Veeco Instruments Inc (VECO) 2007 Q4 法說會逐字稿

Good day, everyone.

Welcome to Veeco Instruments fourth quarter 2007 results conference call.

Today's call is being recorded.

For opening remarks and introductions, I would 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 2007 results conference call.

Joining me for today's call are John Peeler, our Chief Executive Officer, and Jack Rein, our Chief Financial Officer.

Today's earnings release was distributed at 4 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.

We have also prepared an overview of our financial results and segment breakdown, which can be found on the website as well.

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 about the future, such statements are forward-looking statement and are subject to 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 in management's discussion and analysis sections of the company's report on Form 10-K and annual report to shareholders and our subsequent quarterly reports on Form 10-Q, current reports on Form 8-K and press releases.

Veeco does not undertake any obligation to update any forward-looking statements including those made on the call to reflect future events or circumstances after the date of such statements.

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

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

I would now like to turn the call over to John for opening remarks.

Thanks, Deb, and thank you all for joining us today.

Our agenda for this call is to review the fourth quarter and full year 2007 results, provide outlook and guidance for the first quarter and review activities that have been completed to improve Veeco's performance.

I will also cover market trends and strategies for our business and provide guidance for 2008.

As we stated in our press release, Veeco reported fourth quarter revenue of $107 million, which is in line with our guidance of $104 million to $112 million.

Revenues were down 13% from the fourth quarter of 2006, but up 9% on a sequential basis, driven by increases in sales to all end markets except semiconductor.

Fourth quarter bookings of $115 million were at the high end of guidance, down slightly on a sequential basis after our strong third quarter level, and up 5% compared with the fourth quarter of 2006.

We experienced continued strength in LED wireless orders, which were again over $40 million, including multiunit orders and orders from several new customers in Asia.

Included in this strong LED wireless figure was $5 million in orders for solar applications.

Data storage orders of approximately $36 million were flat versus the third quarter and up from the prior year trough of $21 million.

Scientific research orders were down slightly versus the prior quarter.

The only market which showed a significant bookings downturn was semiconductor, which was down 12% sequentially.

Veeco's earnings per share excluding amortization and restructuring charges was $0.07 per share.

This was ahead of our guidance range due to lower than expected operating spending levels, and this has been a significant focus for us.

Veeco's full year 2007 performance was clearly a disappointment, with revenues of $403 million down 9% versus 2006.

While we had strong 2007 revenue growth in LED/wireless, which was up 25%, and scientific research, which was up 5%, data storage and semiconductor revenues were down 25 and 35% respectively.

While we had made significant changes to our spending line in the last six months, our 2007 EBITDA of $11 million was impacted by weak volumes and gross margin declines in several key business.

We are confident that 2008 will be a much improved year for Veeco on both the revenue and earnings lines.

As stated in October, we have initiated a performance improvement program and we're pleased to have completed significant restructuring activities in the fourth quarter, which when combined with a stable overall business environment in most markets, sets the stage for a much better year.

I would like now to take a few minutes to review our activities to cut costs and improve performance.

We've taken a 7.5% reduction in force, which has decreased our work force by about 100 people since July to 1,216 employees at the end of the year.

This represents an annualized savings of nearly $12 million.

We're on track to consolidate our corporate headquarters into our Plainview, New York site by the end of this quarter, which we anticipate will have an annualized savings of $1.8 million.

While we have seen a recovery in our data storage business, we think it's appropriate to increase focus in this business to better reflect the realities of the end markets.

In 2007, Veeco was negatively impacted by the continued industry consolidation, including TDK's purchase of Alps' assets and HGST's factory consolidation, as well as by slower unit growth rates for heads and drives compared to previous years.

Recent data from trend focus indicates that thin film head production will grow at a 6% compound annual growth rate through 2011, and this is well below the double-digit growth rate experienced in prior years.

During the fourth quarter, we took several important actions to rightsize our data storage business in light of the changing environment.

We decided to reduce our product offerings in ALD and some PVD product lines.

After a careful evaluation and discussions with our key customers, we decided that the market payback for continuing to pursue these technologies did not match the Veeco resources required.

We are also consolidating our Fremont, California data storage R&D center into our Plainview, New York site in order to improve the effectiveness and reduce development times.

These activities represent another $1.3 million in annual savings for Veeco.

As Jack will review more fully in a minute, we also recorded $16 million in order cancellations from data storage customers during the fourth quarter, primarily related to these discontinued products.

While we've made some difficult decisions this past quarter in our data storage business, we maintain our commitment to this market and our data storage customers.

Our data storage product line now represents those where we have very high share, technology leadership, and the best growth potential.

