Veeco Instruments Inc (VECO) 2010 Q4 法說會逐字稿

Good day, everyone, and welcome to Veeco's fourth quarter and year end 2010 earnings conference call.

Today's call is being recorded.

For opening remarks and introductions I'd 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.

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

Today's Earnings Release is available on the Veeco website.

Please note that we have prepared a slide presentation to accompany today's Webcast and we encourage you to follow along with the slides on Veeco.com.

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

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

Your participation implies consent to our taping.

To the extent that this call discusses expectations about market conditions, market acceptance and future sales of the Company's products, future disclosures, future earnings expectations or otherwise makes statements about the future, such statements are forward-looking and are subject to a number of risks and uncertainties that's 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 sections of the Company's report on Form 10-K, and annual report to shareholders and in our subsequent quarterly reports on Form 10-Q, current reports and Form 8-K and press releases.

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

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

Information regarding such non-GAAP financial measures, including reconciliation to GAAP measures of performance, is available on our web site.Lastly, please note that all results presented today are for Veeco's continuing operations, excluding results of the former Metrology business which was sold to Bruker Corporation.

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

Thanks, Deb, and thank you all for joining our call.

We're going to do things a little differently today.

We'll start off with Dave talking about our outstanding financial results and then I'll take over and cover our new MaxBright product and our financial outlook.

Dave?

Thank you, John.

Turning to slide five, Veeco's fourth quarter 2010 revenue was $300 million, an 8% increase from the third quarter and up 152% from the prior year.

Net income was $97 million, compared to $16 million in Q4 '09.

That's slightly higher than last quarter's earnings as taxes took a bigger bite of the Q4 earnings.

Non-GAAP net income was $67 million, compared to about $14 million last year.

GAAP EPS was $2.30, and non-GAAP EPS was $1.62.

Gross margin was 51%, which was at the high end of our guidance range.

Higher volumes, good traction on driving down material costs and higher valued products in the mix this quarter all helped our margin story.

These results were in line with the guidance we gave at the beginning of the quarter.

Turning to slide six, I'll now review our Q4 2010 revenue performance by segment.

LED & Solar and Data Storage both reported very strong quarterly revenue with LED & Solar at $258 million, up 6% sequentially and 163% year-over-year.

MOCVD revenues reached a new record of $240 million, up 2% sequentially.

Our MBE business also made solid contributions to the LED & Solar growth this quarter.

Data Storage revenue was $42 million, up 21% sequentially and 99% from last year.

It was our best Data Storage performance since the fourth quarter of 2008.

Turning to slide seven, we reported $295 million in bookings in Q4.

LED & Solar orders were $253 million, up 4% sequentially and 43% year-over-year.

MOCVD had another solid quarter at $221 million.

MBE improved following the low level of orders in the third quarter.

In Data Storage, we booked $42 million, up 20% sequentially but down 21% year-over-year when compared to the very strong Q4 '09 levels which had represented a catch-up in our customers' capacity spending.

We finished the year with $555 million in backlog, and a book-to-bill ratio of just slightly below 1.

Moving to slide eight, I'll now review the details of our bookings growth in the fourth quarter.

Within the $253 million total reported for LED & Solar, we had over 20 customers place MOCVD orders in the fourth quarter.

Our highest quarterly customer count so far.

Although bookings were again heavily concentrated in China, we also had key customer wins in the US, Europe, Japan, Taiwan and Korea.

Some important customer wins in Q4 included multi tool orders from EnRay, Shanghai Epilight and Focus Lighting.

About 12 of the 20 customers that placed orders in Q4 were from China, with both existing and new customers included in the mix.

Data Storage also had a great bookings quarter, $42 million, taking orders for both technology and capacity buys at our key customers.

On slide nine, we see the results of record revenue and good execution at the operations level.

Over the course of 2010, we've seen margins increase progressively each quarter from the mid-40s to the current level as Veeco ramped up production to meet increasing demand.

Average selling prices remained firm.

Operating expenses for the quarter were $52 million, or about 17% of sales.

Most of the increased spending is to support the growth in our MOCVD business.

Slide 10 reviews segment data in greater detail.

As you can see, both of our business segments saw earnings grow at a faster pace than revenue, which is a sign of careful attention to cost control as the Company's growth rate stabilizes at these higher levels of the past few quarters.

Now I'll briefly review the highlights from 2010 which was the best year in Veeco's history.

As you can see from slide 11, Veeco's revenue was $933 million, up 230% from $282 million in 2009.

Our strong revenue drove net income of $261 million, and non-GAAP net income of $188 million.

Gross margins were 47.6% for the full year, up from 39.4% in 2009.

Non-GAAP EPS was $4.42, up from just $0.21 in 2009.

