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Operator
Good day, everyone, and welcome to Veeco Instruments first quarter 2007 results conference call.
Today's call is being recorded.
For opening remarks and introductions, I would like to turn the call over to Senior Vice President of Corporate Communications and Investor Relations, Ms.
Debra Wasser.
Please go ahead, ma'am.
- SVP, Corporate Communications and IR
Thanks, operator, and thank you, everyone, for joining our first quarter 2007 results conference call.
I'm Debra Wasser.
Joining me for today's call are Ed Braun, our 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 1305, to get a copy.
This call is being recorded by Veeco Instruments and is copyrighted material.
It cannot be recorded or rebroadcast without Veeco's expressed permission.
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 makes statements about the future, such statements are forward-looking and are subject to a number of risks and uncertainty that could cause actual results to differ materially from the statements made.
These factors are discussed in the business description and management's discussion and analysis sections of the Company's report on Form 10-K and annual 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, are 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The Company does not plan to update the information on the webcast once it has been archived.
I would now like to turn the call over to Ed.
- Chairman, CEO
Thank you, Deb.
I would like to highlight the first quarter financial results as we reported them this afternoon.
Revenue was $99.2 million, in line with our guidance, and a 6% increase over the $93.9 million reported in the first quarter of last year.
Shipments were approximately $110 million, reflecting increased new product activity with revenue recognition expected in subsequent quarters.
Gross margins were 44%, ahead of Veeco's guidance.
Bookings were $106 million, in line with Veeco's guidance range, 3% down sequentially and 16% below prior year.
Net income was $0.01 per share on a GAAP basis compared to a net loss of $0.01 per share last year, in line with Veeco's guidance.
Earnings per share, excluding certain items, were $0.10 compared to $0.09 last year, in line with our guidance.
I commented in the release that Veeco results were in line with guidance.
As I commented, revenues were a little above $99 million, gross margins of 44%, higher than our forecast due to improved margins in MOCVD deposition systems, and Veeco recently reduced long-term debt by $56 million and exchanged a substantial portion of its convertible notes, significantly improving the Company's capital structure, and Jack will comment later on that.
Veeco's first quarter orders of $106 million reflected significant growth in the high brightness light emitting diode and wireless sectors, and stabilization in the data storage sector.
Veeco's high brightness LED revenues were up 39%, and orders were up 60% in a year-over-year basis as we continued to experience positive customer acceptance for our new K-Series MOCVD systems.
We have received multi-million dollar orders from six LED customers and one in MOCVD and one MBE customer.
First quarter data storage orders of $29.4 million increased 37% sequentially from the fourth quarter trough.
We expect continued growth in the second quarter as data storage investments in areal density, in perpendicular recording and larger wafer sizes are required.
To highlight Q1 orders, data storage, as I commented, was $29 million, LED wireless was quite significant, $39 million, so data storage sequentially was up 37%, and MOCVD LED wireless was up 28%.
Semiconductor orders were $12 million and scientific research were $26 million.
In total, the $106 million was sort of flattish with the fourth quarter down 3% but 16% below prior year.
We expect second orders to be $110 million plus or minus 5% reflecting a forecasted continued strength in high brightness LED and a further recovery in data storage.
For Q1, our strongest sector for orders was the LED wireless sector where bookings, as I commented, were $39 million, up 60% year-over-year and up 20% -- 28% sequentially.
Revenue was $21 million, up 39% year-over-year, reflecting LED market expansion for traditional applications, and those are outdoor signage and solid state lighting, small LCD panel back lighting and automotive applications, which have led now to positive Veeco bookings trend over the last nine quarters.
In fact, in '05, the orders were $62 million.
In '06, they were $111 million, and they're starting this year at a rate of somewhere in the $140 million range.
Large LCD applications, I think are still six to twelve months away, but we're seeing very strong customer acceptance of Veeco's new K-Series MOCVD and multiple system orders from six or seven customers.
We're also experiencing solar cell applications that are adding to our MOCVD growth and new activity in red/orange/yellow for signage and automotive applications.
In this sector, LED, MOCVD and MBE, we expect '07 to be double digit growth in revenues and in orders.
