Veeco Instruments Inc (VECO) 2009 Q1 法說會逐字稿

Good day everyone.

Welcome to the Veeco first quarter 2009 earnings conference call.

Today's call is being recorded.

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

Debra Wasser.

Please go ahead.

Thank you, operator, and thank you, all, for joining today's call.

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

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

Today's earnings release was distributed at 4:00 pm.m this afternoon, and is available on the Veeco website.

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

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

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

Your participation implies consent to our taping.

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

These factors are discussed in the business description and management's discussion and n 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 and performance is available on our website.

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

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

As expected, the first quarter was extremely challenging for Veeco, given the overall economic climate, and limited capital spending across our end markets.

Veeco's revenues were $63 million, down 39% from the first quarter of last year, and non-GAAP loss per share was $0.22.

These results were in-line with our guidance.

Veeco's balance sheet remained healthy with our quarter end cash balance standing at $93 million after paying an earnout for our 2008 solar acquisition.

We are executing on the cost reduction plan we outlined, which has included increasing outsourcing, manufacturing site consolidations, operational changes focused on reducing our materials cost, and work force reductions.

Veeco headcount has decreased from 1,318 on September 30th, to 1,091 at the end of March.

Based upon our previously announced actions, we anticipate head count to be at or below 1,000 by the end of the year.

These significant cost reduction efforts have already yielded declines in manufacturing overhead, service, and operating expenses of over 20% since the third quarter of 2008.

We are on-track to lower our EBITA breakeven to below $80 million by the third quarter, and maintain our goal to return to profitability by Q4.

I am proud of the progress that has already been made by the Veeco team, and confident that we are on-track to create a scalable operational model, capable of delivering better than 15% EBITA performance when the market recovers.

Veeco's first quarter 2009 bookings were $53 million, with weak business conditions in all segments.

LED and solar orders were 28 million down 26% from the first quarter of last year, and 35% sequentially.

One bright spot in Veeco's first quarter order rate is that even in this difficult time, we continue to build our solar business.

We secured a new systems customer, Daiyang Metals of Korea, which will use Veeco equipment to build a 50-megawatt CIGS solar cell production facility.

This was a large multi-million dollar order for four systems, one metal module, two CIGS modules, and one oxide module, with significant follow-on business expected as they ramp to 200 megawatts in the next few years.

We also booked orders for thermal sources from several European CIGS manufacturers.

First quarter data storage bookings experienced a severe year-over-year decline, as customers continued their capital spending freeze.

Data storage bookings were $8 million, down 81% form Q1 '08, and 44% sequentially, representing a historically low level.

Metrology bookings were 17 million, down approximately 45% both sequentially and compared to last year's first quarter, with weakness across all end markets, including Semiconductor, Data Storage, scientific research, and Industry.

Given the low first quarter bookings rate, we are implementing additional belt tightening actions, including additional temporary employee salary reductions, reductions in bonuses and profit-sharing, and plant shutdowns.

These actions when combined with those already under way will reduce Veeco's manufacturing overhead, service and operating expenses, by approximately $40 million in 2009, compared to last year.

We remain extremely cautious about the economic climate, and do not know how long this downturn will last.

That being said, we are encouraged to see early signs of improvement in business conditions.

In LED we have seen improved utilization rates of Veeco equipment in the field, a meaningful increase in quoting activity, and no significant additional push-outs.

In solar, we are actively quoting our FastFlex systems, for flexible CIGS solar cells, and we have just introduced our new FastLine system for glass.

We believe that Veeco is now the only company offering production scale solutions for CIGS manufacturing on glass, using thermal evaporation sources for the CIGS absorber layer.

In Data Storage we are seeing better tool utilization, and our customers our reporting improved business condition.

And lastly in a challenging market for Metrology we have seen some pockets of strength, from regions such as Asia, and for emerging tool applications, including solar.

We are beginning to see increased quoting activity as a result of the positive customer response to our new Dimension ICON, and BioScope Catalyst, atomic force microscopes, that we launched during the first quarter.

Based on these favorable indicators, we currently believe that the second quarter orders will improve from the trough levels we experienced in the first quarter.