Full year GAAP EPS was $6.13.

On slide 12, you can see that both of our businesses delivered fantastic performance in 2010, with LED & Solar revenues at $798 million, up 289% from the prior year.

This strong performance was the result of Veeco's growing share in a rapidly growing market.

We estimate that our share grew from about 30% in 2009 to about 46% on a revenue basis as of the third quarter of 2010.

We shipped MOCVD tools to over 40 LED customers worldwide and penetrated most of the world's leading players.

Data Storage also had a great year in 2010 with revenues increasing 75% to $135 million.

Veeco remains the top equipment supplier to thin film magnetic head manufacturers, and our variable cost manufacturing strategy enabled this business to deliver very high profitability.

Lastly, let's turn our focus to the balance sheet on slide 13.

Squarely in line with our earlier projections and guidance, we finished the quarter with cash and short-term investments of $715 million.

Our balances grew by almost $250 million since last quarter, and included net proceeds from the sale of the Metrology business of $225 million.

Accounts receivable and inventory grew approximately $21 million, and $28 million, respectively, versus third quarter.

Both of these were in line with our projections.

Receivables were up as a result of a larger concentration of sales for the quarter occurring in December.

The higher inventory levels are the result of planned inventory builds for our new MaxBright cluster tools scheduled to be shipped to several customers in Q1, as well as K465i tools that were awaiting shipment at quarter end.

Inventory turns were 5.4 times, which is an industry-leading level and the result of our outsourcing business model.

During the quarter we bought back approximately $6.5 million of Veeco stock at an average price of about $34 per share.

Bringing the total purchase so far to $38 million or about 1.1 million shares.

The buyback program was authorized in August 2010.

I'd now like to turn the call back over to John to discuss our growth outlook for 2011.

Thanks, Dave.

Let me start off with a market update.

The top growth opportunities for Veeco and MOCVD are TV backlighting, sometimes referred to as LED TVs, and general illumination, or just LED lighting.

On slide 15, you can see display search and Veeco estimates for LED TV penetration which is expected to reach 50% in 2011, and increase to about 80% in 2013 or sooner, with the top TV makers targeting 100% penetration in 2011 or '12.

We believe that about 1,400 MOCVD reactors are required to fully support the TV and display backlighting market and about half of those have already been shipped.

While TV backlighting remains an important growth driver, LED lighting is clearly the larger opportunity for Veeco and it's just beginning.

On slide 16, we're sharing our internal estimates of the growth opportunity ahead for LED lighting.

We project that LED lighting chip demand or unit demand will grow at a CAGR of 68% through 2015.

And that outdoor and residential lighting applications will lead in terms of adoption, and these will be followed by commercial and industrial segments.

So the combination of TV backlighting and LED lighting markets will drive MOCVD demand for many years to come.

And in order to make the most of that opportunity today, we launched the next generation MOCVD tool, the MaxBright.

If you turn to slide 17, I'll tell you a little bit about MaxBright.

MaxBright features a multi-reactor or cluster architecture.

Customers can select configurations with either two or four reactors.

And our systems now offer the highest capacity on the market.

For instance, a four reactor system will simultaneously process 24 six inch wafers.

For each individual reactor we've expanded the wafer capacity and incorporated an advanced thermal control system.

And this combination provides up to 25% improvement in throughput per reactor.

Another important item is that we designed the system for either single chamber growth where LEDs are grown independently in each of the four chambers, or multi-chamber growth where you grow different layers of the LED in different chambers that are each optimized for particular layers of the LED structure.

This architecture gives our customers incredible flexibility.

We also made the system so that the transfer of LED recipes from the K465i to the MaxBright is very simple.

So to sum it up, MaxBright delivers the lowest cost of ownership, it has the highest throughput, the highest capacity, the best footprint efficiency and the highest capital efficiency.

It's clearly the best tool on the market to accelerate the adoption of LED lighting.

Turning to slide 18.

As Dave commented, Veeco's MOCVD market share increased dramatically in 2010.

And these share gains were driven by the K465i, which is the industry leader in terms of both yield and productivity.

According to a recent report by IMS Research, the 465i became the number one selling MOCVD tool in the third quarter of 2010, and it achieved a 44% share of unit shipments.

It's really an incredible performance, if you think back that this product was only launched in the first quarter of 2010.

Now we're changing the LED game again and we are extending our leadership position with MaxBright.

The MaxBright system offers five times the throughput in twice the floor space as the K465i, and it offers our customers the lowest cost of ownership of any MOCVD system on the market.

It's clearly the industry's most productive system and it is a generation ahead of the competition.

Turning to slide 19.

While there's a lot of debate about the number of reactors required over the next few years, it's clear that there is a huge opportunity for MOCVD systems.

