Veeco Instruments Inc (VECO) 2010 Q2 法說會逐字稿

Good day, everyone and welcome to the Veeco second quarter earnings 2010 conference.

Today's call is being recorded.

For opening remarks and introduction, 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 Debra 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 4:00 PM this afternoon and is available on the Veeco website.

Please note that we have prepared a slide presentation to accompany today's webcast.

We encourage you to follow along with the slides on Veeco.com.

Today's call is being recorded by Veeco Instruments and is copyrighted material.

It cannot be recorded while we broadcast without expressed permission from Veeco.

Your participation implies consent to our taping.

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

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

Veeco does not undertake any obligations or 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 reconciliations to GAAP measures of performance is available on our website.

I'll now turn the call over to John for some

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

Let us start on slide five.

I'm very pleased to report that Veeco's revenue was $253 million, up 55% from Q1 and 250% from last year.

Our strong revenue growth EBITDA is $68 million and net income to $52 million and resulted in GAAP EPS of $1.20 and non-GAAP EPS of $1.21.

Truly spectacular results and they represent record performance across the board.

Looking at the bookings by performance by segment are Q2 bookings were $347 million -- excuse me, I slipped.

Looking at the revenue performance by segment are LED & Solar revenue was $186 million.

That was up 66% sequentially and 482% versus last year.

Our MOCVD revenue was $175 million.

We shipped 81 MOCVD systems versus our target of 75.

That's a new record for the Company and it's nearly four times what we shipped in Q3 of 2009.

Our Data Storage revenue was $35 million.

That was up 54% sequentially and 103%, up from last year.

Our Metrology revenue was $32 million, that was up 11% sequentially and 40% year-over-year.

The breakdown by segment was 73% LED & Solar, 14% Data Storage, and 13% Metrology.

And finally, for all three of our Veeco business segments, we grew EBITDA both sequentially and year-over-year.

A really great accomplishment.

On slide seven, taking a look at the bookings performance by segment, our Q2 bookings were $347 million.

That was up 30% sequentially and 252% from last year.

Our LED & Solar bookings were $260 million.

That was up 23% sequentially, and 362% from last year, and our Data Storage bookings were $50 million.

That was up 90% sequentially, and 159% year-over-year.

Metrology was $37 million.

That was up 22% sequentially and 59% year-over-year.

Even with record shipments, this exceptional order performance drove a book-to-bill of 1.37 and a quarter ending backlog of $597 million.

On slide eight, let me give you a little more detail beyond the segment totals.

In LED & Solar, we booked $260 million, and this included about $250 million in orders for MOCVD systems.

It's another record for our MOCVD business.

We received orders from 17 different customers for MOCVD systems in Q2 and we continue to penetrate new accounts and gain share.

Orders came from key customers in all regions -- North America, Europe, Taiwan, Korea, Japan.

We saw an acceleration of orders from China and China's activities to stimulate the growth of a LED industry are really having a large impact on our business.

We received orders from Xian Han, Neo-Neon, Invenlux, Smart Lighting, Shanghai Epilight and others.

And beyond the China-based companies, we saw companies like Arima of Taiwan place orders for new fabs in China.

We continue to see demand from customers focused on that backlighting applications, but clearly, there's also a growing demand from customers focused on general illumination.

Our K465 continues to win business, as the best performing, lowest cost of ownership system in production today.

In Data Storage, strong market conditions continue and all of our customers are buying.

We had extremely strong orders at $50 million, and we received orders for a wide range of systems, including PVD, DLC, Saws & Lappers.

In Metrology, we had our best order quarter since Q4 of 2000, at $37 million.

Our new products are driving growth and share gain and applications for research and for emerging applications in LED, Solar, ophthalmic, and precision machining.

We also saw continued improvement in Metrology sales, semiconductor and Data Storage applications.

The overall market trend continues to be very positive in the LED space.

We've seen an expanding, universal of LED manufacturers, on on slide nine, you can see many of the top LED companies in the world.

And while we're not permitted to name every one of our customers, we sell to most of these customers.

The depth of our customer list continues to grow and we're currently scheduled to ship tools to about 35 LED manufacturers in 2010.

We see our success accelerating at both the established industry leaders, as well as the new entrants.

We think our market share is growing and we believe that it's an excess of 40%.

