Veeco Instruments Inc (VECO) 2004 Q1 法說會逐字稿

Good day and welcome to the Veeco first quarter 2004 results conference call.

Today's call is being recorded.

For openings remarks and introductions I would like to turn the conference over to Vice President of Investor Relations Miss Deborah Wasser.

Please go ahead, ma'am.

Thank you.

Good morning everyone.

Welcome to our conference call reviewing our results for the first quarter ended March 31, 2004.

I'm Deborah Wasser, Veeco's Vice President of Investor Relations.

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

Veeco announced our first quarter 2004 results this morning at 7:00 a.m..

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 express permission.

Your participation implies consent to our taping.

The extent that this call discusses expectations about market conditions, market acceptance and future sales of the company's product, future earnings expectations or 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's discussion and analysis sections of the company's report on Form 10-K and annual report to shareholders.

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

Information regarding such non-GAAP financial measures including reconciliation to GAAP measures 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 webcast live at the Veeco.com website and will be available for replay and archived for future reference.

The company does not plan to update the information on this webcast once it has been archived.

I'd now like to turn the call over to Ed.

Thank you, Deb.

This morning Veeco announced it's financial results for Q1 2004.

The March quarter included significant increases in revenue, in orders, and in EBITDA when compared to both prior quarter and prior year.

On review revenue orders and earnings.

Q1 sales were 94.5 million, up 44% year-over-year and up 23% sequentially, about 10% above our February guidance of 84 to $88 million.

This was our strongest revenue performance in nine quarters, including sequential revenue growth in all of vee co's core market.

Data storage was up 13% in revenue to 31.5 million.

Wireless was up 60% to 20.7 million.

Semiconductor was up 41% to 13.3 million and scientific research up 9% to 29.1 million, a total of $94.5 million in revenue.

Our market diversity continues to be helpful in our 2004 revenue growth and we maintained our strategic balance of diverse core markets with data storage about a third of our total revenue, wireless and semiconductor combined about 36% of our total revenue and scientific research 31% of total revenue.

Q1 revenue included 19.7 million from newly acquired MOCVD and precision lapping.

We had Q1 revenue growth year-over-year with and without the acquisitions.

Revenue increased in every geographic region, notably Japan was up 60% and A-Pac was up 37%.

International sales, sales outside of North America, were 63% of our total, a good penetration of worldwide markets.

Q1 orders were 117 million up 61% year-over-year and up 21% sequentially, and about 9% above our February guidance that orders would be in the range of 105 to 109.

This was our strongest order performance in 13 quarters with a book to bill of 1.24 to 1.

Backlog increased to $147 million and we were aided again by our market and product diversity.

Looking at sequential orders data storage was up 100% to 44.9 million with process equipment and metrology orders from all of the five largest (inaudible) head manufacturers.

Wireless orders were up 47% to 39 million including 23 systems for MOCVD or MBE deposition systems with multiple system orders from three major worldwide customers for blue and green LED applications.

Semi-conductor orders were down 41% to 10.1 million following a very strong Q4 and in Q1 one of two multiple AFM orders flipped into this June quarter.

So we expect June results to be better.

And scientific research was down 26% to 23.1 million reflecting the normal seasonality of the March quarter but still above the prior year's orders.

Q1 orders included 36 million from recently acquire MOCVD and Aii precision lapping.

Again, providing Q1 order growth year over year with and without acquisitions.

Geographic sequential order strength included a 78% increase in China and a 37% increase in North America while Europe declined 42% and Japan declined 9%.

Noteworthy that A-Pac orders of $44 million were equal to North America in the quarter, indicative of the importance of China's growth.

China is now the world's leading country in mobile phones.

Overall good penetration of worldwide markets with international orders being 62% of our 117 million order total.

Significant growth in the first quarter both in wireless and data storage.

Again wireless at 39 million was up 47% sequentially up 273% from prior year, data storage at 45 million, up 100% sequentially and up 51% year-over-year.

Q1 earnings, EBITDA of 7.5 million was up 148% year-over-year and up 112% sequentially.

GAAP EPS loss of 2 cents per share included a 3 cent negative impact of purchase accounting relating to our November acquisitions.

