Veeco Instruments Inc (VECO) 2009 Q3 法說會逐字稿

Good day, everyone.

Welcome to Veeco third quarter 2009 earnings conference call.

Today's call is being recorded.

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

Deborah Wasser.

Please go ahead.

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

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

Today's earnings release was distributed at 4:00 p.m.

this afternoon, and is available on Veeco's website.

Also posted on our site, is a power point overview of our third quarter financial results.

As you have probably seen, today we announced that we have commenced an underwritten public offering of up to 5 million shares of Veeco common stock.

The offering includes a 30 day option for the underwriters to purchase up to 750,000 additional shares to cover over allotments if any.

Veeco intends to use the proceeds for general corporate purposes.

Due to SEC regulations we are prohibited from discuss this transaction any further on this conference call.

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

It it cannot be recorded or rebroadcast without Veeco's permission.

Your participation implies consent to our taping.

To the extent this call discusses expectations about market conditions, market acceptance and future sales of the Company's products, future disclosures, future earnings expectations or otherwise makes 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 discussion in the analysis section of the Company's report on Form 10-K, and annual report to shareholders, and in our subsequent quarterly reports on Form 10-Q and current reports on 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 will now turn the call over to John for opening remarks.

Thanks, Deb.

And thank you all for joining us today.

I am pleased to report that Veeco exceeded our third quarter guidance on every metric and that we have returned to profitability.

Third quarter revenue was $99 million, well above our guidance of $80 to $88 million.

And gross margins increased over 7 points sequentially to 41.4%.

Veeco's restructuring actions decreased operating expenses by 19% versus a year-ago.

We completed our factory consolidations ahead of plan, and achieved our $80 million break-even target.

This drove Q3 EBITA to $9 million, positive GAAP EPS of $0.04, and non-GAAP EPS of $0.16, all significantly ahead of our guidance, because cash balance increased $12 million sequentially resulting in a positive net cash position.

We're executing to plan, and we're doing what we said we would do.

By business, LED and Solar revenue was $53 million, or 54% of Veeco's total revenue.

Data Storage was $22 million, or 22% of total and Metrology was $24 million, or 24% of total.

Despite the fact that revenue levels in both Data Storage and Metrology stayed well below historic levels, we're pleased that our cost reduction initiatives have enabled both businesses to return to profitability in the third quarter.

In Data Storage, we completed our outsource manufacturing initiatives ahead of schedule.

This business delivered $1.6 million of EBITA, and gross margins recovered to 40% in Q3.

Metrology's gross margins improved 7 points sequentially to 42%.

And in addition, we removed over $2 million in OpEx in the first nine months of this year.

It is encouraging to confirm that our cost reduction plans are have an impact on Veeco's bottom line performance.

Veeco's third quarter 2009 bookings were $226 million, a record for our Company, up 150% compared to the prior year and 129% sequentially.

This exceptional result was driven by $179 million in LED and Solar bookings.

And we're proud of the progress we're making, winning important business in MOCVD and SiG solar and in MBE systems.

In MOCVD, Veeco has been selected the supplier of choice, for an important Korean TV manufacturer.

And we also received orders from other customers in Korea, Taiwan and China as they ramp production of LEDs for laptop and TV backlighting.

Today we announce that Sanan, China's leading LED manufacturer has selected Veeco's equipment for their latest capacity expansion.

In North America, we penetrated two key illumination customers.

Philips Lumileds and Bridgelux are winning their production ramp business.

In total, we received multi-unit orders from eight LED customers in Q3.

We believe Veeco is gaining share by penetrating key accounts around the world, particularly in China and Korea.

In Solar, we booked a $15 million order for FastFlex CIGS deposition tools from GroupStat of China, and a separate multi-million dollars repeat order for CIGS components from an important US customer.

While Data Storage orders remain weak at $17 million, we are currently experiencing modest increase quoting activity, with customer interest in both capacity and technology purchases.

Metrology orders were $29 million, up 27% sequentially due to new products traction.

Particularly for our Dimension Icon AFM where we reported increased adoption and strong sales.

In addition, our BioScope Catalyst AFM is performing well with our life science win rates improving dramatically since this product was introduced in March.

This is a second quarter in a row of increased Metrology bookings.

And we experienced somewhat improved business conditions across the board in scientific research, industrial and semiconductor We're starting to see higher quoting activity for our automated AFM's, from semiconductor and data storage customers.

And we're working to expand our industrial rep network to sell more optical Metrology products.

Our business segment, our $226 million in total Veeco third quarter orders were 80% LED and solar.

By business segment, our $226 million in total Veeco third quarter orders were 80% LED and Solar, 7% Data Storage, and 13% Metrology.