I will now hand the call over to Jack for some financial commentary.

Thank you, John.

First quarter 2009 sales were $62.8 million, compared to 102.3 million for the first quarter of 2008.

We experienced a 19.9 million, or 47.3% decline in LED and solar process equipment sales.

Primarily due to the continuing economic downturn, as well as the high brightness LED industry absorption of the significant number of MOCVD systems purchased during the last two years.

Data storage process equipment experienced a $7.2 million, or 29.8% decline in revenues, primarily attributable to customers freezing their capital equipment spending.

In Addition Metrology sales declined $12.4 million, or 34.2%, with weakness in all end markets.

First quarter 2009 orders were 53.1 million, down $56.2 million, or 51.4% compared to 109.3 million for the first quarter of 2008, and down 35.4 million, or 40% sequentially compared to the 88.5 million in the orders for the fourth quarter 2008.

Veeco's Book-to-bill ratio was 0.84:1 for the quarter.

As John indicated, the first quarter represents a bottom in our order levels.

Backlog at March 31 2009 was approximately $135.3 million, down $11.9 million from the December 31st, 2008 level.

The first quarter 2009 backlog adjustments totalled $2 million, including $1.8 million of order cancellations, and $200,000 from changes in foreign currency rates.

Gross profit was $20.4 million, or 32.4% of sales for the quarter, down compared to the 41.7% in the first quarter of 2008, and down sequentially from 36.4% in the fourth quarter of '08.

Decreasing gross margin percentage principally resulted from the significant decrease in sales volume, and a mix of lower average selling price tools in Optical Metrology.

LED and solar process equipment gross margins were 29.2%, down compared to 41% in the first quarter of '08, and 35% in the fourth quarter of '08, mainly due to a significant decrease in sales volume, particularly in our MOCVD products.

Data Storage process equipment gross margins were 27.4%, down from 35.3% in the first quarter of '08, and down sequentially from 44.2% in the fourth quarter of '08.

This is principally due to the sales volume decrease and inventory write-off in our slider business, associated with certain discontinued product lines, which adversely impacted the first quarter '09 gross profit by $1.5 million, or 8.9 margin points.

Metrology had a 39.1% gross margin, down from 46.6% in the first quarter of '08, also primarily resulting from the decline in sales volume, and unfavorable product mix due to lower average selling prices, and lower margins for Optical Metrology systems.

SG&A was $18.6 million at 29.6% of sales, compared to 22.6 or 22.1% of sales in the first quarter of '08, and 22.3 million in the fourth quarter of '08.

The decrease was primarily due to restructuring and cost reduction initiatives which have resulted in savings of salary, bonus, fringe, profit-sharing, facilities costs, office supplies, travel and entertainment, and consulting expenses, partially offset by spending in our solar equipment business, which was acquired in May of 2008.

Other expense net was $1.5 million, mostly comprised of foreign currency loss, due to major strengthening of the US dollar compared to the Euro.

R&D expense totalled $12.9 million, a decrease of $1.8 million from the first quarter of '08 and $2.3 million from the fourth quarter of '08, mainly attributable to a more focused approach to Data Storage and Metrology product development, partially offset by an increase in new product development for higher growth opportunities, with particular emphasis on LED and solar.

In addition, the development of the InSight Auto AFM system in Metrology was completed and released to the market during 2008, which allowed us to decrease our R&D spending.

Overall, operating expenses excluding the restructuring charges, asset impairment charge, and amortization totalled $33 million, or 52.5% of sales, compared to 37.4 million, for 36.5% of sales in the first quarter of 2008.

The decline was mainly attributable to reductions in work force, temporary salary reductions, bonus, profit-sharing, travel and entertainment, recruiting, consulting, operating, supplies, occupancy costs, and freight.

In summary, all of the discretionary areas of spending have been reduced.

On an aggregate basis including services, labor and overhead spending, the Company has been successful reducing spending by annualized $40 million, which reflects a 17% reduction in employment levels.

Additional actions already announced will further reduce spending resulting in cumulative annual reduction of 24% in our employment levels.

