Veeco Instruments Inc (VECO) 2009 Q4 法說會逐字稿

Good day, everyone, and welcome to the Veeco fourth quarter and year-end 2009 earnings conference call.

Today's call is being recorded.

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

Debra Wasser.

Please go ahead, ma'am.

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

Joining me today are our CEO, John Peeler; our CFO, Dave Glass; and our Corporate Controller, John Kiernan.

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

this afternoon and is available on the Veeco Web site.

Also posted on our site is a PowerPoint presentation of our forth quarter results.

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

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

Your participation implies consent to our taping.

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

These factors are discussed in the business description and management discussion and analysis sections of the Company's report on Form 10-K and Annual Report to shareholders and in our subsequent quarterly reports on Form 10-Q, current reports and Form 8-K and press releases.

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

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

Information regarding such non-GAAP financial measures, including reconciliation to GAAP measures of performance, is available on our Web site.

I would now like to 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's fourth quarter revenue was $146 million, a record level for our Company, increasing 33% for the fourth quarter of 2008 and 48% sequentially.

This strong revenue drove EBITDA of $25.1 million, GAAP EPS of $0.50 per share, and non-GAAP EPS of $0.41 per share.

Fourth quarter LED and Solar revenues were a record $98 million, with MOCVD revenues more than doubling sequentially.

Revenues by segment were 67% LED and Solar, 14% Data Storage, and 19% Metrology.

All three of our businesses reported improved sequential gross margins, with overall Veeco margins increasing to 45%.

Veeco's fourth quarter 2009 bookings were $262 million, surpassing our prior record of $226 million achieved in the third quarter by 16%, and nearly 200% higher than the fourth quarter of 2008.

Bookings were strong in all Veeco segments.

LED and solar orders were $177 million, with 16 LED manufacturers placing orders for our MOCVD systems this quarter.

We continue to see strong MOCVD demand as LED manufacturers ramp production for laptop and TV backlighting and for general illumination.

Veeco received MOCVD orders from key customers in Europe, North America, China, and Japan.

We are capturing a significant share of the Korean market with Q4 orders from three top tier players.

And in Taiwan, we also received orders from several leading LED manufacturers.

MOCVD orders increased sequentially and represented the vast majority of our total $177 million in LED and Solar orders.

Data Storage orders were $53 million, up 200% sequentially as our key hard drive customers invested in Veeco equipment after a year-long capital freeze.

Q4 was our best Data Storage order quarter since 2006.

In Metrology, we experienced a meaningful recovery in business conditions.

We booked $32 million which was our best order performance in six quarters.

Several factors contributed to this strong performance including excellent customer traction for our newest generation instruments, improvement in research and industrial markets, and the benefit of normal year-end spending from our university customers.

2009 was a year that started with very difficult business conditions, and it ended with record quarterly results.

We built a better Company during this period and I want to recap a few of the highlights.

In LED, we penetrated top tier accounts, with large orders and delivered strong financial performance.

We ramped from single-digit MOCVD tool shipments in Q1 of 2009 to 40 tools shipped in the fourth quarter, with nearly 100% on-time shipments, deliveries in less than six months, and order placement and short, six months from order placement, and short installation times.

We developed and introduced our K465i which we believe is the best tool on the market due to its ability to drive 90% yield in a 5-nanometer bin and industry leading throughput and cost of ownership.

The system was accepted by multiple customers in Asia during the fourth quarter, and customer interest in quoting activity for the new tool is extremely strong.

In Solar, we launched two new CIGS product platforms for web and glass and generated approximately $30 million in backlog for new Solar products in an extremely depressed capital equipment market.

Veeco MBE reported a strong year, continued to gain share in its base business and sold over $14 million in in components to the CIGS solar market.

Our Data Storage business has been successfully restructured.

We have eliminated significant fixed overhead, and dramatically reduced our labor costs achieving profitability in both Q3 and Q4 and bringing the entire year to break even, despite unprecedented low levels for the business.

Our saw and lapper products were successfully outsourced and we completed all manufacturing consolidations on or ahead of schedule.

In Metrology, we launched five new AFM products or scanning modes, and two new optical metrology products and returned the business to profitability in both Q3 and Q4.