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

Thank you, John.

Good afternoon.

Third quarter of 2009 sales were $98.9 million, compared to $115.7 million for the third quarter of 2008.

LED and Solar process equipment experienced a $12 million, or 29.2% increase in revenues, primarily attributable to an increase in demand for high brightness LED backlighting applications.

Data Storage process equipment experienced a $21.5 million or 49.8% decline in sales, primarily due to customers continuing to tightly control capital spending.

Metrology sales declined $7.2 million or 23%, due to the slow down in Data Storage semiconductor industrial (inaudible).

Bookings were a record $225.6 million with $179.2 million coming from our LED and Solar process equipment segment.

Our book-to-bill ratio was 2.28 to 1 for the quarter.

Backlog, at September 30, 2009 was approximately $286.5 million, up $126.3 million from the June 30, 2009 period.

Third quarter backlog adjustments approximates $400,000.

Gross profit was $40.9 million or 41.4% of sales for the quarter, up compared to 39.8% in the third quarter of 2008, and up sequentially from 33.9%, in the second quarter of '09.

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

The increase in gross margin percentage compared to the third quarter of '08, from -- principally resulted from material cost savings, the impact of manufacturing overhead cost reductions associated with the reduction of work force and outsourcing, favorable product mix, and $900,000 third quarter of '08 inventory charge, related to Mill Lane acquisition account.

LED and Solar gross margins were 41.7%, up compared to 36% in the third quarter of '08, due to the increased sales volume, better product pricing and improved product costs associated with the outsourcing and improved purchasing related to our MOCVD high-brightness LED tools.

As noted, the prior year period included a reduction in LED and Solar gross profit of $900,000 related to the acquisition of Mill Lane.

Data Storage process equipment gross margins remain flat, despite a 50% decrease in sales volume.

As the result of cost reductions and improved product mix.

Metrology had a 42% gross margin, down from 44.9% in third quarter of '08, primarily due to lower sales volume.

SG&A was $21 million, or 21.3% of sales compared to $23.6 million, or 20.4% of sales in the third quarter of 2008.

Approximate $2.6 million or 11% decrease was due to lower salary and related expenses resulting from the personnel reductions taken as part of the 2008 restructuring plan.

As well as cost savings initiatives resulting in less occupancy, travel and entertainment, marketing and other operating expenses.

R&D expense totaled $13.7 million, a decrease of $1.6 million from the third quarter of '08, primarily due to a more focused approach to Metrology and Data Storage development, which is partially offer set by the continuing -- continuation of investment, higher growth, LED and Solar opportunities.

Overall, operating expenses, excluding the structuring and amortization charges total $34.5 million or 34.8% of sales, compared to $38.7 million, or 33.4% of sales in the third quarter of '08.

We continue to maintain a focus on all spending categories, in order to enhance our profitability.

Amortization expense totaled $1.8 million in the third quarter of 2009 down from $3.1 million in the third quarter of '08 primarily due to lower intangible asset levels.

During the third quarter of 2009, there was a restructuring charge of approximately $1.2 million consisting of personnel severance and related costs resulting from a previous announced reduction in work force.

Third quarter of '09 GAAP net income was $1.3 million or $0.04 per share, compared to a net loss of $2.4 million or $0.08 loss per share, in the third quarter of '08.

This is well ahead of our guidance, which was a loss $0.25 to a loss of $0.13.

The improvement was due to a higher than forecasted sales and related profit.

Earnings per share for the quarter including restructuring charges, amortization expense, equity compensation and noncash interest, and utilizing a 35% tax rate, was $0.16.

all ahead of our guidance, which had range of $0.02 loss or $0.05 profit.

With regard to our outlook our forecast for the fourth quarter of 2009 is for revenues to be in the range of $120 million to $130 million, with earnings per share between $0.25 and $0.35 on a GAAP basis, and $0.29 to $0.35 on a non-GAAP basis.

Non-GAAP EPS excludes charges of $300,000 related to restructuring actions previously announced, amortization of $1.9 million, noncash equity compensation of $2.9 million, and noncash interest of $700,000, and uses a 35% tax rate.

We forecast that gross margins will improve in the fourth quarter, on a sequential basis to between 43% to 44%, as a result of the increased sales volume and improved mix.

We anticipate an increase in fourth quarter operating spending and a range of $38 million to $40 million, compared to $34.5 million in the third quarter.

The increase is principally due to profit-sharing, bonus and commission -- reinstatement of salaries as well as temporary help for the MOCVD ramp.

Approximately half of this increase is above a normalized spending rate, since most of Veeco's annual profit and related incentive compensation is skewed to the fourth quarter.