EPS excluding amortization charges were positive 11 cents per share, 2 cents above the top of our guidance which was a range of five to nine cents.

Gross margins excluding the nonrecurring purchase accounting charge were 43.7%, versus 44.7% in the fourth quarter, primarily the influence of higher equipment revenue in the quarter.

Process equipment sales rose to 56% of our total revenue in the quarter.

Our balance sheet remains strong with 112 million of cash and was up $5 million in the quarter.

Commenting on overall market conditions the growth in orders in revenue from our core customer markets of data storage, wireless, semiconductor, and scientific research observed last quarter has clearly continued through the March quarter.

Veeco's quarterly orders have increased from 64 million in the September of '03 quarter to 97 million in December to 117 million in this March quarter being reported.

An 80% increase in this nine-month period with a further increase forecasted for the June quarter.

Our customers are clearly ramping production of their new products, including 80-giga bite hard drives and now new consumer micro drives.

In semiconductor 90 nanometer feature size on 300 millimeter semiconductor applications and clearly blue and green high brightness LEDs and nano science research.

While they are continuing their investment required for the development of next-generation product required 12 to 18 months from now, and these include 160-gigabyte hard drive, perpendicular recording heads, smaller micro drives to enable a new class of digital wireless consumer product, is estimated that each household will contain ten hard drives by the year 2010 with the growth in consumer electronics.

In semiconductor we see the introduction of 65 nanometer and research in 40 nanometer devices aiding our AFM sales.

In wireless the development of longer range Y-max devices, camera cell phones, I-pods, hand-held audio video players and white light high brightness LEDs for back lighting of larger LCD color displays as well as high-brightness LEDs to be used in the interior and exterior automotive lighting applications.

And the development of future solid-state lighting replacing energy inefficient incandescent and fluorescent lights.

This impressive list of new growth opportunities prompts two observation.

One, that Veeco's core technologies are becoming significant to a whole new class of digital wireless consumer products that increasingly represent the integration of compound semi conductor and data storage technologies.

Two, that we are early in a new capital equipment investment cycle required to enable these massive high growth consumer product markets.

Veeco is in a unique position to provide both enabling technology solutions and production equipment for the manufacture of these new wireless digital consumer products.

The long awaited post-pc era is emerging and it represents a multi-year opportunity for Veeco's specialty technologies.

Overall we see growth continuing in the June quarter and through the remainder of 2004.

Veeco currently forecasts that Q2 orders and revenue will increase approximately 5% with orders in the range of 120 to 125 million and revenues in the range of 95 to 100 million.

EPS excluding amortization in the range of 11 to 14 cents per share and a positive GAAP EPS in the range of a penny to four cents.

I'll stop here and Jack will comment on our financial results and then I'll return with market sector comments and your questions.

Jack.

Thank you, Ed.

The three months ended March 31, 2004 sales were 94.5 million representing 44% increase from first quarter 2003.

Increase is attributable to a $23.3 million increase in process equipment products including $7 million from New York Process Equipment Data Storage Group, 9.4 million from the Compound Semiconductor Group including TurboDisc, and 6.9 million from Aii, the later two businesses acquired in the fourth quarter of 2003.

By market sales were up compared to the prior year by 65% in data storage, 233% in compound semiconductor, 18% in semiconductor, and flat in scientific research.

Sequentially sales increased by 17.5 million or 23% due to a $11.5 million increase in process equipment attributable to TurboDisc and Aii and a $6 million increase in metrology sales, principally ASMs.

First quarter of 2004 orders improved 117.4 million up 61% from the first quarter of 2003.

Orders were up 21% sequentially from the fourth quarter of 2003.

Gross profit was $39.8 million for the quarter or 42.2% of sales.

As we explained in our February conference call acquisition accounting would and has affected us in both the fourth quarter of '03 and the first quarter of '04.

Accordingly the 2004 margin includes a $1.5 million charge related to capitalization of manufacturing profit in inventory related to the acquisition accounting from the fourth quarter 2003 acquisitions.

Excluding this nonrecurring charge gross profit was 43.7% in the first quarter of '04 compared to 31.2 million or 47.4% of sales in the first quarter of 2003.

Excluding purchase accounting charges the change in gross margin is attributable principally to the significant mix shift to process equipment tools which have a lower average gross margins.