Reporting on our continued improvement in MOCVD gross margins, important as the double-digit revenue growth continues in this product, in Q1 our MOCVD gross margins were approximately 39% compared to 15% a year ago, obviously a significant improvement based on the combination of lower warranty costs, outsourcing, and the initial success of our new platform, the K-Series.
We are forecasting MOCVD gross margins in the 42% to 44% range by Q4 '07, as we achieve revenue recognition of the new larger diameter K465 platform with higher AFPs and further reduced costs.
This is consistent with our forecast to bring total Veeco equipment gross margins to the same 42% to 44% range, up from the Q1 40% range in gross margins by year's end, somewhere in the Q4 time frame.
To complete the Veeco-wide gross margin picture, metrology gross margins are currently about 49.5% in Q1, expected to progress to 52% to 54% by year's end, contributing to a Veeco 46% to 47% blended gross margin again in the Q4 time frame, which would compare to the 44% current Q1 gross margin, the sum of 40% gross margin in equipment and 49.5% gross margin in metrology.
So we expect the year to be a continuation of the gross margin progress we've made in the last two years.
Turning to the other markets and data storage, although the year end -- although the end demand for hard drives continues to grow at about 12% to 14% a year, and areal density technology coupled to further adoption of perpendicular recording certainly continues across all of the industry.
The industry consolidation at Hitachi and Alps witnessed in the first quarter will slow equipment demand for the next one to two quarters so Veeco's quarterly data storage orders increased this quarter from $21 million to $29 million, still below last year's $52 million average per quarter, but we expect further order growth this quarter in the June quarter with real industry CapEx growth expected in the Q3/Q4 time frame and industry utilization remains very high.
We've seen strong customer acceptance of new Veeco products in PVD sputtering and diamondlike carbon deposition and our new high rate alumina and that -- those new products will help fuel Q2/Q3 order growth, helped by transition -- further transition to perpendicular and to larger wafer size.
Remember, the trough in Q4 was $21 million, so the $29 million is an increase from that trough, and we expect something in the $35 million range in this June quarter.
We see continued growth in mobile PC and consumer electronics.
Hitachi announced this last week the first one terrabyte hard drive using perpendicular recording for desktop PCs, for media centers, for gaming, for digital video applications.
At the same time, Samsung announced a single platter 160 gigabyte capacity drive.
Dell announced future notebooks with 250 gigabyte hard drives, and Sony discontinued their 20 gigabyte PlayStation in favor of a new 60 gigabyte with hard drive instead of flash due to overwhelming consumer demand for built-in storage media slots and built in wi-fi.
High growth in mobile laptops continues.
Low ends will continue to use flash memory.
High-end hard drives will continue to favor normal standard rotary hard drive in mobile laptops, and hybrid drives, the combination of flash and hard drives, are being introduced in a number of consumer companies.
We also see the increased consumer personal content of the combination of photos, music, videos end up being stored or backed on a disk hard drive somewhere in the universe so that as flash grows, some of that growth shows up in stored hard drive content.
Samsung, Seagate and others have acknowledged future use of hybrid hard drives, and so we see the combination of flash and hard drive becoming more apparent in hybrids.
In semiconductor, the Q1 orders of $12 million were up 16% year-over-year.
We expect 2007 Veeco growth tied to the introduction of our new auto AFM Hawk system which features higher throughput and 65 and 40-nanometer capability, and in scientific research, the Q1 orders of $26 million were up 18% year-over-year.
Our bio AFM orders are expected to increase following our first bio AFM technical conference held last week, this week actually in Barcelona, including the introduction of a Veeco AFM integrated to a Leica confocal microscope so we had a quite successful bio AFM conference that we co-sponsored with Leica in Barcelona, Spain, where 220 scientists presented papers having to -- showing the application of bio AFM and confocal [microscopy.]
I will pause for Jack to review our financials, and we will come back for closing comments and for your questions.
Jack?
- CFO
Thank you, Ed.
The three months ended March 31, 2007, sales were $99.2 million, an increase of 5.6% versus the 2006 first quarter.
This increase was due to a $4.9 million increase in process equipment sales, primarily attributable to the growth in MOCVD products.
Metrology sales were $41.1 million, an increase of $300,000 versus the first quarter of 2006.
By market, sales were up compared to the prior year by 39% in LED wireless, 18% in research, while down 11% in data storage and 10% in semiconductor.
