Veeco Instruments Inc (VECO) 2008 Q4 法說會逐字稿

Good day, everyone, and welcome to Veeco Instruments' fourth quarter 2008 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 all for joining today's call.

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

Joining me today are John Peeler, our Chief Executive Officer, and John Kiernan, our Senior Vice President of Finance and Corporate Controller.

Unfortunately, due do a death in his family, Jack Rein is unable to join us for today's conference call.

Today's Earnings Release was distributed at 4:00 pm this afternoon and is available on the Veeco website.

Also posted on our site is a PowerPoint overview of our fourth quarter financial results.

The slides include all financial results, detailed business segment information and forward-looking models related to our restructuring plans.

If you haven't already received a copy we encourage you to visit the website or call my office.

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

It cannot be recorded or rebroadcast without Veeco's expressed 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 management's discussion and analysis sections of the Company's report on Form 10-K and annual report to shareholders.

And in 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 this 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 of performance is available on our website.

I would now like to turn the call over to John Peeler.

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

I'm pleased to report that despite the challenging market environment, we executed on our plans to refocus Veeco, grow revenue and improve profitability.

And our Q4 and 2008 results were in line with guidance.

We have swiftly implemented a restructuring program to transform the Company to a simpler, more cost effective structure, and lower our breakeven with a goal to return to profitability by the fourth quarter.

I'm confident that we are creating a scalable operational model, capable of delivering better than 15% EBITDA when the market recovers.

During 2008, Veeco increased revenue 10% to $443 million from $402 million in 2007.

We grew the Company without increasing operating spending and drove 163% increase in EBITDA to $28 million versus $11 million last year.

We generated cash and paid down debt to significantly improve our balance sheet.

We also delivered on our commitments to the Street every quarter.

We made good progress in 2008.

We grew revenue in our LED and solar business by 43% to $166 million, making this our largest and most profitable segment.

We secured new customers for MOCVD and gained traction with our K465.

Increased R&D investments by 38% and grew our solar revenues to over $40 million.

We realigned our data storage business by consolidating overhead and locations, and increasing outsourcing, while at the same time maintaining alignment with our customers' technology road maps.

And this resulted in a 10% increase in revenue to $149 million and a significant improvement in profitability.

In metrology, while revenues decreased by 15% primarily due to the challenging semiconductor market, we've refocused the business with new leadership to execute an operational turnaround.

I'm also encouraged by Veeco's progress in 2008 to strengthen our organization and increase effectiveness across the Company in areas such as product development, manufacturing and sales.

For the fourth quarter, despite the extremely challenging market environment that necessitated a significant impairment charge, Veeco's results were in line with guidance.

Fourth quarter revenues were $110 million and non-GAAP EPS was $0.11 per share.

Due to a strong free cash flow of over $19 million, we significantly improved our balance sheet during the quarter.

Veeco retired $37 million of convertible debt and our year-end cash balance stands at a healthy $104 million.

By business, Q4 LED and solar revenues were $38 million, up 12% versus the prior year.

Data storage revenues increased 21% to $45 million.

And metrology reported revenues of $28 million down 23% from the prior year.

Veeco's fourth quarter 2008 bookings were $89 million stable compared to the third quarter of 2008, despite a 57% decline in data storage bookings.

Data storage bookings were $14 million, which is a historically low level for Veeco.

Our key customers froze capital spending and placed no systems orders.

We believe this order rate of spare parts and service represents a trough level.

LED and solar orders increased 69% sequentially to $44 million, including record orders for our MVE systems for solar and other emerging applications, strong orders for thermal sources from CIGS Solar companies and two large multi-unit MOCVD orders from LED and concentrator photovoltaic customers.

Metrology bookings were down 4% sequentially.

And while we're seeing relatively stable conditions for industrial and research markets, metrology continues to be negatively impacted by extremely weak conditions in the data storage and semiconductor markets.

While the bookings rate in the fourth quarter was relatively flat compared with the third quarter, overall business conditions deteriorated during the quarter.

In particular, LED and data storage customers pushed out approximately $30 million of revenue from the first quarter of 2009.

And as a result, we anticipate a very weak start to the year with first quarter revenues and bookings below Q4 of '08.

Nearly half of our $147 million in backlog is currently forecasted for the second half 2009 revenue.

As we indicated on our October earnings call, during the fourth quarter, we began to implement a series of corrective actions in light of the overall business decline.