And this includes Ion Beam Etch and Deposition, PVDI, PLCX and our new PVD high rate alumina deposition tool, as well as our slider products.

These technologies are well aligned with our customers' needs, such as larger wafer size programs and lower cost of ownership tools.

I'm pleased with what we have accomplished this past quarter to improve Veeco's performance, and I think it will set the stage for a much better 2008.

I'll now turn the call over to Jack to review the further details of our fourth quarter results and to review our first quarter guidance.

I'll come back afterwards to discuss our market outlook and some thoughts about 2008.

Jack?

Thanks, John.

For the three months ended December 31, 2007, sales were $106.8 million, up sequentially 9.3%, but down 13.2% versus the fourth quarter of 2006.

The decrease versus 2006 was due to a $10.3 million, or 22.4% decrease in metrology sales, principally due to lower sales of automated AFM products to the semiconductor market.

Process equipment sales were $71 million, a decrease of $5.9 million, or 7.7%, versus the fourth quarter of 2006, due to lower sales of ion beam products to data storage market.

Fourth quarter 2007 orders improved to $114.9 million, which is at the high end of our guidance, up 5.3% from the fourth quarter of 2006, but down 2.9% sequentially.

Process equipment represented 68% of orders at $78.3 million, and metrology represented 32% of orders at $36.6 million.

Compared to fourth quarter of '06, we experienced a 70% increase in data storage orders and a 35% increase in High-Brightness LED wireless orders.

Veeco's book to bill ratio was 1.08 to 1 for the quarter.

Backlog at December 31, 2007 was approximately $173.5 million.

Fourth quarter 2007 backlog adjustment totaled $16.2 million, primarily consisting of customer orders for the ALD and PVD multitarget data storage product lines, which were discontinued as part of the company's previously announced restructuring plan.

The associated restructuring charge of $10.6 million in the fourth quarter for 2007 consisted of $7.7 million of inventory and related accruals, and fixed assets associated with these data storage product lines as well as $2.9 million of personnel severance costs resulting from the company's 7.5% reduction in employment.

Gross margin on a non-GAAP basis excluding the $4.8 million inventory charge for noted discontinued products was $40.5 million, or 37.9% of sales for the quarter, up sequentially from 36.7% in the third quarter of '07, but down compared to the 44.5% in the fourth quarter of 2006.

Process equipment gross margin was 37.2%, up sequentially from 33.5% in the third quarter of '07, but down from 40.4% in the fourth quarter of '06.

The 3.2 margin point decrease compared to the fourth quarter of '06 was due to $5.9 million of lower sales volumes associated with the data storage products.

Metrology had a 39.3% gross margin compared to the 51.6% in the fourth quarter of '06, mainly due to lower semiconductor and data storage sales volume, less favorable product mix, and overhead absorption.

In addition, there was a one-time $800,000 royalty charge that adversely impacted metrology gross margins during this fourth quarter.

SG&A was $21.6 million, or 20.2% of sales, down in absolute turns compared to $24.2 million, or 19.6% of sales in the fourth quarter of '06, and $22.5 million in the third quarter of '07.

R&D expense totaled $14.8 million, a decrease of $1.5 million from the fourth quarter of '06.

Overall operating expenses excluding the restructuring-related charges and amortization totaled $36.4 million, or 34.1% of sales, compared to $40.5 million in the fourth quarter of 2006 and our fourth quarter '07 guidance of $40 million to $41 million.

This decline was mainly attributable to reduction in compensation-related expenses, lower travel and entertainment, and depreciation, in accordance with our overall cost reduction initiatives, as well as certain fourth quarter adjustments of accrual estimates related to [DAPL] accounts and fringe benefits.

Exclusive of these fourth quarter accruals -- adjustments, a more normalized operating expense level is approximately $39 million, and this is a level that we are targeting for the first quarter of '08.

amortization expense totaled $2 million in the first quarter of 2007 versus $4 million in the fourth quarter of 2006, and this decrease was mainly due to certain technology based intangibles becoming fully amortized during the second quarter of 2007.

Fourth quarter 2007 GAAP net loss was $9.4 million, or $0.30 a share compared to net income of $7.6 million, or $0.24 a share in the fourth quarter of 2006.

Earnings per share excluding amortization expense, restructuring items and using a 35% tax rate for the quarter was $0.07 compared to $0.29 for the 2006 quarter.

For the full year, 2007 sales totaled $402.5 million, or an 8.7% decrease from 2006.

Principally from the weak data storage environment and lower automated AFM sales to semiconductor market.

For the full year 2007, orders declined 8.5% compared to last year.