Sequentially, sales decreased by $23.9 million or 20%, primarily due to an $18.9 million decrease in process equipment and a $5.1 million decrease in metrology products.
First quarter 2007 orders decreased by $20.8 million or 16% to $105.9 million compared to $126.7 million in the first quarter of 2006, and we're down sequentially 3% from the fourth quarter of 2006.
First quarter '07 orders were made up of $38.9 million from LED wireless, $29.4 million from data storage, $25.9 million from research and $11.7 million from semiconductor.
The book-to-bill ratio was 1.07 to 1 for the quarter.
Gross profit improved to $43.7 million for the quarter compared to $41.8 million for the first quarter of 2006 while gross margin percentage was 44.1% compared to 44.5% for the first quarter of 2006.
Process equipment margins improved to 40.3%, up from 38% in the first quarter of '06.
This 2.3% margin increase was due to a significant improvement in MOCVD gross margins, as Ed noted, which were 38.9% in the first quarter of '07 versus 14.5% in the first quarter of '06.
This increase in MOCVD was a result of $4.8 million of higher sales volume, a reduction in material costs, and favorable product mix consisting of high content of parts, service and upgrades.
We had a 49.4% gross margin in metrology compared to 52.9% in the first quarter of '06 due to lower gross margins in atomic force microscopes, resulting primarily from lower introduction margins on new research products and higher revenue bifurcations in the auto AFM.
Sequentially, overall gross margins remained fairly flat despite significantly lower sales volume.
SG&A was $22.8 million or 23% of sales compared to $21.3 million or 22.7% of sales in the first quarter of '06.
This increase was mainly attributable to expenses associated with restricted stock and stock options as well expenses -- as well as an increase in selling expense, primarily from marketing resources targeting life sciences.
SG&A was down $1.7 million sequentially, principally due to lower selling and commission expenses resulting from the decrease in sales volume as well as reduced incentive costs.
R&D expense totaled $15.4 million, an increase of $800,000 from the first quarter of 2006, largely due to spending increases in ion beam and MOCVD divisions for new product development.
Sequentially, R&D expense decreased $1 million.
As a percentage of sales, R&D was 15.5% in both the current quarter and the first quarter of 2006 and 13.3% in the fourth quarter of 2006.
Overall operating expenses remained flat as a percentage of sales at 38.4% in the first quarter of '07 compared with 38.5% in the first quarter of '06 and increased by $1.9 million in absolute terms for the reasons noted above.
We anticipate operating expense to remain relatively flat as a percentage of sales in the second quarter of 2007, but to increase in absolute dollars due to salary, merit increases and incentive accruals.
First quarter EBITA totaled $5.6 million remaining flat compared to 2006 first quarter.
Amortization expense totaled $3.9 million in the first quarter of '06 versus $4 million in the first quarter -- I am sorry, the first quarter of '07 versus $4 million in the first quarter of '06.
Net interest expense was $800,000 compared with $1.4 million in the comparable 2006 quarter, primarily due to lower interest expense resulting from the extinguishment of $56 million of convertible notes and the rise in interest rates on invested funds.
First quarter 2007 GAAP net income was $300,000 or $0.01 per share compared to a net loss of $200,000 or $0.01 per share loss in the first quarter of 2006.
EPS, excluding amortization expense and the gain from early extinguishment of debt for the quarter, was $0.10 compared to $0.09 for the 2006 first quarter using a 35% tax rate.
Street consensus was $0.08 for the first quarter of '07.
With regard to the outlook, we are currently forecasting second quarter 2007 revenues in the range of $100 million to $105 million and EPS between $0.03 loss and a $0.02 profit per share on a GAAP basis and earnings per share between $0.07 and $0.10, excluding amortization of $2.5 million and severance of $1 million utilizing a 35% tax rate.
Veeco currently expects that its second quarter 2007 bookings will be $110 million plus or minus 5%.
We expect the second quarter gross margins to be in the range of 43% to 44%.
We're hopeful that further outsourcing new products and data storage recovery should favorably affect both our profit equipment and metrology gross margins by the fourth quarter of '07.
