Veeco Instruments Inc (VECO) 2010 Q1 法說會逐字稿

Good day, everyone, and welcome to the Veeco first quarter 2010 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.

Ms Wasser, please go ahead.

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

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

Joining me today are CEO, John Peeler and our CFO, Dave Glass.

Today's earnings release was distributed at four PM this afternoon and is available on Veeco's website.

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

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

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

Your participation implies consent to our taping.

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

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

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

During this call management may address non-GAAP financial measures, information regarding such non-GAAP financial measures including reconciliation to GAAP measure as a performance is available on our website.

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

Thanks, Deb.

And thank you all for joining us today.

I'm pleased to report that Veeco's first quarter revenue was $163 million, another record for our Company, increasing 12% from the fourth quarter of 2009 and 160% from one year ago.

This strong revenue drove EBITDA to a record $33 million, with GAAP EPS of a record $0.62 per share and non-GAAP EPS of $0.49 per share.

First quarter LED and Solar revenues were a record $112 million, with MOCVD revenues reaching an exciting milestone of over $100 million.

Revenues by segment were 68% LED and Solar, 14% Data Storage, and 18% Metrology.

Revenues in EBITDA increased sequentially in all three Veeco businesses.

Veeco's first quarter 2010 bookings were $268 million, up over 400% from Q1 of 2009 and 2% sequentially.

This is another record performance for Veeco.

LED and Solar orders were $212 million, increasing 20% sequentially with over $200 million in MOCVD business driven by accelerating orders for our TurboDisc MOCVD systems.

We continue to see strong MOCVD demand as an expanding list of customers ramp production for backlighting and for general illumination applications.

Veeco received MOCVD orders from over a dozen customers around the world, in addition to being the chosen supplier of MOCVD tools for LG Innotek and [Soloptum] Device.

During Q1, we booked our first major wins at the other leading Korean electronics manufacturer.

We're proud of our position in Korea, and believe that Veeco has captured the majority of the Korean MOCVD market.

Veeco is also doing particularly well in the China market.

While it's hard to know specific share, we believe that we are winning at least half of the business in this exciting growth market.

Q1 orders also included purchases from Genesis Photonics, and several other customers in Taiwan.

Excuse me.

And from LED industry leaders in the US and Europe.

In the US, we sold an MOCVD tool to an important semiconductor device manufacturer entering the LED market.

Q1 Data Storage orders were $26 million, up over 200% from Q1 of 2009, but down 50% sequentially from the strong -- strong order catch up we reported in the fourth quarter.

We are receiving orders for both new technology -- excuse me -- I'm choking.

Got something in my throat.

We're receiving orders for both new technology and capacity issues -- additions in a strong growth environment for hard disk drives.

Encouraging activity in Q1 included our first order for heat assisted magnetic recording deposition tool.

This technology, known as HAMR, is the industry's next technology node after perpendicular recording.

Veeco Metrology booked $30 million, up 78% versus the prior year but down 8% sequentially.

This is strong performance considering the first quarter is traditionally a seasonally slow booking quarter for Metrology.

New products for our research AFM business, such as our catalyst, Dimension icon, and new multi mode aid systems all saw excellent customer pick up.

Improved conditions in the semiconductor and data storage markets impacted our auto AFM and optical metrology product lines.

In aggregate, Veeco's Q1 book-to-bill ratio was 1.64, and our backlog at the end of the quarter was a new record of $502 million.

Let me switch to the remainder of 2010.

Clearly the MOCVD business is preceding at a white hot pace.

While we do not provide specific order guidance, Q2 business conditions and quoting patterns are at least as strong as we saw in Q1.

We announced this evening that we've received large multi-system orders this quarter from Sanan, China's largest LED manufacturer, and Seoul Optodevice in Korea.

Our key focus now is to ramp our manufacturing capacity to meet this demand.

We shipped 48 MOCVD tools in Q1, and have the goal to ship more than 75 systems this quarter.

We're striving to build capacity to ship more than 100 and 120 systems in the third and fourth quarters respectively, and all Q3 MOCVD shipment slots are currently taken.

We're extremely pleased about the K465i's market momentum.

Customers are reporting excellent transferability of their recipes into the new tool with dramatic increases in uniformity and adopting the new system into production at a very rapid pace.

Approximately half of our shipments this quarter will be K465i systems.

In terms of the overall LED market, industry forecasts for LED TV penetration continue to increase with the latest display search data indicating that the industry will exit 2010 with LEDs in approximately 30% of all new LCD TVs.

In addition to TVs, LED backlighting is forecasting -- forecasted to penetrate 100% of all notebooks, and 60% of monitors by 2012.

While backlighting is an important near-term order driver, we're also seeing strong growth in lighting in China and other regions.