These difficult actions will assist us in weathering the current business levels, as well as allow the Company to be more profitable as the economy recovers.

Amortization expense totalled $1.8 million in the first quarter of 2009.

During the first quarter there was a $4.4 million restructuring charge, consisting principally of personnel severance costs, resulting from a reduction in the work force associated with the Company's restructuring plan.

First quarter '09 GAAP net loss was $20.9 million, or $0.66 per share, compared to $2.3 million loss, or $0.07 per share in the first quarter of '08, and in-line with our guidance of a $0.72 loss to $0.56.

EPS excluding certain charges, amortization expense, equity compensation and non-cash interest, and utilizing a 35% tax rate for the quarter, was a $0.22 loss, in-line with the guidance of a $0.25 loss to a $0.17 loss.

Our forecast for the second quarter of 2009 is for revenues to be in the range of 60 million to $70 million, with a loss per share of between $0.64 and $0.48 on a GAAP basis, and a loss per share of between $0.24 and $0.15 excluding charges, in the range of $2.7 million to $3.2 million.

Relating to restructuring activities, amortization expense of 1.9 million, non-equity compensation of $2.3 million, and non-cash interest of 700,000, and utilizing a 35% tax rate.

Regarding our balance sheet, cash and equivalents totalled $93 million at March 31st.

We used $10.8 million in cash during the first quarter of 2009, primarily due to the anticipated $9.6 million earnout related to the Mill Lane acquisition.

Accounts Receivable decreased by $21.8 million due to strong collections and lower volumes.

The DSOs for the quarter were 54 days, compared to industry comparable companies of 62 days.

During the quarter inventory also decreased by $6.2 million to $88.7 million, with the turnover of 1.8 times.

We currently anticipate a modest use of cash in the second quarter of '09, but we expect to return to the current cash level by year end.

Capital expenditures for the quarter were $2.4 million, and depreciation expense totalled $3.4 million for the first quarter.

As we noted in our press release our historical financial data reflects the retrospective application of FASB Staff Position #APB 14-1, accounting for convertible debt instruments.

This new accounting rule which was effective January 1st, of 2009, results in the $105.6 million of our convertible debt being bifurcated on the March 31st, '09 balance sheet, between debt of $95.9 million and equity of $9.7 million.

This new rule also results in a non-cash interest charge of approximately $725,000 per quarter for 2009.

This interest charge will serve to increase the convertible debt balance to it's face amount of $105.6 million at it's maturity at April of 2012.

We have included charts 20 and 21 to show this retrospective impact of this rule on prior year's financial statements in our Q1 2009 financial results PowerPoint, that is on our website.

I will now turn the call back over to John.

Thanks, Jack.

Despite the recent pause in customer spending, we continue to invest heavily in R&D in order to remain aligned with technology road maps across our three businesses.

We anticipate strong multi-year LED industry growth, tied to further adoption in applications such as TVs and laptops, driving purchases of Veeco MOCVD tools.

A recent Credit Suisse report forecasted that 9.3% of mobile PCs were backlit with LEDs in 2008, increasing to 39% this year, and 68% in 2010.

While there is still a price gap between LED backlights and compact fluorescent lighting, LED advantages, such as light weight, thin form factor, wide color gamut, and low power consumption, are effectively outweighing the price differential.

While cost is still an issue in mainstream LCDTV adoption, this report forecasted that LEDs will achieve 15% penetration by 2011.

LED street lighting and outdoor displays are also an emerging growth opportunity, serving as growth drivers in the near-term.

In Solar, we are excited about customer interest in our CIGS thin film solar equipment product line.

We expect Veeco to become a leading provider of equipment for this emerging thin film solar technology.

The US Department of Energy's National Renewable Energy Laboratory, has claimed a new world record for CIGS thin film solar cell conversion efficiency at 19.9%.

Production module efficiencies for CIGS are increasing, many with the aid of Veeco technology.

We believe the CIGS will continue to show significant advantages in efficiency and cost per watt of energy produced, when compared with amorphous silicon.

We also anticipate that CIGS will compete on parity with [Katel] without the negative large content of cadmium.