In addition there were an unusual number of bifurcated sales under SAB 101, which is been amended by SAB 104.

We do believe that gross margins will improve by half to 1% in the second quarter of '04 and will improve in each quarter of 2004 due to increased volume, better mix within process equipment and metrology, and improved pricing.

SG&A was 20.1 million, or 21.3% of sales versus 16.9 million or 25.7% in the first quarter of 2003.

We are pleased that SG&A has declined as a percentage of sales, dollar increase realized was mostly due to the acquisitions in the fourth quarter of 2003.

SG&A was up 2.1 million sequentially principally due to high commission expenses resulting from higher sales and the full quarter impact of TurboDisc and Aii.

R&D expense totaled 14 million an increase of 1.9 million from the first quarter of 2003 and up $700,000 sequentially.

Both largely due to the investments in TurboDisc and Aii.

As a percentage of sales R&D was 14.9% compared to 18.5% in the first quarter 2003 and 17.4% in the fourth quarter of 2003.

Overall operating expenses declined as a percentage of sales to 35.8% compared to 42.9% in the first quarter of '03.

Amortization expense totaled 4.9 million in the first quarter of 2004 versus 3.1 million in the first quarter of 2003.

This was a result of approximately $1.7 million of additional amortization expense related to the TurboDisc and Aii acquisitions.

Other income for the first quarter was 286,000 and was related to foreign exchange gains compared to a gain in the first quarter of 2003 of 873,000, principally from the sale of fixed assets.

There were restructuring expenses in the first quarter of 2003 of 668,000 with no similar charges in 2004.

Net interest expense was 2.2 million compared to 1.8 million in the first quarter of 2003 due to the reduction in interest income resulting from lower cash balances as a result of the fourth quarter '03 acquisitions.

Veeco's first quarter 2004 earnings before interest, taxes, and amortization and acquisition charges were $7.5 million compared to 3 million in the first quarter of 2003.

Veeco's first quarter 2004 GAAP net loss was 700,000 or two cents loss per share compared to a net loss of 1.7 million or 6 cent loss per share in the first quarter of 2003.

Earnings per share excluding merger, restructuring, and amortization charges for the first quarter of 2004 was 11 cents compared to earnings of three cents on a similar basis in the first quarter of 2003.

Backlog at March 31, 2004 was approximately 147 million.

With regard to guidance we are currently forecasting second quarter orders in the range of 120 to $125 million, revenues in the range of 95 to 100 million with forecasted GAAP income per share in the range of 1 to 4 cents a share.

Earnings per share excluding amortization costs of approximately $4.6 million are expected to be in the range of 11 to 14 cents.

With regard to the balance sheet cash and equivalents totaled 111.8 million at March 31.

We were quite pleased that we generated $5 million of cash during the first quarter of 2004 which was above plan.

Accounts receivable increased by 6.3 million from December '03 due to higher sales volumes.

The DSOs decreased from 72 days to 60 days, an excellent level compared to the industry norm of 82 days.

Inventory increased to 104.4 million from 97.6 million at December 2003 due to several non revenue tools that did not ship in the quarter.

Inventory turns were two times.

CapEx was 1.4 million the first quarter of 2004 and depreciation expense totaled 3.2 million.

A balance sheet and cash position of nearly 112 million remains quite strong.

We will now return to Ed for some additional comments and your questions.

Thank you, Jack.

To further highlight our Q1 product success by market.

In data storage Q1 orders of 45 million were up 100% sequentially included equipment in metrology purposes from all of the five largest worldwide (inaudible) manufacturers.

These purchases for both capacity and new technology advances included combinations of IM Beam deposition, IM Beam etch, precision lapping, diamond like carbon deposition, PVD deposition process tools, along with optical and AFM metrology systems.

Hard drive growth is forecasted to exceed 10% per year through the year 2007.

In five to seven years consumer product hard drives could equal PC shipments with more than ten hard drives in every home.

This represents a huge data storage opportunity when we consider that compared to today's 275 million drives per year, the volume of future digital wireless consumer products that are candidates for a micro drive storage will exceed 1 billion units per year, requiring smaller, thinner, low-cost hard drives, and driving a continued capital equipment and metrology investment by the vertically integrated data storage suppliers who are our customers.