A more normalized operating spending level at the $120 million to $130 million quarterly revenue level, would be between $37 million to $38 million a quarter.

Regarding our balance sheet, cash and equivalents total $109.4 million.

As of September 30th, we improved our cash position by $12 million during the third quarter.

Inventory decreased by $3.5 million to $75 million, with a turn over of 3.1 times.

This reduction was mainly due to system shipments, and the impact of continued outsourcing and MOCVD and Data Storage process equipment, as well as continued inventory reduction initiatives in Metrology.

We also had a $15.2 million increase in customer deposits associated with our higher level of orders.

Accounts receivable increased by $32 million, primarily due to the higher sales level of MOCVD tools during the latter part of the quarter.

This resulted in DSO's of 59 days of the quarter versus comparable company's at 66 days.

Capital expenditures were $1.5 million for the quarter, and depreciation expense totaled $3.4 million for the third quarter.

We are pleased with the progress that we have made, and continue to improve our working capital, and cash position, while increasing our sales and profits.

I will now turn the call back over to John.

Thanks, Jack.

So as Jack details, Veeco's restructuring activities and dramatic topline recovery are combining to drive higher profitability for our company.

Based on Q4 revenue guidance of $120 million to $130 million, our revised 2009 revenue forecast is $353 million to $363 million.

While 2009 revenue will still be down about 18%, compared to 2008, this is very respectable performance, during an unprecedented economic downturn.

Looking forward, we believe that our backlog positions us very well, heading into 2010.

We continue to experience a high level of customer demand for our K465 MOCVD systems, due to their industry leading productivity and low cost of ownership.

And our ramping up our manufacturing capacity to be able to ship more than 30 tools in the fourth quarter, and more than 45 tools in the first quarter of 2010.

We're managing our slot plans and customer delivery schedules to ensure that our lead times remain under six months.

And we have sufficient capacity coming online to keep them within this timeframe.

We have 100% on time systems delivery, for MOCVD systems on a year-to-date basis.

The variable model we have designed, with two outsourced partners gives us a lot of flexibility to scale manufacturing up and down as required by the market, without bringing a lot of additional costs directly to Veeco.

Given large number of potential MOCVD multi-tool orders, it is challenging to predict quarterly booking trend.

But quoting activity remains well above historic levels.

with large number of customers evaluating the purchase of multiple systems.

And while we're not providing specific Q4 order guidance, we currently expect Veeco will have a positive fourth quarter book-to-bill ratio.

This guidance reflects our belief that while LED business order intake will likely be lumpy, the overall trends in this business remain extremely favorable.

As we look towards the future, we believe be that the LED industry is at the beginning of a multi-year MOCVD tool investment cycle, as LEDs increase their penetration in laptop and TV backlighting and gain momentum for general illumination.

Market estimates for MOCVD are very broad, but the average analyst estimate is in excess of 350 tools, in 2011, or the equivalent of nearly a $1 billion TAM.

With our customer list including over 80% of the world's key LED manufacturers, Veeco is extremely well positioned to capitalize on this sizeable growth opportunity.

We continue to make investments to improve yield, and capitalize on our systems cost of ownership and (inaudible) advantage.

We see a meaningful inflection point in the decision-making process of global LED manufacturers who are beginning to evaluate tool purchases more upon their demanding requirements for mass production, rather than on installed base legacy.

We believe that our TurboDisc technology is the most extendible, offering the industry's highest productivity, excellent brightness and uniformity, lowest cost of ownership, and a seamless transition between 2, 4, 6, and 8-inch wafers.

As the only fully automated MOCVD system on the market, today, we're focusing on gaining traction, satisfying our customers and winning share.

We possess a multi-year technology road map that has been developed with our customers to drive a 4x reduction in Epi costs, and enable solid state lighting.

And we're significantly increasing our R&D spending to drive this road map.

In Solar, Veeco is seeing strong interest in our systems for manufacturing CIG solar cells, and we believe that Veeco is well positioned to capture share in this market.

News from the CIG's industry has been very positive in recent months.

With Solibro reporting 12% module efficiency on a one meter square module.

Ascent at 11.7% on flexible modules.

Dow announcing CIG-based solar shingles, and Global Solar reporting 15% efficiency at the cell level.

Solibro, an important customer recently spoke at our technical conference held in conjunction with the Euro PV show, commenting that while CIG's might not be the first in film technology to market, it has the potential to be one of the best given its low manufacturing costs and high cell efficiencies.

We believe Veeco is uniquely positioned to deliver CIG's process equipment systems with compelling advantages including flexible stainless steel and glass, complete systems for CIG's and TCO steps, and thermal deposition for higher efficiency and lower cost production.

