Veeco Instruments Inc (VECO) 2006 Q4 法說會逐字稿

Good day, everyone, and welcome to Veeco Instruments fourth quarter and year-end 2006 results conference call.

Today's call is being recorded.

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

Ms. Wasser, please go ahead.

Thank you, operator, and thank you, everyone, for joining today's fourth quarter and full year 2006 results conference call.

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

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

Today's earnings release was distributed at 4:30 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 have updated our Investor presentation to reflect fourth quarter results and have posted this presentation on 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 that 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 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 managements discussion and analysis section of the Company's report on Form 10-K and Annual Reports to shareholders.

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

Information regarding such non-GAAP financial measures including reconciliation to GAAP measures of performance is available on our website.

This call is being webcast live at the Veeco 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The Company does not plan to update the information on this webcast once it has been archived.

Thank you, I'd now like to turn the call back over to Ed.

Thank you, Deb.

Good afternoon, and welcome to our fourth quarter and year-end financial conference call.

Today we reported fourth quarter and year-end financial results in line with our guidance.

To highlight some of the fourth quarter results, the revenue was 123 million, a 9% increase over the fourth quarter of 2005, led by high growth of 62% in LED wireless and 13% growth in scientific research compared to prior year.

Gross margins improved in both equipment and metrology to a combined 44.5%, up sequentially and year-over-year.

With equipment exceeding 40% gross margin and metrology nearly 52% in gross margin.

Earnings before interest, taxes, and amortization excluding certain charges were 14.3 million up 20% from the fourth quarter of 2005.

Net income was 7.6 million or $0.24 a share on a GAAP basis compared to net income of 2.7 million or $0.09 per share last year, significantly above Veeco guidance.

Excluding certain items, earnings per share were $0.28 compared to $0.22 last year, significantly above Veeco's guidance of $0.18 to $0.22.

Bookings were 109.1 million up 6% from the fourth quarter of 2005 but at the low end of Veeco's guidance, due to a pause in data storage capital equipment purchases partially offset by strength in high brightness LED which was up 48% and scientific research up 11% from prior year.

Bookings consisted of 62 million in equipment and an improved 47 million of metrology orders, up 17% sequentially in metrology, providing a richer metrology equipment mix, helpful to future Veeco margin growth in the 2007 year.

By market sector, Q4 bookings were 21 million in data storage, down 20% from prior year quarter, and likely a trough in this cycle, and expected to improve in Q2.

As industry equipment utilization rates narrowed to 90% and the large first half 2006 equipment purchases are now being fully absorbed and the industry hard drive unit growth continues at about 12 to 14% per year.

We had 20 million in semiconductor orders, down 9% from prior year but up 40% sequentially and 30 million in LED wireless showing continued strength, up 48% from prior year quarter, and up 4% sequentially, driven by strength in LED back lighting applications, and the largest sector bookings in Q4 were 37.4 million in scientific research up 43% sequentially and up 11% from prior year, showing both new product acceptance and life science sector strength.

Scientific research strength is a good indicator of expected Veeco metrology revenue growth in 2007 and is slightly richer metrology equipment mix to be expected in 2007 which will be expected to contribute to further improvement in gross margin results.

All Veeco businesses were profitable in both Q3 and Q4.

Addressing the year, we are pleased that the 2006 year Veeco revenue was increased 8% to 441 million, driven by double digit growth in data storage and LED.

Data storage was up 10% for the year and high brightness LED was up 42% for the year.

Gross margins increased 160 basis points to 44% for the year , EBITDA increased to approximately 40 million up 38% for the year.

Orders increased to 494 million, up 22% for the year.

Cash generation increased while debt was reduced for the year, net income was 15 million compared to a net loss of 900,000 for the prior year.

So we've seen continued progress in our operational excellence initiatives, including having a dedicated Senior Management Team in equipment and a dedicated Senior Management Team in metrology.

We've developed standard hardware and software platforms across the product line.

We've increased our outsourcing content in new product generation with shorter manufacturing cycles and improved reliability and improved cash flow, as a better supply chain management, reduced number of vendors across the Company, and we are continuing to implement SAP across all Veeco divisions to eliminate layers of support functions.

These initiatives coupled with a complete series of new Veeco product introductions for both equipment and metrology will include new Ion Beam, new PVD product for deposition, new diamond light carbon deposition, new aluminum deposition, all of these for process equipment and data storage applications and a new, very exciting upgradable MOCVD tool with a larger process chamber and higher throughput and larger wafer size capability for high brightness LED, plus in Metrology, new life science, Fiery FM product, a new optical profiler platform, a new auto AFM atomic force microscope for semiconductor applications, a new low cost entry level AFM for University markets, all of which will drive 2007 expected metrology revenue growth.