We strengthened our Metrology operations during the year, dramatically lowered our break even level, improved our supply chain management, and are expecting improved performance this year.

I am grateful to the entire Veeco team for what was truly a year of impressive accomplishments for our Company.

I would like to take a few moments to talk about our outlook for 2010.

Veeco ended 2009 with a record backlog of $402 million, $317 million in LED and Solar, $60 million in Data Storage, and $25 million in Metrology.

The LED market is growing at extraordinary rates and even the experts can't accurately predict demand over the next few years.

New industry forecasts point to LED backlighting for TVs approaching 20% penetration in 2010, which is well ahead of earlier estimates, and they're more aggressive forecasts being published on a near daily basis.

LED backlighting is forecasted to penetrate 100% of all notebooks and 60% of monitors by 2012.

General lighting also appears to be hitting its stride, particularly in regions such as China with government incentives accelerating the pace of adoption.

And we expect China to be an enormous LED market both for backlighting and for general illumination.

Within the last few weeks, there have been meaningful solid state lighting announcements such as Samsung partnering with Acuity Brands for LED lighting products and Philips reporting that 10% of its lighting business today is from LED.

A Fortune magazine article last week stated that the $100 billion global lighting industry is undergoing radical change, and by the end of the decade LEDs will be the dominate source for commercial and residential lighting.

So what does mean for Veeco?

It is hard to envision a scenario that doesn't require 400 to 500 or more MOCVD tools per year in 2010 and 2011 for backlighting applications alone with greater capacity additions required for mass adoption of solid state lighting.

Many in the industry estimate that the size of the MOCVD market for lighting will be more than 10 times the size of the backlighting opportunity.

We continue to experience a very high level of customer quoting activity during the first quarter, with a large number of customers currently evaluating the purchase of multiple systems and our new K465i gaining lots of attention in the market.

Overall trends in this business remain favorable and as positive now as they were six months ago.

As we look towards the future, we believe that the LED industry is at the beginning of a multiyear MOCVD tool investment cycle.

Given the market demand we see, our number one priority is to ramp our manufacturing capacity to 45 or more tools this quarter, to 70 tools in Q2, and to 120 tools per quarter by the end of the year.

We are implementing manufacturing supply chain and field service plans that use a variable cost approach wherever possible to allow for the cost elimination if the market demand changes.

In Solar, Veeco is seeing strong interest in our systems for manufacturing CIGS solar cells particularly in Asia.

We are focused on delivering CIGS deposition systems for flexible and glass applications that leverage our linear source technology to provide higher throughput, high material utilization and complete absorber-layer deposition in one process step.

Business conditions in Data Storage have certainly improved from last year's trough levels.

Trend Focus recently reported that 2009 ended with hard disk drive shipments at record quarterly levels and factory utilization rates at 91%.

They also forecasted that the hard drive unit shipments will increase by about 12% in 2010.

Our recent customer conversations support these estimates, and also reveal their intentions to once again invest in aerial density advances.

In its continued quest to maximize capital efficiency, the hard disk drive industry will restart its move to a larger wafer size which utilizes Veeco core products.

As we start 2010, it is apparent that the hard disk drive industry is returning to more normal levels of technology and capacity investments.

And with our significantly leaner operating structure, Veeco Data Storage is poised to perform well this year.

In Metrology, we have revitalized the business with new products that expand the market, hit growth niches and take share.

Our recently introduced MultiMode 8 small sample AFM builds further momentum on top of Dimension Icon and BioScope Catalyst launches in 2009.

We are also developing key products for new targeted industrial markets.

We strengthened our direct and indirect sales channels to increase win rates and are targeting growth applications such as alternative energy, life sciences, and medical.

We are also starting to see a modest pick up in quoting activity from our semiconductor and data storage customers.

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

In summary, we believe that 2010 is going to be a great year for Veeco.

Our guidance for Q1of 2010 is for revenues to be between $150 million to $165 million with earnings per share from $0.50 to $0.62 on a GAAP basis, and $0.41 to $0.50 on a non-GAAP basis.

As you know, Dave Glass joined us as our CFO a couple of weeks ago from Dow.

