Veeco Instruments Inc (VECO) 2006 Q1 法說會逐字稿

Good day, everyone, and welcome to the first quarter 2006 results conference call.

Today's call is being recorded.

For opening remarks and introductions I would like to turn the conference over to the Senior Vice President of Corporate Communications and Investor Relations, Ms. Debra Wasser.

Please go ahead.

Thank you and thank you, everyone, for joining our conference call this evening.

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

Today's news release was distributed at 430 p.m. this afternoon.

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.

For your additional information we're in the process of updating our investor presentation to reflect first quarter 2000 results and we will be posting this to Veeco.com.

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

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

Your participation implies consent to our taping.

To the extent this call discusses expectations about market conditions, market acceptance, and future sales of the Company's products, future disclosures, future earnings, expectations, or otherwise make statements, such statements are forward-looking and are subject a number of risks and uncertainties that could cause actual results to differ materially from statements made.

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

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

Information regarding such non GAAP financial measures, including reconciliation to GAAP measures or performance, 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The Company does not plan to update the information on this webcast once it has been archived.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 would now like to turn the call over to Ed.

Good afternoon and welcome to our first quarter financial conference call.

Today we reported positive first quarter 2006 results with revenues of $93.9 million, flat with our prior year, in line with our guidance of 90 to 95 million, and accompanied by increased orders, increased gross margins and increased EBITDA - all up significantly above prior year and above our guidance.

First quarter orders increased 28% from prior year to a five-year high of $127 million, above our $110 to $115 million guidance and reflecting strength in both data storage and high brightness LED markets.

Data storage orders were up 55% to a record $70.4 million and high brightness LED orders were up 74% to $24.3 million - both driven by the high growth of embedded hard drive storage in new consumer electronics, and the investment in perpendicular recording, and the beginning of high brightness LED backlighting of new flat-panel LCD TVs and new laptop computers.

Veeco's first quarter book to bill ratio was 1.35 to 1.

Our first quarter gross margin of 44.5%, up 4.5 percentage points from prior year, reflected margin growth in both our process equipment and our metrology products.

EBITDA earnings of 5.7 million were up 115% from prior year, so that our EPS excluding amortization was $0.09 per share above our $0.05 to $0.08 guidance and above the street consensus of $0.06 and well above the one penny for prior year.

GAAP EPS was a loss of one penny above the $0.03 to $0.08 loss offered in our guidance and above the loss of $0.16 per share one year ago.

We ended the quarter with $113.5 million in cash after repurchasing $20 million of our convertible debt during the quarter.

Our focus on operational improvements, on cost control and on cash generation continues as we proceed through a growth 2006.

We continue to see improved 2006 market conditions in essentially all of our core markets with double-digit market growth expected in data storage and high brightness LED, and a more modest single digit growth expected in semiconductor and scientific research market.

We reassert that our -- we reassert our previous expectation that current improved market conditions and new Veeco products will allow us to increase our 2006 revenue to approximately $450 million up 10% from 2005 with significant growth in earnings and with another important three percentage point growth in gross margins to an expected 45% for the 2006 year.

As previously discussed we anticipate continued quarterly growth in revenue, in margins and in EBITDA through the 2006 year.

We expect Q2 revenue - the June revenue - to increase and to be in the range of 105 to 110 million.

We expect Q2 orders to be in the range of 125 to 130 million.

So another positive book to bill quarter adding to our backlog, with improved GAAP EPS in the range of $0.02 to $0.08 per share, and improved earnings - excluding amortization - to be in the range of $0.12 to $0.16 per share excluding amortization and using a 35% tax rate.

Our backlog which increased approximately 30 million in Q1 is expected to increase again in Q2 to support higher Q3 and Q4 revenue expectations.

And continued gross margin improvement as a result of increased outsourcing, continued use of common platforms and hardware and software, and the introduction of new higher ASP Veeco products.

The revenue mix of equipment and metrology in Q1 was 57% equipment, 43% metrology - close to our guidance.

A little higher in equipment.

The order mix reflected higher equipment growth in the first quarter.

In fact, 56% equipment and 34% metrology in the $127 million orders in the quarter.

We should expect revenue in the next few quarters to reflect a higher equipment mix and likely to be somewhere in the 60 to 40 -- 60% equipment, 40% metrology in Q2 and then 62% equipment and 38% metrology as the mix of equipment and metrology in the second half of the year.

With equipment gross margins improving to be above 39% through the year and metrology gross margin improving to 53 to 55% through the year, our total gross margins will remain aligned with the improvement plan of three percentage points for the year, so as to end the year at a 45% gross margin level despite the higher equipment content.

I think at this point I will ask Jack to review our first quarter financials in more detail; and I will return to comment on market trends.

Jack.

The three months ended March 31st, 2006, sales were 93.9 million flat to (indiscernible) the first quarter 2005.