You can see from looking at the customer table here, that the LED manufacturing base in China is expanding, with new names and players entering every quarter and if we move to the next slide, we can take a look more specifically at the China market.

China's government is driving hard to build an LED industry in China, by supporting manufacturers on both the supply side and by ensuring demand for lighting.

And this creates a great opportunity for companies like us.

The map shows seven key cities that have LED-focused investment programs, they're -- which are subsidizing equipment purchases.

And beyond these seven cities, there are many more locations where sizable investments in LED fabs are occurring.

While it's difficult to predict exactly how these programs will play out in the coming year, we see China -- we see the China market as ramping rapidly.

On the demand side, China is creating national and provincial LED street light deployment programs and they are changing their building codes to spur LED lighting.

China clearly wants to tackle its energy challenges by utilizing high efficiency LED lighting, and we believe that they are also gearing up to be a major exporter of LEDs.

China is growing rapidly as a percentage of our orders, both in the second quarter and also, again in Q3.

Our bottoms-up market analysis points to over $500 million in subsidies that are available and we intend to capitalize on this.

We believe that a combination of excellent cost of ownership, high throughput technology, and excellent service and support will make us do really exceptional in China.

So at this point, I want to turn it over to Dave Glass for some more info on the financials.

Thank you, John.

I would like to focus now -- focus in now on some of the major finance drivers this quarter.

And also give a little bit more color on the details of how we see Q3 unfolding.

Turning to slide 12, each element of our P&L represented a new milestone for Veeco this quarter.

Revenues of $253 million far surpassed the prior quarter from last -- the prior record we saw last quarter.

And it's helped drive higher margins.

Gross profit margins were 45%.

That's up 43% in Q1 and -- 43% from Q1 and 34% from last year.

The margin expansion is, of course, primarily related to the higher volumes, but still constrained by higher MOCVD ramp up costs.

The MOCVD ramp cost including items such as increased training and premium freight to assure our customers' ambitious startup schedules can be met.

All these costs -- at these costs, all level off and our volumes continue to grow.

We do see margins ticking up a few more points over the balance of this year.

Selling, general, and administrative expenses were $27 million, or up about 17% from last quarter, as we continue to add resources to support the growth, particularly for MOCVD.

R&D expense is $21 million, also up significantly, about 25% versus Q1.

Just as in recent quarters, most of the new spending is in the fast-growing LED/Solar area to support our next generation tool projects.

Although total operating expenses were significantly up in dollar terms, the overall increase was right in line with our planning and our overriding goal to keep total operating expense to less than 20% of sales as the business grows.

This quarter, we recorded federal income tax, which, of course, negatively impacts our GAAP net income.

With the increased earnings to date and the higher forecast for the balance of the year, we now expect that this year we will fully exhaust all of our prior year net operating loss carry-forwards and tax credits.

As a result, we expect to pay federal tax this year for the first time in many years.

With all these factors taken into consideration, we currently expect this year's annualized effective tax rate to be just over 20 -- just over 12%.

Looking forward to next year, we expect an effective tax rate of just under 35%.

John has already covered bookings and revenue, so let me focus a bit now on EBITDA at the segment level on slide 13.

As you can see, MOCVD was the overwhelming driver for our more than doubling in EBITDA since last quarter.

But it should be noted that Data Storage and Metrology also saw sizable gains as well.

The near doubling of EBITDA on 66% higher revenues were LED & Solar, is the result of expanding margins and good operating expense control as we leverage the higher sales volume while only judiciously adding new costs to support the growth.

The strong Data Storage results are attributable to the excellent sequential top line growth, as well as tight controls to the supply chain costs.

Metrology grew 17% on 11% higher revenue.

Let's turn our attention now to the balance sheet.

Veeco's balance sheet strengthened further in Q2 with cash and short-term securities growing by $65 million since the end of last quarter.

Operating cash flow was $67 million, as the favorable impact of higher net income and increased deposits was only partially offset by higher working capital to support the increased levels of business activity.

Accounts receivable was up $51 million in dollar terms, but held flat in terms of day sales outstanding at 50 days.

Inventory turns hit a record 6.6 times, as the Company continued to streamline and leverage the use of the outsourcing manufacturing model.

CapEx was $5 million and this resulted in free cash flow of $62 million.

Moving on now to our Q3 outlook, which is on Slide 15.