Process and equipment represented $305.6 million or 68% of the orders and metrology was $146 million or 32% of orders.

Gross margin for 2007 on a non-GAAP basis excluding the $4.8 million inventory charge for discontinued products was 40.3% of sales, compared to 44% in 2006, primarily due to lower sales volumes.

Metrology gross margins were 44.1% compared to 51.5% in 2006, as a result of lower sales volumes of automated AFM and optical metrology products, and less favorable product mix in AFM products.

Process equipment margins was slightly lower compared to the prior year, mainly due to the continued slow demand of ion beam products to the data storage customers.

Veeco's MOCVD and MBE Business significantly improved its gross margins from 30.4% in 2006 to 37.8% in 2007, which helps support the process equipment group's profitability overall in a difficult data storage environment.

SG&A was $90.4 million or 22.4% of sales in 2007, compared to 92.5% (sic -- see Press Release) or 21% of sales in 2006.

R&D expense decreased $700,000 to $61.2 million in 2007.

amortization expense totaled $10.3 million in 2007 versus $16 million in 2006.

The restructuring charge, net of gains on our debt retirement -- for the full year the net charge was $11.9 million.

Net interest expense totaled $3 million, a decrease of $1.3 million from the $4.3 million that we experienced in 2006 due to the repurchase of $56 million of our convertible notes during the first quarter of 2007.

Veeco's 2007 GAAP net loss was $17.4 million, or $0.56 per share compared to net income of $14.9 million, or $0.48 a share in 2006.

The 2007 GAAP net loss was impacted by income tax expense of $3.7 million, primarily from foreign taxes, compared to $5 million in 2006.

Earnings per diluted share excluding certain items for 2007 was $0.17 compared to $0.75 in 2006.

The items excluded from this calculation on the gain of extinguishment of debt, restructuring and asset impairment, inventory write-offs and amortization expense.

We used a 35% tax rate in that calculation.

The outlook with regards to the -- our guidance for the first quarter of 2008 is for revenues to be in the range of $98 million to $105 million, with a GAAP loss per share of $0.19 to $0.09, and earnings per share between zero and $0.06 a share, excluding amortization of $2 million and restructuring charges in the first quarter, estimated at $3.6 million.

For non-GAAP EPS we use a 35% tax rate.

We currently expect the first quarter '08 gross margin will improve by approximately 1 margin point to the 39% range.

As noted earlier, we expect operating expenses to be approximately $39 million.

This includes many of the cost savings that John spoke about, such as the 7.5% headcount reduction and T&E savings.

These are partially offset by accruals from planned bonus incentive and equity awards, or variable incentive programs.

The first quarter also is impacted by higher fringe due to [FICO] and 401(k) and other items that are skewed to the first half of the year.

First quarter '08 orders are currently expected to be between $105 million and $112 million.

The forecasted sequential decline in orders from $115 million in the fourth quarter is a reflection of the normal seasonality in our scientific research market.

For the full year 2008, we're anticipating revenue growth of approximately 10% based on our beginning backlog in our key market and customer current indications.

Of course, this does not assume a significant decline in the general economy.

We are targeting sequential quarterly gross margin improvements during 2008 and a minimum of 1% per quarter with an average of 42% gross margin targeted for the full year.

As far as operating spending goes, we will continue to contain spending and expected to decline quarterly as a percentage of sales.

So we are looking at 2008 as a recovery year.

Regarding our balance sheet, cash and equivalents totaled $117.1 million at December 31.

We are pleased that we generated $30.1 million in free cash flow for 2007.

Accounts receivable DSOs for the fourth quarter were 63 days, remaining flat from the September quarter, but well below industry averages of 79 days.

During the quarter, inventory decreased by $7.1 million to $98.6 million, with a turnover of 2.7 times.

The decrease is primarily due to the write-off of inventory related to the discontinuance of certain data storage product lines.

Capital expenditures were $2.2 million for the fourth quarter of 2007 and $9.1 million for the full year.

Depreciation expense totaled $3.4 million in the fourth quarter and $13.6 million for the full year.

We improved our balance sheet during 2007 and in particular reduced our outstanding debt by 30%.

In addition, as previously reported, we exchanged approximately $118.8 million of convertible notes for new notes, which do not mature until the second quarter of 2012.

As a result action our capital structure has been significantly improved during the year.

I'll now turn the call back over to John to discuss our market outlook and to take your questions.

Thanks, Jack.

I would like to take a few moments to describe our strategic initiatives and the market trends impacting our outlook for 2008.

Historically, we have presented the company as two product segments, process equipment and metrology, and four key end markets.