And in particular we believe our thermal co-evacuation approach for the CIGS absorber layer will help drive lower materials cost, and reduce capital costs for CIGS manufacturers.

Using Greentech Media and our own internal forecast, we concurrently believe that CIGS deposition represents a total available equipment market in excess of $600 million in 2011.

Business conditions and Data Storage and Metrology appear to be improving from the trough levels we experienced earlier in the year.

We remain cautious on Data Storage segment, as our customers continue to tightly manage their CapEx.

We are staying close to our customers' technology road maps and poised to benefit from future capacity additions.

And we'll carefully manage this business for sustained profitability, through industry cycles.

In Metrology, we're revitalizing the business with new products that expand the market, hit growth niches and take share.

We have strengthened our direct and indirect sales channel to increase win rates and penetration in industrial markets.

And we're targeting growth applications such as alternative energy, life sciences, and medical.

Incremental volume in this business will drive higher profitability as a result of our successful cost reduction efforts.

At the onset of the recession, we put goals in place to emerge from the downturn in a position of strength, and we're gratified to achieve these goals.

We executed our factory consolidations ahead of plan, achieved an $80 million break-even level in Q3, generated cash through the down cycle, reported the best order quarter in our history, and are delivering compelling new products in all three businesses.

So in summary, we believe that Veeco is well positioned to capitalize on explosive growth in LED and Solar markets.

And we see incremental growth upside from the Data Storage and Metrology businesses from -- from both end market recovery, and our new products.

We have strong customer relationships, and are aligned on technology road maps across our businesses.

And lastly, as you can see from today's results and our fourth quarter guidance, Veeco's restructuring.

outsource manufacturing and spending discipline are driving significant growth and a highly leveraged earnings model heading into 2010.

Thank you for your patience during our prepared remarks.

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

Thank you, our first question comes from Timothy Arcuri with Citi.

Hi, guys.

Couple things.

First of all, John, how do you gauge how much of your current bookings and LED could be sort of double ordering?If any of it is, I mean, is it even possible that it could be?

And how do you gauge how much of it is due to sort of -- you know arms race with your customers to basically sort of keep up with each other?

And how much of it is sort of based on real demand?

And then I had a follow-up question thanks.

Okay.

So Tim we don't see any evidence of double ordering.

Our orders are coming from a broad variety of customers.

Some of them are lighting.

A lot them are are display and back lighting opportunities.

I think at the beginning of this year Samsung ran the first commercial for LED TV, at least the first one that I saw.

And that -- got a huge amount of interest in the industry, and all the TV manufacturers are driving for this.

So I don't believe there is double ordering.

I do believe there is a huge ramp up to satisfy the demand here.

And I also think we're seeing increased activity in lighting.

I mean, you look at the deals we announced this quarter, and there's -- there's ongoing activity there.

So when we look at things, this looks like a multi-year market expansion and think it -- it is very healthy.

Okay, John.

Just as a quick follow-up to that.

How much of your orders right now are for lighting, or how much of your LED bookings are for lighting.

And there was another big section to the order that you booked this quarter, I think that is still kind of out there from that particular Korean maker.

Will the remainder of that booking all be done by the end of December?

So -- first -- first of all we don't split between -- we don't have a good split out between lighting and backlighting.

But I can tell you if you look at our press releases, Lumiled is a focused on lighting.

Bridgelux is focused on lighting, and Sanan does both lighting as well, as backlighting type of applications.

So, just from the three that were public, there is -- there are three lighting customers there.

We -- we have a very disciplined order process.

We put things on the books when we have the full criteria that makes it an order where it can ship within a year, and usually obviously much, much sooner than that.

And that we have a committed purchase from the customer.

So -- we clearly hope to win some substantial additional business from key customers.

And I expect we will do that as we go forward.

We're -- we don't -- we're not predicting forward bookings guidance, so we're not predicting what might show up in Q4 versus Q1.

It is just really tricky to -- to do that.

But I'm just asking, John.

Of what you know, that you booked this quarter, there is more to it than just that.

And I am wondering as of the end of December, will all of what you know you're going to get be in -- will all of what you know you're going to get, be in back log by the end of December?

I don't know.

We have booked a big chunk of business and there is more to come.

It is hard to predict what is Q4, and what is Q1.

Okay.

Thanks.

Thanks, Tim.

Your next question comes from Matt Petkun with D.

A.

Davidson & Company.

Hi, good afternoon.

Couple of questions.

First, Jack, your materials says that the share count you're using for next quarter is $33.5 million in the guidance.

Is that including the convertible notes that convert at 27 and change?