We are excited to have Dave on board and I believe he brings the right combination of operational and financial skills as well as strong global experience to help lead Veeco during this period of rapid business expansion.

I will turn the call over to Dave for a bit more financial commentary, and then we will take your questions.

Thank you, John.

I have to say it is a tremendous pleasure joining this team at such an exciting team in Veeco's history.

I have been part of this team for just a few weeks now but have been thoroughly impressed by the breadth of the technology and the solid role the Company has established for itself as a leader in the industry.

As John mentioned, our fourth quarter revenue was a record $146 million which is up 33% over last year, and 48% sequentially.

The LED and Solar Process Equipment segment led the way with growth of 161% year-over-year, and 85% sequentially.

Although Data Storage sales of $21 million were only about half the level of a year ago, that business saw very encouraging booking activity toward the end of the quarter.

Metrology sales finished the quarter at $27 million, about even with Q4 2008 after showing good signs of recovery all year from the low point in the first quarter.

Total bookings for the fourth quarter were $262 million, also a record for the Company and led by the LED and Solar Process Equipment segment.

Our book-to-bill ratio was about 1.8 to 1 for the quarter.

Gross profit was $66 million or 45% of sales for the quarter, up compared to 36% a year ago and 41% in the third quarter.

This strong margin performance was driven by continued movement toward more outsourcing, higher utilization of fixed costs and lower unit overhead costs.

Restructuring and cost savings programs from earlier in the year played an important role in helping to lower our costs.

Q4 2009 selling, general and administrative expenses were $26 million or 18% of sales.

This is up in dollar terms, but down as a percentage of sales compared to Q4 2008 and third quarter 2009.

In Q4, the Company incurred higher bonus, profit sharing and commission expenses.

We also increased certain elements of marketing and field sales spending to help support the rapid growth in bookings and revenue activity.

Research & Development expense was almost $18 million in the fourth quarter, up 16% year-over-year in dollar terms, but, like SG&A, it was down as a percent of sales as we continue to aggressively support the development of the next generation LED and solar tools.

Veeco's fourth quarter GAAP net income was $18.7 million or $0.50 a share compared to a net loss of $74 million or $2.35 per share last year.

This was well ahead of our guidance.

The improvement was primarily due to the higher than forecast sales.

Earnings per share, excluding restructuring charges, amortization expense, equity compensation, and non-cash interest and utilizing a 35% tax rate, was $0.41, also well ahead of our guidance.

Veeco's Q4 2009 EBITDA as a percentage of sales was 17%, ahead of our guidance of 13% to 15%, and up from 9% achieved in the third quarter.

It also should be noted our earnings per share on a GAAP basis in Q4 is higher than our non-GAAP earnings because we continue to utilize net operating loss carry forwards which reduce our GAAP expense.

For non-GAAP EPS, we follow a policy of applying the full 35% U.S.

tax rate to our adjusted pre-tax earnings.

We ended 2009 with a total employee count of 1,069 versus total employees of 1,256 at the end of 2008.

This means that in Q4 2009, we delivered 33% higher sales than in Q4 2008, but with 15% fewer employees.

This is a good example of the leverage we are getting from both our recent restructuring programs and the outsourcing business model.

Now let's turn our attention to the balance sheet which was significantly strengthened during the fourth quarter.

We ended the year with $284 million in cash and short-term investments, following a successful $5.75 million share equity offering in October which yielded net cash for the Company of $130 million.

In addition, we added $37 million in cash flow from operations in the quarter due primarily to net income and an increase in customer deposits.

Accounts receivable increased by $20 million, primarily due to the higher sales level of MOCVD tools.

This resulted in days sales outstanding of 52 days per quarter which compares favorably to peer companies.

Versus third quarter, inventory increased almost $3 million to $78 million principally due to the increased sales ramp in our LED and Solar business.

Inventory turns increased to 4.2 times for the quarter.

We're pleased with the overall progress that's been made in continuing to improve our working capital position while at the same time sales and profits increase.

Both capital expenditures and depreciation totaled $3 million for the quarter.

I would like to take a few minutes now to review our Q1 guidance.

As John just commented, Veeco's Q1 2010 revenues are currently forecast to be between $150 million and $165 million.