Sales increased 2.8 million in (indiscernible) the equipment due to the continued strong demand for data storage equipment, offset by a decrease of 2.8 million in metrology.

Market sales were up compared to the prior year by 56% in data storage, down 35% in semiconductor, 32% in LED wireless and 4% in research.

Sequentially sales was expected to decrease by 18.9 million or 17% primarily due to a $13.8 million decrease in process equipment and a decrease of 5.1 million in metrology products.

First quarter 2006 quarter's increased to 126.7 million or $0.28 from the third quarter of 2005 and were up 23% sequentially from the fourth quarter of 2005.

The first quarter '06 orders were made up of 70.4 million from data storage, 24.3 million from LED wireless, 21.9 million from scientific research and 10.1 million from semiconductor.

The book to bill ratio for the quarter was 1.35 to 1.

Gross profit improved to 41.8 million for the quarter or 44.5% of sales compared to 37.5 million or 40% of sales for the first quarter of 2005.

Process equipment margins improved to 38% up from 29.8% in the first quarter of 2005, due to a variety of factors including higher volume, favorable mix, cost reductions, and improved supply chain management which included outsourcing.

We had a 52.9% gross margin in metrology compared to 51.8% in the first quarter of 2005, principally due to a better mix.

We are continuing to focus as Ed mentioned on gross margin improvement in 2006 and expect the Company's 2006 gross margin to increase in the second half of the year.

Sequentially gross margins increased 1.2%, due to a higher concentration in metrology sales which had a 1.7% higher sequential gross margin.

This is attributable to a better mix than automated AFM and optical metrology products.

SG&A was $21.3 million or 22.7% of sales compared to $20.2 million or 21.5% of sales in the first quarter of 2005.

The 5.4% increase is mainly attributable to increased selling expenses related to new products initiatives as well as increased investment in the Asia-Pacific area, due to expanding business in this region.

SG&A was down $600,000 sequentially, principally due to lower selling and commission expense resulting from lower sales volume.

Research and development expense totaled $14.6 million for the quarter, a decrease of $200,000 from the first quarter of 2005.

A sequential decrease of $700,000 largely due to the timing of product development efforts in the prior period.

As a percentage of sales R&D was 15.5% compared to 15.8% in the first quarter of '05 and 13.6% in the fourth quarter of '05.

For the second quarter, operating expenses will increase in absolute dollars but should be approximately 36% of sales which will be 2.5 percentage points lower than the first quarter of '06.

Dollar increase in the second quarter is attributable to continued increased investment in Asia-Pacific of approximately $0.5 million.

Salary merit increases, bonus accruals, stock options and restricted stock units issued in the second quarter, all totaling 1.3 million and legal and severance costs of approximately 1.1 million in the second quarter.

We will continue to be prudent in our operating spending while investing in new products end market.

First quarter operating profit before amortization or EBITDA totaled $5.7 million compared with $2.6 million in the second quarter of 2005.

Sorry -- first quarter 2005.

This improvement is a result of improved gross profit principally in the process equipment group.

Amortization expense totaled $400 -- $4 million in the first quarter of 2006 versus 4.5 million in the first quarter of 2005.

Net interest expense was 1.4 million compared to 2.1 million in the comparable 2005 quarter; and this was due to an increase in interest rates and higher cash balances invested in the current quarter.

During the first quarter of 2006, the Company repurchased $20 million of its 4 1/8% convertible subordinated notes which are due in 2008 -- December 2008.

As a result of this repurchase, the Company reduced its convertible subordinated notes outstanding to $200 million and recorded a gain of $600,000 which was a gross gain offset by a $300,000 proportionate reduction related to deferred financing costs for a net gain of $300,000.

First quarter 2006 GAAP net loss was $200,000 or $0.01 per share compared to a net loss of 4.7 million or $0.16 per share in the first quarter of 2005.

EPS excluding amortization expense and the $300,000 gain on convertible note repurchase for the quarter was $0.09 compared to $0.01 for the 2005 first quarter, utilizing a 35% tax rate.

Street consensus was $0.06 for the first quarter of '06.

Regarding the outlook, we are currently forecasting second quarter 2006 revenues in the range of 105 to 110 million.

We expect the second quarter '06 gross margin percentage to be roughly equivalent to that of the first quarter '06.

Earnings per share as the Company forecasted to be between $0.02 and $0.08 per share on a GAAP basis and earnings per share of between $0.12 and $0.16 excluding amortization of $4 million and utilizing the 35% tax rate.

Included in both of these forecasted amounts is our stock compensation expense as required by the SFAS 123R accounting rule.

Cash and equivalents totaled 113.5 million at March 31.

We generated through $8.7 million in free cash flow for the quarter.

Total cash flows for the quarter was a use of $11 million which included the previously noted $19.4 million repurchase of convertible notes and $2 million representing the final earn outs of acquired businesses.

Excluding these unusual items the Company would have generated 10.4 million in full cash flow for the quarter.