Our aggressive restructuring plan is designed to significantly lower our quarterly breakeven revenue level to $80 million.

With a goal to return the Company to profitability by the fourth quarter of 2009.

We've implemented a 26% reduction in force and 70% of those reductions will be completed by the end of the first quarter and remaining impacted employees have been notified and will exit the Company at various times during the year in conjunction with specific manufacturing initiatives.

Our headcount will decrease from 1,318 on September 30th of 2008 to below 1,000 by the end of 2009.

This sizable workforce reduction is being achieved by organizational changes that centralize Veeco's supply chain and operations under new leadership, consolidate business units, increase outsourced manufacturing and decrease the number of manufacturing sites from eight to four.

Some of the more significant organizational changes are as follows.

Combination of our auto AFM and Nano-Bio AFM businesses into a single business.

This eliminated a significant number of applications, R&D and marketing positions.

Going to full outsource models for our data storage Slider product line by June and MOCVD systems by the end of the year.

Consolidating our ion source components manufacturing within our systems manufacturing sites.

Reductions in our sales and services organization, and relocating to more cost efficient offices in France and Japan.

We also significantly reduced our finance, HR and other administrative groups in light of the new organizational structure.

Other key cost cutting actions included senior management pay cuts.

I've taken a 15% cut and other Veeco executives are taking 7% to 10% depending on their level.

Decreased Board of Directors compensation, employee wage freezes and significant decreases in discretionary spending such as travel, IT, telecom, supplies, consultants, marcom and other items.

We estimate that the restructuring programs will result in annualized savings of over $36 million.

These savings include a $20 million reduction in manufacturing labor and overhead and service costs, which are included in costs of goods sold, and a $16 million reduction in operating spending.

Before I comment further on our outlook, I'll hand the call over to our Corporate Controller, John Kiernan, who is substituting for Jack Rein today.

Thank you, John.

I will start with a review of Q4 '08 results.

Sales for Q4 '08 were $110.3 million, up $3.5 million or 3% versus Q4 '07 and met guidance.

The increase was primarily due to 21% higher sales in our data storage business and 12% higher sales in our LED and solar businesses.

LED and solar included a 50% increase in MBE products as well as $7.9 million in revenues for our Solar Web Coaters.

Partially offsetting this was a 23% decrease in metrology sales due to weakness in semiconductor, scientific instruments and data storage.

Orders for Q4 '08 were $88.5 million, down $26.4 million or 23% from Q4 '07.

Veeco's book-to-bill ratio was 0.8 to one for the quarter.

Veeco's backlog at December 31st, 2008 was approximately $147.2 million, down $28.8 million from September 30th, 2008.

Backlog adjustments in Q4 '08 totaled $6.9 million, including $4.9 million from order cancellations and $2 million from changes in foreign currency rates.

Overall gross profit for Q4 '08 was $40.2 million or 36.4% of sales, compared to $35.7 million or 33.4% of sales for Q4 '07.

Purchase accounting adjustments related to our acquisition of Mill Lane, as well as inventory write-offs in our Metrology, associated with the decline in demand for legacy semiconductor products, adversely impacted Q4 '08 gross profit by $3.5 million or 3.1 margin points.

LED and solar gross margin declined to 35% from 39.8% in Q4 '07 which includes the Mill Lane purchase accounting impact of 1.5 margin points.

The gross margin reduction was also attributable to a 33% decline in MOCVD sales.

Data storage gross margin improved significantly to 44.2% from 22% in Q4 '07, due to increased volume, richer product mix and favorable material costs.

Inventory write-offs in our Ion Beam business associated with discontinued product lines negatively impacted Q4 '07 gross profit by $4.8 million or 12.9 margin points.

Metrology gross margins declined to 25.8% from 39.3% in Q4 '07, which included an inventory write-off in Q4 '08 of $2.9 million or 10.5 margin points, associated with the auto AFM semiconductor product line.

In addition, the Metrology gross margin reduction was also attributable to lower sales volume.

SG&A for Q4 '08 was $22.2 million or 20.1% of sales compared to $21.6 million or 20.2% of sales in Q4 '07.

The dollar increase was primarily due to an increase in bonus and profit sharing as a result of increased earnings, partially offset by a reduction in travel and other personnel related costs, consistent with the Company's continuing initiatives to reduce spending.

R&D expense for Q4 '08 totaled $15.2 million, an increase of $0.3 million from Q4 '07.