As previously announced during April of this year, the Company entered into separate privately negotiated agreements with certain holders of our convertible notes which were due in December, 2008 under which such holders exchange $106.4 million dollars of aggregate principle amount of the original notes for approximately $105.5 million of the new series of convertible notes which are due in April of 2012.
Approximately $37.6 million of the original notes remain outstanding.
Therefore, as of today, our convertible notes outstanding total $143.1 million compared to $200 million at December 31, 2006.
The new notes contain certain provisions which will allow Veeco increased flexibility and may minimize dilution to shareholders on such feature known as net share settlement gives Veeco the option upon conversion of the new notes to pay holders in cash for the principle amount of the new notes.
With maturity dates extending -- extended three and a quarter years compared to the old notes, the Company will have more flexibility to utilize our cash flows from operations for the growth of our business.
Coupled with the retirement of the $56 million of convertible notes which we repurchased in the first quarter of '07, we have significantly improved our capital structure.
Cash and equivalents at the end of March totaled $94.6 million.
The retirement of this $56 million of convertible notes during the first quarter of 2007 resulted in a net use of cash of $52.5 million.
The accounts receivable decreased $5.2 million during the quarter with DSOs up 74 days.
Inventory increased by $5.3 million to $105.6 million at March 31, 2007, with a turnover of 2.1 times.
The increase was primarily due to $4.8 million of delayed shipments, and the build of E-450 MOCVD tools for red LED applications.
Capital expenditures were $2.1 million for the first quarter and depreciation expense totaled $3.5 million in the quarter.
As a result of the reduction in outstanding debt, we expect interest expense, net of interest income, to be reduced to approximately $900,000, down from a 2006 quarterly run rate of $1.1 million.
In addition, we will see our amortization expense reduced to approximately $2.5 million down from an historical quarterly run rate of $4 million during the second quarter of 2007, and this will further reduce to $2 million in the third quarter of '07.
This expected reduction in amortization results from a portion of our intangible assets related to prior acquisitions having been fully amortized.
As these reductions in interest and amortization expenses bring Veeco more in line with comparable companies who have not had a history of acquisitions, we will transition to GAAP-only EPS by the beginning of 2008, but we will continue to report GAAP and non-GAAP EPS for the balance of 2007.
At this point, we'll return to Ed for some additional comments and your questions.
- Chairman, CEO
Thank you, Jack.
So overall, we expect 2007 to be a growth year in revenue and earnings driven by strong double-digit growth in high brightness LED and wireless sectors and a second half recovery in data storage, with probably up to a 10% growth in equipment for the year and revenue and up to a 5% growth in metrology for the year, a very strong contribution from new Veeco products in equipment as well as metrology.
We previously anticipated and we seem on track that about 40% of the revenue expected in '07, something in the order of $200 million, will come from new products in ion beam, slider and MOCVD and equipment and in AFM and optical metrology in the metrology group with heavy revenue recognition from those new products appearing in the second half of the year.
We reported shipments separate from revenue and you note that shipments were about $10 million higher in Q1 than revenue.
I expect that shipments in the second quarter will again be $10 million higher than revenue, and so that's the basis of larger second half revenue expectations based on new products.
Operator, I think we'll pause here and we'd be pleased to answer questions.
Operator
Thank you.
(OPERATOR INSTRUCTIONS) We'll hear first from Robert Maire.
- Analyst
Hi.
Yes, a couple quick questions.
In terms of your overall improvement to gross margin, where would you say we are on that program?
Are we 80% or 90% done or do you think there is significantly more gross margin to get at or is it now just a question of being able to load the current facilities to increase the gross margin?
And second question, you had indicated that there was a little bit of a pause in data storage because of some consolidation going on, and it sounds as if you're expecting that to come back in relatively short order.
Is there anything underlying that you've heard from the customers that indicate that that will come back more quickly and when it comes back, any particular sense of what levels that might come back at?
- Chairman, CEO
Robert, let me do those in the reverse order, so in data storage, the major data storage houses are reviewing with us their CapEx plans that seem heaviest for Q3 and Q4, the second half of the year.
I think we'll see another increase in the June quarter, something in the $35 million range.