This combination ends up being a complex and matrix way of looking at Veeco.

In my mind, Veeco has three market-focused businesses.

First, our LED and solar process equipment business, comprised of MOCVD and MBE technologies.

Second, our data storage process equipment business, comprised of our Ion Beam and slider technologies, and third our metrology business.

Going forward, we will report our process equipment business in two segments, LED and solar process equipment, and data storage process equipment.

And we will report revenue bookings and profitability information for each.

We will, of course, continue to report results for our metrology business.

We have posted some historical data on these three businesses on the website and you'll see that the numbers are not that different from the end market breakdowns used in the past.

We believe this is a much simpler way to look at Veeco, with our core technologies aligned with their primary end markets.

We also see these three businesses as having different strategies for growth and profit improvement, and believe that this segmentation will make it simpler for you to model the company and track our progress and execution.

Veeco's senior management is focused on allocating our resources to best drive growth and financial performance, such as where to invest more, and where to cut back, and is taking actions to build and improve each of these three businesses.

I'll now take a few minutes to outline our focus areas and the market outlook for each business.

In LED and solar process equipment, we believe the company has an exceptional multiyear growth opportunity.

Revenues in this business were $94 million in 2006, and increased 23% to $116 million in 2007.

Orders were up 37% from $120 million in 2006 to $164 million in 2007.

In 2007 we launched our new TurboDisc K-series MOCVD platform for gallium nitride based blue-green LEDs and our first K-465 systems are now receiving customer field acceptance.

We also introduced our E475 for arsenic phosphide red, orange and yellow LEDs and triple-junction solar cells, and we believe we have increased our MOCVD market share based upon orders from 20% to about 35% during 2007.

We're particularly pleased that while we remain the number two supplier, we've penetrated several top tier accounts, where our competitor holds the install base.

We continue to enhance our MOCVD systems and develop new products to improve throughput, efficiency and the ultimate value of the LEDs produced.

We expect continued strong order patterns in the LED market, given the broadening adoption of LED.

The overall LED market is forecasted to grow from $4.2 billion to $9.4 billion -- $4.2 billion in 2006 to $9.4 billion in 2011, which is an 18% compounded annual growth rate.

Some applications are forecasted to grow at much higher rates.

For example, LEDs for architectural and retail lighting are forecasted to grow nearly 40% over the next several years.

Our customers are seeing increased penetration in exterior as well as interior automotive lighting and a recent strategy analytics survey estimated that this market alone could be worth $1 billion by 2014.

LEDs are also experiencing increased adoption in laptop back lighting, with industry players expecting growth at the expense of traditional CCFL solutions.

A recent article stated that LED makers from Taiwan project that the cost of LED backlight units will shrink to 1.5 times that of CCFL's in 2008.

Apples new MacBook Air which features an LED backlit display is also expected to help push the growth of LED backlighting applications.

About $20 million of our 2007 MOCVD and MBE orders were for solar applications.

Our E475 MOCVD system with 50% more throughput than the competition is helping to manufacture some of the world's most efficient low cost 3/5 solar cells for satellite and terrestrial applications.

In addition, we think thin film SIGS market offers a very promising growth opportunity for Veeco, given the potential for increased efficiency and lower cost panels than Silicon.

Given the tremendous growth opportunities we see in LED and solar, we will increase our R&D spend in MOCVD and MBE technologies by about 40% in 2008.

In data storage, we had a very challenging 2007.

Data storage process equipment revenues declined from $175 million in 2006 to $136 million in 2007.

Here we have a more mature market with modest growth opportunities and are focusing on areas where we deliver compelling products that address new data storage technologies or that provide significant economic benefits to our customers.

We're exiting those product lines that lack compelling customer benefits and differentiation, and as we do this, we're also simplifying the business and reducing the costs by moving from four to three R&D sites and improving our manufacturing efficiency with increased sourcing from Asia and increased outsourcing.

Our customers' larger wafer formats require retooling in greater than 50% of the process steps and we've aligned our products to address this important transition.

While our first half starts out slowly, we own significant backlog to fuel revenue and profit recovery in our data storage business in the second half of 2008.

Our third business is metrology, where revenues declined from $172 million in 2006 to $150 million in 2007 primarily due to declines in semiconductor and data storage markets.

In 2008, we are focused on growing the instruments business, with new products enhancement -- and enhancements for our AFM and optical instrument lines and we've already started to see traction from our efforts.

In the fourth quarter, we booked a record number of Bioscope 2 products.

Over 30 of our newly released Innova SPM systems and a record 60 plus DekTak 150s.

And in fact our Nano-Bio AFM and optical businesses each reported bookings increases in every quarter of 2007.