This results in earnings per share guidance between $0.50 to $0.62 on a GAAP basis and $0.41 to $0.50 on a non-GAAP basis.

We expect Q1 gross margins to be in the range of 43% to 44%.

This is down slightly on a sequential basis despite the higher revenues, primarily due to increased costs in Q1 necessary to ramp up and support our Q2 goal of shipping 70 MOCVD units.

Operating spending will be about 25% to 26% of sales.

We are particularly pleased to see that our careful management of spending and increased top line is driving Veeco's EBITDA percentage to record levels.

Q1 2010 guidance is for EBITDA to reach 18% to 20% of sales.

Given the dynamic fast growth environment ahead of Veeco in 2010, we would like to help you understand how we anticipate ramping the business.

The improvements made to Veeco's cost structure in 2009 should provide continuing support for margins in the mid-40s range.

We do expect to incur certain period costs along the way as we build and ramp up our supply chain to support operations at the higher rates.

As John mentioned in his outlook discussion, our plans to enabling capacity to deliver tools at the higher volumes envisioned are being implemented with flexibility in mind and by adding variable costs wherever possible.

Moving forward, we will continue to judiciously allow increases in our dollar spending on selling and other costs which support the higher operating rates.

At the same time, we will manage our total S&A run rates to within practical targets of around 15% or less as a percent of sales.

We will continue to direct most of our new R&D spending into the higher growth areas such as LED and Solar while maintaining roughly a static run rate of spending for the other businesses.

We believe 2010 Veeco R&D spending levels in the range of 10% to 12% of sales is probably reasonable for our business given our current growth objectives and outlook.

Operator, we would now like to turn the -- like to open up the line for questions.

Certainly.

(Operator Instructions).

Your first question will come from Bill Ong with Merriman.

Yes.

Congratulations, another solid quarter.

My question is on the Data Storage business.

With $53 million in orders, is it concentrated among one or two customers or is it more diversified?

And given that it is at the general peak levels from a few years ago, any color from your customers that you could see even higher orders sometime in the near future?

Thanks, Bill.

With the $53 million in Data Storage, the data storage industry has consolidated to the point that there are really only three or four or five customers overall, a few large ones and I think we all know who they are, and so the orders are really bunched from the largest players in the industry.

I think that $53 million included some pent-up demand, if you remember in Q1 and Q2 of last year orders were very, very thin and yet, major customers moved to, pretty close to capacity manufacturing in Q4 and got to about all-time records in numbers of disks produced.

I wouldn't be counting on that to repeat because I think it includes some pent-up demand, and I can't really speak for the few future.

I think the good thing is we are very close to our customers, we have restructured the business with much more variable costs and we continue to invest in R&D.

So, we are prepared to help our customers both increase their capacity and improve their aerial density.

Thanks.

My final question is on the LED demand outlook which is clearly strong this year and years to come.

But since LED manufacturing is a complex process, what do you believe is the weakest link in the entire LED supply chain that could prevent growth from strengthening even further?

Well, I thin right now it's capacity constraint on the MOCVD systems.

I can't really speak to the back end processing systems, but the MOCVD capacity constraints in the industry are really holding things up.

And that's been resulting in, as you can see, tremendous order rate, for some time, and we see that pattern continuing with a lot of interest, a lot of interest in the new K465i, the early customers of it have gotten great results and we're just really pleased with that.

Thank you.

Nice job, everyone.

Thanks, Bill.

Your next question will come from Chris Blansett with JPMorgan.

Hi, Chris.

Are you on mute?

Sorry, can you hear me now?

Apologize.

Yes, yes.

I had a question related to your situation of being capacity constrained, and then as you grow your shipment ability throughout the year, I assume your competitors will as well.

Do you think there comes a point that your customers will have to deal with a wave of equipment that could then, I guess, slow continued growth of sales as they absorb this equipment in the second half of the year?

Well, the shipments -- our shipments have been ramping up and we did, I think, about 22 in Q3 and 40 in Q4 and we're ramping our capacity to 45, 70, and then ultimately 120 based on what we know now.

What we have also done during the year is increased our speed to install these systems, and get them in, and the customers are able to get them installed and get them operating pretty quickly.

So I don't see any real bottlenecks here at this point, but it is a big ramp.