(indiscernible) will decrease by 10.6 million during the quarter and DSOs were at 75 days lower than the industry norm of 82 days.

Inventory increased by 3.2 million to 92.1 million at March 31 with a turnover 2.3 times.

The increase was attributable to higher level of finished goods due to the timing of certain revenue recognition items as well as the build for the anticipated higher second quarter '06 revenue shipments.

Capital expenditures for the quarter were $3.5 million and depreciation expense totaled 3.3 million in the quarter.

Our balance sheet with cash position of 100 -- just under $114 million remains quite strong.

We will return to add some additional comments in your questions.

Thank you Jack.

Allow me to comment on individual markets before your questions.

I'll start with data storage.

In data storage, we see a very healthy industry environment where the first quarter Veeco orders were up 55% to a record $70 million level, reflecting heavy industry investment in the transition to perpendicular recording technology to smaller format (indiscernible) heads.

To increase aerial density, important to keep flash memory at arm's length and to the need for more capacity in both wafer and slider portion of hard drive manufacturing.

Both are currently above a 90% utilization level and assume investment to larger wafer size so that the industry can avoid costly brick and mortar expense as we see further expansion.

These combined investments will favorably impact Veeco's 2006 and 2007 revenue levels, the increased industrywide CapEx spending is the result of continued high single digit growth in laptop, desktop, and enterprise applications and dramatic industrywide 30% growth levels and continued embedded storage in consumer electronics - including MP3 players, music players, iPods, music applications, new game boxes, TV set-top boxes and soon TVs themselves, with drives that are capable of downloading video from Internet-enabled TV.

And then followed by high-definition TV over the next few years not to mention digital cameras, home entertainment centers and digital picture storage in our homes and our offices.

So we expect the sales of Veeco process equipment and slider mechanical equipment and metrology to be up over 20% this year in 2006.

Revenue in this sector for Veeco was up 56% in the first quarter.

We saw multi-million dollar orders from all five of our thin film head manufacturers in the first quarter.

In LED wireless, the second market, our first quarter orders were 24 million which was the second strong order level on a quarterly basis - and up 74% from one year ago, reflecting continued success of our [GanZilla] 2, MOCVD gallium nitride system - including multiple orders from our A-PAC customers and that's really become the combination of Taiwan, Korea, China.

In fact the orders - if I look at the geographic breakdown of orders, it's quite interesting that 71% of our orders in the first quarter were outside the United States.

And A-PAC was 48% of our total orders.

So we are clearly seeing the start of LED backlighting for laptops, mobile displays, and LCD TV applications.

And we expect that backlighting LCD TV emergence to reach production levels in 2007.

In the semiconductor market which is primarily our auto AFM metrology tool, revenue was 11.3 million, down from 17.4 million a year ago and orders were 10 million down from 14 million a year ago.

In this small Veeco sector one or two delayed orders causes a disproportionate shift quarter to quarter.

We continue to see progress in penetrating 90 nm, 65 nm and development of 45 nm semiconductor applications, where AFM provides unique high-resolution capability compared to SEM and optical.

And in data storage the auto AFM has found increased use in the transition to perpendicular thin film heads, requiring higher resolution for nm wafer metrology tests.

And lastly in scientific research our revenue was 27.4 million or relatively flat with prior year and seasonally down from what had become traditionally stronger December quarters in scientific research.

The introduction of our bio AFM continues to progress.

This nascent life science sector provides us a significant growth opportunity for both our AFM and our optical metrology tools, complementing our strength in material science and Nanotech metrology.

We expect single digit growth in both semiconductor and scientific research in our 2006 growth year.

So all in all a quite positive first quarter with, I think, good trends that are obvious in the 2006 year being a growth year for Veeco.

Ashley, we'd be pleased to take questions.

(OPERATOR INSTRUCTIONS) Mark Fitzgerald with Bank of America.

I was curious.

On the tax rate here, if you look out the next year would we be running on a GAAP basis the same level of taxes as we are this year?

Yes we would.

So it's the 800 million level?

800,000 level for the quarter.

Yes.

Thank you.

Yes, actually, it might trend up slightly but I would estimate that it would be in sort of the 15% range.

The 800,000 level now really what we're paying only now is foreign taxes.

And that's got about a 25% tax rate which equates to about a 15% rate in the latter part of the year.

Okay.

Thank you.

Derrick Wenger with Jefferies & Co..

A few financial questions.

What was the depreciation and amortization for the quarter?

What were the capital expenditures for the quarter and what's the outlook for the entire calendar year for capital expenditures?

And what was the gross interest expense in the quarter?

The amortization was 4 million.

The depreciation expense was 3.3 million.

The capital expenditures were 3.5 million.

Sorry -- could you repeat them?

Yes.

The capital expenditure outlook for the full year and then the gross interest expense for the quarter.

Okay.

Gross interest expense was about - I'll have to get that number for you;

I don't have that off the top of my head.