We currently forecast that Q3 revenues will be between $290 million and $315 million.

This 15% to 25% sequential increase in revenue should drive up fixed cost absorption, which in turn should drive margins up further to about 46% to 47%.

Operating expenses will continue to grow in absolute terms to support the higher levels of growth, but should decline to 17% or 18% of sales in Q3.

All these factors combined should push EBITDA margins up to the end of the 29% to 31% range in Q3.

So turning to the next page, Slide 16, you can see that based upon our revenue forecast of $290 million to $315 million, our Q3 GAAP EPS will be in the range of $1.55 to $1.82 per share, with the gross margin and operating cost structures just described.

On a non-GAAP basis, we see earnings in the range of $1.23 to $1.43 per share, utilizing a 35% tax rate, which is our policy for calculating non-GAAP EPS.

I'll now turn the call back over to John for some closing comments.

Thanks, Dave.

Let me spend a minute on our business conditions and the outlook.

Our LED & Solar backlog is about $490 million at the beginning of Q3.

And the business patterns remain extremely strong.

Our MOCVD quoting activity remains extremely strong and is similar to what we've seen in the last few quarters, while activity is up in China.

Outside of China, we see an opportunity to grow our business in Taiwan and Japan and build on an already strong position in Korea.

In Data Storage, our customers continue to see overall positive business trends and our strong backlog of $78 million will help to drive our 2011 revenue.

In Metrology, we've got a solid backlog of $29 million at the end of Q2.

The business is performing extremely well, and we're winning deals and penetrating new applications in high growth markets.

So to summarize, our outlook remains extremely strong and we expect to follow up our excellent Q2 with another record quarter in Q3.

And MOCVD, while we don't provide specific order guidance, we're off to a good start in Q3 and we believe that MOCVD orders will once again be very strong.

We continue to focus on meeting our MOCVD shipment goals and plan to ship 100 or more systems this quarter and build capacity for more than 120 systems in the fourth quarter.

Beyond that, we have the ability to scale up our shipments or down, depending on customer demand.

For the long-term, we see a great growth opportunity for LEDs.

backlighting use of LEDs continues to accelerate and we think the industry is on a path to greater than 80% penetration of TVs in 2012.

That will drive purchase of many more MOCVD systems.

In lighting, China is driving growth of LEDs for street lighting and commercial applications and on a global basis, there's an increasing flow of new and more cost competitive LED lighting products.

The LED lighting market is accelerating and will prove to be much larger than the backlighting market.

Given the huge market opportunity for LED equipment, we plan to continue to accelerate our progress, grow our market share, with an ongoing flow of upgrades, and new systems that drive down the costs of producing high quality LEDs.

That's what it takes to enable broad scale adoption of LEDs for general lighting and we intend to be a major enabler of that.

Finally, switching back to Data Storage and Metrology, we're on track for exceptional revenue and profit growth in 2010, and we expect to have a great year for both of these businesses.

All in all, we're forecasting Veeco total revenue of well over $1 billion this year, and this will be a major milestone for Veeco, and I'm extremely proud of our team for making it happen.

So thank you for your attention.

Operator, at this point, we will take questions.

(Operator Instructions) We'll go first to Timothy Arcuri with Citi.

Hi, John.

Nice quarter.

A couple of things.

First of all, just a question on the strategy in the semiconductor business, if I look at the margins across the businesses, margins in semis are significantly lower than the other two businesses.

And I'm wondering whether that's something that could ultimately be sold, whether you view that as core to the Company, and what can be done to increase the margins in that business?

And then I had a second question.

Thanks.

So, Tim, when you say semiconductor business, do you -- are you referring to our Metrology business?

Yes, correct.

Okay.

Well, most of our Metrology business doesn't sell to the semiconductor market, first of all.

The margins in that business have been improving.

The business is growing.

It's gaining share.

It's been getting better every quarter for, I don't know, three or four quarters now.

So we're really pleased with how it's doing and I think the margins will continue to grow.

We're always looking at our strategic opportunities and what we might do or what we might not do.

But we have a policy not to comment on forward-looking strategies for either acquisitions or divestitures.

Okay.

And then just two more quick ones.

John, of the 115 roughly give or take systems that it looks like you booked in the MOCVD business in June, how many of those were for lighting?

It's hard to tell, Tim.