No, it does not include the questionable notes.

We have a treasury method in accounting for that because we have the option to pay it back in cash so --

Oh, okay.

Very good.

And then, just on the CIG solar side of the business, you guys had booked large order, I think it was (inaudible) at the beginning of this year.

Yes.

Can you update us in terms of what is going on there, and my understanding was given progress, you might have some opportunity for follow-on business there.

I -- I believe there is -- an -- it is entirely possible to get follow-on business.

We are building the systems now and testing them and -- expect to ship in Q1 and Q2, and get revenue in Q2 of 2010.

So projects are going very well.

We also, after that one group has the business and are very happy with our Solar systems performance.

Okay.

Then one other question, John.

You commented just about the flexibility and potential for customers to shift wafer sizes.

If you had to guess at the end of next year, what percentage of your customers would still be using 2-inch wafers.

And I know a lot of that is out of your control, but -- what are you hearing, and what does it look like to you in terms of the actual wafer transition progress out there?

So most of the customers are still on 2 inches.

Some are starting to go to 4.

Some are experimenting with six.

I think that is going to be a -- a progress that is -- a process that is hard to estimate the timing.

I think the important thing to note, is due to our turbo disk technology, that whatever size disk there is we will we get more runs per day in than the competitive units, and we got a significant productivity advantage at all wafer sizes.

So we are willing to work with them, and help them move up.

But most people are still running at two inches.

And we will slowly jump to four or six, probably with some pilot lines first and approve the technology, and get it working really well.

And then probably on a bigger way, once they get their back ends processing converted to six.

So the one thing we wanted to make sure of that is we're not a barrier in this process.

And that we don't slow it down and we don't complicate their purchases by having to buy a system that is one way or the other.

Okay.

And then our map says wafer sized transitions don't increase area that much.

Are you getting pressure to expand your reactor size?

They don't increase area that much.

They reduce the edge effects, and they improve the back-end processing efficiency.

We will -- we clearly have a road map of new technologies that we will roll out over time.

We have worked with our best customers to define that road map.

And some day there may be larger reactor, but -- that's one approach to -- to improving, and there are others also.

Okay thank you so much.

Thank you, Matt.

Your next question comes from Andrew Abram.

I'm sorry, one moment.

Andrew Abrams with Avian Securities, your line is open, sir.

Hi, guys congratulations.

I know it has been a long struggle for you guys, so congratulations again.

Breakdown of captive vs.

merchant in your MOCVD business.

Can you give us some color there as to who is buying, and kind of what percentage that might represent to you guys?

So, on MOCVD, most of the companies don't make their own equipment.

Most -- almost everybody in the market buys a -- equipment from Veeco or Aixtron or Nippon (inaudible).

So the vast majority of the business is -- is non-- non-internal.

Okay.

And on your drive business, I -- you kind of indicated that things were -- were at least conversations were getting better.

Some of the drive guys have started talking about their CapEx for next year increasing.

Have you seen anything kind of leaning in that direction, or is it still kind of just polite conversation?

Yes, we have seen -- we have seen more quoting.

We have seen some desire to look at both capacity expansion.

Of course we have been selling technology deals for the last couple of quarters.

But -- but we have seen more quoting and a little and a look that there maybe some capacity expansion.

Over the last year, we have moved this business to much more variable cost model, and really improved our operating efficiencies.

So we have got it where -- where it is making money at still a very depressed level of the business.

And a little pickup here I think, will do great things for this business.

And -- the market is encouraging.

If you look at the Seagate announcements or the WD announcements or Intel's announcement on processors, I think there is a good bit of good news out there.

If you look at that business from a time standpoint, from when you get orders, until delivery time comes to the drive manufacturers, what would you say your timing is now that you have kind of switched your model?

The switching the model hasn't really changed the timing.

And it is a -- it is a three-to-six month lead time.

So it depends whether we have any inventory or not.

Excuse me.

It is a build to order business, though,.

So it is not a stocking type of business.

But it is build to order, kind of standard process equipment lead times three to six months.

Got it.

Thank you.

Your next question comes from Joanne Feeney with FTN Equity Capital.

Hi, guys.

Congrats on a great quarter, guys.

I just had a -- perhaps you can help us understand what you see today of penetration of the available market for LED?

So perhaps you could give us a hint as to perhaps what percentage of the top ten LED manufacturers have placed orders with you guys since the first quarter?

And how much do you think they represent of the total market for this year and next year?

So -- let me give you a couple angles on that.

We have penetrated over 80% of the key LED suppliers.

And how much of the top ten.

and what was the second part of your question?

How much of the total market due to top 10 represent.