We currently estimate that 25% to 30% of Veeco's 2010 tool shipments will be delivered to customers actively selling into general illumination.

We expect the LED lighting market to be driven by demand for better efficiencies and lower costs, increasing penetration into key applications, such as commercial lighting and favorable governmental policies.

Based upon Veeco's order patterns and shipment plans for 2010 and from our key competitors previous comments, we now believe that it is likely that the MOCVD market size will be about 700 to 800 in tools for 2010.

While predicting beyond 2010 is extremely difficult, since there are many variables tied to adoption rates for backlighting and lighting and tool capabilities, it's clear to us that the pace of adoption of LED tools is moving faster than previously predicted.

From a competitive standpoint, we think Veeco is doing very well in the market today with a tool that provides great capital efficiency and better cost of ownership for our customers.

But the K465 isn't our last act, we have several generations of new products in development, and are accelerating our time to market for these products.

In Solar we expect to begin shipping the first tools from our CIGS product family this quarter, and we continue to ship substantial volumes of thermal sources to CIGS customers every quarter.

We're continuing to push ahead on our product development road map for CIGS deposition solutions.

Business trends are strong in Data Storage.

Our key customers are reporting stable pricing, low inventories, and high-capacity utilizations.

They are advancing head technology, proceeding with their programs to increase wafer size, and require capacity additions to keep pace with forecasted double-digit hard drive growth.

Veeco's Data Storage backlog of $63 million at the end of March supports revenue growth in Q2 and Q3, and it's clear that we will have a dramatic increase in revenue and profit compared to 2009.

For Veeco Metrology, bookings continue at a healthy pace, driven by products we introduced last year.

In Q1, we introduced two new optical profilers, the NT9080 and the exciting new Condor GT product and another new research AFM product, the Dimension Edge.

We're penetrating growth applications, such as high brightness LED, solar, medical, and precision manufacturing, and as you can see from the Q1 results, we're seeing good improvements in metrology gross margin due to improved volume, and the success of our outsourcing programs.

Given this backdrop, we expect metrology to have an excellent year with strong growth in revenue and profit.

Before I turn the call over to Dave, I would like to comment about our second quarter 2010 guidance.

We currently anticipate that revenue will be between $220 million and $240 million, with earnings per share from $1.02 to $1.20 on a GAAP basis, and $0.78 to $0.90 on a non-GAAP basis.

We're excited to be forecasting what will be record levels of revenue and profit for Veeco.

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

Thank you, John.

Our first quarter revenue of $163 million marks a new record for Veeco, up 12% sequentially, and over 2.5 times higher than the low point of the downturn a year ago.

The LED and Solar Process Equipment segment once again led the way with record revenue of $112 million.

This translates to sequential growth of 14%, and year-over-year sales 5 times higher than last year.

Data Storage also reported strong results, revenues were $23 million, which is -- is up 10% sequentially, and more than one third higher than prior year.

Finally, Metrology reported good revenue growth for the third straight quarter.

Metrology sales were $28 million, which advanced 5% versus fourth quarter and about 20% year-over-year.

As John mentioned, total bookings for the first quarter were a new record at $268 million.

This is the third straight quarter of record bookings and represents a book to bill ratio of 1.6 to 1 for the quarter.

Gross profit this quarter was $70 million, or 43% of sales, in line with our guidance.

This is a significant improvement over the 32% margins reported last year, but down slightly from 45% in Q4.

A year-ago marked the worst of the industry downturn and margins were squeezed by extremely low plant utilization.

Operating rates are now high, but margins declined slightly from last quarter as the Company incurred period costs to build and ramp our supply chain in support of the higher operating rates expected for the balance of the year.

Q1 selling, general, and administrative expenses were $23 million or 14% of sales.

This is up in dollar terms in support of the rapid business growth, but still down as a percent of sales compared to Q4 2009 and Q1 from a year ago.

SG&A costs declined versus fourth quarter, as the prior period included higher year-end bonus and profit-sharing expenses.

We ended the quarter with a total employee headcount of 1,170.

That's up 1,069 -- up -- up from 1,069 at the end of last year.

The increase includes both permanent and temporary employee additions to support the rapid business growth.

Over one third of these new hires were temporary workers.

Research and development expense was $16 million, up 20% from last year as we continue to refocus spending in support of our next-generation LED and Solar tools.

Last year's first quarter included a restructuring charge of $4 million, and was primarily -- and was primarily severance cost related to the workforce reductions resulting from the severe industry downturn at that time.

Veeco's first quarter GAAP net income was $26 million or $0.62 per share, compared to a loss of $21 million, or $0.66 loss per share last year.

The first quarter income and EPS were within the range of guidance we gave last quarter.

Earnings per share, excluding restructuring items, amortization expense, equity compensation, and non-cash interest, and utilizing a 35% tax rate was $0.49, also within the guidance range.

