Veeco Instruments Inc (VECO) 2009 Q2 法說會逐字稿

Good day, everyone.

Welcome to the Veeco second 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 Relation, Ms.

Debra Wasser.

Please go ahead.

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

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 p.m.

this afternoon and is available on the Veeco website.

Also posted on our website is a PowerPoint overview of the second quarter financial results.

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 concent 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 to 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 on 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 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 of 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.

Veeco met our second quarter guidance and made progress to improve our revenue and decrease losses in what continued to be a difficult business environment.

Revenues were $72 million, down 37% compared to $114 million in the second quarter of last year, but up 15% sequentially.

By business, LED and solar revenue was $32 million or 44% of Veeco's total revenue, data storage was $18 million or 25% of total and Metrology was $22 million or 31% of total.

Our non-GAAP loss was $0.15 per share, a significant sequential improvement and at the top of our guidance.

We did a good job managing inventory and receivables, generating $5 million of cash during Q2 which resulted in a cash balance of $98 million at the end of the quarter.

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

Operating spending was flat on a sequential basis despite the increase in revenues.

We are pleased to be doing what we said we would do, and I would like to make a few comments on our operational accomplishments.

Veeco's cost cutting initiatives have resulted in a total of $18 million in spending reductions during the first half of 2009 compared to the first half of last year.

$7.5 million in COGs and $10.5 million in OpEx, all within process equipment -- excuse me, within process equipment we made solid progress through the first half to lower our total spending by nearly $6 million compared to the first half of last year.

Specifically, in production supplies, labor and manufacturing overhead, occupancy costs, freight and travel.

We exited our Camarillo, California site ahead of schedule, moving to an outsourced manufacturing model for saw and lapper products.

Additional outsourcing activities for our data storage products will lead to further cost savings in the third quarter.

And we believe this variable spending model for our process equipment business will lead to improved performance through industry cycles.

Metrology's total spending has declined by approximately $10 million during the same time period with significant decreases in both COGs and OpEx.

A big focus for Veeco's Metrology group has been has been to outsource machine parts to Asia.

We're also moving to outsource production of instrumentation controllers and subassemblies to Asia and anticipate significant cost savings in the second half of the year.

These savings have the potential to be further leveraged when Metrology returns to normal production volumes.

Equally important, our outsourcing efforts are allowing us to reallocate some manufacturing resources to support and accelerate the release of new products which is is critical to Metrology's return to growth and profitability.

Veeco's second quarter 2009 bookings were $99 million, down 28% compared to the $137 million reported last year, but up 86% sequentially with order growth in all three business segments.

LED and solar orders were $57 million, doubling sequentially as LED manufacturers ramp production for TV and laptop back lighting applications.

We received several large orders for our turbo disk, metal organic chemical vapor deposition systems from key Korean and Taiwanese LED manufacturers.

Data storage orders improved 147% sequentially to $19 million with hard drive customers resuming both technology and capacity purchases.

Second quarter orders included four Nexus CBD systems which help our customers achieve higher aerial densities.

While data storage order rates are still depressed, this Q2 pick up combined with significant improvements in our cost structure allows us to forecast a return to profitability for this business in the third quarter.

Metrology orders were $23 million, up 38% sequentially due to new product traction, particularly for our Dimension icon BioScope catalyst AFMs and some improvement in scientific research spending.

In addition, during the second quarter, we launched our Veeco Confocal microscope.

Veeco's new VCM 3D microscopes provide a compact and easy to use non-contact Metrology solution.

We also announced progress on the semiconductor front with our InSight Atomic Force microscope being accepted by SemiTech during Q2 as an important tool for non-destructive reference Metrology.

Orders by business segments were 58% LED and solar, 19% data storage and 23% Metrology.

This is the second quarter in a row that Veeco's LED and solar orders were more than half of our total, and we currently anticipate that LED and solar will approach half of Veeco's revenues for the second half of this year.

We are pleased with Veeco's accomplishments during what has been a difficult first half of 2009, particularly the swiftly restructure the company and remain focused on meeting our customers' next generation technology and product requirements.

Although we remained cautious about overall economic conditions, we are encouraged by the sequential bookings improvement in all three of our businesses.

The positive trends we have experienced in the second quarter in our MOCVD business have accelerated into the beginning of this quarter, driven by our customers' investments in LED capacity for back lighting applications.

We have already received orders from Asian customers for more than $110 million in MOCVD systems during the month of July.