In the auto AFM side of metrology, we believe our new Insight 3D auto AFM will give Veeco some 2008 bookings growth in an otherwise unexciting semiconductor market.

Current CapEx plans indicate that 80% of fab spending in 2008 will be for 65-nanometer and 45-nanometer applications.

With three times the throughput and two times the measurement, accuracy and prevision of our previous AFMs, Insight represents an entirely new approach for semiconductor 3D metrology.

We are receiving significant interest in demos and samples coming from countries throughout the U.S., Asia, Japan, and Europe.

Our two betas in the field are performing quite well, one as a reference tool and the other in a production environment for 45-nanometer.

In addition to new products to drive growth, we're also moving to increase use of lean manufacturing and driving operational excellence in our metrology services organization.

And lastly, but certainly not least, we've strengthened our leadership team in this important Veeco business.

As we announced two weeks ago, we've hired Mark Munch as our new Executive Vice President of Metrology.

He brings to Veeco deep scientific, technical and product development experience and is comfortable managing a multiproduct, multimarket business.

As we stated in our press release, we currently expect 2008 to be a better year for Veeco.

While we always face unpredictability in our end markets, our 2008 goal is for revenue growth at a minimum of 10%.

When you look at this according to our new segmentation, we're modeling 20 to 25% growth for LED and solar process equipment, 0 to 5% growth for data storage process equipment, and 5 to 7% growth for metrology.

So as we said back in October, the first half of 2008 will have a modestly improved revenue when compared with the second half of 2007 as we face a trough period in data storage revenue, but we expect 2008 to be a recovery year for Veeco overall in terms of revenue growth and improved profitability.

As Jack discussed, while 2008 operating spending is currently expected to increase in absolute dollars due to necessary budgeting for raises and incentive compensation and other variable costs, our significant cost cutting actions and continued cost containment focus will allow us to decrease our operating spending as a percentage of sales by 200 basis points from about 38% in 2007 to about 36% in 2008 while simultaneously investing in the future growth of Veeco, as I just outlined.

We're continuing to improve our gross margins through better pricing, a global supply chain initiative and outsourcing.

As Jack stated, we currently expect gross margins to increase each quarter in 2008, as we ramp revenues.

Now that I've been here for about seven months, I believe we're on the right track to transition Veeco's business model over the coming months and years.

Our goal is to align the company to higher growth opportunities and to deliver steadier revenue increases and profit improvement.

Thank you for your patience during our prepared remarks.

Operator, we would like to now start the Q&A session.

Thank you, sir.

(OPERATOR INSTRUCTIONS) We'll take our first question from Bill Ong with American Technology Research.

Yes, hi.

In the MOCVD bookings that you saw, is it true in mostly by the demand red/orange LED applications or more towards the blue-green gallium nitride applications?

And how do you see this all play out?

Are you expecting these strong bookings to pause and then reaccelerate year end or into '09?

Thanks, Bill.

First of all, the strength is really across both types of LEDs.

We have not seen anything to indicate a pause at this time, but it has happened before in the market and it certainly could happen again.

We do enter the year with strong backlog, so we believe we can deliver good results, even if there's pause, but we haven't seen that.

Do you have a sense of market share for 2007 right now?

Well, we have tracked the bookings wins and losses versus our competition as we've gone through 2007, and we think on a bookings basis that we've come from about 20% to about 35%.

Revenue is clearly lags the bookings, but we think bookings is a good leading indicator for the future.

Okay.

Then my last question is on your 2008 revenue guidance, you're expecting data storage to be flat to up 5%.

Given that the CapEx for Seagate and Western Digital is kind of flattish and back end year loaded, is there a risk that even the flat to up 5% is too optimistic?

Maybe some comfort on why you may do a little bit better this year?

We -- comfort really comes from the fact that we entered the year with a strong backlog and we have multiple customers going to 8-inch wafer size and we have both backlog, as well as anticipated additional orders for these new technologies.

Even in a fairly tough CapEx environment, we think we can deliver at least at the bottom of that range and perhaps better.

Great.

Thanks so much, gentlemen.

Thanks, Bill.

Our next question comes from JoAnne Feeney with FTN Midwest.

Good afternoon, folks.

Thanks for taking my call.

Couple questions on the HB-LED world.

Could you give us an update on your gross margins over there?

You were making some steady improvements.

Has that been continuing?

Yes, we, we have made improvements and I think I indicated that in my comments that we had gone from, I think it was 30% gross margins to almost 39% gross margin during the course of 2007.

And as John and I both indicated, we have expectations that our gross margins will continue to improve in the coming 2008 year.