In wireless and compound semiconductor again a record Q1 orders of 39 million nearly quadrupled our Q1 '03 results and was up 47% sequentially, including 23 epitaxial deposition systems, a combination of MOCVD and MBE with three of our customers placing multiple systems for blue LED and RF micro device applications.

Cell phone growth is expected to reach 750 million phones by 2008, driven by new fully featured color camera cell phones.

Each handset now contains over 20 compound semiconductor devices for both back lighting and electronics, requiring more MOCVD and MBE deposition equipment.

Emerging automotive applications are increasing year-over-year based on greater use of all solid state LED interior and exterior lighting, control of cruise control, infrared backup alarms, exterior cameras, more automotive electronics will tax battery life demanding more energy efficient high frequency compound semiconductor devices for automotive applications.

So automotive is a strong market for these next few years for LEDs and for RF devices.

In semiconductor, driven largely by our 3-D auto AFM tools, orders of 10.1 million were down 41% sequentially impacted by a large multisystem orders flipping into this June quarter and a larger than normal concentration of lower ASP tools in the first quarter.

Orders included six automated AFM tools and three optical metrology tools.

We are seeing more interest in 65 nanometer feature size applications within the capability of our high resolution AFM.

We continue to populate the world's wafer fabs penetrating the top ten semi conductor device manufacturers.

Lastly in our scientific research market, sector Q1 orders were 23.1 million down 26% sequentially.

Again the result of normal seasonality of the March quarter influenced by stronger government spending in the December year-end prior quarter.

Our Q1 orders were up 11% compared to Q1 of last year in line with the overall research spending increase expected for the year.

Here our research AFM's and scanning probe microscopes continue to be the industry standard for atomic imaging and molecular manipulation.

We have also seen significant growth around the acceptance of our new optical interferometer profiler made in Tucson for industrial and men's application.

Our research sector combines material science, Life Science and multidisciplinary nanotech research centers.

Long term nano technology continues to be a very broad, rich, disruptive technology, currently largely in the R&D phase but with an ability to be a one trillion dollar market size by 2015.

And to ultimately impact all of industry and Life Sciences and to be as ubiquitous as today's semiconductor devices.

Nano technology is a large multi-year opportunity still in a development stage, Life Science and material science but clearly impacting our current growth in data storage and semiconductor applications where as fair to identify GMR (inaudible) magnetic heads and 65 nanometer feature sized semiconductor devices as nanotech devices that are in production and development today.

Nano science is currently impacting the extension of both Moore's Law in semiconductor and aerial density growth in data storage as we see a proliferation of new materials used in feature sizes well below 100 nanometers exhibiting improved device performance as search nano science impacts both our process equipment and our metrology equipment growth.

Operator we would be pleased to pause here and take some questions.

Thank you, gentlemen.

The questions and answer session will be conducted electronically.

If you would like to ask a question please do so by pressing the star key followed by the digit 1 on your touchtone telephone.

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

We will proceed in the order that you signal us and we'll take as many questions as time permits.

Once again please press star 1 on your touchtone telephone to ask a question.

If you find that your question has been answered you may remove yourself by pressing the pound key.

And we'll take the first question and that question comes from Ali Irani of CIBC World Market.

Good morning, gentlemen and sounds like all your businesses are starting to rev up.

I was hoping, Ed, that you could give us an update on the AFM need and the new 300-millimeter lines.

There's obviously a tendency towards larger dollar spent on process diagnostic.

Could you give a road map?

Are we looking at two, three systems per fab or are we looking at ultimately five systems per fab?

And is there a competition for some of the applications from the new dual-beam platforms that are penetrating the fab inline environment?

I think, as we state before, when people populate, and you're right, they have begun to do so, all of the 300 millimeter fabs at 90 nanometers and eventually at 65 nanometers we will see five to ten AFM's in the fab at the points of etch lithography and CMP.

And many of our customers now have two to three per fab so we expect that this ramp-up will occur over the next two years.

The competition from optical and CD SEM really relates to -- it's not competition.

We really find that we compliment some of these higher speed tools that look down at deep trenches and give you top measurements but really aren't very effective at looking at sidewalls or three-dimensional features, we're deep into the trench.