In Data Storage we remain focused on providing customers with solutions that increase aerial density, while maximizing their equipment return on capital.

For example, we launched new Nexus chemical vapor deposition system, which deposits conformal films for advanced thin film magnetic head applications.

In Metrology, we have accelerated the flow of new high performance products, featuring expanded functionality and ease of use.

The team is focused on identifying new growth opportunities, through expanded applications of AFMs and optical instruments.

In the last year Veeco launched two new breakthrough product platforms, the Dimension ICON and the BioScope Catalyst, and a dozen new modes or product extensions.

Our operational improvements, such as Lean manufacturing and Asian parts procurement are bearing fruit.

Independent of volume, Metrology's cost of sales has been reduced by 3.3 margin points since the first quarter of last year.

Additionally, Metrology operating expenses have been reduced by $3.6 million on a quarterly basis versus a year ago.

In term of new business opportunities, for Metrology we are actively working with research and university customers, that are likely to secure Federal Stimulus funding, via various US government organizations.

Clearly this is a difficult time for Veeco and many other companies.

However our restructuring activities are on-track, we are controlling what we can, and our team is focused on partnering with our customers and winning new business.

We remain confident that Veeco will emerge from the present downturn, with leading edge technology, a solid balance sheet, and a leaner more cost effective organization structure.

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).

Our first question comes from Tim Arcuri with Citi.

Hi, a couple of things.

Can you give us the backlog number?

Yes, we did give it to you.

We will give it to you again.

It was 135.3 million.

Okay.

And then also, Jack, can you give us, I know you gave some of the margin numbers by product line, but they don't necessarily add up to what the overall average was.

So can you give us those numbers excluding any charges, or excluding any one-timers?

Yes.

Let's see.

Excluding one-time charges, our Data Storage gross margin was 36.4%, LED and Solar was 29.2, and Metrology was 39.1.

Overall 34.9.

Great.

And as you look into June, and as you look to a better bookings quarter, where do you think that is going to come from?

What particular product line?

So we see quite a bit of additional or new activity in the LED space.

We have seen an increase in quoting activity in Metrology, based on our two new products there.

Those would be a couple of examples.

There is certainly activity in the Data Storage area, but we wouldn't be counting on an uptick here.

And of course, we continue with a lot of activity and quoting in our Solar business.

Okay.

And just the last thing for me, John, as you get back to, let's just kind of play this out where the revenue goes back to the $100 million per quarter level.

You were in the high-single digit operating margin range during this past cycle, at that level mid to say high-single digits.

Are these cost cuts sustainable, so that you would be, say a couple hundred basis points higher than that, as the revenue would kind of get back to that level?

Well, there is a chart, actually chart 11 in our presentation, and what you will see there is that at the 110 million we can probably get to 15% EBITA, and at 90 to 100, 6 or 7%, or more.

The reductions we have done, we believe are sustainable, because if you remember from the last call, we kind of started by redesigning the Company at the top level.

We reduced the number of business units.

We took out layers.

We targeted going from six manufacturing sites in process equipment to two.

Increased our outsourcing so we would have a higher percentage variable cost, and really a lot of activities, as well as taking out a significant number of employees.

I think Jack said it adds up to about 24% as it is done.

So we do think they are sustainable.

Now we have announced that with this earnings announcement, some additional reductions that we would call temporary in nature, which are some salary reductions, and reductions in the 2009 bonus and profit-sharing, those we will bring back.

But our model allows for that, and we would like to bring those temporary ones back as soon as possible.

So this has been a real redesign of the Company, and when we get back to a more normal revenue level, we will be a lot more profitable.

Okay.

Thanks.

Our next question will come from JoAnne Feeney with FTN Equity Capital.

Thank you.

I was hoping perhaps you could give us more description of the backlog, 135 million is sort of a nice comfort level, given what you are planning to do over the next couple of quarters.

Can you tell us what the composition in backlog looks like, in terms of both timing and when those things are likely to ship as a percentage over the next couple of quarters, and composition in terms of the segments that your backlog is strongest in?