As a result of this pace of orders, we currently believe that the third quarter LED and solar bookings will be between $125 million and $175 million, and that Veeco's overall orders will therefore be significantly higher on a sequential basis.

Veeco's outlook for the remainder of the year looks better than it did a quarter ag,o primarily due to the strong LED industry demand.

We are forecasting that Veeco will return to EBITDA profitability in the third quarter and Jack will provide you with specific Q3 revenue and earnings guidance and as you will see, we are achieving our target of an $80 million break even model.

We are currently forecasting that 2009 revenues will be between $310 million and $325 million.

Since the global economic situation remains uncertain, it is our intention to continue to carefully manage our expenses while at the same time making selected investments that are required to support our high growth LED and solar business opportunities.

We are currently expecting a strong sequential uptick in second half 2009 LED and solar revenues as we begin shipping the recently ordered MOCVD tools.

We will continue to work with our primary US based outsource manufacturing partner and will also conduct final testing of MOCVD tools at our New Jersey sites.

Some jobs that we have previously planned to eliminate will now remain on site for this important work, and we will also be doing some hiring.

In addition, we have selected a world class outsourcing partner in Singapore to help us meet this ramp.

This multiprong manufacturing strategy will represent a competitive advantage to Veeco as we support our customers' capacity requirements.

While it is difficult to forecast the MOCVD tool opportunity, we are working with our customers to develop a model that speaks to the back lighting penetration over the next several years.

Assuming a mid range estimate that over 40% of laptop and TV back lighting will be LED by 2012, we believe the MOCVD tool market just for this one application could approach $1 billion over the next few years.

This estimate is supported by data from industry and market research groups such as display search and others.

In CIGS solar, we announced two weeks ago that we are increasing our investment in this growth business through the purchase of certain assets from Day Star technologies.

As announced, Veeco has purchased selected equipment, taken over lease facilities and hired Day Star's R&D group in Cliffton Park, New York.

This creation of a solar process development center will accelerate Veeco's position as a leading integrated equipment provider to the rapidly growing CIGS solar market.

We have brought on board a team of highly qualified CIGS technology specialists who bring to Veeco years of CIGS process know-how on a range of both glass and flexible substrates.

They will now work in tandem with our design team to help our customers achieve the lowest cost of ownership through process and hardware optimization on Veeco's suite of equipment.

In the past year, we have rapidly expanded our CIGS product line to include integrated thermal deposition sources, our FastFlex platform for flexible CIGS solar cells and our Fast Line platform for CIGS on glass.

Veeco's estimated that the equipment market opportunity for CIGS could be approximately $750 million by 2011 due to the CIGS broad end market applications and competitiveness on a cost-per-watt basis, and this estimate is supported by green tech media and other industry forecasts.

As you know, Jack Rein has announced his retirement from Veeco, and I would like to take this opportunity to thank him for his many years of service and many contributions to Veeco.

We've selected a search firm to help choose a new CFO, and Jack will remain as our CFO until a successor is selected.

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

Thank you, John.

Second quarter 2009 sales of $72 million compared to $114.4 million for the second quarter of 2008.

We experienced a $19.2 million or 52.1% decline in data storage process equipment, primarily due to the low level of orders for capital equipment in the first quarter of 2009.

LED and solar process equipment experienced a $13.2 million or 29.3% decline in revenues, primarily attributable to the 15% decline in MOCVD revenues also associated with the low level of capital spending in the first quarter.

In addition, Metrology sales declined $10 million or 30.8% with continued weakness in all end markets.

Bookings were $98.7 million, so our book-to-bill ratio was 1.37 to 1 for the quarter.

Backlog at June 30, 2009 was approximately $160 million, up from 24.

-- up $24.9 million from March 31, 2009.

Second quarter 2009 backlog adjustment totaled $1.8 million.

Gross profit was $24.4 million or 33.9% of sales for the quarter, down compared to the 41.7% in the second quarter of 2008, but up sequentially from 32.4% in the first quarter of '09.

On a sequential basis, gross margin percentage was favorably impacted by the increase in sales volume.

The decrease in gross margin percentage compared to the second quarter of '08 principally resulted from the significant decrease in sales volume.

LED and solar process equipment gross margins were 32.7%, down compared to the 41.4% in the second quarter of '08, due to the significant decrease in sales volumes in MOCD specifically.

Data storage process equipment gross margins were 34.3%, down from 40.2% in the second quarter of '08.

This decline from the prior year quarter was primarily as a result of decline in sales volume.