So in today's fab you'll often see SEM and optical and AFM existing side by side where the AFM is particularly focused on 3-D dimensions at 90 nanometers and below.

Thank you very much.

We'll now take the next question from Robert Maire of Semiconductorequipment.com.

Congratulations on some really nice numbers in data storage.

Question on the semiconductor side.

It seems everything but semiconductor had a really great quarter.

If you could give us kind of your sense of the market.

We also heard of some weakness from other semiconductor equipment manufacturers and could part of this be that a lot of the yield management equipment or more R&D oriented equipment is purchased, perhaps, a little bit earlier in the cycle and now that we have a particular generation of technology under our belt in semiconductor devices that we're now moving more towards production or more capacity-oriented equipment and if that's the case or if that's not the case what do you see as sort of the next kind of impetus point, if you will, in the semiconductor space?

Robert, the next impetus clearly will be life below 90 nanometers will be richer in metrology tools just as 90 nanometers was better for metrology than 130.

So this is a 10 to $15 million hunk of Veeco, so it's going to be lumpy quarter to quarter and influenced by one or two multiple system buys.

But I think overall we're very confident that 2004 will be very, very significant, 30 to 40% increase in revenue in auto AFM year-over-year and we will continue to see smaller feature size, CMT, deep etch, lithography being the drivers going forward.

I wouldn't read into this quarter that the semiconductor growth cycle of '04 or '05 has peaked.

Okay.

Do you see sort of a second leg to it?

Is there some sort of seasonality there, some expectation out there for other firms that there may be a sort of a second coming in the second half of the year?

I think different for Veeco because true wafer fab semi conductor in Veeco is maybe a 15 to 20% total of our total business.

So, we're seeing the integration of semiconductor, compound semiconductor, LED, data storage, it's a bigger drive impact for Veeco than it might be for other semiconductor equipment companies.

The second stage, as you describe it, I would say are digital wireless consumer products beyond the PC, that are going to drive all of Veeco's core businesses very significantly through the rest of '04 and '05.

And semiconductor is a leg of that.

Clearly at the moment we're seeing compound semiconductor, LED, wireless, data storage more active in their growth in the next wave of wireless consumer electronics.

One last question.

If I were to put a number on utilization of equipment in the data storage similar to numbers that are put on in the semiconductor industry, where would you say we are?

Would you say most of the disk drive manufacturers are running relatively flat out with current capacity or where do you think they are?

That's a good question.

I think the curves would look the same, so if you look at the semiconductor utilization curves that have trended up now for nine to 12 months and are probably overall 80% but in smaller feature sizes well over 90%, the numbers in data storage, probably the trend line looks similar in that it's increased utilization but is probably five or ten percentage points lower in total but similar in trend.

Okay, great.

Thanks.

Congratulations again.

Thank you.

We'll now move on to Matt Petkun of DA Davidson & Co. Hi, good morning.

Ed, could you characterize for us the bookings that you saw in Q1 for Aii as well as from TurboDisc.

Sure.

I think I commented that there were in the 117 million there were $36 million of orders from the newly acquired TurboDisc and Aii.

Pretty decent number compared to, I think it was about -- considerably less than that in the Q4..

It was 13 million in the Q4 period and it was above our forecast.

It was about 5 or 6 million from Aii and about a little over 30 million from TurboDisc.

So did you get orders from Aii then?

Yes.

How is the penetration of other customers outside of Seagate going for Aii and how do you see that playing out through the remainder of this year?

Despite the really record sort of a booming quarter for data storage orders of $45 million, the Aii orders were all Seagate orders, so I expect the penetration that we will make of precision lapping into the non-Seagate accounts will start in Q2.

Okay.

Thank you.

And we'll now move on to Brett Hodess of Merrill Lynch.

Moving on we'll move on to Graham Tonica of Tonica Capital Management.

I'm sorry, I didn't hear.

Hello?

Yes.

Am I on?

Yes, you are.

I'm sorry.

Yeah, I was wondering if you could talk a little bit more about the data storage and how there was such a big jump-up in this quarter.

Did you get wind of this or is this a big lumpy series of orders that might meter down a little bit in future quarters?

What were the trends there?

I think the year will be strong in data storage.