Well, we can tell you the backlog is predominantly in process equipment, our Metrology business is mostly a turns business.

So it turns, about 50% of it's turns within the quarter.

So predominant, we have got Data Storage of about $31 million of backlog, and our LED and Solar is about $90 million of backlog.

And it essentially goes out in Q2 and Q3, in Data Storage, and through Q4 in LED and Solar.

And so the push-outs, Jack, that you talked about last time in Data Storage, you see some of that starting to ship this quarter, you think?

We said second half and kind of standing by that.

I'm sorry you just mentioned 2Q and 3Q for Data Storage?

2Q yes, those were not the push-outs, the third quarter were the push-outs.

Okay.

Got it.

Then if I could, curious about, where in the segments, Metrology, LED/Solar and Data Storage, where you might have most operating leverage or are they roughly the same?

As revenues start to come back, where might we see operating profit rise more quickly in those three segments?

Well, certainly, in general process equipment has a higher material content.

I think that is true in capital equipment in general, than Metrology.

And so you do get higher leverage, we have had historically higher gross margins in Metrology.

But I think that conversely operating spending, since there is such a wide distribution channel in Metrology, the cost of distribution selling is higher there.

So it is kind of a mixed bag, frankly.

But I would say that, we are confident that we can get to, we developed the model that we have, as John pointed out earlier, where we kind of talk about gross margin improving to the mid-40s, so I think that with volume we can get back to that kind of level on a gross margin basis.

So given the decline to next quarter in gross margin, I think you had 33 to 35%, or currently have 35.

So is there a mix shift, or is it volume?

Actually you should be up on volume the next quarter, so why are you expecting an apparent decline in gross margin this quarter?

We actually had some favorable mix in this particular quarter in some of our equipment businesses, in terms of bifurcations, and some components business.

Okay.

We are not anticipating this continuing.

Okay.

Thanks.

Next we will hear from Matt Petkun with D.A.

Davidson & Company.

John, I was wondering if you could give us an update on the competitive landscape in the LED market?

Well, there are predominantly two players shipping products, Aixtron and us, certainly a very competitive marketplace.

Orders started to dry up in kind of late summer before the economic meltdown hit the world, and we went through a pretty dry spot in term of orders.

I think we are seeing a lot of activity, and we have heard of a lot of higher utilization rates in our customers, and I saw the first Samsung LED TV announcement over the weekend.

So they are actively marketing the TVs based on LED technology, and I think that is creating some real competitive pressures to drive purchase of our type of tools.

Okay.

And then one other question, just on this new announcement you guys made today, for the ability to do CIGS deposition on glass.

Do you see near-term order activity coming out of that, and can you talk about the types of customers who may be selecting those tools?

Well, we have been quoting the product for some time.

I think if you look at the CIGS market now, probably about two-thirds of it is on glass, and maybe a third of it on web.

We think there may be an increased shift to web coating over the longer term, because there is some pretty good economics of a web coating, versus a glass type of system.

But there are quite of few companies out there up and running on with CIGS on glass, and we see a number of opportunities.

We see current customers that have built their own equipment historically, that are interested in looking at alternatives to homemade equipment.

And we see new companies trying to get into the market, and selecting glass.

Right now the highest efficiency CIGS are being made on glass.

And we also see companies that are in other thin film technologies, wanting to move into CIGS, and looking for a way to do that quickly.

So there is a lot of interest and a lot of activity in the market.

Okay.

And then just one final question it applies to seeing a lot of interest and activity, but I am not sure any real dollars, yet.

Just wondering if you guys have any opportunities maybe from an internal R&D funding perspective, or even from a market opportunity, given new Stimulus dollars flowing into all sorts of end markets, most notably for you guys the energy market, but also maybe some in your Metrology segments?

Yes, we do see opportunities.

I mentioned the Metrology side, there is NIST, and a number of government agencies.

It looks like there is going to be some Stimulus funding coming through them.

So we see that in a lot of laboratory and university-type of applications.

And then on the other side, on the Energy side, we see potential opportunities in both LED and Solar.

There is a lot of interest in that, and we have been actively engaged with a number of different states, and hope to secure some funding.