EBITDA as a percentage of sales was 20%, up from the already strong 17% EBITDA reported in Q4.

Turning now to the balance sheet, we saw continued strong growth in our cash and short-term investment balances, finishing the quarter at $350 million.

The $66 million increase over the year-end balance is principally composed of net income plus an increase in customer deposits and proceeds from the exercise of employee stock options.

Accounts receivable and inventories increased by $5 million and $7 million respectively this quarter, reflecting the higher levels of demand we're experiencing.

Accounts receivable days sales outstanding saw a favorable 2 day decline from 52 to 50 days.

Inventory turns also improved slightly, moving from 4.2 turns last quarter to 4.4 this quarter.

We're very pleased to see the continued working capital improvements as our sales continue to grow.

Capital expenditures were low this quarter, just $1 million, but are expected to grow throughout the balance of the year as we invest to support business growth.

Most of our capital additions over the balance of the year will be focused on lab tools and facilities to support the new business -- support new product development.

I would like to take a few minutes now to review the Q2 guidance.

As John described earlier, Q2 2010 revenues are forecast to be between $220 million and $240 million.

This translates to earnings per share guidance between $1.02 and $1.20 on a GAAP basis, and between $0.78 and $0.90 on a non-GAAP basis.

We expect Q2 margins to be in the range of 44% to 45%.

This is above the -- this is above the Q1 margin reflecting -- reflecting the increased operating rates, countered by an expectation of continued period cost to support the unprecedented ramp in capacity.

These factors, plus a continued focus on allowing only strategic increases in operating costs, should result in pushing EBITDA to a new record level of between 24% and 26% of sales.

Given the forecasted increasing LED Solar volumes throughout 2010, it is currently our expectation that Veeco gross margins will improve in each sequential quarter of 2010 with an average for the year above 45%.

As mentioned last quarter, moving forward, we expect to continue to cautiously allow increases in our dollar spending to support the higher confirmed growth rates.

At the same time, we plan to manage our total SG&A spending run rates to stay within practical targets of below 15% of sales.

Similarly for R&D, we will continue to direct new R&D spending into higher growth, LED and Solar projects, while targeting ongoing spending rates this year in the 10% range.

Over the longer term we see R&D spending at around 12% as reasonable for our business.

Let me now turn the call back over to John.

Thanks, Dave.

Operator, we'd now like to start the question and answer session.

Certainly.

(Operator Instructions) And our first question comes from Timothy Arcuri from Citi.

Hi couple of things.

First of all, John, last quarter you gave a forecast of roughly 500 tools per year required the next -- the next three years on average.

You are going to be well over that run rate this year.

I am sort of wondering of that forecast at the time, how much of that was for lighting?

So we don't break our forecast down between lighting and general illumination.

What we have seen is that it appears that both markets continue to accelerate the adoption rates in backlighting are -- continue to be revised upwards.

And we see a lot of activity in lighting.

So we have given a forecast of a few hundred -- how many tools were required for the backlighting application over a two-year period.

We stopped doing that, and really moved to kind of a more simple format this quarter of -- that we think the market requires 700 to 800 tools in 2010 for the combination of lighting and backlighting.

Okay.

I guess two more things for me then.

Number one, I think the install base of tools entering this year was something in the 1500 range, and I'm wondering, A, if you think that's right?

And B, is there's some way to model some sort of obsolescence factor to that number?

In other words are these tools good for a certain number of years such that of that 1500 install base, X-percentage has to be sort of rebought per year?

Yes, we don't provide the install base of tools on a public basis.

The tools last a long time, but what is happening is each generation of new tools makes more LEDs with better quality faster, so people tend to bring on new tools and push, really, older tools into lower -- lower applications that don't require as good of performance.

Okay.

And then I guess last thing for me, John, can you break down the $502 million in backlog by division?

Dave, I think you can -- we have provided that.

Yes, okay.

It's $415 million is LED and Solar, $63 million is Data Storage, and $24 million Metrology.

Great.

Thanks a lot.

Thanks, Tim.

Our next question will come from Bill Ong from Merriman.

Congratulations on a great quarter.

My question is on the LED industry trend.

We saw a recent US LED chipmaker talk about 6-inch capability by the middle of next year.

What do you think is the time line is for the industry to move towards 6-inch?

And do you think a force in upgrade cycles, like the 2-inch tools next year, or do you think it will be more primarily R&D pipeline production?

So more than half of our product that's shipping currently is for 4-inch applications, and maybe 40% for 2-inch.

We have key customers that we're working to bring 6 inches online, and I think as they add tools they'll start to add tools for 6 inches.

It's not exactly clear what the timing is and we can't comment on specific customers, but clearly, over time here, the market will move to 6-inch, and I know some of the very large producers are moving in that direction.