But the outlook for the year for CapEx is about $20 million.

JoAnne Feeney with Punk, Ziegel & Co..

Just a couple of questions really about your feeling for the data storage industry.

I know you think it's going very well for this year but this is an industry that tends to be fairly cyclical.

Six months on, six months off.

It seems like we're seeing a bit more strength this year.

I wonder if you could talk a little bit about the difference that you see between purchases for capacity utilization versus the move to thin film head versus the move to perpendicular drive?

Yes.

Most of the activity we are seeing is technology.

Probably in the order book is 70% technology and 30% capacity right now; and some of the capacity elements that will drive, I think, a multiple year expansion haven't really begun like the larger wafer size.

So predominantly we are seeing perpendicular recording, higher aerial density, the continued transition to [PEMCO].

People are only beginning to talk about larger wafer size with an expectation that they would buy larger wafer size equipment at the tail end of '06 and that most of that would happen in '07.

So I think if laptop and desktop continue to grow high single digit - let's call it 9 or 10% and consumer electronics continues a 30% growth, I think there's a multiple year growth opportunity in data storage as a result of the fact that you are beginning life with a 90% utilization.

Even though your comments are absolutely correct it -- traditionally this is a cyclical market.

But it's never had the kind of power that consumer electronics are now applying to it.

And within Veeco, this has been a 35% growth opportunity in revenue over the last three years.

So I think I'm comfortable with a growth scenario that is '06, '07.

Okay.

And then if I could, a follow-up regarding the margins.

The higher gross margin you said was a mix of various changes.

I'm wondering particular about the GanZilla product line and that area where there's been some trouble before.

How has that margin changed?

Well the good news is that the margin - the 44.5% gross margin for the quarter which was sort of above where I think the street was - reflects a 38% gross margin in all of equipment and a 53% gross margin in all of metrology.

So slightly up from the fourth quarter even though the revenue was down.

Now I would share with you that the 38% gross margin in equipment while up compared to prior quarter still has a fairly miserable MOCVD gross margin, which doesn't get better until sort of Q3, Q4 if you remember our earlier comment as the GanZilla 2 has higher volume.

GanZilla 2 has very low revenue in this quarter.

So when we say that the reason we are comfortable with ending up at 45% gross margin for the year, despite the fact that equipment content is higher, it's really because equipment and metrology individually are producing higher levels of gross margin even at this modest $94 million revenue level.

And by the end of the year the GanZilla 2 will have a 32, 33% gross margin - helping all of equipment to be well over 40%.

So even though you expect the GanZilla 2 to be a bigger revenue earner in Q3 you're not worried about that depressing your margin in the latter half of the year?

No because it will have, by then it'll have a 33, 34% gross margin.

In an equipment world that will have about a 43 or 44% gross margin.

Mark Miller with Brean Murray.

(indiscernible) reported was rather interesting for your conference call but they are now talking about introducing a perpendicular desktop drive.

And the reason they are saying that is what I understand to be very impressive yields on perpendicular.

Perpendicular as you know it is very very early, there are very few perpendicular drives out there.

And just wondering what your take is on that?

Do you think we are going to see an acceleration now because of the impressive initial yields on perpendicular?

Well, I mean Seagate is a leader in perpendicular unquestionably.

But if you look at -- if you go to some of the market trends for the entire industry, the chart I am trying to find in my investor presentation - the perpendicular content of the entire thin film business at the end of '06 will be 14%.

So we are still in sort of single digit - aside from Seagate has made some great strides in perpendicular - but aside from their advances the entire thin film head world if you look at the 1.3 million heads being built -- 1.3 billion heads being built - only 14% of them by the end of year will be perpendicular.

So you have a lot of growth in perpendicular in the '07, '08 timeframe and you have aerial density changes in perpendicular that will continue to improve at about 30 to 40% a year.

So you'll see where yields might be fine for the current phase of perpendicular.

You'll see yield challenges as they go to higher aerial density perpendicular and you are absolutely right.

The world will look for a terabyte in a desktop and it'll look for one inch micro drives that are 100 GB.

I was wondering about the semiconductor unit.

You're still fairly modest there but some companies are typically have been forward looking for instance [Simer].

A lot of people buy the lithography agreement really early in the cycle and has really started to pick up and I don't know if you noticed any other early signals in that market but certainly Simer was -- has been impressive and continues to talk.

Their business is really picking up and they're usually early in the cycle.

I'm just wondering what you are reading there?

I'm on -- and you may know -- I'm on the board of directors for Simer so yes you are correct.

Simer has a very attractive [excimer] laser product for the (indiscernible) industry and we do see a promising growth at 65 and 45 nm semiconductor applications, requiring larger numbers of our atomic force microscope.

So I think we will also see at these narrow feature sizes some growth opportunity in semiconductor.

Thank you.

Matt Petkun with D.A.

Davidson and Company.

Good afternoon.

