization of inventory, deferred revenue, which is non-cash.

The deferred revenue actually gets the cash, so by losing it, it's a non-cash item.

Could you explain that a little bit further?

I found that a little bit confusing.

It is confusing.

I guess under the current accounting, the fair value (indiscernible) your assets.

So you take effectively any profits that exist that is a result of production activity and you capitalize that in inventory.

So you have a distorted cost of sales and gross margin as a result of that aspect.

There's also a portion when you look at any -- when the earnings of process is essentially complete, any of the deferred revenue or deferred profit related to that is not ever recognized as a permanent deferral from a GAAP accounting perspective.

From a cash and legal perspective, they're absolutely our sales, we absolutely get the cash on it, but GAAP accounting says you don't recognize it.

So it is confusing.

Did you do that with prior acquisitions?

That's the required protocol for all accounting, yes we did.

And for the merger and restructuring expenses, was that related to TurboDisc and AII, or was that related to previous mergers?

Most of it was related to AII and TurboDisc.

Now you said that there were no onetime charges that you anticipated in the first quarter, but could we expect perhaps a facility consolidation take place at some point this year?

We don't have a facility consolidation anticipated this year.

We do have -- I should have been a little bit more clear, in terms of onetime charges related to acquisition activity.

We will have again a charge related to the capitalization of inventory and the deferred SAB, the loss of SAB, and that is about a $1.8 million charge in the first quarter.

We do not have any restructuring charges or personnel costs of those sorts of things anticipated in 2004.

The purchase accounting technique, Christina, usually it applies to a charge in the first two quarters that you have acquired a new company.

Okay.

Could you -- I know it has only been half a quarter, but when you had acquired Turbo and AII, you said that you had plans to bring up their gross margins a little bit and I wanted to know how far long you've come in progressing and bringing those gross margins up?

I would say we're right online far a half a quarter's worth of progress.

And you're targeted to bring them in-line with the rest of the Company?

Yes.

At what point in time?

The guidance that we gave earlier in the call on 46 percent gross margin on equipment and -- sorry, 44 percent gross margin on equipment and 57 percent in metrology, they would fall right into those two categories.

Okay.

So that sounds like end of the year, I think Jack had mentioned, and that was probably something that was more achievable at the end of the year, right?

Yes.

Bear in mind tat those two acquisitions will be accretive for every quarter of '04.

Question on the progress that you have made in getting ASMs and multiple ASMs in line applications and semis.

Are you getting them into the pilot lines, or are you getting them into production facilities?

Into production facilities.

Okay.

Do you see those ASMs cannibalizing any other metrology segment besides stylus profilers, do you see them taking up any other role like a (indiscernible)?

No.

It's sort of interesting that below 90 nanometer, probably below 110 nanometer, as you are aware, the metrology world became much broader in terms of people wanting to use a CB sem (ph), a metal measurement tool, an x-ray tool and an AFM side-by-side.

And so we don't see these things cannibalizing each other, we see people sort of dedicating particular technologies to an application that they are excellent at.

And so our AFMs often are sold instead of somebody having to cross-section a wafer or do something in failure analysis that they would prefer to do in the fab.

Okay, great.

Thank you.

Karen Lange, Smith Barney.

I had a question on orders.

If I take your organic order growth rate; actually, if I take your organic orders for the quarter at 84 million and add what you would expect to be a full quarter of the two acquisitions, I pretty much get to your order guidance for the March quarter.

So I guess my question is -- there seems to be a lot of conservatism there.

Good math.

Let me do that again, because there is some conservatism.

If you compare -- remember the Q3 orders were 64 million.

The Q4 orders, which were 97, were really 84 plus 13.

So the base business did very nicely, going up from 64 million to 84 million of 30 percent increase and we got just a little piece, or let's say half of, the combined normal quarterly orders of TurboDisc and AII because we only owned them in November.

And so there was 13 million that came from -- in fact, it's all TurboDisc.

We did not book any AII orders at all in the quarter, so that 97 is 84 plus 13.

So you are right.

Our guidance is conservative.

I guess I'm trying to gauge the degree of conservatism there, so if I start out data storage and telco at what would be a normalized --

You have to kind of guess -- will the 84 -- if the 84 goes up to 86 and TurboDisc and AII have their sort of normal $22, $24 million order rate, so you are at 108-110, the high end of our guidance.

Does the rest of the business stay relatively flat, or are you still sort of expecting a 10 percent growth on top of that?

I'm using a 10 percent growth conservatively for the mix.

But you're right, that is conservative.

It could be higher than that.

And I will let you do the analysis of how different it could be.

Okay, thanks.

Operator, I think we'll take one more question.

The questions are getting tougher, so that's probably a good place to stop.

Chen-Ley Ong, Bank of America Securities.

Hi, Jack.

Just a quick question on amortization for '04.

I see first quarter is going to bump up to the 5 million.

Should we assume that is going to be pretty linear, or is there additional charges that will come?

Actually, it should tail off a bit.

The purchase accounting requires that there is some acceleration of amortization in the first two quarters, so we would expect it to be more in the $4.7 billion range for the balance of the year on a quarterly basis.

Okay, thank you.

Operator, I think we'll stop here.

Thank you for all for your questions and we certainly look forward to speaking with you at the end of this conservative quarter.

Thank you.

That does conclude today's Veeco conference.

We do appreciate your participation.

You may now disconnect.