So going from 40 to 120 in a year's time is a lot of ramp up in shipments per quarter.

So, I don't see the bottleneck.

I think we plan to execute and do our best to pull this off.

All right.

And then second question I had is related to the diversity of customers you've had previously and maybe what you have today, if you can provide some color, if you have seen a change in the mix, it sounds like your customer base is broadening out?

Is that a good way to look at it?

It is broadening, and we came to this market with a relatively low market share some number of years back, and believe that in aggregate we have grained significant market share.

We think we are continuing to gain market share.

So we are penetrating customers that we had not been in before.

We are also seeing customers getting into points of real serious manufacturing and they're looking for more automated solutions, and solutions that work really well in a high volume environment.

We think that's our tool, and so rather than maybe in the past just making decisions on what they have used before, we think they're making the decisions to really maximize their volume going forward.

As I mentioned in the earlier comments, we've really been winning deals on a global basis, and it really in all regions, we think with we have done tremendously well in Korea and China, and have been really gaining strength recently in Taiwan.

So, those are really important areas for us.

So we think we have got good geographical coverage and we're hitting leaders everywhere.

All right, thank you.

Appreciate it.

Thanks, Chris.

And from Lazard Capital Markets, we will hear from Daniel Amir.

Thanks a lot.

Thank you very taking my call.

Couple questions, first of all with the outlook of 400 to 500 MOCVD tools for this year, what do you think needs to happen in order for us to get to the high end and what could happen on the negative side that we would be on the low end of that number for the industry?

I think the biggest growth driver right now is backlighting for TVs and laptops, and what I've seen happening over the last six months or nine months, and what we hear from our customers, is that the adoption rate is really going faster for the adoption of LEDs into LCD TVs.

They're penetrating faster than I think people expected.

The TV form factors are a very attractive, people like the color and contrast of the TVs.

So what's happening is the leading companies are pushing very quickly to get more of their models to be LED backlit and you will see a press announcement, for instance of Samsung, a month or so ago about they're going to get half of their TVs, TV models in 2010 to be LED backlit.

We hear from some customers they would like to get half of their sales to be LED based.

So, I think what has to happen to drive these numbers is for this penetration into the TV market to continue and frankly I think it is going a lot faster than was predicted.

So we are on a path for rapid adoption there.

And we are also seeing more interest for lighting and we're hearing from customers that they're making LEDs for backlighting, but, and lighting, and when the backlighting starts to catch up, they can move their LED production into general illumination markets.

So I think there's a second wave coming and people are gearing up for that.

Okay, then in terms of your bookings in the LED side, how should we be looking at trends going forward here?

I mean it seems like you have obviously posted very strong bookings in the past couple of quarters, but kind of at the same levels I guess.

Where should we kind of, I mean is it really related to the capacity you are ramping, or is it customers are going to take a pause at some point this year?

How should we look at that?

So, first of all, we don't give bookings guidance, but what I can tell you is if you look at Q3 they were just tremendous orders there.

We followed that up in Q4, and the activity of quoting and penetrating new customers and acceptance and excitement about the new product goes on.

So we see a really good business environment that will likely drive strong orders going forward.

And we came into the year with a very solid backlog, much more than half of that backlog will ship in the first half of the year.

And we think that there's room for more orders to fill our slots in the second half of the year, and we see customers wanting to get those slots.

Okay.

Great.

Thanks a lot.

Thanks, Dan.

From Bank of America/Merrill Lynch we will hear from Krish Sankar.

Thanks for taking my question.

I had a couple of them.

John, you said that you went from about eight customers in Q3 to about 16 MOCVD customers in Q4.

Can you tell a little bit on the color of those customers, are there any repeat or follow on orders and also were you able to get any new customers in Japan?

So, there are some repeat orders in there.

And there are some new orders.

There were five orders that are very significant, and over $10 million out of that business.

We did win some business in Japan.

We are not a big player in Japan, though.

So we are still relatively small there, I would say that's the one region where we have the least market share, and it definitely is where we have the least market share, but good distribution both across region, several major semiconductor companies purchasing for volume production or just getting started.

So a really healthy distribution of different types of customers.

Got it.