Our product doesn't require an upgrade to go from 2-inch to 4-inch to 6-inch.

It really just requires new wafer carriers.

So the product actually doesn't change for us.

Thanks.

And my last question is what is your gross margin break down between the three business units?

And can you comment on trend direction for those three units?

Yes -- well, in terms of trend, I think we'll focus just on the total company.

We're putting that at 44% to 45% right now for second quarter.

For -- let me see here.

So Metrology in the first quarter was 47%.

Data Storage -- bear with me -- Data Storage was 40%, and LED Solar was 45%.

Great.

On -- thanks so much, gentlemen.

Bill, I would just add to that the trend in each of those is headed upward.

Yes.

Yes, as I mentioned the -- we're held down in the first quarter and second quarter because of additional cost to support the ramp.

We see that lightning up over the course of the year, so -- progressively increasing.

Thanks for the incite.

Thanks, Bill.

Our next question will come from Patrick Ho from Stifel Nicolaus.

Thanks a lot and congratulations on a really good quarter.

In terms of -- following up on Bill's question about the transition to 4-inch or 6-inch, you have tracked better than your competitor in terms of MOCVD units and orders over the last few quarters.

Can you just go into a little detail of what -- what is your differentiating that is allowing you to outpace your competitor?

Well we introduced the -- over -- let me go back a little bit.

Over the 2009 period, we made product improvements in every quarter, and improved our uniformity, and our overall product capability in -- early in Q1, we announced the 465i, and this product built on the fact that we were already the most automated solution on the market, and the fact that we already had the most runs between cleaning and basically a significantly -- a significant through-put advantage, and added to that very substantial improvements in uniformity, and they gave us the tool that have, really, the best overall cost of ownership on the market.

So it's an ability to do more runs per day, to not have to change the tool as you go from 2 inches, to 4 inches, to 6-inch, to provide world-class uniformity, and run-to-run repeatability.

The new product is very easy to tune.

It's very easy to transfer recipes from the older systems on to this, and we think it's -- it provides the best cost of ownership on the market.

So we have been booking and increasing share throughout the last three quarters of 2009, and of course, we haven't seen our competitors bookings data for 2010, but the market likes our product, and we have been able to penetrate a number of new accounts, where previously we sold very little.

Great.

That's helpful.

And one final question on my end, you are (Inaudible) manufacturing capacity to meet this demand, yet you are holding the gross margins really well given this ramp.

Where are you finding the levers -- you offsetting the cost that are coming on board to keep your gross margins at these pretty high levels?

So we use a manufacturing strategy that is largely outsourced, and that makes it easier for us to ramp without adding a lot of bricks and mortar, and internal people.

We have had to add substantially to people doing final test, and supply-chain management, and people doing field installs, and what we find is we need to add about a quarter ahead of the actual capacity requirements in order to train people and fully come up to speed.

So in Q1 when we were delivering 48 systems, we actually had the manpower on board to meet or exceed our capacity goal of 75 systems in Q2, and so it's a very flexible approach.

We have been able to do it with a very high quality.

I believe we have shipping the best-quality products we have ever shipped.

Our out of box failure rates are exceptionally low.

And our average time to install systems is just slightly over 20 days.

So we have been able to do the ramp up to this point with a high degree of efficiency.

It has put a little pressure on our gross margin, but that will continue to go up as we -- as we ramp up both the volume and as the next quarter's shipment target is not as high of percentage of the current quarter's actual shipments.

So our strategy for manufacturing, I will say is working exceptionally well.

Great.

Thank you.

Thanks, Patrick.

And next we'll go to Krish Sankar with Banc of America Merrill Lynch.

Yes.

Thank for taking my question.

John, I had a couple of questions.

One, I understand you don't want to break out of -- in terms of general lighting versus backlighting.

But last quarter you said backlighting could be about 400 to 500 tools this year and now you think 700 to 800 total MOCVD tools.

Is the delta coming predominately from general lighting?

I think it's coming from two areas.

One is, I believe, that the pace of installing tools for backlighting is picking up.

I think that -- if you look at the market analysts data on LED penetration into TVs, it's been increasing each quarter, so the penetration into TVs has been increasing.

That's driving additional demand for MOCVD systems, and I think lighting is also moving at a rapid pace.

We have looked at our tools, and 25% or 30% of our tools are going into customers that ship -- that ship into general illumination.

Now they may ship into backlighting also.

So it's hard to peg exactly how much is lighting, and how much is backlighting.

But, I think both are growing and both continue to accelerate.

So it is fair to assume that your 25% to 30% shipments into general lighting, is that uniform through the year?

Or do you think it's happening now?

Or do you think it's more back half of the year kind of adoption?