Metrology had a 35.2% gross margin, down from 43.8% in the second quarter of '08, also primarily resulting from the decline in sales volume as well as an unfavorable product mix to the lower end ASP products and lower price lower margin optical Metrology systems as customers with limited budgets are opting for lower price products.

SG&A was $19.8 million or 27.5% of sales compared to $24.3 million or 21.2% of sales in the second quarter of '08.

This $4.5 million or 19% decrease was primarily due to restructuring and cost reduction initiatives commenced in the second half of 2008 resulting in savings of salaries, fringe bonus and profit sharing, facility costs, project materials, office supplies, travel and entertainment, which is partially offset by increased spending on solar equipment business which was acquired in May of 2008.

R&D expense totaled $13.2 million, a decrease of $1.9 million from the second quarter of 200,8, primarily attributable to the 2008 completion of development of our auto ASM InSight system, as well as a more focused approach of data storage product development which resulted in reduced R&D spending.

Partially offsetting these reductions was an increase in R&D spending focused on high growth LED and solar products.

Overall operating expenses, excluding the restructuring asset impairment and amortization charges, totaled $32.9 million or 45% of sales compared to $39 million or 34.1% of sales in the second quarter of '08.

We continue to maintain a reduced level of spending in all discretionary areas.

Amortization expense totaled $1.8 million in the second quarter of '09, down from $2.4 million in the second quarter of '08, primarily due to the writeoff of purchase technology in connection with the asset impairment charges during the fourth quarter of 2008.

During the second quarter of 2009, there was a restructuring charge of approximately $2.3 million consisting of $900,000 of remaining cost on the leases for abandoned facilities, $800,000 in personnel severance and related costs, $300,000 in moving costs and consolidation activities and $300,000 asset impairment charge related to fixed assets associated with the abandonment of certain discontinued product lines.

Second quarter '09 GAAP net loss was $14.7 million or $0.47 per share compared to net income of $3.5 million or $0.11 per share in the second quarter of '08.

This is slightly improved from our guidance of a loss of $0.64 to $0.48 per share.

EPS, excluding certain charges, amortization, equity, compensation and noncash interest and using a 35% tax rate for the quarter, was a loss of $0.15 in line with the guidance that we gave a loss from $0.24 to $0.15.

With regard to the outlook, our forecast for the third quarter of 2009 is for revenues to be in the range of $80 million to $88 million with a loss per share of between $0.25 to $0.13 on a GAAP basis in a non-GAAP EPS range of a $0.02 loss to $0.05 of income excluding charges of $300,000 related to restructuring activities, amortization of $1.9 million noncash equity compensation of $2.9 million and noncash interest of $700,000 using a 35% tax rate.

We forecast that gross margins will improve in the third quarter on a sequential basis to between 38% to 40% of sales, driven by increasing volume and better mix.

As John commented, we'll remain focused on cost cutting company-wide and executing to our plan.

We are also making selected investments in our LED and solar businesses.

The establishment of the our solar process development center in Clifton Park will add approximately $500,000 per quarter in costs for this key strategy to accelerate our CIGS solar business.

In addition, we are making investments in MOCVD to support our capacity ramp in response to current demand.

These investments are somewhat offset by decreased spending and other Veeco businesses, so we currently anticipate a modest increase in third quarter operating spending to range of $33 million to $34 million compared to the $32 million in second quarter of '09.

We are also reinstating a majority of the salaries effective August 1.

It is important to point out that the dramatic change in the LED business requires some additional headcount in the back half of 2009.

While we had previously stated our intention to bring headcount down to approximately 1,000 by the end of the year, it is now more likely that our year end head count will be approximately 1,100.

This remains a 17% or 218 person reduction from our 1,318 headcount peak at December 30, 2008.

Regarding our balance sheet, cash and equivalents totaled $97.5 million at June 30.

We improved our cash position by $4.4 million during the second quarter of 2009, which was above forecast, primarily due to accelerating collections of accounts receivable and reductions in inventory.

Accounts receivable decreased by $5.7 million due to collections with DSOs for the quarter at 40 days.

So in the quarter, inventory decreased by $10.2 million to $78.5 million with a turnover of 2.4 times.

This reduction was mainly due to the accelerated systems shipments and LED installer and the impact of continued outsourcing and data storage process equipment as well as the continued inventory reduction initiatives in both process equipment and Metrology.

Capital expenditures were $1.2 million and depreciation expense totaled $3.5 million in the second quarter of 2009.

I will now turn the call back over to John.

Thanks, Jack.