Ed, I was wondering if you could be a little bit more specific just on the progress you are making on the Epitaxial deposition part of the business in terms of gross margin.

It looks to me like it might have been down just a little bit, sequentially, on a revenue basis.

Were you able to maintain kind of around the 24% gross margin that you had in Q4?

The combined margin of content semiconductor I think was at about that same level, despite the fact that you are right we went from about $17 million in revenue to about 15 to $16 million in revenue.

So the -- and the GanZilla 2 is absolutely progressed in terms of having lower warranty costs, and having better uniformity.

Better film brightness.

Being more reliable.

Having higher throughput.

And we are seeing that in the order rate.

I mean, the fact that the orders are up 70% in that sector indicates the acceptability of that tool.

Now we won't be shipping GanZilla 2s in very large numbers until the second half of the year.

And that's when you are going to begin to see high 20s, low 30% gross margin, sort of a doubling of the gross margin that we now see.

So I did an interesting exercise.

In the quarter that we just completed, I took the order book and ran a gross margin analysis on the order book on the mix of GanZilla 2s and it came out at 30%.

But you won't see that in revenue until the Q3, Q4 timeframe.

Okay and then it looks like the Ion Beam part of the business is down maybe $10 million sequentially on a revenue basis and again margins are roughly the same there quarter-over-quarter.

Is that correct?

Yes and there the backlog has built a lot.

So we are going to see revenue improvements that will be pretty much $10 million per quarter sequentially in Ion Beam. (MULTIPLE SPEAKERS) Margins that are now 46 kind of percent, that could be 47, 48% through the year.

Where are you putting any potential orders you may have received from compound semiconductor manufacturers in that telecom wireless kind of piece? (MULTIPLE SPEAKERS)

Very little wireless.

The bulk of it is LED backlighting.

Gallium nitride LED backlighting.

I will say the order book for this coming quarter is a little richer and molecular Epitaxi; so we are seeing in the prospect list some interest in GaAs that I think has to do with this next-generation cellphone that has higher frequency devices.

Largely outside of the United States but I think there's expected to be some wireless cellphone growth in the latter part of '06 that will benefit our GaAs disposition system.

Thank you.

Brett Hodess with Merrill Lynch.

Two questions.

First, to look at the gross margin just a bit more.

With the gross margin outlook for the next quarter being around this level even as your process tools pick up as a percentage.

Is the guidance for the full year 45%?

Is that a little low because it seems to me that as you move into the GanZilla in the second half based on what you're talking about, you can move up maybe 100 basis points or more above that level.

You could.

You have asked two questions really.

In the second quarter, Brett, the reason that Jack said the margins are likely to stay at the 44.5% point is that you are going to have even a higher equipment mix in the second because of the bookings.

A higher equipment mix so in this 105, to $110 million revenue opportunity in Q2 the equipment could be -- content will be up, despite the fact that the margins will be up which will have more equipment than you will metrology.

So the margins will remain the same.

But you are absolutely right.

As you go to still higher revenue levels including higher metrology levels at the end of the year you could exit the year with some higher margins.

If you remember our earlier guidance, we said two things.

We said we wanted a 3 percentage point margin improvement for the '06 year - that is going from 42% in '05 to 45% in '06 - and we wanted to end the year at higher than 45%.

Could be 46, 47% gross margin in the fourth quarter of '06.

And so, you are right about that.

Okay.

It sure looks that way, and then secondly on the HB-LED side and the backlighting you are talking about, if you look at the marketplace for HB-LED last time around there were many many Asian players.

They added too much capacity and it ended up in a really sharp downturn.

Can you talk about how the customer base is -- could you talk about China, Korea, and Taiwan ordering?

Has that customer base consolidated?

Do you see a more rational purchasing pattern from those folks at this time?

And maybe talk a little bit about the timing of how you think they will ramp up this year?

There has been.

You are correct, there has been some consolidation in Taiwan.

So if you look at the order book that we just finished in the LED area, let me find that page.

You now have in what we used to think of as the tier 2 accounts and most notably in Taiwan, you now have some sizable company.

So (indiscernible) [Epitech, Hi-Link], some of these companies are now the result of some consolidation of three or four companies and I think compared to maybe 20 companies competing in that space a year ago, I think you can end the year with six or seven of them on a consolidated basis.

So hopefully they won't buy in excess as they did in '04.

And then just one last quick one.

Last summer you know you showed a number of new products for the scientific research area - AFMs and what not - that you commented will help growth this year.

When you come out of the usually the seasonally week 1Q period, do you think that the scientific research part has the opportunity to accelerate a little more than your single digit growth when you look at the new products and then the better seasonality through the year?

Yes.

I think that but I would still sort of describe it as high single digit for the year.

I think in '06, the expectation is the metrology can grow maybe a number like 8 or 10%.

And you're absolutely right; it will the on the strength of new optical and atomic force microscope product.