I think the market is an accelerating market, so I would expect each -- each period there will -- overall be more units ordered for lighting.

So I -- I don't think it's a flat market.

I think it's an aggressively growing market.

Okay.

I had a couple more.

What is your booked market share for MOCVD in Q1 do you think?

Our competitors haven't announced their results, so that would be purely guessing at this point.

Okay.

That's fine.

And then a final question on the Data Storage side it seems like just one customer who ordered in Q1.

Do you actually think there is going to be the other couple of guys coming back in Q2, or do you think we will be at this low level for a while?

Well, first of all, I wouldn't call Q1 orders as a low level.

I think -- Q4 was a huge quarter because there were almost no orders in Q1 or Q2 of 2009, or Q4 of 2008.

So there was huge pent up demand, and the $50 million Q4 was truly extraordinary.

I think the market in Data Storage has continued to heat up.

If you listen to the earnings announcements of the top players, Seagate or Western Digital, you can hear their activity.

They are moving their forecasts up, and this is a very healthy growth market for hard disk drives, and I think we're going to do really well in this from both an order and a revenue standpoint.

The customers are investing in new technologies, which is a good thing and they are also investing in increased wafer size, and it's not just one customer increasing their wafer size anymore.

Because the other -- other players have announced changes.

So I think it's going to be a very healthy market for us in 2010.

Great.

If I could just squeeze one last.

In the past you said that you expect some customers in the field to upgrade from the 465 to 456i?

Are you seeing that happen?

And if it does happen, what is the ASP for the upgrade?

Thank you.

Well, one of the advantages of the K465 is it is upgradeable.

And it's a modular upgradeable platform and we've been able to deliver numerous improvements.

You can't upgrade a 465 to 456i.

Right now the demand in the market is -- is very high, so people are -- are tending to keep their -- everything they've got running at full speed and ordering new tools.

We are focusing our capacity on delivering new tools, as opposed to doing upgrades.

But I think over time, there will be an upgrade market and we'll -- we'll be able to support that.

But right now, we're putting our effort into new tools, because that's what everybody wants.

Thanks, Krish.

Next our question will come from Daniel Amir from Lazard Capital Markets.

Thanks a lot, and congratulations on a good quarter.

Couple of questions here.

Following up maybe to the previous question.

Your major competitor has announced kind of a new tool that it's -- will start shipping, I guess in the second half of the year.

Can you comment on kind of your R&D activities in terms of your road map as -- their new tool supposedly will may have higher yields than your K465i, so can you comment a bit about that?

And then I have a followup.

Thanks.

First of all their product is new, it's not been widely deployed.

I don't know if it's signed off for production any where.

So I think what we have seen is -- our -- the customers are evaluating our tool.

They like our performance.

They have seen dramatic improvements in -- in our tool performance, and they are ordering them as fast as we can build them.

So I think that speaks a lot for the performance of our tool.

We have R&D going on on two more generations of the -- of products, and multiple new technologies and upgrades to allow us to keep delivering new products to the market that reduce the cost of making very high quality, very high brightness LEDs.

So we have been accelerating our -- our R&D funding for the last few years, and are making great progress on that.

I think right now, we think we have the best tool on the market.

Okay.

And the follow-up question is in terms of kind of the market right now, you are seeing -- obviously different waves of companies that have entered into the market in the past couple of years, and there seems to be another wave of new companies that might be entering the market in terms of LED manufacturing.

Can you comment a bit about what you are seeing in potential new companies and what type of order visibility, maybe you can seeing from them thus far?

Well it really varies region to region.

I think we have seen, obviously huge demand for products in Korea.

We're seeing a tremendous growth in China and Taiwan.

China is helping to subsidize building LED factories in China, and paying for somewhere in the order of half of the cost of a new tool.

If certain conditions are met, China is also driving market for LEDs by basically focusing a lot of the province of street lights to basically mandating that they are going to be LED based.

So we see a huge wave of new growth coming from China, and that is a combination of existing suppliers that have been in the market, and have very aggressive expansion plans.

Excuse me.

As well as new entrants that are going to -- to build substantial fabs in China.

We see a lot of work going back and forth between Taiwan and China.

So -- and then there are new entrants in the US also.

So kind of a mixed bag, but a lot of expansion going on with companies that have been doing this for a while, as well as some new ones coming in.

Okay.

Thanks a lot.

Next we'll go to Jed Dorsheimer with Canaccord Financial.

Hi.

Thanks.

And congratulations on a great quarter.

Thanks, Jed.

The first question, just sort of a continued thought process on what you were talking about on the last one.

The China subsidy, the $10 million R&D.

I'm curious, I think a third of that comes when an order is placed, a third qualified, and a third producing products, and so are the -- how does it work with the customer?