In fact, during the quarter, we announced receipt of several new product orders in equipment and metrology, including a $10 million order for the next generation K-series MOCVD tool for high brightness LED, a multi million dollar order for our new multi-target PVD for advanced perpendicular sensor development in data storage, and a 1.7 million combination AFM optical order from UCLA's nano system lab, including the first integration of our bio-AFM and a confocal microscope for life science applications and multiple orders for our new caliber low cost entry level AFM for University applications.

In addition, we've announced the creation of a separate service business to increase revenue to provide a path for customers to extend the useful life of Veeco legacy tools and by purchasing upgrade modules for our quite large worldwide installed equipment base, which exceeds about 5,000 systems, this will improve customer satisfaction and provide a stable continuous revenue stream from our large installed base of equipment.

The goal is to grow our future service revenue to approximately 40% of total Veeco revenue from its current 28 to 30% size.

In all, these combined steps will allow Veeco 2007 growth in revenue, margins, and profitability, at least similar to the growth rates achieved in 2005 and 2006.

Like 2006, we expect the first half of 2007 revenue to be lighter and a higher skewed second half of 2007 reflecting the recent data storage bookings pause and 2007 will be influenced by the delayed revenue recognition of our strong new product introductions through the year.

So, quite similar to the performance in first half-second half of 2006 repeating itself in 2007.

We expect 2007 revenue growth driven by a continued industry technology investment in our core markets.

That is data storage, semiconductor, high brightness LED wireless and scientific research.

We expect new Veeco product introductions in both process equipment and metrology and the recovery in data storage.

I think I will pause here and have Jack review the Q4 and '06 financials and then I'd be pleased to come back and comment on market segments and to take your questions.

Thank you, Ed.

The three months ended December 31, 2006, sales were 123.1 million, an increase of 9.1% versus the 2005 fourth quarter.

This increase is due to a $10 million increase in process equipment primarily attributable to growth in MOCVD and in lab products.

Metrology sales were 46.2 million, an increase of 300,000 versus the fourth quarter 2005.

By market sales were up compared to the prior year by 62% in LED wireless, 13% in research, and 2% in data storage, but down 21% in semiconductor.

Sequentially, sales increased 10.7 million or 10% primarily due to a 5.6 million increase in process equipment attributable to 8.9 million increase in Ion Beam and a $200,000 increase in Slider, partially offset by a decline of 2.1 million in MOCVD and 1.3 million in MBE attributable to the timing of shipments as well as product mix.

Fourth quarter 2006 orders increased to 109.1 million up 6% from the fourth quarter of 2005.

Gross profit was 54.8 million for the quarter or 44.5% of sales compared to 48.9 million or 43.3% of sales for the fourth quarter of 2005.

Our gross margin increase resulted from buy in increase and mix improvement in process equipment, primarily in our MOCVD and Slider saws and lapping product lines.

Process equipment margin improved to 40.4% up from 37.9% in the fourth quarter of '05.

This 2.5% margin point increase was largely due to a significant improvement in MOCVD gross margins which were 34.6% in the fourth quarter of '06 versus 15.2% in the fourth quarter of '05.

This improvement was due to a higher sales volume as well as improved pricing and product mix.

Gross margin in our Slider saws and lapper business improved to 41.4% versus 18% in the fourth quarter of '05, attributable to higher sales volume as well as cost improvements from the standardization of product platforms.

The improvement in process equipment gross margin was a significant area of focus for Veeco in 2006 and we are pleased with these results.

In addition, we had a 51.6% gross margin in metrology in the fourth quarter of '06 compared to 51.2% in the fourth quarter of '05 due to favorable mix in pricing in our optical metrology product line.

SG&A was 24.5 million or 19.9% of sales compared to 21.9 million or 19.4% of sales in the fourth quarter of '05 and 22.3 million in the third quarter of '06.

The increase versus the prior year quarter was principally due to stock option and restricted stock expenses, bonus and compensation expenses as well as search fee and legal fees.

R&D expense totaled 16.4 million an increase of 1.1 million from the fourth quarter of 2005 largely due to new product development in PVD and MOCVD tools.

R&D expense was 13.3% of sales in the fourth quarter of '06.

Overall, operating expenses remained flat as a percentage of sales at 32.9% in the fourth quarter of '06 compared to 32.8% in the prior year quarter.

Amortization expense totaled $4 million in both the fourth quarter of '06 and '05.

Net interest expense for the fourth quarter of '06 was $700,000 compared to 1.6 million in the comparable 2005 quarter.

The decrease in interest expense is attributable to the rise in interest rates on higher level of investment funds over the past year and reduced interest expense resulting from the repayment of 20 million of our convertible notes in the first quarter of 2006.

Fourth quarter EBITDA totaled 14.3 million compared with 11.9 million in 2005.

The improved EBITDA is primarily the result of strong sales and earnings performance in process equipment.

Veeco's fourth quarter 2006 GAAP net income was 7.6 million and $0.24 per share compared to net income of 2.7 million or $0.09 per share in the fourth quarter of 2005.