I would expect bookings north of $50 million, which was the average of last year, to appear somewhere in the second half of the year, and that's based on larger wafer size, the propagation -- further propagation to perpendicular recording, propagation to the [fento], the smaller head size, and a rather significant amount of new Veeco products in the pipeline in the form of PVD and DLC and slider products, and some new AFM metrology product for precise measurement, so I think their business, they reflect that there is continued growth in units, in revenue and hard drive.
Seagate was among those this past week who said they would have to increase their capital expenditure in the second half of the year, and so I think we get back to sort of $50 million run rate bookings in the second half, Robert.
- Analyst
Okay.
So would it be fair to characterize that as sort of we've gone through this digestion period after we've had the first round of spending on vertical recording and this is sort of a second round after this pause or digesting as it more broadly gets dispersed within the industry, is that a -- ?
- Chairman, CEO
I think, Robert, that's true.
I think at mid-year, perpendicular recording, even at the leading houses, will still be sort of a 30% of total slider event, and so they need to finish the propagation of perpendicular recording and none of them have gone beyond starting just to look at process enhancements at 300 -- at 200mm.
So the larger wafer side spending hasn't really occurred at all outside of their R&D process development steps.
- Analyst
So you would expect a sort of next wave of spending to be similar in terms of total cumulative volume as the first phase was roughly?
- Chairman, CEO
Yes.
I think they return to that average spending that they experienced last year.
- Analyst
Okay.
Great.
- Chairman, CEO
On the gross margin question, as you know, we've made margin improvements in each of the last couple of years.
I would say we're sort of in the sixth inning.
As we said, MOCVD will be a dramatic increase between Q1, it's 38%, 39% and a 42%, 44% run rate by the end of the year, and it will be our largest sector for the year.
The added revenue will also contribute to a gross margin bump up, so I would look for the year to end at about a 46%, 47% Veeco gross margin run rate, and the total year to be up another 100, 150 basis points compared to '06.
- Analyst
If the year ends up at 46%, 47%, is that sort of the eighth or ninth inning?
Is that approaching optimal margin in your view?
- Chairman, CEO
If you look at our investor presentation, we speak of peak quarters which would be about $130 million in revenue and would have a 46% to 48% gross margin, so that's kind of the fourth quarter expectation, and then we speak of a target quarter that has more like a 48% to 50%, which would be something north of $140 million in revenue, and hopefully that would be in the next three or four -- the next four to six quarters.
- Analyst
Okay.
- Chairman, CEO
So I would look at 48% to 50% as the next target.
- Analyst
Got it.
Okay.
Thank you.
- Chairman, CEO
Thank you, Robert.
Operator
Now we'll hear from Timothy Arcuri.
- Analyst
Hi.
A couple things.
If I just look at your guidance, so I look at your revenue guidance for June and I look at what you did for March and I look at your comments that you're going to grow year-over-year this year, that implies if I flat line revenue in September and December, that implies you're going to do like an average of at least $125 million, $130 million, in those two quarters which is quite a dramatic step up from the $100 million that you've done in March and June, and I am wondering what's going to make that happen given that storage is typically front half loaded, usually they don't spend during the back half of the year.
I can certainly understand that there are some upgrade buys that they have to buy, but what's going to make that happen given that that's against the last seven years of trend we have in storage?
Thanks.
- Chairman, CEO
Tim, I think two things.
First of all, in your Q1/Q2 $100 million run rate, you're again, you're ignoring the $10 million in each quarter that is in the shipments not reported in the revenue, so in the second half of the year, you'll see a carry forward of some $20 million of shipments that were completed in the first half of the year and won't become revenue until the second half of the year.
I also think this is not a typical year in data storage first half strength because they really bought so heavily in the first half of '06 and I think they're still in the digestion phase and I think we're going to see a bump up from these very modest first half numbers in data storage, but your numbers aren't totally wrong.
I think you're sort of your $125 and $135 numbers, I think are foreseeable if not better in the second half of the year because of the backlog that's out there that's not revenue and because of increased booking activity in high brightness LED wireless and a recovery in data storage.
- Analyst
So you think that second half of the year would be up in both LED and also storage?
- Chairman, CEO
Yes.
- Analyst
Okay.
Maybe one for Jack.
If I look at inventories and I look at the turns, you're kind of turning inventory less than most other companies that we follow, at about two times, and I know that we were going to -- that there is some outsourcing going on in the GaNzilla product line and I thought that that was supposed to start to help the inventories.