So in summary, we are excited about Veeco's positioning as a key equipment provider to LED manufacturers as they ramp up their capacity for the back lighting opportunity and are also focused on growing our CIGS solar business.

While data storage conditions remain challenging, we believe the tide is turned enough to get this business profitable again.

Our key strategic technology wins for CBD systems orders in the second quarter are evidence that while Veeco has significantly downsized this business, we remain closely aligned with our customers' technology road maps.

Data storage customers have reported improved business conditions and while we are not back up to normal order rates, we believe that the business has stabilize.

While Metrology's end markets remain week, especially semiconductor, data storage and industrial applications, we are seeing positive quoting activity from the scientific research community, particularly for our new products.

Solid progress on cost reductions combined with the impact of these new products should drive Veeco Metrology to deliver improved performance in the back half of this year.

In closing, we are pleased with the progress Veeco is making, both on the top and bottom line.

While we are excited about the near term growth opportunities, it is clear that the global economy remains depressed and it is uncertain when a broad recovery will begin.

Rest assured that we will remain vigilant in our efforts to manage expenses and execute on our operational improvement strategies.

Our goal is to get Veeco to consistent GAAP profitability and to stay there.

Thank you for your patience.

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.

Thank you, your line is open.

Hi, guys.

I am just wondering, John, what the breadth was of these bookings that happened during the last month.

Was this from just a couple of customers, or was this like 15 to 20 different customers?

It was -- I would say it was a few.

It wasn't one or two, but it wasn't 15 or 20, and it was particularly focused around applications over back lighting.

And then John, I guess as you look at the last time that we saw this sort of a big increase in bookings in that sector, think that the market is a bit broader now than it was back then.

But it was pretty rapid in its decline, too and pretty lumpy.

So I guess when you look at where these bookings came from and you look at what else is out there, that, that could follow it up, does it seem sustainable in these sort of bookings levels for at least six or nine months, or do you think it is a flash in the pants sort of a thing?

I think it is more than a flash in the pan.

As far as length of sustainability, that's hard to say.

But we do see an overall uptick, and we gave you a sense of what we expect Q3 to look like for LED and solar.

So we think there's more opportunity out there.

And one of the things with the LED business, prices have been coming down, productively is better, uniformity is getting better and as the prices come down, the devices are suitable for more applications.

So, we believe there will be growth in the general purpose solid state lighting also, and that will follow off on the end of this trend.

Thanks a lot.

Thank, Tim.

Our next question comes from Matt Petkun with DA.

Davidson and Company.

Hi.

Good afternoon.

John or Jack, can you comment as to what you would expect specifically in the LED and solar segment for margins going forward?

Obviously, you have given numbers for this quarter and they will improve next quarter, but what are roughly, I don't want to call it peak, but margins that we should be thinking about for this business for next year?

We have given guidance for the third quarter that margins will be 38% to 40%.

We certainly think that the LED process equipment orders will be in that, or MOCVD process equipment orders will be in that range.

So as far as peak, at this point we do have a model where we talk about our peak being 45 to 46 as a target model.

Modest recovery is sort of 43 to 44.

So that is not, since LED and solar will be the predominant sector, you can infer that those will be the kind of margins that we can expect at those levels.

Okay.

And then John, is there anything we can learn from the recent order activity about market share?

Is it still too early to really count that out?

Yes, I think it is too early to be talking about market share.

Okay.

And on the data storage side, you said that you see things have stabilized.

Historically, and obviously history is thrown out the window the last nine months but historically, Q2 had been seasonally a strong quarter for LED and then -- or not LED, but data storage and then some softening.

You think that Q3 can at least continue the similar bookings run rate?

I hope so, but it is hard to say.

Q1 was really deeply down in data storage.

And as a reaction to the activities in the fall, clearly, we did a -- we grew significantly off of that very low base in Q2.

I think the good thing is that we had a number of technology wins with our ruthenium CBD systems, and we saw some capacity purchases.

So that is a good combination, and we are not counting on any any great uptick here.

But we are prepared, I think, to at least have a profitable business at this level.

Okay.

And then just the last question for me, you guys had a large new customer on the CIGS solar side, I think it was announced last quarter, and there was a potential for follow-on business there.

Can you update us as far as how things are going with that?

I know it is early days, again, in that project, and you are helping them really get up to speed, but give us an update with that situation.

We are progressing to build the equipment.

Equipment has not been shipped It will be a few more quarters before we ship that equipment.

We don't expect a follow-on order until we ship the first order and basically get it up and running.