The increase was primarily due to our research efforts related to our MOCVD product enhancement and next generation tool development, as well as investment in our web coaters.

Amortization expense totaled $3.2 million in Q4 '08, up by $1.2 million compared with Q4 '07, due to the amortization of intangible assets associated with the Mill Lane acquisition.

In Q4 '08 the Company recorded an asset impairment charge of $73 million for goodwill and other long-lived assets associated with our data storage and AFM businesses.

While the Company did not have an impairment at the October 1st, 2008 annual test, a second test was necessitated at year end due to the significant decline in Veeco's market capitalization along with a weakened business environment.

In addition, a restructuring expense of $3.6 million was incurred which included $2.5 million in personnel severance costs and $1.1 million in lease commitments.

In November 2008, the Company repurchased 12.2 million of its convertible subordinated notes due April 2012 at very favorable pricing of $7.1 million.

As a result of this repurchase, the Company recorded a net gain from the early extinguishment of debt of approximately $5 million.

Q4 '08 GAAP net loss was $72 million or $2.29 per share, compared to a net loss of $9.4 million or $0.30 per share in Q4 '07.

EPS, excluding certain items and amortization expense and using a 35% tax rate was $0.11 in Q4 '08 compared to $0.07 in Q4 '07.

I will now review full year 2008 results.

Sales totaled $442.8 million, a 10% increase from 2007.

Orders were $424.4 million, declining 6% from 2007.

The book-to-bill ratio for the year was 0.96 to one.

Gross profit for the full year of 2008 was 39.9% compared to 39.1% in 2007.

Strong performance in both our LED and solar and data storage businesses due primarily to an increase in sales volume and favorable mix was partially offset by the effect of 15% lower sales volume in metrology.

Operating expenses increased $1 million compared to 2007, primarily due to a $7.4 million increase in bonus, profit sharing and equity compensation expense, $1.6 million of increased spending for our web coater business and $2 million of R&D project materials.

Offsetting these increases were reductions of $3.2 million in consulting costs, $3.1 million in travel and entertainment, $1.5 million of salary and fringe, and $2.3 million of insurance facilities and other costs.

During the full year 2008, the Company recorded charges of $83.8 million.

As previously discussed, $76.6 million of these charges were incurred during Q4 '08.

Veeco's 2008 GAAP net loss was $71.1 million or $2.27 per share, compared to a net loss of $17.4 million or $0.56 per share in 2007.

EPS, excluding certain items and amortization expense and using a 35% tax rate, was $0.51 in 2008 compared to $0.17 in 2007.

Turning to the Q1 '09 outlook.

Due to the significant deterioration of the overall economy and credit availability for our customers, our trailing six month order rate decreased 27% compared to the first six months of 2008.

In addition, customers have delayed $30 million of shipments from Q1 '09 to later in the year.

As a result, Veeco is currently forecasting Q1 '09 revenues to be in the range of $60 million to $70 million with gross margins in the 33% to 36% range.

Q1 '09 operating expenses are currently forecasted to be approximately $33 million to $34 million, down from $37.4 million in Q4 '08 due to our restructuring activities.

Q1 '09 restructuring charges expected to be in the range of $5 million to $6 million.

Excluding these charges, amortization expense of $1.8 million, equity compensation of $1.7 million, non-cash interest of $0.7 million and using a 35% tax rate, Veeco's Q1 '09 loss per share is currently forecasted to be between $0.25 and $0.17 on a non-GAAP basis.

We believe this new EPS measure excluding equity compensation and non-cash interest more accurately reflects the way we will manage the Company's performance going forward.

With respect to our balance sheet, cash and equivalents totaled $103.8 million at December 31st, 2008.

Free cash flow for the year was a positive $31.5 million.

Accounts receivable declined $12.3 million sequentially and DSOs for Q4 '08 were 49 days down from 56 days at Q3 '08 and well below the industry average of 69 days.

During Q4 '08 inventory declined $10.7 million to $94.9 million with a turnover of 2.8 times.

Capital expenditures were $2.4 million for Q4 '08 and $12.8 million for the full year.

Depreciation expense totaled $3.4 million in Q4 '08 and $12.9 million for the year.

In Q4 '08 we made significant progress in reducing our outstanding debt by $37.4 million.

In the past two years, we reduced our outstanding debt from $204 million to $109 million, a 47% reduction.