Is the customer having to apply beforehand, getting reimbursed by the Chinese government and actually placing the order?

Or placing the order and then having to try to get reimbursement from the province?

I -- Jed, I can't speak to the specific terms, but at least -- because it may vary province by province.

There is local variations.

I know in at least one case that I looked at in detail, the customer receives money when they received the tool.

And so the customer needed some funding to basically get started in this.

This is not a -- full funding for the tool.

Got you.

And if we look at the LED bookings, John, what is the geographical mix breakup?

It sounds like you have done really well in Korea, in gaining some share there.

I'm curious in some of the other regions, how does that bookings break out?

So, we have done really well in all regions, I think, on a -- a change in share basis.

We have seen pick up in the US and European markets, but we have really seen the heavy spending going on in Korea and China and Taiwan, and the Asian markets.

We have less visibility and less penetration into Japan.

So I think we're less qualified to say how much are we losing versus what is being spent there, but we really have had broad-based sales with -- with a huge pick up in our business to Asia.

All right.

And what about the US?

Any percentage in terms of the -- the bookings?

Yes, it's growing.

It's growing significantly, but the Asians are the ones that are really spending the most.

Fair enough.

Last question, then I'll jump back in the queue.

You mentioned 40% being the 4-inch, I think 50% being 2-inch, and presumably the 10% being the 6-inch.

Was that shipped product?

Or is that what's been booked?

So I -- so what I have here is more like 40% 2-inch and 60% 4-inch.

And that's more booked for -- for what we are delivering.

And the 6-inch, being relatively small, but, again, with Veeco products, this is just which wafer carriers you are going to get the product with.

It's not a different product, so we have top customers working at 6-inch.

They have given us really exceptional feedback on our performance of 6-inch.

And we see the market continuing to move to 6-inch, especially as the waivers become more available at a lower cost, and I think if we're here -- in six months from now, you are going to see different statistics there.

So you haven't recognized the bookings -- a large customer on 6-inch at this point?

If 40% is 2-inch, 60% is 4-inch, you haven't had some big order on 6-inch at this point?

That would be true.

All right.

Thank you.

And next question have a follow-up from Timothy Arcuri from Citi.

Hi, thanks.

John, I just wanted to make sure what you were saying on bookings for June.

I know you don't guide bookings, but it sounds like you are saying, sort of at this point in the quarter, bookings are higher than what they were at this point in Q1.

Is that the right read?

I think bookings -- we have just announced two major orders.

There's a lot of activity that is very positive.

And we just finished a quarter with $200 of MOCVD orders, and the -- I think the comment was that the market is at least as hot and active in Q2 as it was in Q1.

So -- it's an exciting market, and it continues to move along at a very fast pace.

Okay.

And then just lastly, John, have you done any really sort of big-picture analysis on what the ultimate general lighting opportunity is in terms of tools?

We have sort of done some back-of-the-envelope math.

Something in the high four digit thousands, so six, seven, eight, 9,000 tools over 10 years, something like that?

Is that remotely in the ballpark of what you have come up with?

We have looked at the market studies from various analysts and various predictions around.

It is amazing to see the range of the predictions between different analysts being different by as much as 10 to one.

We think this is a huge market with numbers like you are talking about.

We're off doing a lot more detailed market research, and working to -- to really nail down a better set of numbers, but the numbers that you are talking about seem reasonable.

Okay, John.

Thanks a lot.

Our next question will come from Chris Blansett from JPMorgan.

Hi.

Thanks for taking my call.

I had a quick question about the longer-term modeling of the Company.

Obviously your top line is growing very strong.

We should see a lot of leverage and it sounds like you expect to see that on the OpEx going forward.

I guess, for modeling for this year, should we just assume the metrics provided before for SG&A were 15% for SG&A and R&D down to 12%, and then going forward should we see those continue to shrink as well as a percentage of sales?

Yes, I think as I mentioned, look for -- we're looking for around 10% -- 10% R&D this year, and then as I said longer term 12%.

So that puts us in the 20% to 25% range longer term for total OpEx.

I had a quick question.

When you look at the mix of your LED and Solar business, the trends tend to indicate that there's a declining ASP trend.

And I just want to make sure since you don't effectively break out LED versus Solar that is or isn't the case?

And I wasn't sure if some of your very large orders are coming where they get some sort of volume discounts.

No, actually there is not a declining ASP trend.

The 465i commands a price premium versus the 465, and -- and we would say that our -- our old prices, 465 were probably $2 million to $2.2 million, and newer prices or more $2.2 million to $2.5 million.

It varies somewhat by customer configuration.

So we have some customers that order configurations that are $500,000 or more, different than others.

So you may be seeing differences in customer mix, but the market has held up very well on ASP, and the new product has really generated some additional premium.