Getting our process center up and running in Clifton Park, I think will accelerate our ability to help the customer and get things running quickly.

So we are excited about that and think this was a really good opportunity for us.

Okay, thanks a lot.

Our next question is from Andrew Abrams with Avian Securities .

First of all, congratulations guys, it was an unusually spectacular quarter after last quarter.

Can you characterize a little bit the customer type of the MOCD, the equipment from the LED side?

Are we talking about your typical merchant LED guys, or are we talking about some of the more captive process that you might see from the panel manufacturers themselves or their -- the guys they might own a piece of?

Is there anyway for you to characterize that?

There is some of both.

There is some from companies that are vertically integrated to build the LEDs and to build those into the products they make and there is some more general suppliers that supply other companies.

So some of both.

Got you.

And on the data storage side, about -- is -- does this look like to you guys new capacity, or is this change in technology kind of improvements?

Really, the capacity orders were laid to wafer side and following through on programs that were launched in the past and put on hold when the market melted down.

Got you.

Okay, thanks.

Appreciate it.

Okay.

Our next question comes from Patrick Ho with Stifel Nicolaus.

Thanks a lot.

Nice job on the quarter.

First on -- in terms of the outsourcing initiative and some of the steps that are remaining that you mentioned in your prepared remarks, when do you think this will be fully implemented, and when do you think we can start seeing the full benefits of those effort?

So the -- we completed a major milestone this quarter with the completed outsourcing of our lappers and saws, and I think that has been very successful and gone well from our perspective and from our customers' perspective.

We have other milestones that will happen in Q2 and Q3 -- excuse me, in Q3 and Q4, which will move a number of key milestones forward, get us out of manufacturing at another site as well as increase the percentage of outsourcing in our data storage business.

So we expect to have most of it up and completed in the US by the end of the calendar year.

We are bringing on another outsourcing partner in Asia to give us additional capacity and flexibility.

That will continue into 2010.

But at the beginning of the year, we laid out a program to consolidate some sites, to move more of a greater percentage of our cost of variable costs, and we are exactly on track with all of that.

So we beat our milestones as far as when we set out to do them, and you will see good progress in each of the next two quarters.

Great.

On the data storage side, could you just comment a little bit about some of the technology drivers and whether the 320 gigabyte platter technology for 2.5 mobile drives, is that more of a timing issue?

When do you think the timing of that will come about?

So our wins have been on ruthenium CBDs to drive higher aerial density based on the heads, and we've taken the lead in that market and won most of the key customers.

So I can't speak to when the platter that you are talking about will come out.

That's not our side of the business.

Okay.

So whenever that takes hold, you feel like you will get the capacity buys at that point?

We are really driving (inaudible) side of the business at this point.

So -- but all of the (inaudible) leaders are using our new technology to provide their aerial density and their heads.

So more disk drives will drive our business here.

Okay.

Great.

Final question, on the operating break even point that you mentioned on the call, at least the EBITDA break even point that you mentioned.

As we go into an (inaudible) scenario, say in 2010, how much of a temporary OpEx that you've cut, how much of it comes back that will raise that level in the future?

Well, we said in our prepared remarks that we expect that the OpEx will be between $33 million and $34 million.

It probably would be -- we are talking about hiring back, as I again said in the remarks, 1,100 from the current 1,028.

So, we could see another $1 million a quarter in operating spending.

And would that be the end of it once you get that back on board?

I think so, yes.

That's what I was looking for.

Thank you.

Our next question is from Joann Feeney with FTN Equity

Hi, good afternoon, folks, and congratulations on a nice quarter.

I wanted to get a little bit more into the MOCVD sales.

You have talked about the strength that is Asia.

Are you seeing anything out of North America or Europe at this point?

We are seeing some business opportunities in North America and Europe, but the real strength is in Asia.

Do you think that because your competitor has a stronger hold in the European and American customers than you guys do, or is it just they have more ample capacity and so don't need to add right now.

I do not think it has anything to do with our competitor.

I think it is the primary sources for the LEDs in back lighting applications are in Asia.

So it is really the application and where the suppliers for those applications are.

Okay.

That makes sense.

And then if I sort of infer your revenue ranges for the fourth quarter, given your third quarter guidance and your full year outlook, you have got a range there if I -- if you hit the midpoint in the third quarter of roughly $90 million to roughly over $100 million, which fits into your modest recovery quarter description on the model that you handed out with the tables.

So is it -- should we be applying that model for the fourth quarter?