We've maintained a cash balance of approximately $104 million while completing the cash acquisition of Mill Lane.

We feel this is a strong indication of the cash generation power that the Company has.

I will now turn the call back over to John.

Thanks, John.

Clearly, Veeco's financial results for the beginning of this year will be poor.

However, we believe that our restructuring activities have the potential to dramatically improve our future performance.

We expect that gross margins will improve to the 41% to 42% range at the $80 million quarterly revenue level and can go higher than 43% with a revenue north of $90 million.

With all of the restructuring activities factored in, plus a full end market recovery and revenues in the range of $110 million to $120 million, we believe that we could see gross margins in the range of 45% to 46%.

And for comparison, in Q3 '08, we reported $116 million in revenues and 41% gross margins.

Obviously, future gross margins will depend on mix and other factors, but this should serve as a guideline for what we're trying to accomplish.

While we are dramatically changing the organization and cutting spending in 2009, we're continuing to fund R&D programs with a particular focus on high growth opportunities in LED and solar, and new applications for metrology instruments.

In LED and solar, we'll remain focused on growing a profitable equipment business in green technology.

Despite the current pause in capacity spending, we anticipate strong multi-year MOCVD growth tied to further adoption of LEDs for applications such as TVs and laptops.

We continue to deliver MOCVD cost of ownership and uniformity improvements designed to increase yield and decrease our customer's cost per wafer.

Veeco MOCVD also offers a seamless transition to larger wafer sizes, which is more important than ever for customers focused on maximizing their capital investments.

And we think this potentially is a significant competitive advantage for Veeco.

We're also making meaningful investments in our CIGS solar business, and engaging potential new customers for our integrated CIGS product solution.

Veeco's solar growth strategy is based on building an integrated equipment offering for CIGS thin film solar cells, which is emerging as a next generation, low cost, high efficiency solar technology.

While the timing of new orders is in question in this environment, we're working with key CIGS solar manufacturers worldwide to understand their technology road maps and equipment requirements.

In the first half of 2009, we'll expand our CIGS solar product line to include a new glass deposition system.

We believe there is a several hundred million dollar equipment opportunity in CIGS vacuum deposition equipment.

In data storage, we've positioned Veeco to maximize opportunities as our customers' capital spending moves from capacity to technology buys.

We'll continue to offer state-of-the-art products that provide lower cost solutions.

Our metrology leadership team continues to focus on operational excellence and is making great progress in quality improvements, material cost reduction, contract manufacturing and supply chain management.

In our AFM business we're rationalizing and repositioning our product lines and in our optical business we see expansion opportunities in industrial markets.

Last week we launched our new dimension icon research AFM platform, which we see as a very significant new product for Veeco.

It's our goal to emerge from this downturn with a strong product portfolio that is well aligned to our customer's technology needs and exciting multi-year growth opportunities in LED and solar.

A solid balance sheet and a leaner, more cost effective organizational structure that can achieve 15% EBITDA when the end market conditions improve.

Thank you for your patience during our prepared remarks.

Operator, we would now like to start the question-and-answer session.

Thank you.

(Operator Instructions).

And the first question will come from JoAnne Feeney with FTN Equity Capital Markets.

Hello, there.

Good afternoon, folks.

Yes, I had a few questions about the segment developments.

First of all, can you perhaps elaborate on how you see yourselves doing during this downturn relative to your competition in MOCVD?

Well, it's -- our competition hasn't reported their results yet.

So there's no actual data there to base that on.

But we think we will do well moving ahead.

Our products have some unique productivity advantages.

They are scalable and make it easy to move to larger wafer sizes, which are important for our customers.

And we've seen good traction in new customers.

So we're expecting to do well.

And the pause that you're seeing out there.

Is it equally occurring in Asia as well as North America and Europe or is there any difference there on how capacity utilization is sitting at your customers and how it might change over the next few quarters from your perspective?

The pause appears to be worldwide, but I'd say it's stronger in the Taiwan markets where there was a significant purchasing last year.

So probably Taiwan is more over bought than other areas of the market.

Okay.

And then on the restructuring side, seems just looking at one of your slides and you're going to be trying to do a lot more outsourcing it seems.

How long is it going to take you to move the manufacturing out of the New Jersey site and what's the current state of that effort?

Do you have partners in mind and has that begun at this point?

So, we started on our operational restructuring programs really over a year ago.