Because I think it is probably changing with the increase in activity in Asia at this point.

Yes, I am not -- I don't have those -- those figures at hand.

But I think we have -- about 30% share.

And, I believe that on an order basis, we think we have been gaining share.

So, I think we're doing very well, and we're doing very well in leaders, in -- in China and in Korea, and in the U.S.

So I think we're -- we're pretty -- we're pretty excited about what the future looks like here.

Has there been any pickup in activity in Europe at this point or is there -- pretty much Asia and the US?

We have seen some pickup in Europe, yes.

So I think we're seeing pickup now in all regions.

Although, Asia moved first on the recovery.

We have seen some pickup in all areas.

Okay.

Now if I could get one follow-up on the gross margin side.

You have made a number of changes in the supply chain.

I am wondering how much that could add to -- to gross margins, specifically on the LED side.

And I would imagine that it is going to take a little bit of time for those changes to work through your inventory of products.

So what kind of evolution, might we expect in gross margin on the LED side?

Have we reached a peak, or can this still improve over the next few quarters if orders continue to build like this?

I think there is still some good potential for performance improvement.

we have gone to a much more of a global sourcing model.

So we're buying materials in the low-cost regions.

Creating a dual outsource partner gave them both some incentives to really manage their costs.

Of course, as volumes go up, we get better overhead absorption.

We talked about more than 30 units in Q4,and more than 45 in Q1.

So that will drive some improvement, and obviously we're buying in volume.

So that -- so there is a lot of things.

I think we had talked about a longer term model for Veeco, 45% to 46% gross margin.

And we're moving towards that.

We made, I think great progress in our Q4 projections.

It has been a long time since we have been able to project a quarter like this.

Okay that's all for me.

Thanks so much.

Thank you.

Our next question comes from Krish Sankar with Bank of America.

Hi, thanks for taking my question.

I have a couple of them.

John can you tell us in terms of your book-to-build for next quarter, can you give more granularity by segment?

We really haven't announced that.

Let me -- I don't believe we can.

We -- we do -- we did give a revenue range, 120 to 130.

And we expect bookings to be better than 130.

And there is a wide range around that.

There -- things are lumpy.

One of the things that -- so, things are lumpy.

It is hard -- hard to say.

We did deliver a substantial sequential growth in Metrology bookings this quarter.

That was good to see.

It's two quarters in a row.

And Data Storage, we were a little down from last quarter, but way ahead of the kind of Q1 trough.

So, we could see good things happen there.

And there is tremendous interest in this LED and Solar area.

And there -- the -- it is exciting to see these markets move.

Okay.

If I could squeeze in two more.

Given the fact that there are a limited number of MOCVD vendors, are there any concerns that your customers regarding the limited number of suppliers?

And are your customers asking you for any kind of of exclusivity in response for getting large orders?

The -- there are two main suppliers and Nippon, Sansui, in this business.

Many customers wanted to have two suppliers.

Most customers want to have two suppliers.And many are switched, kind of large volume from one supplier, and a -- a lesser volume from the other.

Some places we're the lead.

Some places Aixtron is the lead.

So -- they are making sure they have supply, though,.

And they are visiting our factories.

They are checking out what we're doing.

They are very engaged to make sure that they do not have supply limitations.

And we're doing a really good job for them.

One of the things I mentioned earlier, is we got 100% on time delivery for our systems.

So we have become very focused on meeting our commitments, beating our commitments, and making sure the customers can see that when they get a commitment from us, it gets met.

And that's going very well.

And then, a final question from me.

You guys said you can do over 45 units in Q1 next year.

What do you think of the maximum output, maximum number of units Veeco can supply next year in 2010?

We have the ability to continue to ramp.

And we can ramp substantially beyond 45.

And we do have plans to ramp beyond 45.

So, you could -- I won't say you can add 50% more units every quarter, but -- but we will really ramp to meet the needs.

We have really good outsourcing partners.

We have really good teamwork.

They're experienced.

They know how to build this type of equipment, and I just don't see -- I don't see a limitation.

And -- it may take us a couple of months to respond to something really big.

But we don't feel capacity limited.

We don't believe we have lost business on lead time.

And we're very happy with our expansion.

You will note that I said more than 30, and more than 45 systems in Q1.

So, we have got a good record of doing well here.

Thank you.

Our next question is from Bill Ong with Merriman.

Hi, Bill.

Yes.

Hi, how are you doing?

Congratulations, excellent quarter, excellent execution.

So excluding the LED solar business for now, what kind of seasonality can we expect in 2010?

And do you expect Q1 to be slightly better than seasonality, and maybe just general thoughts on how LED solar will play out in the coming quarters and years?