So I'm wondering is that going to be more June or what's going to start to draw down this inventory balance?
Thanks.
- CFO
Yes.
One of the things that we experienced was sort of a revitalization of red LEDs which is a different product line than the GAN, and frankly we didn't carry those inventories, so sort of an unexpected blue bird that we got, and we did build inventory in the quarter relative to those products, so I think you're right that the outsourcing will have a favorable impact, and we should see the turns improve and certainly in the second half of the year, and we would like to be targeting close to a three times turn by the end of the year.
- Analyst
Okay.
So okay.
All right.
Thanks.
Operator
(OPERATOR INSTRUCTIONS) We'll now hear from David Duley.
- Analyst
What were the percentages?
- Chairman, CEO
David, your first part of the question was clipped.
Can you repeat your question?
- Analyst
Yes.
Who were the 10% customers in the quarter and what were the percentages?
- Chairman, CEO
Okay.
Give me a second there.
- Analyst
And I'll just -- while you're looking that stuff up for Jack, when you talk about the gross margin improvements that you've laid out in total for the Company, is that pretty much -- did I hear you right and it is like pretty much all the improvement for the -- to get to the annual numbers by year end is coming from that MOCVD product line from 38 to 42 which kind of takes the overall average from 44 to 48, is that roughly what we're talking about here?
- Chairman, CEO
No, no, I don't think that's the case.
I think you're right that MOCVD will improve, but we believe that there will be improvements in our other product lines as well, ion beam, for example, as well as our AFM product lines.
- Analyst
Okay.
That's good to hear.
- CFO
And to your other question, David, so in the over 10% customers in the bookings of the first quarter, the $106 million, were number one was Headway, a combination of TDK with SAE and Headway, that company was a little over $11.4 million in orders, and Seagate was about $9 million in orders, so typically good order rates from the data storage world, but very significant were in positions number three through number 12 were all largely MOCVD high brightness LED wireless customers who I probably shouldn't name, but they were the tier 1 and in Europe and then the Taiwanese Korean companies and that's where there were six or seven customers ordering multiple MOCVD and MBE tools, so you had seven people whose orders ranged in the quarter between $8 million and $3 million each.
- Analyst
So when you were booking at the peak run rates, whatever the peak numbers were in the disk drive space, I can't remember, $60 million, $70 million, did the leading customers there were Seagate and Hitachi, correct?
- CFO
Right, and Seagate was closer in those quarters to sort of an $18 million or $19 million rate so Seagate today is about half that rate.
- Analyst
Yes, so you mentioned earlier in the call that you have consolidation going on in a couple of customers.
That customer, Seagate, is definitely not consolidating facilities or anything like some of the other guys have announced, but I did listen to their conference call, and it seems like their CapEx budget needs to go up dramatically to spend what they said they're going to spend for the year.
So I am wondering the kind of visibility you're getting into those programs?
- Chairman, CEO
I think, David, I think Seagate's getting back to the sort of $18 million, $20 million quarterly run rate in the second half of the year.
That's the guidance that they're giving us currently, and it's not just guidance.
They're giving us kind of a slot plan of the tools they need.
They're saying they anticipate a significant bump up in business in Q4, and that they would have to CapEx prepare for that in Q3.
- Analyst
Okay.
- Chairman, CEO
So I am calling that the second half of the year.
- Analyst
Okay.
And just a couple housekeeping, were there any cancellations in the quarter and what -- now that you've bought some of the debt back and the extent of the maturities of the balance of the debt, what is the cash balance and the debt balance right now?
- CFO
Our debt balance is $140 -- I am sorry, the convert balance debt balance is $143 million, and we have about $8 million of mortgages on top of that, so $151 million or $152 million, and our cash is approximately $95 million.
- Analyst
Okay.
And cancellations?
- CFO
No cancellations of any note in the March quarter.
- Analyst
Great.
Thank you.
Operator
Tom Diffely has our next question.
- Analyst
Good afternoon, Ed.
I was hoping you could talk about the seasonality versus cyclicality of your four end markets and if you have seen seasonality become a bigger factor of late?
- Chairman, CEO
Yes, there is always the balance of generally a history, as Tim Arcuri correctly reflected of the September quarter.