And can you tell me in your view what is the MOCVD market share exiting 2009?

And I had a follow-up after that.

Well, I think if you look at it on a revenue basis, and you just take the publicly reported numbers for Veeco and Aixtron and you lay those out and make some assumption for Nippon Sanso, a couple of interesting trends.

One is we believe we have been gaining revenue share for each of the quarters in the year.

And then, secondly, with we exited the year probably around 33% was a decent estimate for revenue market share.

But maybe more interesting is looking at the bookings because the bookings are basically a good bit ahead of the revenue trend, and our share is significantly higher there.

So we think that is 40%-plus in recent quarters and I can't speak to Q4 because other companies haven't released their numbers.

But Q3, you can do the math yourself on that, and figure that out.

So, we think we are gaining share on both bookings and revenue and have a very attractive ramp here in both sides, penetrating new customers where we weren't in before, and getting great feedback on a new product.

Great, great.

And just a few question, on the HDD side, clearly you did mention that the number of customers has been much lower this cycle versus last cycle.

Is there a way of quantifying from cycle over cycle what do you think the CapEx would be this time, how much lower versus last cycle would be for HDD?

Well, so, in the data storage market what has happened is the customers consolidated in 2007, significantly 2007, maybe some in 2006, and as they merge together, there was generally some excess capital in one company or the other.

And those merged entities got a -- they used the equipment they had from either company to deliver results.

And that caused some slowdowns in 2007, it came back up in 2008 as that capacity was digested.

It is basically the industry has a smaller number of players now, a much smaller number of players with the top three being Seagate, Western Digital and Hitachi.

There are some other guys, but those three make up the bulk of the market.

The good thing is there's not a lot of other people to consolidate.

So we are down to a relatively small number of customers.

There is a push to improve aerial density and reduce the cost of these disk drives.

And so there's good growth, Trend Focus says it is kind of 12% unit growth, going forward on average, multiyears.

And at the same time, each unit is going to have more storage in it as there's more video storage and more data storage in these devices.

So, I think it is a healthy situation at this point.

And there certainly was a pause following the global economic crisis but that's over.

The growth is there and we are the world leader in products to make thin film magnetic heads.

So we are seeing both capacity buys as well as new technology buys.

And that's back to where kind of where things should be.

Thank you.

Thanks.

From Canaccord Adams, we will hear from Jonathan Dorsheimer.

Hi.

Thanks, and congratulations on a great quarter.

Thanks, Jon.

Just a couple of questions, a lot of it is pretty straightforward, but just want to ask, on the booking side for the MOCVD bookings, do you have firm delivery in deposits on what you've reported in terms of bookings?

I just want to make sure there hasn't been any change in recognition of what's booked?

Dave, why don't you take that?

Yes, sure.

No, there has been no change in the policy.

Our policy is firm purchase order and appropriate deposit, depending on the customer and the region, and then a confirmed delivery date within 12 months and that's the same policy we have been following.

Great.

And then John, or David, not sure which would be better to answer this but just the -- when we look at the bookings this quarter, percentage, on MOCVD again, percentage that are K465i tools, is the vast majority that you're booking right now for the i tool?

It is a mix.

But a lot of it is K465 with agreement, with a, we can ship K465, K465i and we can upgrade K465 to K465i and that's actually an advantage of our modular architecture within the product.

So ultimately, they will shift to K465i, but it will take some time for that because the customers may have one unit qualified and they're likely to requalify the new product before they buy more.

Although I think some of the customers are hearing about the results from the i and would like to get more of those faster.

So it's a mix, I can't give you an exact breakdown, but it's a mix at this point and ultimately eventually I think a lot of people will come back and ask us to do the upgrade if they didn't get i's at the beginning.

Great.

Sort of -- maybe just a follow-up on that, last quarter we saw a descent number of i beta tools that were out there, how many of the betas converted into multisystem purchases?

And then as we look forward, how many beta tools do you have at large, sort of 10-plus type of system customers that have not converted?

Well, first of all, we didn't have a whole lot of beta tools, so every one of them went to a real critical customer in the region of Asia somewhere.

And everybody that has received those tools has had great comments on them, and we have had two major acceptances of those, and I expect those customers either have or, that they will order quantities.