We did introduce successfully the beginning of a bio AFM product line that is a new customer base for us in Life Sciences and we are developing additional optical products.

And data storage activity in metrology is quite strong.

So I would expect that Life Science which will be new to the Company but modest in size in '06 will be significant in size in '07 and '08 and represents new market.

And I think there are more things that we can do in data storage with our metrology product line.

Thank you.

Timothy Arcuri with Citigroup.

Ed, if I look at where your backlog is and I look at where your guidance is for revenue for the full year and what the bookings guidance is for June, it looks like for you to keep revenue where you guided the full year '06 revenue to, it looks like the bookings in the back half of the year have to be at a minimum, flat.

So, otherwise, the revenue would go higher than your 450 to 460.

Is that the right way to look at it?

Rather than encourage you to think about more revenue, I think I would use the bookings number of the first quarter and projection of the second quarter 94 million -- I'm sorry, the 127 million bookings that we just delivered and the guidance that we've given for Q2 to say that those two quarters or first half of the year will produce orders of about 255 million in combination of Q1 and Q2.

And that should give you comfort that the $450 million we talked about for the year is supported by - let me call it second half revenue from Veeco of about the same amount. 250 million.

So you should be -- remember the call a quarter go.

People were saying wow, you had such a buildup in revenue expected in Q3 and Q4, we are a little nervous about it.

We would hope that you would be less nervous about it now, because of the Q1, Q2 bookings.

But I think we are still aligned to a $450 million year so I would caution people to sort of keep that revenue cap as being correct.

Yes;

I guess where I was going with it is if bookings even are flat in the September and December, one would think that some of that would turn into revenue during the back half of the year and therefore that number would be a little higher for the year.

Yes; theoretically.

Remember Joanne's comments about the volatility of data storage.

It's hard to have visibility into Q4 bookings and also remember that our slot plan will be -- it's filling up.

So there's a lot of the Veeco slot plan manufacturing will soon be more or less set for Q3, Q4.

So I think the $450 million Veeco revenue in 2006 is a good number.

Okay and then I guess for Jack - we've talked in the past about inventory turns being between 3 and 3.5 with things you've already done in '06.

It looks like we have a fairly long way to go to kind of get there from here.

I guess during this revenue ramp what is your outlook for absolute inventory levels?

Do you think that they're going to stay pretty flat?

Yes.

We expect them to stay pretty flat and therefore the turns to increase is north of 3 turns.

And then I guess last thing's for you, Ed.

Of the outsourcing plants for the GanZilla 2 how much of that has been outsourced today versus what the target is?

So in other words, how far along are you relative to what the full year or the full program target is?

Good question.

Very early.

If I look at the outsource very early in GanZilla 2 and the model for the success of outsourcing continues to be what we've done in Ion Beam and Plainview.

So if I look at the Plainview product there are now -- there's a lot of new products coming out of Plainview.

But Plainview is pretty much crossing over the 60% outsourced content which is really helping inventory turns, cash and gross margin.

And we are only beginning now to show the new GanZilla product to those same outsource partners for the outsourcing of GanZilla.

So I think GanZilla - which is all entirely an in-house project now - will be maybe 20 or 30% outsourced by the end of the year.

And that will be accountable for a lot of the margin increase I've described.

But it will be even more margin increase in '07 for GanZilla.

Robert Maire with Needham & Co.

By the way congratulations on nice organically grown numbers.

Just to follow up on the questions regarding GanZilla and the MOCVD.

You've described a lot of progress you are going to make at the end of the year and you just recently said more progress into '07.

Do you have some sort of target gross margin or how far away does that sort of wrap up in '07 that we get to some ultimate gross margin that we are so early in '06 here or what's sort of the terminal concept there?

If you think of - and we do - if you take of GanZilla as a vacuum deposition system with a handle or a process chamber gas mixing and electronics, there's no reason that it should have a gross margin very different from Ion Beam systems.

Which have the same build of materials.

And we've transferred general management from our Ion Beam systems to now the New Jersey site and they are running GanZilla and they are helping develop the next generation of GanZilla, with a platform that takes advantage of many of the handling many of the bill to materials of the Plainview product line.

So that's a long-winded answer to it's really 46 to 48%.

At the end of the day the gross margin of GanZilla should be very little different than the gross margin for a vacuum deposition Ion Beam system which, today, is 46 and 47%.

But a year or two ago was 10 percentage points less than that.

So I think in the '07 timeframe, you clearly will see a line of MOCVD products from Veeco that have 46% gross margin.

That's exactly what I was looking for.

And that's important, Robert, one last point.

That's important because the -- even though LCD backlighting is the driver today when you get to specialty lighting, architectural lighting and general lighting, volumes are going to be very large and you really need to have a 46, 48% gross margin.

Because the revenue from those applications will be very high.

And a couple other questions.

Any pull ins, push outs or other adjustments to backlog or just stuff that you are seeing out there that people perhaps looking to be more aggressive or less aggressive in a particular space?