So that is pretty exciting.

We have not baked anything into our plans, and so it will be upside for us if we do.

Okay.

Thanks so much.

(Operator Instructions).

Next we will hear from Brett Hodess with Bank of America.

Good afternoon.

I was first wondering when you look at the temporary cost cuts going into place today, what revenue level would you get back to before you would start to put some of those costs back in?

We have basically said that we hope to restore some of these things pretty quickly, and that so we are hopeful that this isn't a year-long thing, or anything like that.

We are really looking to get the Company to EBITA breakeven.

If we get to EBITA breakeven, then that would be a good guiding point that we might be able to turn these things back on to a more normal situation.

Okay.

And you were commenting on the fact that the bigger part of the market in CIGS right now is on glass efficiency is higher there.

A lot of your customers, or a lot of folks are interested on the new FastLine, I guess as a result of that on the glass side.

How long do you think it takes somebody to evaluate FastLine for that, and make a decision on purchasing?

Good question.

It probably takes three months or more, and so I am going to guess at three to six months.

I think it depends a lot on the speed of the company.

We see some companies with very fast decision-making, and others that are slower.

And of course, part of that depends also on funding, whether they have the funding, and the confidence from their Board to do it.

But I would say, we have been talking to customers for quite a while here, so we have had a lot of customer activity.

The press release that we put out today is not going to be a big surprise to people that are interested in this.

So we have started on that already.

So meaning orders potentially sooner than three to six months, because you have already been out there talking to them before this?

Yes, I would hope so.

Okay.

I would hope so.

And I said that a lot of the customers are on glass, and the glass market overall developed earlier, but the glass market has an advantage currently of efficiency, because people have gotten the highest efficiencies on glass, due to the sodium in the glass having some impact.

But the web coating has some real economic advantages, in terms of the capital cost is lower to build a given sized factory.

It is significantly lower.

So I think we are going to see growth in both sides of this, and we have the technology to do both sides.

So we have been working on both.

We just happened to get to the web faster due to our acquisition.

Yes.

And then the final question, we were taking a look at the Data Storage side, which is pretty bouncing along the bottom here, and noticed the correlation on your sales in the Data Storage market, are extremely correlated to the Seagate capital spending every quarter, which is no big surprise since they are a top customer.

If you look at Seagate's CapEx, and based on their commentary, it does appear this might have been their bottom quarter on CapEx as well.

Would you expect off the bottom there might be a lag between you and their cap spending, or do you think you would stay pretty much in-line with it?

That is kind of a guess really, because we don't know exactly where their internal discussions are.

I will say in the Data Storage market overall we saw some significant downward trend in non-systems products, or consumables over the last quarter, and it went down pretty fast.

I don't think that is sustainable to run at those levels, so I think, we are expecting that over time whether it is two quarters out, or now, or this quarter, that both the non-systems will start to move back up as well as the systems, and we do have quite a bit of discussions going on related to some key technology products that are already proven, that we are hoping to sell to a number of new customers, and with Seagate I would keep in mind that this quarter is the last quarter of their fiscal year, so that may keep some pressure up, but we will see.

Okay.

Thanks for taking my question.

Thanks.

Thanks, Brett.

(Operator Instructions).

We will hear next from Andrew Abrams with Avian Securities.

John, I was wondering if you could kind of give a little more detail in the LED side.

Maybe if you could break down where you thought the interest was?

I realize that there is still a lot of capacity out there, but maybe if you could look at it from the merchant side, or the captive side.

I know there has been activity on the captive side a little more recently.

Is there a way you can see into that, and give us a little guidance there?

Well, I can give you a few hints, one of the new drivers is the TVs, and the big TV manufacturers are in Korea, that are announcing LED backlit LCDTVs.

So clearly a lot of interest there.

But that market is not all captive.

There are people that are vertically integrating, and they are simultaneously buying from other people.

So that is one application, but we have seen, interest pretty widespread interest across Asia so far, and some in other places, too.

In the Solar space, what kind of expense run rate do you think you are going to be running for the next six or 12 months there?