EPS excluding amortization expense and certain charges utilizing a 35% tax rate for the quarter was $0.28 compared to $0.22 for the fourth quarter of 2005.

On February 7, 2007, the Company completed the repurchase of $46 million of its 4 1/8 convertible subordinated notes which are due in December 2008.

As a result of this purchase the Company has reduced its convertible subordinated notes outstanding to 154 million and is expected to record a net gain of $600,000 in the first quarter of '07.

For the full year, 2006, sales totaled $441 million, a 7.5% increase from 2005 due primarily to an increase of of 41 million in process equipment sales which included significant increases of 20.7 million in MOCVD, 15.5 million in Slider, and 8.5 million in MVE.

Offsetting this increase is a reduction of 10.2 million in metrology sales.

Gross margin for 2006 full year were 44%, sales compared with 42.4% for 2005 primarily due to the increase in process equipment sales volume as well as improved pricing in mix in MOCVD and Slider products.

The Company also realized cost improvements to the supply chain management which included outsourcing.

SG&A increased to 93.1 million compared to 84.7 million for 2005 primarily due to higher selling expenses resulting from the increase in sales and the expansion of our Asia Pacific business as well as marketing initiatives related to new products and markets.

There were also increased administrative costs related to incentive expenses resulting from improved profitability, stock option, and restricted stock expense as well as increased litigation related costs.

R&D expense totaled 61.9 million, an increase of 1.5 million from 2005 primarily due to new product developments in Ion Beam and MOCVD products.

As a percentage of sales, R&D decreased to 14% during 2006 down from 14.7% in 2005.

Amortization expense totaled 16 million in 2006 versus 16.6 million in 2005.

Net interest expense totaled 4.3 million compared to 7.6 million in 2005 due to the increase in interest rates over the prior year and higher invested funds as well as a reduction in interest expense from the repayment of $20 million of our convertible note in the first quarter of '06.

EBITDA was $39.7 million compared to 28.8 million in 2005.

Veeco's 2006 GAAP net income was $14.9 million or $0.48 per share compared to a net loss of $900,000 or $0.03 per share in 2005.

Earnings per diluted share including certain items in 2006 were $0.74 compared to $0.46 in 2005.

The items excluded from non-GAAP EPS are one-time gains and losses as well as amortization expense, a 35% tax rate is utilized as well.

We are pleased that we continued to make progress towards our goal of improved profitability and we will continue this focus in 2007.

As previously announced, we intend to broaden our data storage product line with development of a new high rate Alumina deposition tool with introduction expected in 2007.

The Company acquired a 19.9% interest in Fluens which is a higher rate Alumina deposition Company.

Current accounting standards require us to consolidate the results of this business as if we had purchased it in full and then eliminate 80.1% of the results.

Accordingly, we have additional line items in our full year income statement, a 1.160 million, charge to write-off purchase and process technology and a 1.358 million credit to income , cash, and non-controlling interest, which eliminates the 80.1% of the previously noted charge as well as Fluens's operating loss.

Veeco's cash investment in this Company as of December 31, 2006 was $600,000.

Backlog at December 31, 2006, was approximately approximately $141 million.

Our outlook with regard to guidance, we are currently forecasting first quarter 2000 revenues in the range of 95 to $105 million and earnings per share between a loss of $0.10 and a profit of $0.03 per share on a GAAP basis and earnings per share of between $0.02 and $0.10 excluding the $600,000 gain on the repurchase of convertible notes, excluding amortization of 4 million and assuming a 35 % tax rate.

Veeco currently expects that its first quarter 2007 bookings will be flat, approximately 110 million plus or minus 5%.

We expect gross margins to decrease about 2% in the first quarter due to lower sales volume compared with the fourth quarter of '06.

We do, however, expect that gross margins will increase sequentially each quarter in 2007.

Similar to 2006, we expect 2007 revenue to be skewed for the second half of the year as Ed noted as a result of delayed revenue recognition on new products as well as data storage recovery.

With regards to the balance sheet, cash and equivalents totaled 147 million at December 31.

We are pleased that we generated $22.5 million in cash for 2006, and that this $22.5 million cash generation was after the expenditure of 19.4 million for the repurchase of our convertible notes in the first quarter of '06.

Free cash flow was $28.6 million for the year.

Accounts Receivable DSO's for the quarter was 63.3 days down from 69.7 days at September 30, 2006.

Inventory decreased by $4.3 million sequentially to 100.4 million at December 31, from September 30, primarily due to shipment to systems that were previously delayed in the third quarter.

Inventory turnover was 2.7 times for the quarter.

Capital expenditures were 4.9 million for the fourth quarter 2006 and 17.4 million for the full year.

Depreciation expense totaled 3.6 million in the fourth quarter '06 and 14 million for the full year.

As we noted above last week, we repurchased 46 million of our convertible notes.

We do seem to balance outstanding and convertible notes to $154 million.

Our cash position remains quite strong after this repurchase.