Is it -- or maybe you can just help us understand what would it take in terms of either volume or mix to get to the gross margin that you have in that model or 43% to 44%?

Yes.

I think that's representative of where we think we will be.

At this point, we don't have our full compliment of slot plan figured for the fourth quarter although we do have most of our process equipment tools for the fourth quarter so we don't have any turns there, but we do have returns in Metrology.

So it is somewhat depends upon the mix that we get, but that certainly is representative of what we might expect.

But what kind of mix would you need to see for that to come through, do you think?

Well, I think we need to see some (inaudible) by Metrology and we need to make sure that our systems and nonsystems business was at the rates that we expect.

Nonsystems generally drives a higher margin.

Okay.

And then since you mentioned Metrology, that's the one that seems to be struggling the most with operating income percentage or operating loss percentage.

What would it take to return that business to more traditional levels and is it purely a volume story?

Is it a product mix?

Is it research, scientific research spending that needs to come back?

And what are you seeing there the next couple of quarters?

I would say that certainly, that business is very volume dependent.

So -- and I think we have seen our customer base opt for the lower price, lower margin product offerings.

Having said that, we have some new products coming out that we hope will stimulate interest.

There is some stimulus spending that may, in the next several quarters, have some impact, but it is just general business conditions.

That's probably our broadest -- in terms of market, that's the broadest segment that we have as it addresses scientific, industrial and a variety of other markets.

So I would say it is -- a recovery of the economy would be a big factor in that business.

And do you think you will have some uplift from the stimulus packages that have been floating around?

It is possible but at this point, it is too early to predict that.

Okay.

And could you shed light on the competition and timing of backlog, either by segment or by margin or something like that?

Well, most of the backlog, as you might expect, is in process equipment.

So we have got all of our third quarter in backlog in terms of major systems.

We have got most of the fourth quarter in backlog, I think there's two turns in data storage that's required.

And as the backlog that we have in Metrology, that is a turns business.

It is sort of at the level that we might expect to be turns to be.

So it sounds like you have pretty good visibility.

Reasonably good visibility.

Great.

Thanks and best wishes, Jack.

We are going to miss you.

Thank you, Joann.

Our next question comes from Bill Ong with Merriman.

Yes, congratulations on solid execution.

Just a couple of questions.

The MOCVD 2 orders that you booked in the June quarter.

What portion of these bookings will be shipped as revenue this third, fourth quarter and beyond?

Most of these orders will be shipped in the third and fourth.

Okay, and did you have a 10% customer?

In terms of bookings for the current quarter?

Yes, in terms of the current quarter.

Either bookings or revenue.

I am going to have to check that.

I'm not --

Bill, we'll get back to you with that.

That's fine.

Then finally, just given the surge in the MOCVD 2 orders, you mentioned that you are adding capacity to meet demand.

What is your current 2 capacity output or in other words, what is your revenue output before you start to see a lead time start to stretch?

We have been working with outsourcing partner in MOCVD for quite a long time.

We have been shifting, actually ramping up their capability over the last few months and working with that.

So, we are continuing to work with them.

We are keeping some testing capability that we have and we are bringing on a third outsourcing partner, or a second outsourcing partner.

So if with we look at Q2, or Q3, we are in the 20 plus systems per quarter capability.

I think you can add more than 50% to that in Q3 -- Q4, excuse me.

So 20 times 1.5 for Q4, and then I think you can take that to another 1.5 plus for Q1.

So capacity is ramping up very quickly for us, and we think we are very well prepared for it.

Great.

Thanks so much.

Nice job.

Hey Bill, we do have -- I have that answer for you.

On the revenue side, we did not have a 10% customer.

On the bookings side, we had actually had two 10% customers

And what are they?

Are you able to disclose them right now?

No, at this point, we can't.

Okay, thank you.

Our next question is from Jed Dorsheimer with Canaccord Adams.

Hi.

Thanks, and congratulations on a great outlook, guys.

Thank you.

Thank you, Jed.

Just a couple of questions here.

As you look at the magnitude of your bookings increase, I am just curious, what type of deposits do you typically require in order for these MOCVD tools to be counted as a book tool?

Well, we generally require -- first of all, we generalty require book deposits for all of our MOCVD and solar tools and sometimes in data storage, as well.

Process equipment tools, let's say.

They range anywhere from 10% or 15% up to 35%, kind of what we require.

Great.

And then as we look at the increase here, I was wondering if you could -- should we assume the majority of these are the 465, or is it a split between 465 and 300s?