I think we kind of provide expense run rate down to that level, but we have got three types of solar technologies.

We have got our thermal sources, out of our MBE business.

That business has done quite well.

We have our Veeco solar business, making the web coaters, FastFlex, and the new glass based systems.

We have been investing since we bought the company a year ago, we have transformed it, and come out with the CIGS product lines.

Before that it was just Moly and TCO.

So we will continue to spend.

I think we were excited that this quarter we got another systems customer, as well as did well on the sources side.

Systems revenue for new type systems will be delayed, because it will take a while to fabricate the units, ship them, and get revenue acceptance, and if it is a type of system that we haven't shipped before, we would rather be stretched out a little bit, probably into 2010.

Great.

Thank you.

Next we will hear from Patrick Ho with Stifel Nicolaus.

Thanks a lot, and thanks for taking my questions.

In terms of your cost cuts and shifts to outsourcing, can you give us a little color in terms of what type of leverage you are getting out of outsourcing, is it between the different businesses?

Secondly, if business does pick up quicker than you anticipate, how quickly can you get these, outsourcing, how quickly can you get the outsourcing up, versus what you have been doing internally, particular since I believe you have consolidated several of your manufacturing facilities?

Again, so when business picks up, what will you be able to do, how can you react quickly to a changing environment?

Okay.

On the first part on the leverage, what we have been trying to do is simplify the Company, so we don't have so many sites where we do manufacturing.

And associated with that, it gives you with a number of sites, you get a really heavier internal cost structure, than if you had all of the internal manufacturing in one place.

So we are looking to simplify the Company.

That gives us some cost improvement, but another real key element to the outsourcing is just making the costs variable, and we are looking by the end of this year to get to more of an 80% variable cost structure on the process equipment side, and that will basically give us a significantly lower breakeven, so when the industry cycles in the future, we don't go, we don't feel as much impact on the bottom line.

As far as speed of turn-up, we think the outsourcing is going to give us really good ability to turn up, and to actually be able to turn up faster.

So we are not worried about that, and we think we can move fast to meet whatever ramps.

We don't envision any capacity limitation problems here, based on the partners we have picked, and the arrangements that we have, we don't see a capacity limiting problem.

Frankly, that wouldn't be the worst problem to have, because it would mean a lot of other good things were happening.

All right.

Sure.

In terms of your EBITA breakeven of $80 million, can you clarify what your operating breakeven is, and on that operating breakeven, what would your gross margin assumption be?

When you say operating breakeven, you are talking about GAAP earnings, or I am not sure what you are referring to there?

I guess GAAP just like the pro forma or operating basis, what would your revenue levels be, because obviously there has got to be some difference between EBITA and your standard operating number, and then what would the gross margin assumption be on that?

I would say it would probably be at a low-40 percentage on a gross margin level, and it would probably be 84 million in revenue.

Great.

Thanks a lot.

And next we will take a question from David Duley with Steelhead Securities.

Most of my questions have been asked, but one clarification is, how many shutdown days do you plan in this current quarter, and how many did you have in the quarter that just ended?

I don't believe we had any in Q1, and I don't believe we have any in Q2.

Okay.

I am not sure of that.

On a company-wide basis, we have one shutdown around the Fourth of July week, and we have one around Thanksgiving, and we have some vacation policy changes that will push people to take at least three weeks of vacation in the second half of the year, and maybe even a little more.

So I wouldn't consider these large shutdowns based on kind of what we are seeing from other companies in the capital equipment business.

They are pretty modest.

Okay.

And a final clarification for myself.

When you get to your breakeven levels of revenue, and you get to this 40% gross margin range, on incremental revenue above this $80 million, what do you think the drop rate is, trying to compare this to the drop rate that you had in the last upturn?

Yes, depending upon the mix obviously we get a higher flow-through from Metrology than we do from equipment, but the equipment you probably get 50% flow-through to the operating, and then you probably have a 35% at the EBITA line, something like that, and for Metrology it would be slightly higher.

Thank you.

And we have no further questions in the queue at this time.

Okay.

Well, thank you all for joining us today.

That does conclude today's conference.

We appreciate your participation.