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

Thank you, Jack.

So, commenting on our separate market sector opportunities, starting in data storage, the 2006 revenue increased in data storage to 184 million for the '06 year which was up 10% year-over-year.

Bookings increased to 209 million in data storage up 26% year-over-year, despite a second half decline in bookings, a result of too much CapEx purchased in the first half of '06 and absorbed in the second half of '06.

Our customers continued to see success in their next generation perpendicular head programs.

Investments will continue in advanced perpendicular, smaller tempo Slider size and now conversion across the industry to a larger wafer size to avoid costly brick and mortar expansion.

Hard drive unit growth continues to be in the 10 to 14% per year category.

Equipment utilization rates along our customers are now in excess of 90% and consumable spending associated with running the equipment has increased.

In Q1, we are seeing increased activity in new wafer and Slider data storage metrology products within Veeco.

We're seeing increased quoting activity with planned purchases from a number of our customers in the very late Q1, Q2 time frame, and we expect a more normalized data storage order rate in Q2.

Industry hard drive storage growth reflects increased video, Internet, home network, TV, and laptop growth.

In our highest growth area last year, high brightness LED, wireless, in that sector 2006 revenue increased to 89 million, up 42% year-over-year, and bookings increased to 111 million up 78% year-over-year.

We introduced in Q4 our new K Series MOCVD platform upgradable to a larger chamber size and a larger wafer size, with increased throughput, and we received five orders valued at 10 million in Q4 for delivery this year 2007.

The industry investment in higher brightness LED's across red, blue, and green wavelengths leading to integrated red, blue, green, white LED development will continue to enable new automotive headlights and interior lighting, small area LCD back lighting like your laptop, further computer laptop back lighting in general, and higher resolution signage applications, leading to a large area TV production likely by the end of '07.

LED unit growth continues in excess of 20% per year, with more explosive growth expected with the introduction of large LCD screen back lighting, the 30 and 40" size, and in fact product introductions at the recent Las Vegas consumer electronics show included a Samsung 40" LCD TV, a Texas Instruments LED back lit rear projection TV, a 20" Samsung LCD monitor, with LED blue back lighting, and a Apple and Hewlett Packard notebook product line with LED back lighting, so continued activity in the growth of LED.

Let me comment on our scientific research sector, which has been a recent growth laggard last year, and corrected itself in the fourth quarter.

Our largest fourth quarter sequential order growth and the largest sector orders within Veeco occurred in this sector with orders of 37 million up 43% sequentially and 11% year-over-year.

For the year, revenue and orders were flat with prior year at approximately 110, 111 million in size.

The positive combination of our new product introductions across atomic force microscopy and optical profilers and increased spending in life science and bio-AFM applications will positively disturb this pattern and allow Veeco 2007 revenue growth in this, our most profitable sector.

So clearly, the life scientist and the bioresearcher now require atomic force microscope resolution and physical measurement capability for cell protein analysis.

And lastly, in our smallest sector, semiconductor, our Q4 orders of 20 million were up 40% sequentially. 2006 orders for the year were 64 million, down 3% year-over-year, and the 2006 revenue for the year was 58 million, down 17% year-over-year.

Here, one of two auto AFM orders make a very big difference in this small sector, but I think the overall story of semiconductor within Veeco is that we were late in 2006 with the introduction of a new auto atomic force microscope platform which is now ready for introduction in the Q2 time frame.

This new product called the Hawk is an exciting new auto AFM platform featuring higher resolution, higher throughput, higher wafer throughput, increased reliability, and aimed at the 65 and 40 nanometer nodes for applications both in semiconductor and data storage markets, and these Hawk products will be delivered later this year.

We expect a revenue increase opportunity in all four of Veeco's market sectors in 2007, driven by increased end-user market demand in our key market sectors and our customers need -- their need to invest in new technology relative to Moore's Law in semiconductor, increased aerial density and hard drive storage, and increased LED brightness in our LED wireless sector, and better microscope resolution in biolife sciences and all of these necessary technology investments by our customers are supported by a quite a rich pipeline of new Veeco product introductions being introduced in this quarter and in Q2 of '07, some of them in fact as you've heard were successfully introduced in Q4, and orders taken.

Operator?

We'll pause, and we would be pleased to take questions.

Thank you. [OPERATOR INSTRUCTIONS] And we'll take our first question from Timothy Arcuri with Citigroup.

Hi, this is [Shreeni] calling for Timothy Arcuri.

If I look at the historical seasonality in your data storage orders, it looks like there's typically a 30 to 35% decline in second half, this is the first half, in any given year, and based on your commentary, it sounds like your storage doesn't really snap back until Q2 of '07, so is it safe to assume that you're not expecting to see the same sort of seasonality pattern holding in 2007 and if so, can you give us some color as to why this is the case?

Yes.