Any additional detail there?

It is a 465.

All right.

And then are the majority of those configurations in the 12 by 4 or 45 by 2?

They are actually, can be used -- we just switched carriers to change the wafer size so you don't have to change the tool.

But are you seeing the majority -- in other words, are your customers asking for these to be set up mostly the 12 by 4 or the 45 by 2 configuration?

I was just wondering if you can provide any additional visibility there.

I don't think we -- we don't have that information with us here.

All right, and then lastly, what are our lead times right now?

Lead times are six plus months at this point.

So what were they last quarter?

Four months.

Four months?

All right.

Great, congratulations.

Thanks, Jed.

Our next question comes from Kris Shankar with Bank of America/Merrill Lynch.

Thanks for taking my question.

Just a couple of them.

So, in terms of the orders for MOCVD over Q2 and July, these all came from existing customers.

Were there any new customer wins or any new additional customers?

They were mostly existing customers.

There may have been some smaller percentage new customers, but mostly existing customers.

And you guys book about the market for LED being over $1 billion in a few years.

Do you have any number for 2010, what the (inaudible) available market is?

No, not right now.

I will call you after, Krishna, I have it.

Okay, all right.

Then then on the storage storage, and you guys mentioned about some Nexus tool on the booking.

Can you tell the split between consumables and units for data storage?

The data storage, I would say it is probably 65% tools or systems and 35% nonsystems, which includes parts and services.

Got it, got it.

And then the final question, in terms of the OpEx coming back, incremental about -- incremental $1 million in Q3 and then another $1 million in Q4 or so, (inaudible) end of the Q3 OpEx increases coming from salary reinstatements and Q4 increase would probably come from the additional headcount?

It is a little bit of both, actually.

Because it is a -- not quite mid quarter, but we are reinstituting salaries on August 1 for most of the employees and we are phasing in additional hires in Q3 as well as Q4.

So both.

All right.

Thank you very much.

All right.

Our next question is from Amar Zaman with UBS.

Please check your mute feature.

Our next question comes with Graham Tanaka Capital Management.

Hi guys, nice quarter, and things are looking great.

Just wanted to ask a little bit more about the pricing that's going on in LED.

How much are prices down in the end market?

And how much are customers talking about further price cuts that could stimulate demand, say in 2010, 2011?

Well, prices in the end markets have come down in the order of 50% over the last year.

So significant drop in prices, which is enabling the build out and the use of the devices in more applications have become more cost competitive.

Device equipment manufacturers have also figured out ways to do the back lighting with less LEDs to bring down their overall price difference there.

So, prices have come down significantly, and I believe they will continue to come down.

The equipment productivity continues to increase.

So, we keep making improvements to the equipment that helps to drive down the cost for our customers.

And what kind of annual rate of improvement and productivity of the equipment are you achieving?

I think that is something to be seen, I would say a little later in the year.

We are not prepared to project that right now.

Great, okay.

So, I assume double digits of some sort, right?

Yes.

Okay.

And the price of the unit, say, of an LED.

I was wondering how much of the lower cost?

You say the price is down 50%.

Is that price per LED lightbulb or whatever, or is that --

Yes.

So in addition to that, they have -- are you able to use fewer LEDs per laptop or whatever, per display?

Yes.

Okay, okay.

And how much of that -- have you had any conversation, are you seeing what that price decline is versus, say, their competing technologies, whether it is LCD for display or other standard lighting for lighting -- for illumination?

Well, the difference in costs between LED back lighting unit and a CCFL unit has dropped significantly and is expected to continue to drop over the coming years.

So the TV and laptop manufactures get a premium for providing LED back lights and right now, they get a premium that is much higher than the cost difference between the LED and CCFL.

So as that price drops farther, I am sure the premium will drop significantly and we will see wider adoption in these types of displays.

And I think earlier we quoted a figure of 40% adoption in a couple of years out.

So there's a lot of room for a lot of growth here going forward.

A 40% adoption is for which end market?

That was for laptops or for --

Aggregated laptop and TV.

Laptop and TV, okay.

And so, I would assume that would also include desktops and other displays?

Yes.

It includes anywhere where they're used, yes.

Great.

And in terms of data storage, we of course read and hear a lot about NAND flash and the industry's talked about it coming in, and I am just wondering what is happening in that horse race in terms of price declines and data storage utilizing Veeco and other tools.

What kind of price declines are you seeing in cost per bid or whatever versus NAND flash?