I think that the information that we've been telling people is that probably 25% or so of those -- 20% to 30% of the customers we sell to are active participants in the lighting market, but many of them are also in backlighting.

So it's hard to split it out.

But I think you can take that 20% to 30% or in both, are in lighting, and we see a lot of lighting growth driven by the Chinese, as well as other regions.

Okay, and then just of the backlog that you reported for Solar & LED, how much is Solar?

Thanks.

Dave, can you help me with that?

It's mostly LED.

And most of the bookings were LED.

I think we gave you a separate breakout of the LED.

$29 million.

$29 million, $30 million type of backlog there.

Great.

Thanks a lot.

We'll move now to Chris Blansett with JPMorgan.

Hi, guys.

Thanks.

I had a quick question about your system ASPs during the quarter.

If you do the simple math, you get an ASP that's a little bit below what I believe you guys had mentioned before.

You get something like $2.16 million.

And I wanted to understand why that's lower than the $2.25 million and $2.5 million we expect for the 465 models.

Yes, I think, Dave can look at the math, but I can tell you that overall the system pricing is not changing.

We have a relatively stable pricing environment.

I think the 115 systems that Tim mentioned a minute ago is a little higher than we did.

I think it's a lower number of systems than that, probably closer to 106 systems or something like that we booked.

But we shipped 81 systems.

So I -- the pricing is not overall changing.

There may be mix changes in the E475 for red, orange, yellow, and Solar applications.

And John, I think, too, part of what can influence the average selling price, if you just take the pure numbers that are reported, is when that last 10% is booked based on when it's finally accepted.

Okay.

That makes sense.

All right, and then the second question I had is related to the change in gross margins throughout the year.

Obviously you just started shipping from Asia in volume.

How did that go versus your expectations, you said we should expect a few points of uplift throughout the year.

And will that continue into next year as well, as that gets more efficient?

Yes, I -- this is Dave.

I would say that it is right in line with expectations.

At some point, we're going -- you reach a ceiling that there's just not enough more fixed costs to spread, but it's about where we've expected it to be and as I mentioned, with a couple points higher creeping up into the upper 40%.

Okay, and one last quick question is on the tax strategy.

You gave a little guidance for next year, which is slightly below 35%.

Will that evolve over time to even lower levels as you're able to take advantage of -- to lower tax jurisdictions in Asia?

Yes, I mean, we don't comment on specific tax strategies, but what I will say is with our business evolving so much to outside the US, with 80% of our bookings in Asia, that's a significant element of our business growth.

The 35% assumes the current structures that we have today.

As our business evolves, we'll evolve our strategies and certainly give an update to that rate as soon as we have any concrete changes in our business strategy.

Great.

Thank you, guys.

Appreciate it.

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

Hi, thanks for taking my question.

Great quarter.

Couple of them.

One, I wanted to find out a little bit about the competition with Aixtron -- with Aixtron going to release the G5 in the calendar fourth quarter.

How do you see that evolving with the current 465I?

Well, we think the 465 has the best performance on the market today versus the G5.

I think time will tell on that.

We're absolutely a clear winner at 2-inches and 4-inches and I think we perform extremely well at 6-inches and I think the market is making its decision on that.

So our products are doing extremely well.

Great.

And off your revenues and orders, how much of it was the 4-inch, and how much of it was below 4-inch and above 4-inch.

Our products don't really have to be configured before they are shipped.

So I think we would give you a general rule of thumb for recent times of 40% are 2-inch and 60% are 4-inch and larger.

So, but our system doesn't -- it just needs different wafer carriers.

It doesn't have to be modified.

So it's the same system.

Okay.

Final question, John, last time you spoke about a potential 45% gross margin for the full year, now you seem to be running well ahead of that, where do you think your full year gross margin will be for Veeco?

Thank you.

Full year margins, as I mentioned, we'll see it ticking up into the -- I mean at this point right now, I'll put it in the upper mid-40%, let's call it.

All right, thank you.

Thanks, Krish.

We'll go next to Jed Dorsheimer with Canaccord.

Hi.

Thanks, and congratulations on a stellar quarter here, guys.

Thanks, Jed.

First question, John, was wondering if you've given some thought to replacement cycles.