I think the -- I don't expect to see the exact same pattern in 2007 relative to 2006, and as I've commented, I think of a normal data storage booking rate at this point looking at the last four quarters would be something in the 45 to $50 million category and I expect us to be back to a normalized booking rate in data storage in the second quarter.

I think they disturbed the pattern a little bit last year with a very heavy spending in the first half of the year.

Yes.

There still is a considerable amount of investment required on their part for perpendicular next generation perpendicular for [Femco] and for larger wafer size.

Like the semiconductor industry, in recent quarters, they really withheld capital purchase as they've watched utilization go past 85%.

It's now well past 90% and it's clear to us even in this quarter that there are multimillion dollar CapEx programs being funded today, among three or four data storage customers for orders to be placed either in the March time frame within this quarter or at the very beginning of the second quarter.

So I think we'll see a more normalized flow through the year.

We won't see that lopsided purchasing in '07.

Okay.

I have another question.

Yes?

On the scientific and industrial resource related purchases, isn't that basically correlated to the grants given by Federal Government, around October time frame?

No.

The spending on table top -- there is some influence of the table top AFM orders which are typically a little higher in the fourth quarter because government spending in general, not so much nanoscience grants but government spending in general picks up in the fourth quarter and struggles a little in the March quarter.

I think what we're seeing now is not so much government related spending as just general spending in life science that previously went into optical instruments, now going into more advanced resolution instruments, so AFM certainly you saw FDI this last quarter have a nice pick up in life science.

I think more of this is the transition of people going from SGNs and optical to confocal AFM and combinations of AFM and confocal for higher resolution.

Okay, great.

One last question.

On the semiconductor orders, would you be saying that memory or logic is the one that is supposed to adopt AFM technology?

Well, it's more closely related to node size, so I think if you track where our 65 and 42 nanometer nodes are being used, and then you look at the sort of etch CMP and lithography steps in those nodes, that's a better indicator of where auto AFM is required.

Okay, great.

Thank you very much.

You're welcome.

And we'll take Robert Maire with Needham & Company.

Yes, by the way congratulations on the nice operational performance over the year.

Thank you, Robert.

In terms of gross margin, you've made a lot of improvement, and you have this new Series K MOCVD product, and you received some orders there for it.

Can you tell us how that rolls out over the year and what you see the year sort of starting out in terms of gross margin and the MOCVD and equipment side and where you think that can get to and is that sort of subject to mix and what kind of percentage do you think the new higher margin products will be as we exit the year?

So, that's a good question.

So, I think as many of you know, MOCVD has been a larger laggard over the last 18 months or two years and Veeco has worked very hard even before the K Series to get the GaNzilla I and GaNzilla II products from a very modest 15 to 17% gross margin to 35% gross margin in the Q4 period before the introduction of the K Series So even though we've doubled the gross margin, it still lags the corporate average.

Now, the excitement of the K Series is not only its throughput capability and its upgradability, but the fact that it is an outsourced product fully capable of a low 40% gross margin much more similar to our Ion Beam equipment.

So when those new K Series platforms are recognized in revenue, which will probably be at the end -- near mid-year or second half of the year, we will start to see 40% gross margins flowing through our high brightness LED, MOCVD sector, and that will help raise the gross margin across all of equipment.

So in equipment where we had a 39% gross margin for the year, the year in MOCVD was 27% gross margin, so a 42 or 43% gross margin on the K Series represents a significant step forward for all of Veeco equipment.

So it's a, the K Series is a significant margin improvement for our '07 year.

If I took that across all of Veeco, could that raise all Veeco's margins by another 2, 3 points?

That may be just a little bold.

It real is going to depend on the growth rate of high brightness LED, but we certainly wanted high brightness LED to be fixed in margin before it got to its 150 or 200 million size within Veeco, which is where it's headed.

The power of 30 and 40% compound growth in that sector year-over-year means that at some point in the next three years, it surpasses data storage in its content within Veeco.

So at that point, we certainly would want its gross margin to be 46 or 48% and then, absolutely, we would have the ability of raising Veeco's -- helping raise Veeco's total margin from today's 44 or 44.5% up another couple of hundred basis points in the future.

Just one quick follow-on.

Approximately what percent of your MOCVD business would you expect K Series to be exiting the year.

In the fourth quarter, it would be probably 80% of our business.

Great.

Thank you.

Next we'll move to David Duley with Merriman.

Yes, a couple questions.

When would we expect the March quarter to be the bottom in the revenues and shipments in the disk drives space, and as far as the order number goes, I'm just kind of looking, I think we have to look back to like 2004 to see a number that was this low, so I was a little surprised with that.

Maybe you could give us a little bit more commentary.

Did you see any cancellations or push outs?

No cancellations, just didn't orders.

You know, David, knowing me to be somewhat optimistic, I reflect that the 109 million in orders is a decent order quarter for a quarter that had $20 million in data storage, meaning that the rest of the sectors within Veeco performed pretty well, but you're right.

The $20 million is a abnormally low order amount.