As we've moved to a strategy or started to implement a strategy where we would create a more centralized manufacturing organization and move to a greater number of outsourcing partners and a higher percentage of variable cost.

So back in 2008, we brought in new leadership in our manufacturing organization for process equipment and in our metrology business.

We put a big focus on changing the way we manage the supply chain to qualify outsourcing partners in Asia.

We brought up a new partner in Asia that could do complete systems manufacturing as well as moving substantial amount of our purchasing of machine parts and other items to Asia.

So we got a good start in 2008, a lot of those benefits will show in 2009.

Although we got benefit in 2008, it takes time for some of these things to fully kick in.

So we have partners picked for the different types of products that we need and we're well along in the path.

In New Jersey, we were outsourcing about 60, or 60 or more, percent of the product line as of a year ago.

So what we're really talking about doing is taking the remaining products in the New Jersey site and moving those to an outsourced model.

So we're far along the way.

We expect that to be complete in 2009.

And when you talk about centralizing the supply chain.

Can you (inaudible) on what you mean by that, is it using fewer number of suppliers or centralizing the way it's run out of Veeco?

Well, it's really -- if you looked at our process equipment manufacturing organization a year ago, we had six manufacturing that were relatively independent.

And there was some moves, some corporate programs to look for partners that would supply metal work and various commodities to multiple businesses.

We actually went to a model where we hired a senior executive in charge of all process equipment operations.

We took each of those six process equipment operations organizations and had them report solid line to the new executive.

And at the same time took the materials people and had them report to one supply chain person.

So we're on a move to run with less suppliers, more strategically picked instead of picked locally by six different manufacturing organizations, to be picked on a more strategic basis.

Some in Asia, some in the US, and we think there's significant benefits from that.

We actually know there's significant benefits from it because we've already seen a good bit of it.

And so when we think about that $36 million in savings and we think about your modest recovery quarter where you're hoping to do 43, 44% gross margin.

Is that -- should we view that as sort of at the conclusion of all these restructuring efforts?

And is the $36 million in savings -- which quarter should we use as a benchmark for that?

For the run rate from which you will then be reducing spending?

So, we will have most of the operational changes made to get us to the $80 million breakeven level from an expense perspective by the third quarter.

There will be some additional savings that will flow into the fourth quarter, but we expect to have most of the operational benefit of our restructuring done by the end of the third quarter.

Okay.

So in theory -- and I don't think anybody wants to go out on a limb yet and say the world is going to recover by the end of the year, but if it were to -- you could potentially have enough leverage in the model to reach a 43% gross margin by the end of the year?

Yes, it's possible.

Okay.

Well, that's helpful.

Thanks very much.

Thanks, JoAnne.

Next question will come from Brett Hodess with Merrill Lynch.

Good afternoon, John.

First, on the market side.

You commented that the solar side was one area that held up a bit.

Is that still holding up?

And then also, can you talk -- you mentioned that there was quite a bit of push-outs from the first quarter and first half into the second half.

Was it across the board or predominantly in MOCVD or solar?

If you could help us with those two questions.

Okay.

In the market side of solar, we participate in three areas.

We participate in the concentrator solar cell market with our MOCVD systems.

We participate in thermal sources for CIGS suppliers.

And then we have our CIGS web coating systems.

So what we see is that there's a lot of activity.

First of all, there's been good activity in the concentrator solar cell market over the last year.

We think we had a good year there.

We haven't seen a big change yet.

And we do see continuing activity in the CIGS market.

There are customers buying our sources and investing in their businesses and ramping their lines.

So we think the market is holding up well.

It certainly depends on whether a Company has funding or not.

And I think that's a real critical factor here because there are some companies that have substantial funding and they're moving ahead on their expansion plans and moving forward with that.

And as I think everyone knows, for companies that don't have funding, it's a very difficult time to go and get it.

So I think the market's still solid but it really depends on kind of Company by Company, what their cash situation and funding level is.

On the push-outs, the push-outs were really about equally split between data storage and LED and solar.

And they were really focused on the LED and data storage markets.

Okay.

And then a follow-on.

You gave a great explanation of a lot of the things you're doing to get to that margin model which would be quite a strong improvement than what we've seen in the past.

But you also mentioned earlier on in the commentary that some of it is dependent on mix.

So if we assume that the HB LED businesses and solar business, that piece of the business is the higher growth piece of the business.

Is that a correct assumption that if we move to a heavier mix of HB LED and solar that the margin model would work?