It's very difficult, as you say, because there are sometimes large buys to predict exactly quarter to quarter.

Significant in this quarter was the fact that all five (inaudible) head manufacturers made purchases, multiple system purchases, having to do with capacity and development of 160 gigabytes.

So what you really see, you see a lot of new things happening in data storage both the ramping, finishing the ramp of 80 gigabyte, doing the development of 160 gigabyte, many people going to cento(ph) heads which will be required for smaller consumer product form factors, people beginning to work on perpendicular recording.

So there's a lot happening simultaneously, not so different from sort of copper, CMP, 90 nanometer and 300 millimeter that drove semiconductor this last year or two.

Data storage is in a similar technology and capacity spending period to largely to get them in line for what will be a huge consumer product opportunity for hard drives.

And how's it looking in terms of market share?

Do you think you're gaining market share in the quarter?

Yeah, Veeco has, absolutely.

Veeco has a very large install base and very significant market share in etched, deposition, metrology, and now in lapping we're beginning to penetrate through Aii some slicing and dicing requirements.

We continue to expand our product line because we are probably the largest equipment manufacturer broadly serving data storage at wafer, at slider, and now in some points of test.

This is a very big opportunity for us going forward.

Congratulations.

Thanks.

And we'll now move on to Brett Hodess of Merrill Lynch.

Good morning, Ed.

Good morning, Brett.

On the mix of products, you mentioned that this quarter number of AFM's slipped out and as a result metrology business was only like 27% of the orders.

If you look at the next quarter or two, do you think that the metrology will start to rise back up as a percentage of the mix and that will give us some better margin leverage in the second half?

Yes, I do.

Let me just, your number sounds low to me, metrology of 117 million was 32 million.

So that's 27%.

You beat me at math.

I still know how to use my calculator.

Yeah, I think this was a very, very strong equipment quarter, because of the LED's and because of data storage, and sort of a so-so metrology quarter.

The quarter before was 47 million in metrology, and I think that's more norm.

I think you're going to see metrology coming up considerably in the remaining quarters of '04.

Which will be good for margin, you're correct.

And the second question, now that the process equipment does have a large bookings in backlog, from a volume standpoint and learning curve, because I know there's a number of new process tools and data storage as well, can you give us some thoughts on what you think the trend line for margin on the process equipment side is?

Two remarks you've made there and they're both good.

First of all, you're right, the backlog went up 247 million and the backlog now is in some of the newer equipment systems that were introduced that will have a SAB 101 revenue recognition that is slower than it has been in the past.

So this will be clearly a growth year but I think some might say why is the Q2 guidance 95 to 100 million revenue not higher.

It's really because of the point you've just made.

That there will be some heavy shipments that will have revenue recognition in Q3 and Q4.

So gross margins in equipment will improve from about a 36.5% gross margin to about 40% in the first half versus the second half, Brett.

Okay.

That makes a lot of sense.

And just to finalize that, Jack, when you're recognizing the revenues later on, on some of the shipments that occur now, you're recognizing 100% of the costs against those now?

That's correct.

And the final question I just wanted to ask was if you look at the process tools, would the MOCVD acquisition recently, have you been able to look yet at synergies between that platform and your MBE and ion beam and whatnot to see if there's purchasing power leverage or component leverage you can gain?

We've identified some significant gains that we will make and I think it will start to show up sort of in Q4 and Q1 of '05.

We've created now larger business sites within Veeco to take advantage of buying for larger revenue pieces of equipment where there are common valves, pumps, chambers, and certainly we will see the benefit of that and we're also seeing the benefit of the LED customers now buying AFM's.

They're discovering that surface conditions of the LED films can predetermine, right.

So we're seeing Veeco metrology being exported into LED applications.

They're buying the automated type of AFM?

No, they're current buying research AFM.

Very good, thank you.

We'll now move on to Glen Yeung of Smith Barney.

Hi, this is Karen Lang.

Just a question for Jack on the gross margins.

When you talk about 40% gross margins on the process equipment side what sort of revenue level that you're looking at?

Probably the level that we're booking at for the quarter, I would say.

Okay.

That's it for my questions.

Thanks.

Moving on, Robert Weiss of Bear Stearns.

I just got a couple questions.

I'm not as educate as all these other guys.