And so if I understand the outlook for the process equipment in HB-LED, you were remarking that you saw an external source, about an 8% compound annual growth rate forecasted for the next few years, yet you're forecasting growth in that segment of 20% or better for '08.

Is that because either you expect to take share or you just see this year as a particular year in which capacity is constrained in that market?

Well, first of all, Joanne, if I said 8, I meant 18% as the kind of overall LED market growth.

On the other hand, a lot of the segments are growing at 40% or more growth.

So our growth is based on a couple of things.

Being able to address the higher growth segments, as well as really entering the year with a very strong backlog and a 37% bookings growth last year really positions us for a very good revenue growth this year.

So we're confident we're going to keep growing above 20% in this market.

Do you have any sense of the state of capacity utilization in this segment?

All we know is what our customers tell us by buying additional units.

We've seen a good ramp of on bookings, so we don't know a whole lot more than that.

Okay.

Then on the metrology side, do you see -- that's obviously traditionally been an area where gross margin is much higher and with auto AFM kind of waiting to see a ramp with the recovery of semiconductors.

Is there anything else that might go on within that segment that could bring up gross margins?

Are there other new products that you see bringing up gross margins through this year?

There are.

First of all, on the instrument side, we are anticipating a growth year.

Our new Innova product line has a better gross margin than prior products.

So the new products, we expect to pull up the gross margin.

And we're also working on our operational effectiveness.

We've added Mark Munch, who we're very glad is with us, and we believe that the combination of products, some growth, and some improvement in our operations will drive the gross margins on the instrument side, and of course on the auto AFM side.

We had a real tough revenue year last year.

We believe the new Insight product will help to produce a better growth year this year and that will produce better gross margins.

In the past, metrology has been just so much better in terms of gross margin than profit equipment.

Today they're almost even.

So is it the case that the potential in those two segments is more balanced now than traditionally, with the only exception perhaps being the auto AFM product?

I think first of all, on the metrology side, the instruments continue to be much higher gross margin than the process equipment side and we expect that to continue as well as to get improved gross margin on the instrument side.

The auto side has pulled everything down this last year, so I expect metrology over the average to operate at significantly better gross margins than process equipment, maybe 8 to 10 points better.

Okay, and then just finally, any sign from your customers of an economic downturn?

Are you seeing anything concrete that would suggest a slowdown across the board here?

We, we are not.

I think the data storage market news is pretty much out there with good announcements, solid end market announcements from Seagate and WD.

And we're not seeing any other signs, other than a continued very tough semiconductor market.

Okay.

Thanks very much.

Thanks, Joanne.

We'll take our next question from Timothy Arcuri with Citi.

First of all, John, can you give us some update with respect to the potentially pending competition in the, in the MOCVD space?

There's a big process tool vendor that has talked about getting into that space.

Do you see any new entrants in that space?

I think we've long said that this was an attractive market and we wouldn't be surprised if anyone else entered this market and that certainly may be the case.

We do believe there are some significant barriers to entry, based on the complexities of the technology and the install base of Veeco and Axtron.

So I don't have any new news, but we'll continue to stay on our toes, build our products to be better and work on next generation products.

I guess, John, on that point, if you look at the valuation of your primary peer in that space, it would imply that you're getting -- one buying Veeco would be getting the entire rest of the business basically for free if you kind of comp up to what they are being valued just on the MOCVD business.

As you kind of look at the valuation that the market is paying for the LED space, what sort of strategic alternatives over the long-term do you think exist for the other businesses?

Because right now, the market doesn't seem to be giving you any credit whatsoever for anything beyond just your LED market.

Well, Tim, we've taken a couple of things that we're working on.

First of all, we've just announced that a more clear way to present the company, which is actually the way we manage it, which we think will improve visibility into each of the businesses and hopefully that will result in getting a realistic value for the businesses going forward.

Secondly, we announced the new approach to providing the segmentation, because each of these businesses has good opportunities and good potential in its own right, but they each need different things to maximize their value going forward.

In High-Brightness LED and [silverware], it's continued investment, really coming out with the next generation products, building the revenue, gaining share and growing.

And in metrology, as I outlined, it's different.

In data storage, it is different yet.

So we are working to get the full value and development of each of these businesses.

And if the market hasn't seen that yet it, probably will in a while.

Last thing for me.

It looks like -- if you look at your data storage guidance, it looks like basically you're kind of flatlining revenue in the kind of mid-30 range, off of your Q4 bookings numbers.

So you're just kind of assuming that revenue flatlines basically out where the bookings were in Q4.