The -- it really depends within the category of LED and solar.

There's certainly different mixes between sources and MOCVD systems and web coaters.

But there's also a bigger potential mix between Metrology and the process equipment businesses.

Historically, and I'll say not necessarily in all quarters of this year, but over the longer term, the metrology business tends to operate under a margin model that has a higher margin.

So that has potential to push us one way or the other.

Margins have been depressed in metrology recently due to some one-time charges, as well as the auto AFM business really having a tough year.

But there has not been a large margin difference between data storage and LED solar over the last year.

Over the last -- a few years back, LED solar was actually lower margin, but we really improved it over the last year and it's become quite similar to data storage.

We don't need to see metrology go back to their old plus 50% range though do we to make the model work?

We just need to see it at least get back to more the other businesses.

Or how do you see that?

Yes, that's right.

That's right.

That's great.

Thank you.

Thanks, Brett.

And moving on to Timothy Arcuri with Citi.

Hi, guys.

This is actually Brian Lee calling in for Tim.

Just had a couple things.

I guess you're not giving specific bookings guidance.

But can you give me a sense directionally for how you think book-to-bill will look in Q1 -- above one?

Less than one?

We stopped giving bookings guidance in Q4, so we don't want to do that.

It's just a very difficult time in terms of visibility and in terms of some large orders that can swing around and shift due to timing.

So can't really give you much there.

And the book-to-bill, it's possible for it to be above one or below one.

I would tell you that.

And it will really depend on order timing.

Okay.

Fair enough.

Maybe asking it a bit different way.

Can you give me a sense for what percent of bookings and revenues were from service and how you would expect that business to track here over the next couple of quarters?

We've -- let me start off and John can join in, in a minute.

We've seen overall service -- some weakening of service and parts business or what we call non-systems, a little bit in Q4.

But overall the business has held up pretty well.

It kind of depends on a business by business basis.

So in data storage for instance, in Q4 we didn't book any systems business and everything we booked was non-systems or parts and parts, consumables, and services.

So clearly, in that case the mix is shifting dramatically to that becoming most of the business.

And until we win some technology buys and ship some products or ship some products in backlog.

Other businesses have different ratios.

So John, do you want to add to this?

Yes.

In the most recent quarter, we're still running about at the volumes that we were running at somewhere in the 30% range of total non-systems; everything besides our systems business.

And as we look to Q1 with a smaller revenue forecast in the $60 million to $70 million range, we expect the percentage of that business to be a larger percentage; north of 40%.

North of 40%.

Okay, okay, that's helpful.

And then I guess on the $30 million in push-outs.

I know you're keeping it in the backlog for now.

But I guess how confident are you that the shipments push-outs don't result in outright cancellations?

I guess, what are your customers telling you about what they're waiting for in terms of being able to take delivery?

Is it just a basic pick-up in demand or is it financing?

Maybe if you could help us there a bit.

So, our customers are telling us they're going to need the product.

But they are in an over capacity situation and so they would prefer to take it later.

A fairly good percentage of these products have deposits associated with them.

At some point if the orders cancel, we will retain the deposits and those are significant.

So that gives us some increase in confidence in it.

But it's a tough environment.

So, it's hard to say.

We will take anything out of backlog that we don't think is a good order.

So we review our backlog on an ongoing basis and if there is product that fails to meet the criteria for an order, we'll take it out.

And so we think it's good backlog, but I guess things could change.

Okay, okay.

Maybe one last thing from me and then I'll get back in the queue.

In terms of the cost cutting, can you update us on your thinking here with respect to any potential structural changes to the business model?

It seems like your breadth of product and end market exposure are more of a liability now, given where the cycle is.

And so, is there anything we can expect in terms of shuttering or divesting product lines to narrow the Company's focus going forward?

Well, Brian, we made a bunch of structural changes and actually a good number of them are in the presentation.

But on one hand we centralized operations.

We're going from eight manufacturing sites to four.

We merged a number of business units together and that helps us reduce our G&A and improve our overall cost structure.

We have taken layers out of the organization.

And running with a less layered, what we think is a faster and more effective organization in sales.

So we did a lot of structural changes.

And actually we started on this, I mean, we started on it a year ago.

But we really accelerated our efforts in the fall, when we saw the Lehman Chapter 11 gave us a lot of motivation to move faster and harder and to assume that the world was going to get tougher very quickly.