On the data storage business, which is 33% of your business, that did pretty well, we all hear about how there's so much excess supply, do you sense that things may slow down in the second half, or is it full steam ahead, or got any sense on what kind of visibility you have there?

Then I got one other question after that.

Well, this was clearly a very strong quarter.

Right.

And it came from all five head manufacturers buying equipment.

Right.

I think the industry overall is quite healthy, and although we may see -- I wouldn't be surprised by a modest decline or flatness in the Q2 orders.

I think the rate of the orders for the year will be significant in double-digit growth over the prior year.

And what kind of visibility do you think will you see?

Is there any guess into '05?

Then I've got another question.

I think the big impact of digital consumer electronics, like I-pods and like TiVo, and cameras, the big boys in the industry if they can make these one-inch micro drives a bit thinner, cell phones are an application for hard drives, then you're talking about 500 million units per year.

I think you're going to see a two or three-year period where there's going to be unusual date storage growth largely around, not so much around the PC, but around consumer electronics and these smaller form factors.

The second question is, 31% of your revenue goes into scientific research.

Is there any visibility you have there, good, bad, or indifferent?

How do people like myself try to view this in terms of the growth rate?

Has there been a growth rate over time?

Can you just help us on that a little bit?

I think the best model to use there is scientific research, combination of Life Science, material science, and nanotech sensor is probably growing at 10% a year, maybe 2 X gross national product compared to data storage which is clearly going to be growing closer to 30% a year as will semiconductor and wireless.

Okay.

Ed, thanks a lot.

Thank you.

Mark Miller of Hoefer & Arnett has our next question.

Again, my congratulations on a strong quarter.

Ed, from what we're hearing here in terms of the gross margin improvement you're anticipating in process equipment as well as perhaps increased metrology sales the second half.

Can you give us any range where you think your margins might grow to in the second half of the year over where they're at now?

We're currently expecting a half to 1% growth as I indicated in the second quarter and I would say in that range on a sequential basis.

For the next two quarters?

Yes.

Third and fourth quarters?

This market has really become explosive, the LED market over in Asia.

You feel it's in the early stages.

How long does that have to run, any concepts in terms of the market potential there, where we're at now?

There's always a temptation to sort of identify this as a bubble similar to optimal filters.

I think it's stronger than optical filters and it's long-lived capability because the applications are much deeper.

You have not only all these hand-held devices where keyboard lighting and color display lighting but now you have LED's going into larger LCDs for TV and for computer.

You have two or three cars coming out next year that will be all solid-state lighting, you have most countries pulling forward the research on solid-state lighting because incandescent is so energy consuming.

So I think you'll see a ramp and these are cyclical industries, but they're growth cyclical industries.

I think we have good visibility for '04, '05, and then someone has to sort of size where do the cycles occur after '05.

What type growth are you projecting over those two years?

I think we're going to see excess of 30% a year growth for two years.

Thank you.

Now moving on to Mark Fitzgerald of Banc of America Securities.

Thank you.

Couple of questions.

Ed, you've made a career out of dodging going head to head with the large companies.

The fact that KLA's piling into the AFM business, does that change your strategy in that market at all?

Mark, you're absolutely correct, hedging the strategy, as Veeco gets to be a four or $500 million company as far as to stay off the screen of some of these larger companies.

But with reference to entrance like KLA and AFM as you know we have a large installed base of 6,000 research AFM's, and 120 production AFMs in the field.

We have very strong 3-D AFM intellectual property, we're qualified at 65 nanometers and capable of 40 and 20 nanometer feature size with true atomic resolution, so we do think that KLA will introduce a product in the summer months with a limited 1-D using a purchased head from SEACO, so as these businesses get larger we'll have competition but we have very strong technology and I think we'll continue to be a player that has specialty niche technologies that get larger and at some point competes with larger firms.

As we will be a large firm.

So it doesn't make you have a bipolar strategy where you go after the research market and kind of abdicate the semi conductor where KLA might be stronger?

No, I think where we have technology leadership positions and installed base it would be sensible to exploit those.

We still will be different from these other suppliers in that we will have a much more diverse product and market strategy and we will combine metrology and equipment and try to keep a third of our business in research so that our volatility isn't as great as a pure equipment company.