We haven't put any out there, and had anybody do an evaluation and accept it but not order.

That's just not something I think is going to happen.

How many are still in evaluation mode, I guess, is what I am trying to -- because it sounds like it is a pretty significant upgrade from the 465 so you are seeing most betas turn into multisystem orders -- how many evaluation units or how many customers are still in evaluation mode at this point in time?

Just bracket it, sort of five, 10, 30.

Trying to get an understanding of that.

Less than five of what's out there, but we're continuing -- we are now getting requests for people to basically buy systems to take and evaluate.

I wouldn't call them betas anymore.

The system is -- the products have been accepted by top companies in the world, and they are extremely solid products that came up very quickly, and the improvements they gave the customers in yield and productivity were really significant.

So people tried them and liked them, and it is not beta anymore.

We have got a small, very small single-digit number of units out there, that kind of haven't finished the process, and the only reason they haven't finished is they got, they got there later because we put out two at the beginning, and then some more after that.

Great.

Sorry for my terminology, but that is helpful.

Two last questions, just on the Solar, I think you had two web coaters that were out there.

In terms of getting some order.

Have those been booked in terms of those orders on the solar side?

Yes.

We came into the year with two groups, kind of sets of tools on order for China and Korea.

Each one was for four tools.

That was about $30 million or so of backlog that we came into the year with.

Those tools are being fabricated, expect to ship them to the customers in the first half and get revenue probably in the second half.

I mean, some of it could come in the first half, but I'd say ship in first half and revenue in the second half.

We continue to see great interest in these tools, and think there is a good pipeline of potential orders behind this.

And last question, and then I will pass it on, just a more of a numbers question, if I look at the break out in terms of the EBIT per segment, it is obvious that MOCVD is really boosting things while Data Storage and Metrology are carrying a relatively low EBIT margin.

If we look at the pick up in the Data Storage bookings, lead times I'm assuming -- or actually let me ask what lead times are because the, just by doing the math, it would suggest that you should see a pretty drastic pick up in EBIT for the Data Storage as you start recognizing those revenues, or am I missing how something flows through the model?

Thanks.

No, I think you figured it out right.

Data Storage lead times tend to be four, five, six months, and the revenue trend recently in Data Storage has been very, very depressed and the good thing is, is at those depressed levels, we were profitable at $20 million type of revenue level and as you can see, we just booked $50 million.

So you know the revenue is going to come up and that business should be profitable and healthy business.

And Dave can give you more specifics in a second.

On the Metrology side, we booked, I think it was $32 million, it was the best bookings quarter in six quarters really driven by new products, and, again, they were profitable here the last two quarters also.

So I think that business, as we get the revenue up, we did a lot of work on our cost structure last year, and in the midst of the Great Depression, that business was hit pretty hard from a lot of angles, as the revenue comes up it is going to achieve very healthy profit levels.

Yes, John let me add just one more bit of information on timing which might help shed a little bit of light.

In Data Storage, just because of the timing of how bookings come in, we had a big flush of things really freed up toward the end of the fourth quarter.

So that may be causing a little bit of the anomaly you see with the big bookings in the fourth quarter.

Uh-huh.

Great.

That's helpful.

Thanks, guys.

Thanks, Jed.

From UPS, we will hear from Ahmar Zaman.

Hello.

Thanks for taking my question.

Again, congratulations on an excellent quarter.

Real quickly to begin with, you have given us gross margins by segment in the past.

Will you be willing to share those now?

We have -- I don't believe we have provided gross margins by segment in the past.

So, --

Okay.

I just -- in the past conference calls I have seen -- anyway, okay.

Then just trying to think, get an idea of the sustainability of bookings going forward.

So you clearly had an amazing booking quarter.

And I know you don't give booking guidance specifically.

But looking at the backlog, is it fair to -- can we assume backlog would be up directionally in the first half of 2010?

Yes, I don't know how to answer that without giving you guidance, to tell you the truth.

So, look it is -- it is a great market out there, and we are, things look very good to us.

And the product is getting great reviews and we are -- the market is growing, and we are gaining share as more things get signed off, and we've been gaining share, and orders look good to us.

So, I guess that's probably the best I can do.

Okay.