All other things being equal, the September quarter is normally reflects vacations and shutdowns and so it is a seasonally low quarter for CapEx, but all of that intends to be offset by where people are in the cycle, so the cycle in the two very volatile sectors of MOCVD of high brightness LED and wireless reflect what new products are they introducing and so the moment they start to introduce 30-inch and 40-inch LCD TVs back lit by LEDs or a breakthrough in China building more cities that are LED lit or the U.K.
announced last week actually an end date for putting incandescent light bulbs into cities, so those secular factors, if I may call them that, will outweigh the seasonality impact, and so you look for areal density, change to a larger wafer size, change to fento in data storage or you look for the next big wave of applications in LED sort of driving the orders up in a more significant fashion than seasonality.
- Analyst
Okay.
- Chairman, CEO
I think in this year we're going to see a second half booking rate because of those applications that's higher than the first half booking rate.
- Analyst
Okay.
So the fact that the consumer is becoming a bigger percentage of the end products hasn't necessarily made you a seasonal company, then?
- Chairman, CEO
o because we're deeper in the food chain.
- Analyst
Right.
- Chairman, CEO
So we reflect the technology changes that the consumer electronic company must prepare for to be in that consumer market, so we're the technology that he has to reach for to get to that consumer application.
- Analyst
Okay.
And just real quickly, could you repeat what you said about the dip in metrology margins and if you expect that to continue?
- CFO
Yes.
So the metrology margin in the first quarter was just under 50%, 49.5%.
That's quite disappointing because those margins have typically been 50%, 51%.
I would expect them to get back to that rate and finish the year at 52% or 53%.
We're looking for a year end 47% gross margin in total which would be probably 44% in equipment and 52% in metrology.
- Analyst
Was it a mix issue or was it more than that going on?
- Chairman, CEO
There was a bit of a mix issue as Jack mentioned.
There was new products in life science bio AFM, and we're taking some management steps to correct what we think has been sort of underperformance in metrology that we're addressing by replacing senior management.
- Analyst
Okay.
Great.
Thank you.
Operator
Thank you.
Now we'll hear from JoAnne Feeney.
- Analyst
Good evening, folks.
Just a couple questions.
Would you be able to provide us a backlog figure for Q1?
I may have missed it.
- Chairman, CEO
You didn't miss it, Joanne.
And if you behave, I am going to provide it.
It is --
- CFO
147.4.
- Chairman, CEO
Did you notice my voice changed?
- Analyst
Very good.
And then I thought, Jack, I heard you mention that for charges next quarter, we should expect 2.5 in amortization and $1 million in severance.
- CFO
Yes.
- Analyst
Okay.
So that's in addition to 2.5, right?
- CFO
Yes.
- Analyst
Okay.
And then if we could talk a little bit about high brightness LED, so you've clarified the geographical spread and then you've talked about the red.
Now, the tools that you use for making the red LEDs are sort of lower priced, right, and lower quality than your high brightness LED tool, is that correct?
- Chairman, CEO
No longer.
Today the ASP on the 450 and now the 475 are, in fact, a little higher.
People are looking for brighter red and they're looking for more uniformity.
And so as we approach true white, which is a combination of red, blue, green diodes, they want increased brightness from all three.
So the new red applications that we're seeing are for sort of higher performance red, and the AFPs are quite high.
- Analyst
So have the AFPs gone up since last quarter?
- Chairman, CEO
AFPs have been sort of creeping up each quarter by $100,000 or $150,000.
- Analyst
And is that largely behind the improvement that you expect over the next three quarters?
- Chairman, CEO
No, it is about half of the improvement.
The other half is the outsourcing, the standard platform, going to the K-Series platform, that gives us a standard platform, hardware and software and gas introduction and the outsourcing of that platform will be a large part of the increase from 38% gross margin to 42% to 44% gross margin.
It is probably half manufacturing costs and half AFP growth.
- Analyst
So then over in the metrology side, is it correct to assume that some of the loss in gross margin and the AFM business was due to lower AFPs?
- Chairman, CEO
Some lower AFPs, some mix and volume.
I mean they did $37 million in orders, and I think $41 million in shipments, so they're, JoAnne, they're off like $3 million or $4 million per quarter in volume from where they should be to be within the range of the business -- the right business model for gross margin.