As we've gone through, a clear cycle with the handset and now as we go through the LCD, as you prepare for the lighting, how do you think LED manufacturers -- r what are they telling you in terms of where you need to lower cost of ownership in order to justify mothballing the old one and replacing a new one?

And what would that timeframe be?

I think -- first of all, we've looked at the replacement cycle and what's the model for that.

Obviously these tools last a long time, so they get replaced more not because they wear out, but because there's just better economics of going ahead and buying a new one.

I think we are thinking that from the information that we have, that about 7% of the installed base would get replaced each year on average.

I think over the last couple years, they are pretty extraordinary circumstances because the tool, the tool performance is improving at a rapid rate on one hand.

So that could push that up.

On the other hand, we're shipping a whole lot of tools here in late 2009 and 2010, and so that could push the actual percentage down.

But I think over the next couple of years, when the market settles down a little bit, there will be some opportunities for that.

Mostly now, we see people expanding capacity as fast as they can.

So adding capacity without really paying attention to changing out old equipment or even upgrading old equipment.

So I agree with you, but the -- if we look at a base of about 750 tools in the marketplace before we really started on this in terms of high volume between you and Aixtron and this cycle here, with the bottlenecks that have been caused, particularly on the base materials and including the gases, the material utilization has got to be a big factor in cost of ownership.

So would you -- do you think that those 750 tools become replaceable once the current, whether it's a 1000 or 1500, whatever that number is, gets installed?

Do you see -- is that what you see?

Do you see it over a two-year or three-year type of timeframe?

I think that's going to vary by customer and their economic situation and what they can -- what they are able to do and that thing.

But I think there will be a future opportunity there.

One of the benefits of the Veeco systems is that they are modular and upgradable and in addition to coming out with new platforms, we've come out with a good stream of upgrades and improvements.

Our customers really appreciate that.

So I think there as the -- when we catch up, there will be an opportunity to go back and upgrade a lot of those systems.

Either upgrade or replace them, depending on what generation they are.

Some of them can be brought to much improved performance, at least some of our systems can be brought to much improved performance, with an upgrade without replacing them.

And then there's some older generations that, of course, need to be totally replaced.

So I think it's an opportunity, but it's a ways away still.

Great.

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

Lot of talk recently about caps in China.

This is a little bit of a surprise to us because it seems inconsistent when we were just over there.

But was wondering if you know of any -- are these subsidies capped at a certain level and how many provinces have you identified here?

I think you mentioned it in your slides.

So we mentioned seven major cities and we've been working with the customers.

We haven't been able to identify specific caps.

We haven't been able to identify a specific pool of money in each of these, that this is all we have to give out.

So we haven't really seen the caps.

And earlier, I mentioned the $500 million opportunity in upgrades and that was a really, really conservative number.

As -- we worked through and built our estimate and then scaled it back a bunch.

So, we think that there's potentially a significantly bigger opportunity than that $500 million in subsidies.

Great, thanks.

Thanks, Jed.

Edwin Chan of UBS has our next question.

Great.

Hi, John, Dave.

Congratulations on the results, too.

Couple of questions on the bookings from China.

Our own checks have found there's a big LED fab being built in China by a company called Elec-Tech, and both Wuhu and Jiangxi-- so my question is, did Veeco's June quarter include any bookings from this big fab by Elec-Tech?

And how should we think about potential bookings ramps from these mega fabs out of China, that are not on your list in the presentation, John?

Right, right.

Well, there's no Q2 bookings to Elec-Tech.

And I think we've all seen lots of articles and publicity published by multiple people, including the -- some of the customers' own website material.

We have some very large POs from Elec-Tech and they are not in any of the orders we reported so far.

And in fact, we haven't booked them yet because we just haven't gotten to the point where they meet our bookings criteria and we put them on the books.

We expect that to happen very soon, but it hasn't happened.

So I think we are -- we expect to play a big role in Elec-Tech, which is a joint venture with Epivalley.

Okay, thanks for that.

And then, what are your thoughts, John, on when China could potentially be your largest geography for LED bookings, and if so, when could that inflection point happen?

We don't provide bookings breakdown by country or by region.

Clearly, China's a region at this point.

But, China has been ramping at a huge rate over the -- we've had major business from Korea over a number of quarters in a rogue year, really three quarters before or so.

And we continue to have major orders in Korea, but what's the big change versus the last quarter is a real ramp of China and a tremendous amount of activity.