Can you comment on book-to-billed in the first quarter?

Not really.

Not really.

We didn't provide that as guidance.

I think we gave you a revenue number and told you that bookings were really, the market environment is good.

And so, we just had a record quarter in bookings, had two record quarters in a row actually.

So I think you can figure it out.

Yes, Ahmar, we have said three times the business feels really good this quarter and similar trends as it's been in the last six months.

I don't know how more clearly we can state that.

Okay.

Great.

That's all I had.

Thanks.

Thanks, Ahmar.

I think, operator, we probably have time for one more if there is one.

Your final question will come from Jesse Pichel with Piper Jaffray.

Hi.

Congratulations for firing on all cylinders, now with the drive business coming back.

Thanks.

I won't ask you about the bookings, but let me ask you, is there any risk to the backlog there if the customers wait for the 465i?

And can you tell us how is the margin profile directionally of the 65 versus the 65i?

We notice that your gross margin guidance is down a little bit next quarter, which may be impacting the stock here because I thought it would have been up.

So is it because of the i transition, and if not, do you have any initiatives there to improve it?

And then I have a follow-up.

Yes.

Let me take the first part of this question, and then Dave can talk a little more specifically about the gross margins.

We've been getting positive pricing on the 465i and I think it is a tool with tremendous benefits that, with a little higher price.

That has been very positive, and I think I will let Dave explain why the margin may be temporarily depressed due to ramping our manufacturing capacity.

Yes, you see, in our guidance you see the margin dipping a little bit in the first quarter.

That's because we expect as we ramp up capacity, we are going to incur a number of expenses that would get charged to cost of sales that are period expenses in order to support that ramp, things like training up, training up installation, field support and such.

Those costs will be incurred in the first quarter, but they're going be out there in the field and working to bring in the new capacity in Q2 plus.

So you think that Q1 is the margin trough there on that product?

That comment wasn't product specific.

That's in general.

As we support the overall MOCVD ramp, we are incurring period costs that will get charged off in Q1 for things like field support and training.

Oh, right.

Understood.

Then we go to the ramp of 70 tools by Q2, Jesse.

Yes.

Right, and then 120 by Q3 or is that by Q4?

End of the year.

End of the year.

Great.

And of the 16 in the quarter, the customers, can you tell us are those mostly single sourced?

I am trying to ascertain if the strength we're seeing is all market related or perhaps if there is some share gains as well which you alluded to, John?

Most of them are not single sourced.

I mean there are a few companies in the industry that are single sourced.

But there are many that are, that split the business between a couple of suppliers, and that have had maybe a few -- we have customer that have mostly Veeco tools, and a few Aixtron tools and we have the opposite, but most customers are building an aggressive manufacturing capability are going to buy some of both companies.

I think that's a pretty normal practice in this type of industry.

Has the i won you a new shared customer?

I believe it has, yes.

The i gets great reception and from, maybe there have been some companies that in the past did not buy much from us, and some of those companies really like the 465i a whole lot.

Right.

And finally, although you probably won't comment on your positioning relative to a potential applied materials launch, should we assume then your guidance assumes a launch, and that you have a pretty good read of their beta customers either in Japan or Korea?

We -- our guidance, we put out guidance, we are pretty confident in our guidance.

We have made, we've hit our guidance every quarter since I have been here in two and a half years.

So we think we have a pretty good read from the places where we're selling things and the guidance that we give for Q1, those systems were booked long ago.

They are being built, they have deposits -- there's really -- I don't see impact of applied on any kind of near-term business there for us.

Let me take a shot at one more.

I understand if you have no comment, but [Sheman Sonon] publicly announced that it would buy 200 more MOCVD tools, and I believe they said you're a customer publicly.

How likely do you think it is that this would turn into a near-term new order for you, or is that in your bookings guidance now?

I can't really comment on individual customer orders other than we've had past press releases with [Sonon], and they are an important customer of ours.

Fair enough.

Well, listen, congratulations.

Thanks again.

Thanks.

Okay.

Thank you for joining us.

Operator, we are going to wrap this up.

We will talk to you again soon.

Thanks.

Ladies and gentlemen, this does conclude today's presentation.

We do thank everyone for your participation.