Well, the disk has a 10 times advantage, cost advantage and cost per bit versus NAND flash, so really dramatic cost difference or cost advantage of rotating media.

NAND flash obviously fits better in something that's very small and compact.

So the highly portable applications people will pay for flash and in the applications that require a bigger drive, they tend to go with a disk.

Right.

And is that differential -- you are saying ten times cost advantage.

Is that changing, or has it maintained that kind of a ratio over time?

It may be shifting somewhat, but both the price of disks and the price of the NAND is coming down, so both have come down.

Both have come down, great.

Well, thank you very much.

Congratulations.

Thank you.

Our next question comes from Amar Zaman with UBS.

Hello, this is Amar Zaman from UBS.

Can you hear me?

Yes.

Hi.

Sorry about earlier.

So, just to -- first a follow up question on the MOCVD equipment.

What type -- are you seeing any orders for six inch LED equipment at this time?

We are seeing customers that are anticipating moving to six inch and working with us on that.

So -- and again, our equipment works with six inches or four inches without changing the equipment.

So -- but have you -- did you -- have you placed any orders for that in this quarter or not?

It is a little -- I would say no, but it is a little hard to determine when the customers are going to change over.

But we have a number of customers that are planning to move to six inch.

Okay.

And then on the LED industry overall, your customers, do you know what your customers utilization rate -- the overall -- the LED package -- or sorry, LED industry's utilization rate is right now?

They have changed dramatically.

If we go back nine months or utilization rates were below 50%, we heard utilization rates were coming up significantly in calendar year -- calendar Q1.

And we hear some of our customers are running at capacity at this point.

So there has been a move very quickly to add capacity and to plan a significant capacity ramp.

Great.

Thank you.

And then finally, I don't know if you mentioned this earlier, but what was your cash flow from operations in the quarter?

We generated $4.5 million overall, but hang on one second and I will tell you where the cash from operations was specifically.

It was $5.9 million.

Okay.

Thank you very much.

All right.

Operator we will take one more question here.

Okay.

Our final question comes from Tim Arcuri with Citi.

Hi.

A couple of things.

Is the right way to think about this, John, that if I strip out your big $110 million bookings in July, roughly, you are doing kind of like 20 per quarter in that business.

So the right run rate ex- that one big bubble of a month is more like 40 a quarter.

Is that the right way to think about it?

I think it is a real hard set of math to do, Tim, because we saw a real drop off here in Q4 of last year, and Q1 hit an all-time low, and Q2 came back at a very strong rate and as you can see, there is -- we have done very well in July so far.

There's a lot of activity out there still.

So, I am not going to annualize this or take it to a quarterly rate.

We will see.

We think the industry is healthy, people are buying equipment, it is not one or two customers.

There's a large number of customers looking for equipment.

It is really focused on volumes around the back lighting application.

But there are people buying products for general purpose lighting and other applications.

So I think it is healthy and I think we are going to see much better than just a flash in the pan here.

John, where I am going with that is do you have any math around what the equivalent unit capacity add is for this is for this $150 million -- let's take the midpoint of the range and say that you book $150 million in the September quarter.

Do you have any math around what sort of unit capacity that will add relative to the roughly 48 or 50 billion units that the industry did in 2008?

I don't have that, no.

Generally though, is your sense -- if you look historically, that's such a significant number that it would suggest if you run some math that that's a fairly healthy capacity add.

So I am trying to understand if it is just a couple of customers ordering for the year, then -- or if they're telling you they're going to come back six months later and order again.

It is a healthy capacity add but remember, we quoted market statistic that said there's $1 billion dollars of business in back lighting applications only for a few years here.

And that's not coming from us, that's coming from other analysts.

There's a good bit of business out there, and I think there is more to be had.

Okay, John.

And then just last thing from me, of the orders -- if you take months of April, May, June and July, you are going to book 165 million roughly in bookings just during those months.

How much of that is from organically developed products versus stuff that you bought, acquired?

Thanks.

I'm struggling to answer that because it is all -- once upon a time, we bought our MOCVD business, but that was bought a long time ago and the product that is selling was developed 100% after the acquisition.

So, I put that in the organic -- most of this stuff was.

We haven't really done a lot of acquisitions in recent times.

So this is really organic business.

Yes, and we had no orders for the new solar systems in Q2 at all, so.

Yes.

Okay, Thanks.

Okay.

Okay.

Thank you all for joining us today.

Good night.

Thank you, that does conclude today's conference.

Thank you for your participation, and you may disconnect at this time.