I guess one last question for me then on the product gross margin.

Specifically the MOCVD side.

Obviously as you -- you're going to grow your capacity for manufacturing through an Asia-based out -- contract manufacturer, and then you are also going to roll out an Asia-based supply chain over time.

I guess generally speaking how does this play out throughout there the year?

When do we really start to see the leverage from that, obviously from the contractor first and secondly from the supply chain?

And then, generally speaking, will this flow back into your US-based manufacturer as well?

As least on the supply chain side?

So, I guess there's a few questions in there.

First of all, we manufacture in both the US and Asia, so we have a dual source supply strategy here.

We have before manufacturing in the US for a long time, and we have expanded that into Asia.

Even when we are manufacturing in the US we had a fair amount of Asian content in the product, and had been driving to -- to increase that.

So I think what you'll see is as our second outsourcing partner in Asia increases their volume, that will improve and contribute to gross margins.

We're still in the phases where they are an earlier manufacturer of this product, and it will take time for them to really get up to full speed.

I think over time, and -- over each quarter of this year, what you are going to see is an improvement in MOCVD gross margin.

As the volume goes up, the overhead amortization is spread over more units.

We -- and we begin to drive our material costs down, and -- if -- assuming that we get to a point where the next quarter growth isn't such a huge percentage of the current quarter, that will also pull up the gross margin.

So there's clearly an opportunity for kind of ongoing growth and improvement in gross margin

All right.

Thank you.

Next we'll go to Ahmar Zaman from UBS.

Hi, John.

Congratulations on a great quarter.

Thanks.

First question, I wanted to go back to kind of China a little bit.

In the last quarter you mentioned -- I think you said there were about six customers that placed orders from China.

Can you give us an update for this quarter?

There were about six more, I think for China this quarter.

Six more new customers?

Yes.

Well, six more customers placing orders, so about the same.

There was some overlap in those, but there's a lot of activity both in new customers approaching us, as well as customers that have been buying, such as Sanan coming back for more product to meet their expansion needs.

Just trying to figure out, based on the subsidies we hear about in China, just trying to figure out what inning we are with the subsidies.

What would you -- can you provide some sort of estimate on what percentage of the backlog is -- is from China at this point?

I don't think I can do that.

But, there is a -- a ramp in that side of the business, and I think -- I think there's going to be a lot of strong business there for a long time unless something -- unless something changes.

There's -- there are customers placing significant orders, and customers like Sanan, who have announced very aggressive purchase plans of their own, in terms of what they are doing in China.

So I can't say when it will stop, but it is a very hot market at this point.

Would you -- would you characterize it as just sort of begun, or kind of in the middle?

I would say it's earlier stage.

Earlier stage than Korea for instance.

Okay.

And then just final question on China, and then I have a follow-up.

Of the -- you had mentioned the total size -- shipment size of 700 to 800 tools for the industry in 2010.

What percentage of that do you think would go to China?

I don't have that part done.

Okay.

Moving on to materials.

We have been hearing about sapphire shortages more and more lately, and one of the big suppliers of sapphire reports on Thursday.

Do you have any sense at this point of the shortage there, and if that might be a risk to continued shipment growth for the equipment, for MOCVD reactors?

I'm not an expert on the sapphire market.

We are -- we believe that our customers will solve that problem, that they are bringing on more capacity, and that the industry will provide more capacity.

We're -- we are scheduled out to ship through 2010, and we mentioned that all of our slots were taken in Q3 and most of our slots are taken in Q4.

So there's obviously a lot of equipment coming online from us and our competition over the next year.

I think we'll have to wait and see how the sapphire industry can flex to provide for that.

Great.

And then just if I may, quickly, on the slots for Q3.

That's -- is that your new capacity target of greater than 100 MOCVD reactors?

That's -- yes, that's -- that's actually not a new capacity target.

Although last quarter when we made the announcement we said 70 in Q2, and 100 in Q4, and I think everybody kind of extrapolated 120 in Q4 and then everybody extrapolated that to get 100 in -- in Q3, which is -- which was our target.

So we're still working on this aggressive ramp.

So far, we have hit all of our targets for manufacturing, and we kind of upped the target for Q2.

It was 70, and we moved it to 75.

So -- but -- right now there's huge demand, so we're trying to up our capacity as quickly as we can.

Great.

Thank you very much.

Thanks Ahmar.

Next we have a question from David Duley from Steelhead Securities.

Yes, just to follow-on the slot plan question, you mentioned that you were full in Q2, full in Q3, and partially full in Q4.

Where are you on the Q4 slot plan?

I think we said we were mostly full in Q4 and booking orders into Q1.

Okay.

I guess when we look at your presentation -- financial stuff that you gave us with the press release and what not, you clearly seemed to be more confident about your targets of shipping 100 tools in Q3, and 120 in Q4, because slot plan is now full at those rates?