It was there last quarter.

And there were big orders, but it's just gotten bigger and more aggressive.

So it's really a key region for us and we're doing -- we're working hard to do a great job there.

I think one of the interesting things that we see in China is that there are three different categories of customers there.

There are customers that have been making LEDs in China for a long time, that are very successful, and have been building fabs and proven their capability.

I think Sanan is an example of that.

Then there are -- is a category of customers that are joint ventures between Chinese companies and either Taiwanese companies or Korean companies for the most part.

There may be some others, but we see a lot of Taiwanese and Korean joint ventures into China where a company that's been making LEDs in Taiwan or Korea is working with the Chinese company to establish a joint venture, establish a fab, and really ramp business there.

That gives them a lot of capability, because they are growing on the expertise from Taiwan or Korea.

And then there are emerging start-ups.

They are whole new companies that are starting out and trying to take advantage of the stimulus funds and build a business.

So it's not a homogeneous -- all these Chinese organizations look the same.

There's really differences between them.

Okay.

And last question for me, John.

Can you share your view on why you think Veeco's MOCVD share in China is higher than 50% and do you think this is a longer term sustainable advantage?

Thanks.

Our products, our sales and our service are really good.

And the China market evolved a little later than the Korean and the Taiwanese market.

We had a lower share in Taiwan.

We got there a little later, especially with our new generation products.

The Korea market started to unfold after the Taiwan market and we did extraordinarily well there.

And now we see a huge growth cycle coming in China and on an even playing field, we do really well.

So I do think it's a sustainable advantage.

Okay, thanks, John.

Congrats again.

Thanks.

We'll go now to Bill Ong with Merriman and Company.

Yes, hi, congratulations.

Solid quarter.

Given that Veeco's product sales in the semi, or at least historically (inaudible) LEDs, what do you estimate the proper capital intensity levels for each of these industries to support demand supply equilibrium growth?

So in other words, if I look at the chip industry's intensivity level, it is about 16%, which is cap equipment to revenue, I think data storage might be at 8%, just correct me if I'm wrong.

What do you think is the LED capital intensity going forward?

I think it's lower than the semiconductor market.

I don't think I can give you a percentage here overall.

But what I would say, that it is lower than semiconductor, a good bit lower.

Is that just based on some of your feedback you got from some of your customers?

I'd love to get a sense of what level of investment they're spending -- what type of forecast are your LED chip customers are looking at?

Yes, it's just beyond the level of detail we're prepared to comment on the call here.

Okay, that's fair.

Nice job, everyone.

Thanks, Bill.

And we'll move on to Daniel Amir with Lazard capital.

Thanks a lot, and congratulations on a good quarter.

A couple of questions.

First of all, on the Korea market, you have seen significant growth there and then there was a little pause there and now you're seeing growth, it seems like, in Korea again.

Can you comment on Korea in terms of where we stand with your Korean customers and the growth curve there?

Well, it's been -- look, it's been a lumpy market.

I haven't seen any pauses.

There are order quarters that are bigger and what we have seen out of the Korea market is there are a few very large players and they have placed large orders and, you might get a really large order in one quarter and not get one in the next and then get another one.

So it's bumpy.

And when we plot out our bookings or revenue to the market, it bumps up and down, but there's been no discernible trend other than roaring, I think, from our point of view.

So we've done well there and we will work to continue to do well there.

On the general lighting market, I mean, you've commented, I think, in last quarter as well that you think about 20% or 25% of the tools go into that market.

I mean, how should we look at the general lighting market into next year?

I mean, are you seeing signs of, further ordering in that space, or is this -- is there somewhat of a wait and see mode, or is it hard for you necessarily to quantify what your customers are doing?

So, we've said that 20% to 30% of our tools go to customers that do lighting.

But many of those customers also do backlighting.

So that's the hard part for us to quantify, exactly how much is going in the lighting.

And frankly, I think, some will going to backlighting and some will end up in lighting, as markets catch up.

But I think the real positive signs in lighting we see are, first of all, in every region there's tremendous growth in the lighting market.

Phillips has announced that its business is growing and its overall LED lighting business is growing.

We talked about what the Chinese government is doing both to drive subsidies for MOCVD, but also to guarantee an end market.

And I think everybody's talked a lot about street lighting, but we're also seeing them change the building standards and set the stage for a much broader use of LEDs in new construction.