Okay.

And then just out of curiosity here, you're looking at your model on a GAAP basis.

Do you guys talk about target operating margins for the company at this point?

Well, we certainly have operating margins on an EBITDA basis which we're targeting at 18% over a four quarter period, and amortization is current running about $4.7 million a quarter.

What I'm trying to get at is there any chance you guys can get back to some of those operating margins you had in the late 90s in terms of the high teens, 20%, if we were to include amortization in it?

I think so.

If you give credit to this recovery, which looks quite strong, existing for a two-year period, you'll see those numbers.

So that basically is the top line's got to outgrow the expense line.

Is that the point?

Well, no, we're decreasing operating expense as a percentage of revenue as we go, so there's great control of operating expense but it is a combination of revenue growth and sort of holding operating expense flat.

Okay.

Thank you.

We'll now move on to David Duley of Merriman.

Good morning, this is Maynard Arif for David Duley.

Congratulations on a nice quarter.

Ed, if you look at the strength in the data storage can you give us an idea how much was coming from capacity expansion from 80 or 100-gigabyte or is it all for technology purchases?

It's probably two-thirds capacity and one-third technology.

In this quarter.

I'm eyeballing that, but you still have a serious ramp continuing on 80-gigabyte while you have development of 160 gigabyte, smaller form factors, micro drives, perpendicular recording, cento.

You have both advanced development occurring at a pretty serious level along with capacity.

And normally it would take them like about 12 to 18 months for new technology?

As far as like research and development and to ramp to new technology?

Yes, and I think that's still the case.

Okay.

And also in the AFM side you mentioned about five to ten per fab opportunity.

Do you have customers with five or ten tools right now?

I commented we have a number of customers who are using AFM's sort of at three or four per fab, where they're dedicating an AFM to CMP, to etch, and to lithography.

Okay.

Lastly, if you look at your order guidance for the June quarter would it be fair to say that you're probably expecting growth coming out of the semi as well as the tellco and wireless?

And research.

The June quarter is almost always stronger in research than the March quarter.

Great.

Thank you.

And Byron Walker of UBS has the next question.

Good morning.

Couple of questions.

Jack, I just want to be sure that on OpEx you're forecasting relatively flat.

Is that what we should look at certainly for the second quarter and perhaps going forward?

We're looking for a point improvement and in terms of operating spending, so from a 36% operating spending to 35%, and that would assume some growth based on sales volume, though, some variability in our operating spending.

Admissions and some bonus accruals, that sort of thing.

Are you still targeting I think gross margin of 48 to 50% on revs of 125 million per quarter?

Probably in that range, 47% perhaps, depending upon the mix of equipment and metrology.

The 125 per quarter do you think you got a shot at seeing that sometime in the next four quarters?

I would think so, yes.

Sometime in the next two quarters?

Well --.

By year end?

See what our bookings trend turns out to be.

That's sort of the booking forecast for Q2.

We've always said there's sort of a three to six-month gap between bookings and revenue.

It can't be more than two quarters away, that revenue line, because we are wanting to keep a lead time between 90 and 120 days.

One of the concerns is as we see these ramps we want to be able to deliver product in 120-day time frame.

Uh-huh.

And do you have a target inventory level in terms of days on hand?

We'd certainly like to get to two and a half turns at that level.

Great.

Thanks.

Thank you, Byron.

And ladies and gentlemen, at this time we do have one question remaining in the queue.

Once again if you would like to ask a question or if you after followup question please press star 1 to signal.

As a reminder, if you are using a speakerphone, please make sure that your mute function is turned off to allow your signal to reach our equipment.

We'll now take a follow-up question from Matt Petkun of DA Davidson & Co.

Hi, Jack.

Just one point of clarification.

On the gross margin improvement you said 50 to 100 basis points in Q2.

Is that from the reported gross margin or the gross profit margin that would be excluding the accounting for the - ?

Excluding the accounting.

So above the 43.7%?

Yes.

Okay, thank you.

You're welcome.

Just as a final reminder if you would like to ask a question or if you have a followup question please press star 1 to signal.

Operator, if there are no further questions thank you all and we look forward to speaking to you after the second quarter.

And that does conclude today's teleconference.

Thank you for your participation.