The data storage world is on fire and so we can't deliver data storage equipment fast enough.

There really have been no push-outs.

The LED manufacturers also are not too happy with our 14- to 16-week delivery.

They would like that cut in half.

So I mean, we're seeing a very healthy market environment both in LED and data storage with no push-outs and with people wanting the equipment as quickly as we can get it to them.

And one last question but a somewhat more open-ended question.

In terms of data storage, obviously Seagate is pretty far along but other players may not be as far along with perpendicular recording.

Where would you say we are in that standard head conversion cycle?

Are we a third of the way through, 40% through?

What is your take as to how long we've been in it, and how much more we have to go for that sort of conversion to (MULTIPLE SPEAKERS)?

That was the start of - flip that page again.

It's sort of interesting.

Despite the enormous progress that has been made in the development lab for perpendicular recording and the very high aerial density successes that have been attained in prototype manufacturing, the truth is that we are still less than 15% of all the heads of the world being made of perpendicular technology.

So we are very early in what will be a transition maybe 30% by the end of '07 and maybe 50% by the end of '08.

So second or third inning at best, perhaps?

That's right.

Thanks, congrats again.

Daniel [Berenbaum] with Susquehanna Financial.

Can't we talk a little bit more specifically about some of the components of backlog?

What does your backlog consist of in terms of Ion Beam versus metrology.

And also for order rates, Ed, you had mentioned that one or two orders getting pushed out of auto AFM could make that number look different than you would expect.

Are you implying that there were orders that were pushed out or am I reading too much into that?

No you are correct.

I was maybe too subtly implying that the disappointing orders in the quarter from semiconductor order last time was a result of two Asian orders being pushed from Q1 into Q2.

So my comment there (MULTIPLE SPEAKERS)

Actually on the orders it looks as - if I am reading this right - that research and industrial orders were maybe a little bit lower compared to revenue.

I thought that was mostly a turns business so I thought that revenue orders would be relatively close in there.

Am I reading that right or can you give me a little bit of color on that?

There again you are correct.

And it is a high turns business but if I look at the - let me just find in scientific research for the quarter where the orders were 21 million and the revenue was 27 million.

There was still a high degree of turns and I think we're going to see an order - the traditional order uptick in the June quarter with also maybe 50%, as much as 50% of our revenue in that sector are turns.

So we expect to see higher revenue from that sector in the June quarter.

Okay; good.

And then just can you talk a little bit in a little bit more detail about the breakdown of backlog by product?

Yes.

So looking broadly, so the backlog is around 138 million.

There's almost 50 million in Ion Beam; and there's 26 million in MOCVD; and maybe 34 million in all of metrology.

Those are the major elements.

Thank you very much.

David Duley with Merriman.

Congratulations on a nice quarter.

Couple of RAM questions here.

Could you give us what your leadtimes are in your disk drive business?

We've kept leadtimes in just about two flavors.

In wafer, the leadtimes are probably 13 to 14 weeks.

So we are pretty much booked through into the end of Q3, I think.

There may be some slots left in Q3.

On the mechanical side we are introducing a lot of new products.

The leadtime is a little longer - maybe a week or two longer.

So in general I would say 12 to 14 weeks.

And we are still operating a single shift.

So if the world got much more energetic, we would respond with a second shift.

At what percentage of the incoming orders in disk drive this quarter which I think were about 71 million which was clearly a record from any quarter I've looked at.

What percentage do you think is perpendicular?

Maybe a third.

Is that centered?

Do you think that, from your perspective, is that concentrated at one or two customers at this point?

No.

No.

No.

If you are in the drive business today and you don't have a perpendicular program you will soon be selling tape.

So, no, as an active perpendicular program I would say at all five or six thin film head manufacturers.

At different stages, Dave, in terms of the spending level but the -- and all have talked about increasing CapEx.

I mean, Seagate gets a lot of press so the world knows that recently Seagate has gone from 500 million to a billion projection in CapEx.

And they have said that that excludes the investment they need to make in (indiscernible).

But WD., Hitachi, [SE], Headway all have very active CapEx expansion programs announced.

What is happening in your process equipment area?

What's been happening with pricing?

Well, the benefit of new products and if you remember about 170 million of intended revenue this year will be new product introduction and new products tend to have more features and higher throughput and greater capability.

So ASPs are creeping up.

New products bring with them generally a higher ASPs - higher performance.

Can we - not necessarily tool for tool - but you know on the average number of tools that you sell into the described process equipment area we could see an increase in your ASP?

Yes.

And you'll see that again when at the end of the year when they begin to embrace larger wafer size, it will be at a slight increase in ASPs but they will be a winner as well, because they will have a 25 to 50% improvement in throughput at a larger wafer size.

And could you give us an idea of when you talk about your order outlook next quarter and it kind of sounded like you expected to be somewhat flattish.

I'm not going to put words in your mouth.