Well, we have a good track record of meeting our expansion goals.

Yes.

And -- but these are huge changes to go from a -- a 45, 70, 100, 120, these are huge changes.

So there is always risks.

There is always challenges.

We know that we can meet the part of that ramp plan that's in our control, but -- but there's a lot of things that -- we depend on suppliers for and things that can happen.

But, we are -- we think we can do it.

We generally put out goals that we think we can make.

And we generally make them.

So along those lines, now that we have this kind of like target capacity in mind, when do you think your revenue will come much closer to meeting your order demand in the MOCVD business?

Well, I think that's going to depend on the orders, right?

First of all those targets were minimum.

We said we were going to try to ship more than those targets each quarter.

So we are working to do that, and we don't give order guidance, but you can kind of map out that 100 systems is $230 million, or something like that, and kind of figure out the math.

It really depends on how sustained the current orders are, how many quarters out.

We know there's great activity now, and we think there's potential to have really great activity throughout the year, but it's -- it's too early for us to say what that is going to be.

Would it be your target -- because I right now, if you use round math, you roughly booked 100 tools, $211 million in the quarter, let's just call it $2 million a pop, 100 tools, and you just shipped 48, so you are kind of like two quarters behind your target?

Do you think you are going to shrink that difference over time or do you kind of think you're going to have two quarters of differential there?

I can't kind of give you the guidance out three and four quarters ahead.

We -- if the orders continue at the level they are at, you can figure out what happens when we get to 75, 100, 120.

We're clearly -- we just can't give you bookings guidance out that far.

Okay.

Final thing from me, and -- again, congratulations on a great quarter -- you mentioned that there seems to be kind of a gross margin impact from the ramp-up in this business.

I'm wondering whatever -- not asking you to give me a time frame, but when revenue does catch up with orders, what sort of impact, unwinding of this extra headcounts that we have, what kind of impact are the gross margins to the MOCVD business could we see when things do catch up?

Is it a one percentage point?

Or five percentage points?

Just trying to understand the magnitude of adding the headcounts in advance of the ramp.

Well, yes, I think that -- your last comment kind of nailed it, and that is that we have got people on board for 75 while we're doing 48.

And we have got people for 100 while we're doing 75.

So it's -- when we have got people on board that are doing 120, if we're still forecasting 120 next quarter, then there will be no excess manpower, and we will improve in gross margin.

And you have to have an idea of what that excess manpower cost is at this point, really, is what I'm trying to figure out.

I think that's more detail than we are prepared to put out, but I think what you can count on is that we believe that each quarter, that gross margin is going up, due to both volume effects and a lesser percentage ramp up impact.

Okay.

Great.

Yes, I'll just add.

I mentioned in my commentary that we expect averages to go up to 45% for the full year.

We're at 44% to 45% in the second quarter.

You can extend that that by the end of the fourth quarter, the end of the year, we expect to be on a run rate in the low -- in the mid-40s.

Mid 40s, north of 45% to get that average.

At the Company level.

At the Company level.

That's right.

Thank you.

Thanks, David.

Operator, we'll take one more question.

That question will come from [Addy Merchand] from ITR.

Hi.

Congratulations on the quarter.

You are bundling LED with Solar, and as we have seen in the solar market, the depressed pricing of PV is giving some challenges to CIGS and other technology.

So what percentage is Solar and where do you see the growth in Solar?

Well, we -- first of all our LED and Solar is mostly LED.

And the bookings were 200 -- about 200 of MOCVD out of about 212 or --

212.

212 LED and Solar sales.

Yes.

So you can see that we have been running at, you know, 90% or so LED in our LED and Solar.

We do have some significant solar backlog that will start to ship in Q2 and Q3, and probably revenue delayed by a quarter or so on that due to the shipment times and start up times.

We have been building a set of CIGS deposition tools for flexible stainless steel.

We think they are exceptional tools and they are unmatched by anything in the industry and we are in the final stages of rolling thos out.

I think there is a good set of market applications where that technology has a -- has a great benefit.

But clearly, pricing has come down in the Solar industry and in 2009, and it's a more cost-competitive business, but we think that the product we have, along with the CIGS technology for flexible has a great application and a good future there.

Okay.

One last question from me is are you expecting any additional capacity expansion into 2011, once you get to 120?

We will plan that as we get -- as we -- as we go -- as we get closer, and we see what the market demands look like, we -- we will ramp that as needed.

It's too early for us to put forth any capacity plans for 2011, but we can expand if we need to expand.

So there's nothing that's fundamentally limiting us.

Okay.

Thank you very much.

Thank you.

Operator, that concludes the call.

Thank you.

That does conclude our conference call today.

Thank you for your participation.