The year was growth in revenue and in orders, and I think we'll quickly see a return like in the March, like in the second quarter, the June quarter, for data storage coming back to more normalized numbers, and I think you're right, that the revenue trough will be the first quarter.

And then you'll see growth from the first quarter.

So just give us a little bit more color when you talk about the flat bookings guidance, would we expect all the businesses to perform similar to this quarter or are there any moving pieces inside that that we should be thinking about?

Well, I think data storage gets better from the dismal number, but as one of the recent questions came up, maybe in scientific research, there's a little fall off in the March quarter, but one way to look at it is it could be sort of a flattish, all the other sectors in Veeco could be kind of flat to down a couple of million and data storage could be up 5 million, 10 million.

When you look at whatever gross margin progression you expect for the year, is the biggest driver of that progression just simply having better utilization rates in your process equipment factories?

Well, I think as I've mentioned in my earlier comments, we're going to -- a very nice growth element in '07 will be at last the growth of Veeco metrology within all of Veeco, and so last year, Veeco Metrology struggled to stay north of 39 or 40% of our total mix, and it has, as you know, a 52% gross margin, even at these lower volumes.

So if we can get metrology up 10, or 15, or $20 million in revenue, that by itself has probably 150 or 200 basis points contribution to total Veeco margin in the '07 to '08 time frame.

So we're going to start to see I think there are -- to those people who might be sitting there and saying gee, has Veeco run out of steam in gross margin?

I would say no and it's the two or three things of, first of all a higher metrology content is very helpful.

All of these new products have higher ASP's and higher margins.

They might have an initial quarter of introduction where their margins aren't so great but by the second and third quarter their margins will be quite better than the legacy products they are replacing and I think you'll have another year of total revenue growth in all of Veeco.

So I think -- I continue to feel that our 150 to 200 basis points improvement in margin that we've delivered in each of the last two years is doable, again, in the '07, 08 time frame.

Great.

Thank you.

Thank you.

We'll move to JoAnne Feeney with FTN Midwest.

Good afternoon, folks.

Congratulations on a nice quarter and just a couple questions regarding the outlook, really.

You've given us some target models for the Company, and the trough quarter sort of 90, $95 million in revenues suggests a earnings rate of about 5 to 6% yet next quarter it looks a bit weaker than that.

So I'm wondering if you could help us understand sort of why the potential loss next quarter and what might be -- might explain that?

Well, at the high end of the guidance it's probably about 5 or 6% and at the low end of guidance it's a little bit lower than that, you're absolutely right, and again it's just going to depend on the metrology equipment mix and on their new products and do they get bifurcated?

So it's not very different from the model.

If it's 1 or 2 percentage points difference, that's the size of the difference from the model.

So I still like that model that I'm flipping to it as we're talking that says, Veeco makes money in the trough quarters, whether it's 3% or 6%, and then in quarters that are at 125 to 135 million, where I hope orders will be by the middle of the year, Veeco is sort of a 10 to 12% EBITDA and a target levels of 135 to 145 million where I hope Veeco is by the end of the year, Veeco runs 14 to 17% EBITDA.

So I still think think that model is achievable.

That's helpful, thanks, Ed.

And then separately and more specifically, in the HB LED side of things, you've had sort of a steady and moderate growth in orders and revenues from that segment over the last few quarters.

I'm wondering if you can perhaps explain to us a little bit the source of that growth.

I'm not hearing if tier one guys are really buying more equipment so can you tell us a little bit maybe what's going on in Taiwan?

Yes, so the question is who are the tier one guys?

Let's say North America and Europe.

I'm being a little facetious, because I think they could be in Taiwan.

I think there's been some shift.

We keep using the same language.

We think of the tier one guys as the North American and European group, despite the fact that they haven't shown the growth rates that the Taiwanese and Koreans and Chinese have shown this last year, and I think that continues through '07 when we talk to our Taiwanese customers, they say we're buying now two or three tools at a time so that we can start sampling the LED's for these larger LCD screens, but that when by the end of '07, when some manufacturers, whether it's Samsung or LG are actually making 30 and 40" introductory screens in production, they are going to need 10, 15 MOCVD tools at a time.

So I think the growth rate, again, in '07 and '08 is going to be much higher and we may have to start calling them the tier one accounts, and later in the North American accounts.

The European account has really come to the table and purchased a lot of equipment in these last four or five months.

Based on, across-the-board increases but largely automotive, so I think the European tier one is behaving as we would think.

The Taiwanese are more aggressive and the North American sort of lag, but still seem to have some capability in brightness that you would think would allow them higher penetration of these new markets.

So we have hopes.

That's helpful.

And then perhaps a specific question on the AFM business, the auto AFM in particular.

You talked about higher resolution and higher throughput.

I was talking to some folks that suggested that at 45 nanometer, the AFM tint may be too large in some sense to get down into the villas and I'm wondering if there's been a change in the application of the AFM as line widths have shrunk over time?