Well, so Data Storage, it is really going to depend on a little bit of Data Storage market recovery, and -- going back to some basic capacity expansion.

The announcements we saw said that should happen, and we shall see.

The -- Metrology -- the trend is less seasonality.

Although in Metrology, Q3 has historically been a weak bookings quarter for Veeco.

And yet, we delivered a substantial sequential increase.

In Metrology, what is really paying off for us is a couple of years of hard work on a new product pipeline.

The products are coming out.

They are exceptional products.

Our win rates are increasing.

And I think we're taking share.

So, that -- I -- I expect that we will continue to do that.

We -- have historically had seasonality for solid orders in Q4, and then a little bit of fall off in Q1.

In Solar, there is one important factor.

And that is, we have been building the -- we have been building systems, but we haven't shipped them.

And we're not going to take revenue until we get full acceptance.

And factory, they are big systems.

The new CIG system weighs 8 tons.

It has got to be shipped on a ship.

So we add about six weeks of transit time versus our traditional air shipping.

So, the point is -- I'm going to get to is, we have been seeing revenue and solar from our sources business, but not substantial revenue on the systems side.

And we will start to see that ramp up a little bit in Q1, -- and more in Q2.

So we're going to count on next year being a -- a bigger contributor to Solar systems revenue that we really don't have this year.

And we do have $30 million of backlog going into the year.

So I think that's going to give us a boost in the solar area.

And what we have seen in the solar trade shows and things is, is CIGS is really gaining momentum.

And a lot of companies that went after other technologies like amorphous silicon are flipping, because efficiencies are just too low and CIGS is gaining -- gaining momentum.

The Dow announcement of the solar shingle was pretty darn exciting to see.

We have known about that for a couple of years.

But to actually see it come out as a real announcement from them was exciting.

because it is just represents a huge opportunity and you can't do it with crystalline silicon solar cells or other technology.

It is really -- it is a CIG's application.

Thanks.

Nice job gentlemen.

Thanks, Bill.

Our next question comes from Patrick Ho with Stifel Nicolaus.

Thanks and also, congratulations.

First of all, in terms of the LED ramp in the orders over the next few quarters.

I think you have characterized you know how the ramp has been in 3Q, and how it will trend in 4Q.

Can you -- just give a little color whether those are from repeat customers, are you going to see new customers in Q4?

We have been seeing both.

We have had follow-on orders from -- large follow-on orders from current customers.

We have had customers that were more Aixtron-focused that chose us for their next generation after a head-to-head battle.

And we have penetrated new customers.

So, we have got some of the mix there, and I think we will see that trend continue.

I -- I clearly expect to get more orders from people that have ordered from us in the past.

As customers get to use our systems, and get experience with them, they have really get some great performance improvements.

Great.

I just -- as a follow-up on that in terms of the share gains.

In your head-to-head battles with Aixtron, what would you characterize as the biggest differentiator that has allow you to gain share?

Is it something technology-wise or is it your ability to ramp or get systems faster to your customers which can be an advantage as well.

So the turbo disk technology, it has some unique attributes.

It doesn't have a particle problem.

It doesn't have to be cleaned.

The systems don't have to be cleaned between runs.

So our systems are automated.

You get more runs per day.

And you get an economic model when you look at what you get out of the system versus the costs, that is just better.

So, it is productivity and cost of ownership.

And we -- customers really value that.

And our systems are also very flexible in terms of being able to meet the customers' specific process requirements.

There are -- there is a lot of ability to change our system parameters.

So our customers like that.

And they like working with Veeco.

We have heard that some of the other suppliers aren't very flexible.

They like the way we work.

Great.

Final question on my end on the solar side of things.

Given that the overall industry remains relatively weak, do you believe that that is an advantage for CIG's adoption?

Or could that also delay the market traction or acceptance CIGS as -- in the 2010 and beyond?

The overall market has been down.

The European subsidies have been cut.

And clearly, that is hurting everybody.

But at the same time, I think it is an advantage for CIGS because it is enabling -- it is enabling the people that have a little bit of time to get up to speed with new factories, before building large CIGS factories.

The economics are improving.

And I think there will be a shakeout with some of the other technologies.

The other -- I think really important trend that we have seen, other than just there is more interest in CIGS is that the efficiencies are coming up.

And you read the press releases on module efficiencies, they are getting better.

CIGs has been done in lab with 20% efficiencies.

So whereas top customers are putting out 20% modules, and that is a 14% to 15% cell.

They are still 5% -- percentage points -- a huge additional level that can be driven, and will be driven in coming years.

So there is a lot of head room for efficiency improvement.

The other thing we're seeing is that companies that went after CIGS were sputtering early in the market because they thought it was more producible.