And then beyond that, as we talk to lighting manufacturers, there's a whole flow of new lighting products for applications outdoors, indoors, residential, commercial, there's a whole lot of new products being delivered and on the drawing board that really change the cost curve here.

And, right now LED lighting is expensive.

So, people buy it when the economics are really good.

Street lighting's on a long time every day and it could really pay off there.

So we think that there's a big opportunity here.

The challenge that everybody wants to figure out is what happens to backlighting in 2011?

And what happens to lighting?

And is there a pause there in between the two?

And we can come up with all scenarios and have modeled lots of different scenarios, so there's no absolute answer.

But as we look at it, we think that there is a really good probability of a really strong backlighting market in 2011 and that could be augmented by a stronger general illumination market.

Now, we have war, economic meltdown, or lots of other things, all those things can change.

And these are models.

But I think there's real potential for sustained growth here by the aggregate of these two markets.

Over the long-term, the general illumination market is going to be much bigger than the backlighting market and a few years out, the backlighting market's going to fall.

We think the general illumination market will grow fast enough to maintain a good market for us.

Okay.

And my last question is, has anything changed in terms of tool lead times since last quarter?

No.

I think tool lead times remain about the same.

You can get a sense of ours.

We have about $440 million of MOCVD backlog, and about 85% of that is scheduled to ship in 2010.

So that will give you a feel for -- they tend to be six months-ish, and in some cases lower, some cases people place longer term orders and take so many a month or so many a quarter.

But timing remains about the same.

Okay, thanks a lot.

Thanks, Daniel.

We'll go now to Andrew Wong with Sterne Agee.

Hi, John.

Thanks.

I have a couple quick questions.

Just I'll go through them really quickly.

First, does ASP vary much between geography or is it more a function of order size?

Yes, it doesn't vary a lot by geography.

Yes, it's -- it does vary somewhat by customer, because customers sometimes have special configurations or special requests and they want more of something or less of something.

So we have some customers with more complex configurations than others.

But there's -- I wouldn't say that there's a variation by geography.

Okay, and then on the MOCVD business in particular, do you talk about your visibility and specifically how far out your customers are placing orders right now?

Well, most of the orders that are in our backlog ship in 2010.

We have a lot of orders where we have POs from customers that we haven't put in backlog.

And some of those would go into 2010, later in the year, where maybe we don't have a deposit or something like that, so it's not in the backlog at this point.

And more of that scales into 2011.

So -- but, our backlog is 84% shippable in 2010.

And this is MOCVD, and about 96% shippable by the end of Q1 2011.

So you can see that anything in our backlog is going out pretty darn soon.

Customers are ordering for longer periods, but again, we don't put the orders in our backlog until all of the criteria to go into backlog are met.

And that means it's got to be within a year.

We've got to have an appropriate deposit, and the other factors.

So they are ordering for farther out, but there's a process that goes through to before it gets locked out.

Okay.

And next question, have you seen -- I know this is going to be hard to answer, but have you seen any evidence of customers pushing out orders as a result of these raw material shortages that people are talking about, metal organics and sapphire?

Yes.

We haven't.

We've heard -- we've had a lot of discussion with customers and it's a concern.

It's an issue.

People think it will be resolved.

And of course when they are ordering from us, it's for sometime in the future.

So they are assuming that something will change along the way and that some other companies will bring a lot more capacity, whether it's later in 2010 or early in 2011.

So we haven't seen delay specifically related to that, but we've seen concern.

It's clearly there for both the metal organics and the sapphire.

Okay.

And then on Data Storage and Metrology, how would you characterize the outlooks through the remainder of this year?

Well the Data Storage market is the overall market for hard disk drives is very positive.

There's huge growth in the number of laptops out there.

There's a lot of growth in developing regions, plus there's growth in hard disk drives for video and media applications around the home.

So there's growth in the end market.

And of course, the market didn't buy anything to speak of in 2009, or at least in late 2000 -- for a year period.

So there's been a lot of catchup.

And maybe the really positive thing was a year and a half ago, people were talking about pattern media and taking hard disk drives in that direction.

For the most part, those seem to have been abandoned, at least in the short-term.

And what that means is for the customers to improve the performance of their disk drives, they've got to improve the heads and we make the equipment that makes the heads.