No, in fact, we have, I've visited recently and I would invite anybody to, we have a nano fabrication tip facility in Camarillo.

We probably make maybe 60% of the tips we use.

We have some outside partners as well.

But we're working at 30 to 40 nanometers which we intend to be a useful node for AFM.

We're working on sub-10 nanometer tips, and carbon nano tubes and different designs.

So I think the big news about the Hawk when you finally get to see the spec sheets is that the throughput will go from 8 or 9 or 10 wafers an hour to 20 wafers an hour at these higher resolutions, so I think people will stop looking at it as a valuable reference tool in the fab and start buying it in lower quantity purchases so that they could use it at higher throughput.

Okay, thanks very much.

Thank you.

Next we'll move to Matt Petkun with D.A.

Davidson & Company.

Hi, good afternoon.

A couple of questions.

First, Jack, did I hear you, I'm pretty sure I heard you say that margin would be down sequentially in Q1 but then improve throughout 2007; is that correct?

That's correct, Matt.

JoAnne sort of asked a question along these lines, but when I compare what you guys did in Q1 '06, with much lower margins in the MOCVD business and then you put up gross margin of 44.5%, that quarter and now you're saying it's going to be below that in this March quarter, I'm just trying to see how the margin would be lower because otherwise, the mix looks fairly similar between the two quarters.

Well, we have our auto AFM business is -- we're looking at a lower revenue level in the first quarter and that is part of our metrology margin and that is down significantly from what it was in the first quarter of '06, so that probably is the single largest item.

Okay.

And you have a little mix change within equipment in that in equipment, we've introduced a lot of PVD ALD product in the last six months and you're starting to see the first shipments of the PVD which I'm very pleased with in this March quarter, at a slightly lower margin than some of the old legacy Ion Beam tools that are lesser of the mix in this quarter.

Okay, and then, I mean, I still say, the metrology revenues for you in Q1 '06 were 43 million and it looks like you could probably do something around that this quarter just based on what you booked in the most recent quarter and your kind of run rate.

So are you saying that just the auto AFM portion of that metrology business is lower as a percentage of the total metrology business?

The '06, the 94 million that we did the first Quarter of last year--.

Yes.

-- had a 40.7.

Right.

You think you'll be lower than that next quarter?

No, it will be about the same.

Right, but so therefore, for kind of comparing mix, the auto AFM portion of the metrology business is likely lower?

Yes.

This quarter what Jack was commenting is in the March quarter of '07, the auto AFM revenue will be lower than it was a year ago.

Okay.

And so it's dragging down the metrology margin a little bit 1 or 2 percentage points.

Understood, great.

And then Ed, did you have any 10% customers in 2006?

Seagate.

You did?

Yes.

And that leads me to my next question which is how do you expect your business from the data storage market to change maybe and when you look at the customer base, do you think that perhaps that customer could be lower and you're looking to the other guys to kind of fill in and make more significant investments in perpendicular or do you think it will be kind of similar from a customer mix perspective in '07?

Jack is directing me to remind you that over 10%, HSC Jack is over 10% as well?

Yes.

So we have two customers over 10%, HSC, that's Hitachi, and Seagate and the good news about perpendicular being now so widespread is that all of our six data storage vertically integrated thin film head manufacturers have very active perpendicular programs so even those people who at the offset of perpendicular said they would be a laggard are now ramping perpendicular.

Clearly Seagate has still a lead that maybe 9 months or 12 months on the rest of the world, but we see very big sizeable spending programs now in even in the non-Seagate world to catch up to Seagate in perpendicular.

Okay, last quick question, Jack.

What are your assumptions in the guidance for next quarter just on interest expense?

Given the repurchase?

Yes.

Interest expense, we actually we expect it to be up a little bit or net interest expense we expect to be up a little bit to about 1.1 million.

Okay, thank you.

Okay.

Next we'll take Mark Miller with Brean Murray.

Just wondering if you could give us some color about the data storage.

Was this across-the-board in terms of customers and types of equipment, the weakness?

It was.

It was, again, because they all spent so heavily in the first half of '06 and I think if you could recall a comment I made during '06 was that senior management at all of those customers sort of said to us in the June-July time frame, Oh, my God, we over bought a little bit.

We had a stretch revenue plan, and a stretch capital plan.

We spent our stretch capital plan.

We didn't quite achieve our stretch revenue plan.

Also, the other factor was they converted pretty aggressively during the second half of '06 to Femco, and so at a wafer level, that gave them some capacity because you get that many more of the smaller heads on to a wafer.

That took a couple of quarters to be absorbed, so now, we've between Femco has sort of been now absorbed.

The excess equipment that they bought has been absorbed, but they've grown 4 or 5 percentage points in drive unit growth in Q3 and Q4 and they are again in Q1, so now, utilization is well over 90% and particularly in Slider, but also in wafer, and I'm beginning to watch the consumable spending on their capital equipment which although it's a very not large, absolute number, the trend line of the significance in telling us that they're using the capital very highly, and it's showing, it's tripled in the last 90 days, so it's clear that they need to buy more equipment in the Q2 time frame.