- Analyst
Okay.
And then maybe just one last thing on the hard disk drive.
Just wondering if there is anything -- any shift you see in terms of the competitive landscape in the technology that might be causing one or the other of your customers to be a bit more aggressive on spending?
- Chairman, CEO
Okay.
That's a good question.
So what -- perpendicular recording, because it is still like the fifth or sixth inning, is a very important ingredient.
So if you look at the leaders and today those are probably Seagate and TDK, who are probably nine months to twelve months ahead of the rest of the pack in their perpendicular technology, they have an advantage that they can produce 160 or 180 gigabyte drive with one platter and two heads whereas the laggards, I won't name names, but the people who describe themselves as sort of technology laggards, have to come up with a much higher bill of materials for that 160, 180, 200 gigabyte drive, two disks and four heads instead of one disk and two heads.
So there will -- catch up is required.
All of those people who are not leaders in perpendicular will have to spend in perpendicular to keep their gross margins high, higher as the world gets to 250 gigabytes.
Is that clear?
- Analyst
That's clear.
Thanks very much.
That's all for me.
Operator
Now we'll hear from Doug Reid.
- Analyst
Hi.
This is [Naoh Shoxian ] for Doug Reid.
A couple questions.
First of all, you talk about the service repairs and parts business last quarter, how you're going to put a little bit more focus on that.
Do you have any update on that and also can you discuss what is the gross margin relative to corporate margins for that segment?
- Chairman, CEO
The -- we'll give you a fuller report on that I think in the next call but you're correct.
We were looking for about, I think it's about $150 million.
We're trying to grow that business to about something over $150 million.
We're currently running at about 30% of revenue being in upgrades and spares.
We've made a business unit --
- Analyst
Okay.
- Chairman, CEO
-- out of that sector.
They're developing a bunch of new products including upgrade products with very good strong inches from customers and, I do expect it to increase from 30% of revenue to 40% of revenue at a run rate change by the end of the year with significant increase in upgrades --
- Analyst
Okay.
- Chairman, CEO
-- which will have a margin, not so much a gross margin because I more look at them at the EBIT line, the operating margin should be at the corporate average.
- Analyst
Okay.
All right.
And then the other question is that you guys had a very significant amount of orders in the high brightness LED segment, and I think you mentioned you expect now the high brightness LED segment to be the largest segment by revenue for 2007.
Is that correct?
- Chairman, CEO
Well, it will be at a run rate of -- I think you probably won't be -- in an absolute basis for the year, it won't be -- it won't surpass data storage in '07, but the run rate, the quarterly rate by the end of '07 will be a challenge equal in size, let me say, to the data storage side, and its potential is larger, so as the world goes to solid state lighting, replacing incandescent or fluorescent lights, you will have a larger LED business within Veeco than data storage.
- Analyst
So would you say your confidence level of the high brightness LED eclipsing the data storage segment in '08 is higher given the -- ?
- Chairman, CEO
I would allow it as an '09.
I think in '09, it definitely surpasses data storage.
- Analyst
Okay.
Last question.
You guys did the recent release with Leica for the AFM combined confocal optical microscope.
Can you discuss what is the potential of this market, how big it might be, how big it might be right now and how big it might be, say, three years from now?
- Chairman, CEO
We're sort of in the discovery phase.
I would say that we're trying to get that market within Veeco to be, let me call it $20 million in revenue.
An AFM, an atomic force microscope tabletop bioversion, sells for about $200,000.
A confocal microscope as one would buy from Leica, [inaudible] or Nikon also sells for $200,000.
So there's a -- and they sell optical microscopes at the rate of about 1,000 per year, so a very high rate, so even if 20% of their microscope sales included a confocal microscope combined with an AFM, you could have something in the order of $100 million new Veeco business over the next two or three years.
- Analyst
Okay.
Excellent.
Thanks.
I appreciate it.
- Chairman, CEO
You're welcome.
Operator
And gentlemen, there are no further questions at this time.
- Chairman, CEO
Okay.
Operator, thank you.
Participants, thank you.
We look forward to speaking with you after the June quarter.
Thank you.
Operator
That does conclude today's conference.
We do thank you for your participation.
Have a good afternoon.