So what we're seeing is the customers are buying equipment both for new technology, improve their disk drives, as well as capacity expansion to keep up with demand.

And we're booking stuff into 2011 now.

So that's -- I think we're not only going to have a good year in 2010.

It's preparing us to enter 2011 with a higher backlog than we probably normally would have.

In Metrology, we worked hard to improve this business for a bunch of years in a row.

The team did a great job.

The new products are flowing.

We're gaining share.

We just had the best quarter since 2007.

And the business is growing based on -- it's still a tough market, but the business is growing based on our performance, and so if you look at our Metrology bookings over the last few quarters, we keep booking more than we shipped.

So that's a really good thing and it's a quick turn business.

So you don't tend to build -- you don't tend to book a lot that's going to ship six months or nine months from now.

So it's very positive along those.

Okay, and then last question, just to clarify your commentary on the outlook section of the earnings release, do you feel like overall bookings have plateaued, or do you think that the pace, or the rate of growth will continue what you've seen over the past two quarters?

We don't give bookings guidance.

And we think bookings can always be pretty lumpy.

You get big orders and we have tremendous discipline of what we put in the backlog, so that's one of the reasons we don't want to be pushed into that.

The environment is really strong and that's what we've said the last couple of quarters.

The environment is strong.

Our products are performing.

And we've done really well here.

We've yet to get to a quarter where we could ship what we book.

So it's a great place to be.

Okay.

Thanks very much for your time.

Appreciate it.

Take one more question.

And that will come from Andrew Abrams with Avian Securities.

Hi, guys.

I just wanted to ask a couple of specifics.

Can you give us the idea, or the percentage of 465Is in shipments in the second quarter and in your backlog?

I don't think we have that statistics specifically, but I think I can probably give you what you need.

I mean, most of what people are booking at this point is 465Is.

We have some customers who have certain internal policies where they want to -- they have to really evaluate for a long time before they could flip.

But most of what we're booking is 465Is and most of what we're shipping is 465Is.

Do you want to add to that, Dave?

No, no.

I think that's exactly right.

We did see some orders this last quarter for 475s, E475s, which are used for red, orange, yellow LEDs, and for Solar cells.

So those are -- we do see some of those and that bounces around.

And just to go back to an earlier question about the existing base of MOCVD equipment that's out there and maybe going back a couple of years, in your view, are there a percentage of those machines that are out there that just cannot do today's High-Brightness LEDs and have to be relegated toward, I guess, the industrial sector or bin 3 or bin 4 LED manufacturing?

Yes.

I mean, there are older systems out there that economically aren't very useful for meeting really high performance applications today.

And they are going to be sold or relegated to lower performance applications where either wavelength uniformity is not as important or other factors.

So there's a whole bunch of those out there.

And our job is to keep delivering products that really lower the cost of making a really uniform LED.

And that's what we're doing.

We're -- our target is to drop the costs from an epi-perspective by factor of four over the next couple of years.

And we think we're on a path to do that.

So at some point, you just say from a gas consumption, throughput, and whatever, you're just not going to use those anymore.

The industry hasn't gotten to a big upgrade cycle yet.

I mean, we've sold a lot of 465s and all of those should be upgraded to new systems and eventually, all of the other product that we've sold should be replaced or moved to some really low end application.

Okay.

Just one other question.

What are the lead times on the Data Storage business equipment at this point?

They generally end up about six months.

But we will see customers for certain of these products buy a set of products and then schedule shipments.

But generally unless there's something going on -- let me actually reverse this.

We can't make one that's in a whole lot less than six months.

Maybe four months, if some particular situation, but they are going -- they are going to go through the process in four to six months.

What we'll have is customers that might show up and say I need 20 lappers and I want five of them in six months and four more in month seven and four more in month eight.

So you will see that type of scheduling because it's a practicality for the customer to install and ramp that.

So if when you say lead time it means how quick can I get one, it's about six months.

But if you say I want to divide your backlog by your lead time and see where I end up, then it tends to be longer.

And you're not constrained on the Data Storage production equipment at this point, are you?

No.

Given some reasonable notice.

Got you.

Okay.

Thank you very much, and congratulations on the quarter.

Thank you.

Thank you, all, for joining us today.

I think we'll close the call at this point.

Again, that does conclude our conference.

We thank you for joining us.