So we actually started our really aggressive restructuring program at that time, which we are just announcing now.

We didn't want to announce part of it back in the fourth quarter because we wanted to announce the whole thing.

We didn't want to roll out piece meal changes.

So a lot of changes and clearly we've gotten out of any product lines where we don't think we can be number one or number two.

We did a good bit of that last year.

Those proved to be good decisions.

They worked well with our customers and they improved our economics.

So the businesses we're in -- we think have potential to grow and be profitable and be leaders going forward.

Okay.

Thanks, guys.

Thanks, Brian.

(Operator Instructions).

Next question will come from Matt Petkun with D.A.

Davidson & Company.

Hi, good afternoon and first let me extend my deepest sympathies to Jack and his family.

Just want to ask a couple of questions.

First, a housekeeping question.

It looks like the guidance that you provided for Q1 excludes equity compensation.

Although it also looks like your $0.11 number that you reported in Q4 included equity comp.

Is that correct?

That is correct.

So can you give us the equity comp for Q4 and for all of 2008?

One second, Matt.

Or you can e-mail it.

It's about $8 million, I think.

We'll send it by e-mail.

Yes, we will get back to you.

Okay.

But from now on out we should be looking at non-GAAP, excluding both that and the noncash interest expense?

Yes.

And then one other point of clarity.

I know somebody else asked this.

But what were the cancellations in Q4?

The cancellations were overall about $5 million.

Okay.

And it was really a couple of LED systems.

Okay.

And then so was that bookings number, the $88.5 million, a net number or gross?

Gross.

Gross.

Gross.

Okay.

That works with my math.

Great.

Then one other question, John.

More in terms of a strategic question.

I'm noticing in the slides that you guys have prepared, which I think are fantastic by the way and very comprehensive.

It looks like in the semi portion of the business your incremental R&D expenses and investment is going down pretty notably.

What should we read into that in terms of maybe the success or health of the AFM, the new AFM, auto AFM, in the semi business?

Well, let me answer that question in two stages.

First of all, since I've joined, there's been an initiative to get more of our R&D dollars focused on high growth markets.

And there's a curve in the presentation that kind of shows where it was in 2007 and how we have shifted it.

And that's not to say we're leaving all of our lower growth markets behind but we are funding differently based on the potential of the markets.

On the AFM business, our AFM business had two business areas.

It had an auto AFM business and a research AFM business that we called Nano-Bio.

The largest portion of that business is the research business.

It's focused on research markets and to some extent industrial markets.

We're far and away the world leader in that area from a technology and market share perspective.

So we think we're more than twice the size of the next competitor.

The good news here is that we've been working to improve our product development capability in our AFM business.

We've made a lot of progress.

We've achieved a lot of predictability over the last year and we've got our first major new research AFM product really in a few years.

And it's a product that is better than anything else on the market.

It's a large sample AFM.

It has better stability and better resolution and faster time to results and better productivity than anything out there.

So we're really excited to be rolling out a new product because it's been a long time since we had one.

And when you start to go do a business turnaround, one of the things that takes a long time to do is to get it to show up in the new products because they take a long time to develop.

So we think the AFM business is a good business and will do good things for us.

But, we're spending more of our money on research and industrial markets and not focusing a giant investment into the semiconductor market.

I think that's what you would read out of that and we think we get better growth in these other areas.

Okay.

Great.

And then just one final question.

On the CIGS equipment product line, have you won any incremental customers for the flexible CIGS?

And John, you mentioned working on glass coater.

Are there any specific customers that you're going to be partnering with on that?

Yes.

So we have not won any additional customers on the CIGS web coating business.

But what we -- what we have been doing is when we bought this product line it was focused on the Moly and TCO layers.

We're adding the CIGS layer.

We have we think what is a really exceptional design and we have a great product line shaping up in this area.

We haven't won any additional business.

I don't think we've lost any either, so it's not like we're not winning.

It's -- there's a lot out there being quoted and investigated.

We've done very well in our CIGS thermal sources and we think that gives us a competitive advantage in this CIGS line.

And we're working on a glass system.

The market's split between flexible and glass applications and we think we can provide whichever type the customer wants.

Okay.

Great.

Thank you so much.

Thanks, Matt.

At this time, there are no further questions.

Okay.

I want to thank you all for joining us today.

Operator, that concludes our call.

Thank you.

That does conclude today's conference.

We do thank you for your participation.