So that being the case, A, do you think that the seasonality in storage is gone, and, B, if -- we're kind of bouncing along a perpetual bottom here.

Is there any strategic alternative for that business so that if you even wanted to get rid of it, would it be a product sale?

Or are those products too intertwined with what you do in other parts of the business that you couldn't outright sell that business?

So, first of all, on the data storage market, the fourth quarter orders were significantly up from the fourth quarter of last year.

So if you look at the order trend, the order trend is improving.

The revenue trend does lag the order trend.

So based on that, it gives us a tough revenue trend in data storage for the first half of 2008.

But based on the orders that we've been getting and the backlog that we have, we do believe there is a good recovery in the second half.

I don't -- I would like to think the cyclicality of data storage went away, but there's a long history here that would probably prevent me from drawing that conclusion.

So the business, the bookings provide some good insight that we do have a good future here.

We've taken a lot of costs out of the business.

We've simplified it.

We've made it easier to run, with less sites.

So we do think it's a good business.

There is some synergy across our businesses and to data storage.

We sell metrology, and we sell MBE products, and some cross-selling of data storage into other markets.

So we do think there are synergies between the business.

We're working to get more leverage in our supply chain and some of the areas to get more out of that, and as far as strategic alternatives, we're focused on building the business and getting it back to profitability, making it a healthy business.

Okay, John.

Thanks.

Thanks, Tim.

Next we'll go to Mark Moskowitz with JPMorgan.

Yes, thank you, good afternoon.

A few questions.

First off, I appreciate the newly introduced format for reporting going forward in terms of judging how you -- performed to your milepost and respective segments.

Taking that one step further, as far as data storage, can you maybe help us understand how your customers are reacting.

Already talked about the cancellations in terms of what you've done with the PVD and ALD.

Can you talk about their response in terms of, do you see their response in terms of realizing how really focused you guys are in terms of improving the profitability of your data storage business?

Maybe are they going to work with you more as partners rather than trying to beat you over the head on your existing business for continuing price declines?

Mark, their reaction of our customers is actually been quite good.

And first of all, we didn't surprise any of them.

We've been working with our customers since early in the fall, as well as up through last week to talk to our top customers, understand best where they really valued us, and versus where we were selling them products that were kind of me-too products, and maybe where we had entered the market late or didn't have compelling technology, or just in line with what they really saw as their high value products.

So we got a good understanding of where they needed us and wanted us to be.

We went through a process of where we were potentially going to exit product lines of working them with -- working with our customers carefully to do that, and I think that's very important.

I have seen companies cut product lines and surprise customers and do tremendous damage in the past.

We were very careful not to do that, and not to leave our customers high and dry.

So this was a carefully worked plan over the prior months, to get to a situation that worked for our customers and worked for us.

So as I've talked to them and our other senior management have talked to the customers, it's been, it's been well received.

They are looking for us to improve our efficiencies, to use more Asian sourcing, to be a more efficient company, so they have been very positive about the changes we're making and feel that it actually aligns with their very competitive environment.

So the $16 million of backlog reduction was really worked carefully.

This wasn't, we sent them a letter and they responded and cut orders.

This was a jointly worked plan with our customers, and I think we will work more closely together going forward.

So I think we feel good about what we did here and it was hard to do, but I think it was the right thing for the company and will be better for us and our customers in the future.

Okay.

Appreciate that.

And then I may have missed it, but Jack, or John, did you say what the quantifiable reduction in that business will mean in terms of -- as we look forward to '08 in terms of comparisons, how much of the LED and PVD divestiture pulls out revenues on a quarterly basis?

If we look back at '07?

On the revenue side, our 0 to 5% growth assumes those product lines are gone.

So we're -- the numbers we've issued, as far as going forward growth include the impact of these canceled product lines.

Okay, but you're not going to give us what it was on a quarterly basis, the four quarters of '07?

Those respective product lines being canceled?

We don't have that at our fingertips, frankly.

Okay, that's fine.

And it was not a terribly meaningful number.

Okay.

If we could shift gears to HB-LED, I just want to get a sense in terms of the visibility around the 20 to 25% revenue growth for this year and getting back to the earlier question as far as just -- is it more front end versus back end loaded?

The reason I ask that is because of the Olympics -- how much have the Olympics had an impact here?

It's not -- first of all, we had a very solid bookings year in 2007.

We are beginning to ship the new systems.

We've gotten acceptance of our first 465, so the revenue is not back end loaded.

It is loaded throughout the year in a fairly uniform way, and actually as we talked about, there was a kind of first half trough in data storage.

The High-Brightness LED business is making up for that in a pretty big way to get us where we've ended up to.