Maybe you can give us some color there.

But help us understand what is going to happen with the pieces because I guess 70 million seems like it's rare air for the disk drive business?

Yes, you are right.

It is a record and you were also right -- I mean, I kind of selected the guidance to give a signal that, despite the strength of the first quarter, the second quarter bookings could be up a smidge.

They could be up a little bit and I think they will be.

So the range is 125 to 130.

It's hard to predict additional growth in data storage although I think data storage will remain very strong because it will have more players.

There are a lot of people who didn't get around to their increased CapEx in the first quarter bookings and I also expect metrology to improve its bookings in Veeco's second quarter.

One final thing from me is when you look at your revenue guidance by all the little pieces, it seems like your overall guidance of 440 or 450 seems conservative.

And I think what I heard you say is now you think the disk drive business is going to grow at the upper end of its range, up 20%.

So I guess I'm a little curious why we didn't bump up the yearly target when your biggest bucket's growing faster than -- .

I always thought you wanted me to be conservative.

Well I guess we want you to be.

Yes, it's a delicate balance here.

I'm glad I'm not in your shoes.

I think -- so, Dave, I think I feel better about the $450 million having confidence in the $450 million year.

I think it's the right number for you to be aiming at and for us to be aiming at.

And let's talk again at the end of the second quarter when we see what the bookings look like and more importantly what does the projection of bookings look like for the second half of the year.

Right now we feel very bullish but I think the conservatives -- I think 450 is absolutely the right number for you to model.

Okay.

Just so I do understand where you are coming from.

It is accurate when you look at all the little four or five pieces that you give us and you take your revenue growth of all those pieces and add them up that we might be looking at more than 450.

But you are trying to be conservative and have a number that we can all jump over for the year.

And the fact the that we are multimarket and you know you have -- it's hard to know.

It's hard to have visibility as to what semiconductor or even data storage looks like in the fourth quarter.

One final thing from me for Jack.

Jack, when you look at your operating expense targets for the balance of the year, clearly sounds as we have all been looking for and modeling, that we are going to have pretty good increases in revenues throughout the year.

How should we think about dollars of operating expenses?

I kind of described in my talk that we had had a couple of discrete items that would increase spending such as merits, increased salary merits, increases, bonuses, stock options, RSUs expenses at about 1.3 million.

I mentioned there was some legal costs and severance of 1.1 million.

And then, there was an investment in the Asia Pacific area about another $0.5 million.

So that's about $3 million in the aggregate that I would say is a step up - not all of which is a recurring step up.

But I think that would be safe to model.

Outside of those specific programs with the big revenue growth you're seeing we might see increased commissions but (MULTIPLE SPEAKERS) going to see R&D dollars grow at the same level as your revenue or the balance on your general administrative expense?

Right.

Commissions would be the one variable number; yes.

So it sounds like there's a lot of leverage in the operating expense space throughout the year as revenue grows.

Yes.

We like -- as I said we like to take down the operating spending 2.5 points in the next quarter on a percentage basis.

If you hit the targets you expect for the -- by the fourth quarter, what kind of operating income target would you expect?

If you remember we've always -- we said previously in a growth year like this where review is up 10% it would be nice to end the year at sort of a maybe 46 to 48% gross margin and maybe 30 or 32% operating spending.

So that you could have it as high as 16 to 18% OpEx.

Operating profit.

That would be great.

I hope you achieve those numbers.

Thank you.

Operator, we will take a more question if there is one.

John Gerber with Gerber and McBain Capital.

Ed, I was wondering what you had all those extra orders in the quarter versus your guidance, yet related to the last question they don't seem to go anywhere.

I figured they would be shipped and they would go into higher revenue and higher guidance.

So where do they go?

That's my comment that if you add up the first quarter, if you add up the first half booking they become the second half revenue.

There is this traditional quarter or five month delay between an quarter and revenue.

Yes but you beat your guidance by 15 million in orders.

So you know. (MULTIPLE SPEAKERS) and 15 to shipments.

In Q3 and Q4.

Yes, so, which would make higher guidance.

Remember we started the year with a very low backlog because we depleted the backlog significantly in the last half of '05.

So we sort of needed these higher orders to restore the backlog for you to have comfort that the second half of the year could be $250 million in revenue.

Now what you should watch now is the orders in these next two quarters to see in fact might there be an uptick to the latter half of the year.

Thank you.

Okay.

Folks, thank you and I just want to comment again, thank you for your attention and we continue to anticipate 2006 will be a strong year for Veeco both in revenue and earnings growth.

We continue to forecast 2006 revenue will be in the 440 to $450 million range with growth across all of our end markets, including double-digit growth in data storage and LED and single digit growth in semiconductor and scientific research.

The growth is supported by significant new product introductions expected from both our process equipment and our metrology segment.

And we look forward to speaking with all of you following the close of the June quarter.

Thank you very much.

That does conclude today's conference.

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