I'm just wondering beyond Q2, last I heard is that Seagate is still projecting lower capital spending about 10% lower in fiscal '08 which begins in July and you're projecting growth there I guess overall for data storage.

Are you expecting other customers to step up or are you expecting a retool because of the wafer size increase?

What's going to drive that especially if Seagate is, as people expect is going to do some more cutting of capital equipment spending in the second half of this year?

I think the combination that I've mentioned across the board, that every one of them has a wafer size change program that they haven't yet really begun to spend on.

They all need to continue to ramp Femco.

They all need, some of them a third or fourth generation perpendicular and some of them a first generation perpendicular and they all need capacity in Slider where the pressure is the greatest in terms of utilization.

So I expect still something as large as maybe a 10% increase for data storage for the year.

And finally, is this consistent with your understanding of the industry is projecting, this is data storage again, about 50% of drive shift by the end of the year will be perpendicular with Seagate somewhat north of that?

Is that your understanding?

Well, one has to sort of separate the run rates from the actual year, use of perpendicular.

I think we ended, as you know we ended '06 with the industry probably running 15 or 18% total perpendicular and many of them have said that by the fourth quarter of '07, they would like to be at a run rate of maybe 75%, but for the year, they have a lot to do to get the entire year up over 30%.

Thank you.

And we'll move to Brett Hodess with Merrill Lynch.

Ed, two questions.

First, on the semi side, to get the -- I guess, the Hawk it is to start to ship in the second quarter you mentioned?

Yes.

Is that pretty far along in terms of evaluations by the top tier guys that are moving to 65 and 45 and whatnot?

Brett if you brought your wafers to Santa Barbara tomorrow, we could run them.

Okay, and the customers are running them already?

Yes.

But there, we expect, again my comments are we expect shipment to be followed by revenue recognition.

So for all of these new products, the Hawk, the K Series, there will be a quarter delay between shipment and installation and revenue recognition because you won't be able to bifurcate these new tools.

You'll need complete customer acceptance, so we're being very careful to make sure that customer acceptance is being accelerated and so we may during the year even share, we will look at whether it will be useful, sort of shipment numbers as well as revenue numbers, so people can see that the tools are, that there's actual movement in the tools even though they've not yet been revenued.

That would be helpful because that would let us get a sense of more linear shipment pattern than the revenue recognition, hocky sticking in the second half.

Exactly.

Yes, and I guess the follow-on is that if you look at your comment earlier, one of the main margin driver over the next year or two, increasing the mix of metrology?

Yes.

Is the Hawk product a major driver behind that or what are the other metrology areas that could provide that kind of a mix shift for you?

Well, metrology in Veeco is three pieces.

It's the auto AFM, it's the table top AFM, and it's the optical profiler.

The reality is that all three have very good margins, so if I look at '06, the auto AFM had 52% margin so it had the same margin as the average Veeco metrology, so increases in all three pieces are very helpful, just just a 10 million, $15 million increase in revenue for the year, which I think we'll absolutely get, will have a nice margin uplift for the Company.

But to move the actual mix though, are there specific programs in each of the areas that can allow you to move that mix over time or is it mostly a case of this year, the revenue recognition and some of the other parts will be a little slower because of the lag time on revenue recognition and then some of the timing on the data storage side?

No.

Well, we did metrology first.

The nice thing about the '07 year is there are product introductions in all three pieces of metrology.

I spoke of the -- there's a low cost University level called the caliber AFM that we've already taken orders on and are shipping.

There's the Hawk that we've just spoken of, and there's a new optical interferometer profiler being introduced in the optical portion of metrology.

So all three will have reason to see increased revenue all about this 52% level.

Got it.

Thank you.

Okay.

Operator, I think maybe there's time for one question if there is one.

We'll take that from Graham Tanaka with Tanaka Asset Management.

Yes, hi.

I just want to get -- if you could summit up for us because you were giving us some information on what you expected by product area, for example, metrology up 15 million.

If you could just review it for the four product areas for revenue this year and then what are the bottom of the order in terms of which quarter would be the bottom for the four areas this year?

Well, I think -- I don't think that it's prudent to try to build a model on the telephone or for the '07 year.

I tried to include in my comments, we expect to see growth for the Company quite similar to the growth of '06.

In '05 and '06 on 5 and 8% increases in revenue, we increased gross margin 150 to 200 basis points.

We held spending pretty flat and so we had a 20 to 38% increase at the EBITDA level.

I'd like to do that again.

And I think the first quarter is a trough quarter.

Thank you.

You're welcome.

Operator?

Thank you.

Thank you.

That does conclude our conference call, and we do thank you for your participation.

Thank you, all.

Bye-bye.