So it's not back end loaded.

And -- there's a lot of backlog to ship, so we're comfortable in our numbers.

Okay, and then did you comment as far as the 20 to 25% growth target, how much of that is, that's based on the contribution from new products in solar?

Or soon to be announced new products in solar?

Or does it even include --

It's really a combination of our High-Brightness LED and solar products, with a little bit to wireless out of those businesses.

It is mainly High-Brightness LED and solar.

We booked about $20 million of solar in 2007, probably shipped about $10 million of revenue of that.

So the solar growth is probably nominally about equivalent in 1 percentage point to the LED growth.

Both of those markets are exciting markets and growing together.

Just lastly, I know it's kind of a loaded question, but Dr.

Munch has only been there for a few weeks, but John, when you worked with Dr.

Munch, have you kind of recognized metrology as having the same type of opportunities as maybe data storage, where there could be realignment or refocusing efforts that you could implement over the next six to 12 months?

Well, first of all, Dr.

Munch has been here only four days, maybe five days, including today.

He -- him and I spent a lot of time together before he joined the company to make sure this was going to work for both sides, but I think he has seen the opportunity in the business, and he has seen that we can make this business operate better and improve the growth and the effectiveness.

And I'm sure he'll be working on that in the coming months.

I've spent a good bit of time over the last couple of months working with that business myself and we do believe there are opportunities to improve our growth rate, as well as to improve our gross margin and our predictability.

So we think it's a good business and that we can do good things with it and I think Dr.

Munch is exactly the right guy to lead that to the next level.

Thank you.

Thanks, Mark.

Your next question will come from Matt Petkun with D.A.

Davidson and Company.

Hi, good afternoon.

Couple questions for me.

First, John, what are you seeing in terms of wafer-size transitions in the data storage market?

And when you look at the implied economics of a shift in the wafer size for thin film heads, how does that color your view of a market that you think will grow at only 6% -- industry sources suggest will grow at only a 6% kegger in and of itself?

Well, for the, for the wafer size changes, we have multiple major, multiple customers planning to go to larger wafer sizes.

Generally they will not throw out their existing equipment, but they will add 8-inch equipment going forward as they need new capacity.

And so that presents a significant capital opportunity over a few years.

The end market kegger of 6% doesn't naturally exactly tie to the capital equipment growth market, because there are increased efficiencies in the use of capital, the move to femto sliders, getting more heads on a wafer, all make for a more efficient operation.

So over the long run, we would expect capital to grow at a slightly less rate than the end market rate, but we think there's a big opportunity.

We do see our customers being very careful with their capital spending and very efficiency-oriented.

So what we've tried to do with our product lines here is really focus on the ones that align with the technology change or the economic change for our customers.

So we do think there's a good opportunity here, but it's not going to come as a giant wave of dollars.

It's going to come as, as customers start with 8-inch, get their pilot lines up and running, and then add capacity.

So we think it gives some good growth going forward and we see that really starting a second half with 2008, always some potential they will pull some of that forward.

Okay.

And then Jack, you mentioned OpEx for Q1 of $39 million roughly.

Was that including your amortization of intangibles?

No, that's exclusive of that.

So you guys should be running at a higher rate than you have over the last couple of quarters, and you mentioned some of the increases there, but will it come back down to the level that we saw in Q4, or?

Well, we do have some variable compensation that we did not have in 2007, where there was very little in the way of incentive bonus for management.

That will be impacting 2008.

Okay.

Thanks so much.

Thanks, Matt.

We'll take one more question.

Our next question comes from Mark Miller with Brean Murray.

I was wondering if you could break out just for the High-Brightness LED orders, this quarter, last quarter, say a year ago with no solar included?

No, I think we're not prepared to provide any more granularity on that than we already have.

Would it be accurate to say your orders declined sequentially, just based on High-Brightness orders from the third quarter?

No.

No, we think -- I would say that the third quarter and fourth quarter are probably similar in terms of solar orders, so I don't think that's a correct assumption.

Okay.

Finally, your competitor's working with universal display on the development of equipment for OLD.

Do you have anything on the line for that?

There's been some fairly -- it's still I know several years away, but Sony and a number of people are jumping into this market and you feel like it'd be eventually a replacement for some of the LED applications.

No, we're, we're -- at least in our MOCVD business, we're not working on LEDs -- we've seen some metrology sales and some other product sales, but not MOCVD.

Thank you.

Thanks, Mark.

Okay.

Well, I want to thank you for joining us today and we will -- so, operator, that concludes the call.

Thank you.

That does conclude today's presentation.

We appreciate everyone's participation, and have a good day.