Sputtering is an old technology that everybody was comfortable with.

They were concerned about making thermal work.

And what is happening now, is if you look at all the record efficiencies in the lab, they all come from thermal co-evaporation.

And if you look at the companies that are announcing high efficiencies in the field, they are the companies with thermal co-evaporation.

So there is a shift to the -- to the approach that we have taken.

And we think that our experience in this area, and our experience providing thermal sources to these companies really gives us an advantage.

So I think that is a real benefit for us as we look forward.

And I guess the third factor I would add is, the Asians have money.

And the Koreans and the Chinese have -- and the Japanese, there is a strong stepping forward of people with money to invest in this technology.

And although things may have dried up in some -- in Europe, boy, the Asians are really taking a lead.

Great, thanks a lot.

Thanks Patrick.

Our next question comes from David Duley with Steelhead Partners

Congratulations.

Thanks for taking my question.

I was wondering -- you talked about the increase in your manufacturing capacity for your LED tools.

Is that managing your lead times at about six months.

Is that what your message was there?

Trying to keep lead times at six months?

We're trying to keep lead times below six months and we have been able to successfully do that.

They are currently below six months, and in special cases, we can get people things earlier.

So traditionally, in this business, they have been four to six months.

And we're focused on driving them down.

And doing that.

Great.

What do you think the drop rate to gross margins on incremental revenue above $125 million will be?

Jack?

Well, we -- we would like to target sort of a 50% flow-through with the gross margin line.

On an incremental basis.

Incremental sales basis.

Okay.

Great.

And final question from me.

Is -- you might have answered it but -- I might have missed it.

Do you expect a disk drive orders to grow sequentially in Q4 or early next year?

Yes.

We haven't really provided any kind of order guidance but when I read this Seagate or Western Digital guidance, that looks pretty exciting to me.

If they are talking about spending more CapEx, that is a good sign.

We did say there is more quoting activity.

But we don't really have specific guidance.

Okay.

And one more -- how much industry capacity do you think is is being added in the LED space at this point.

You kind of gave us a tool number that you thought the industry would be in 2011, but -- beside however you want to measure it number of wafers, LED bites however you're looking at it.

What sort of capacity increases is this backlighting opportunity driving in the overall industry?

I don't think I have any specific numbers kind of on the tip of my tongue.

There is clearly a lot of capacity being added.

And if you -- there -- there are a lot of analysts that have published data that you can see what is coming out.

But, I -- I would look at some of those other reports.

Thank you.

Thanks, David.

We will take the last question, operator.

Your next question comes from Peter Wright with GC Research.

Fantastic.

Thank you for taking my question, and congratulations on a great quarter.

I -- I actually have two questions, if you let me.

But -- the first one is, I was hoping could quantify kind of your capacity ramp assuming more strategic thought goes into how big you build your internal capability for MOCVD?

Where do you see yourself kind of tapping out at, internal capacity of how many systems you would want to build internally and kind of the medium term in the next 12 to 18 months?

And the second question is, I was hoping you could give some color on the complexion of the follow-on offering if there is any insider participation?

So, I can't take any questions related to the offering.

And I will have to refer you to the -- the offering materials for that.

On the manufacturing capacity, so for the last few years, we have relied on a very highly proficient outsourcing partner in the US.

They were building most of the production.

They were doing most of the building of our MOCVD systems, and then we were testing them.

What has changed, is we moved to them building the entire system, and -- and/or entire systems.

And then, we do testing at their facilities with their people and our people, and during this expansion wave, we also do testing at our sites.

So we're really just doing testing.

We do help manage the supply chain, make sure that we have got the right vendors and the right suppliers, and that there is nothing in the supply chain that is going to limit us.

So in addition to this company, which has ramped substantially and done a great job for us, we also have been working with an Asian supplier to bring on capacity.

They have been building units here in the US with us to develop that capability and are now building units in Asia.

And we augment their capability with our people to make sure that there is no quality glitch here.

So we have a whole second manufacturer coming online.

And the figures that I quoted don't have a lot of output from that second manufacturer.

So if we needed to double 45 to 90, we can do that.

And I -- I won't say -- there is just -- we're not going to let manufacturing limit us.

And -- and we have been very, very careful about this.

We have been very methodical.

We have very experienced people working on it.

So -- it is not -- it is not a limiting factor.

We're going to go sell more and win more business.

Okay.

So thank you all for joining us tonight.

Really appreciate it.

And -- it is exciting to be here to have this type of quarter to announce.

We look forward to seeing you soon.

Operator, that concludes the call.

Thank you, sir.

At this time you may disconnect.