Our estimate is that over 5,000 reactors will be required from 2011 to 2015.

On the other hand, one Wall Street firm has published a forecast for over 7,000 systems over the same period.

The launch of MaxBright just really 12 months after the K465i's launch, is the result of our focused approach to the MOCVD business that we started three years ago.

We put to work a very strong technology team, including a lot of new talent, additional R&D funding, and the expertise of our Data Storage group in building high performance, multi-reactor systems.

And we did this to take a leap ahead in MOCVD.

MaxBright is clearly another game changer for Veeco.

It's already been accepted at a top LED manufacturer and we plan to ship systems to leading industry players in Korea, in Taiwan and in China this quarter.

We believe that Veeco will help to accelerate the industry's transition to LED lighting by delivering systems that dramatically reduce the cost of making high brightness LEDs.

Let's switch to the Q1 outlook, turning to slide 20.

Our Q1 revenue guidance is $215 million to $265 million.

We're projecting Q1 revenue below Q4 revenue because we plan to ship between 12 and 20 reactors in the new MaxBright cluster format for which we don't expect to get any revenue in Q1.

And another factor impacting Q1 revenue is that for China orders, the order to revenue cycle time averages a couple of months longer than other regions due to customer facility readiness issues.

Basically many of our customers in China are expanding or building new fabs.

Even so, our lead times remain solid, around five to six months.

In terms of order outlook, we anticipate strong first half 2011 bookings.

We continue to see the impact of Chinese government subsidies driving LED fab expansion across a really broad customer base.

In Korea, we see signs of increasing utilization rates among our customers and we expect order rates to improve in the Q2 and Q3 time frame.

We also continue to make good progress in other key markets and believe that MaxBright will enable Veeco to continue to gain share in those markets.

And lastly, the order trends in our Data Storage market remain favorable.

Moving to slide 21.

With revenue in the range of $215 million to $265 million, we expect gross margins to remain strong at 51% to 52%, operating spending in the 19% to 22% range.

And that will result in an adjusted EBITDA of 30% to 34%, GAAP EPS $0.94 to $1.31 a share, and non-GAAP EPS $1.02 to $1.39 per share.

Flipping to slide 22 for the full year outlook.

With a beginning backlog of $555 million, and visibility to strong first half 2011 orders, we currently forecast that Veeco will achieve revenues over $1 billion, and non-GAAP earnings per share of over $5 a share in 2011.

We expect that 2011 will be a solid year for MOCVD tool demand, due to a combination of backlighting and LED lighting markets.

We believe that our MaxBright product puts us in an exceptional position for additional market share gains.

Beyond LED, we're making steady progress in our CIGS Solar business.

We're shipping tools to key customers, advancing our capabilities for high efficiency and low cost solar cells.

We expect to have revenues from this business later this year.

In Data Storage, business conditions remain healthy.

We see another growth year ahead.

All in all, we're optimistic about the future.

We're confident that we're well-positioned from a technology, a product and an operational standpoint to grow both our LED & Solar and our Data Storage businesses in 2011.

Thank you for your patience.

Operator, we'll take questions at this point.

Thank you.

(Operator Instructions).

We'll go to Stephen Chin with UBS Investment Bank.

Hi, John and Dave.Congrats on the 2010 results.

A follow-up question on the bookings outlook you're calling for in the first half of 2011.

If you look at your numbers, the MOCVD bookings in the fourth quarter were actually down sequentially again, yet you think orders will be strong in the first half of 2011.

Do you think MOCVD orders can grow here in the first half of 2011?

And, what gives you that confidence?

Is it just follow-on orders from the 40 customers that you have in LED?

I think in Q4 orders were down a little bit, but, frankly, things bounce around a lot.

The difference wasn't really significant.

They might grow in the first half.

I think what our point is, is that they'll be strong.

There continues to be a tremendous amount of growth activity in the industry, especially in China, and that there is a good outlook.

They may be higher, they may be lower.

We're really not trying to forecast every product line down to a fine level of detail, so that's why we don't give bookings guidance.

But, the environment is still very good and I think that's what's important.

Okay.

And, then, if I could just follow up on the facility readiness issues with the China-based customers, John.

Is this a situation where the more advanced customers in China are doing fine with facilities but it's the other 10-plus customers in China whose facilities are moving maybe a bit slower than expected for revenue acceptance?

It's actually broader than that.

If we look at our orders in China, 70% of the units are going to customers that know how to make LEDs, that have made LEDs before, and about 30% are really going to newer start-ups.

But, both the customers that are doing facility expansions, both the experienced customers and the new customers, there's a lot of new fab construction going on, fab expansion and those things.

And, we found that it just takes longer sometimes and on the average it takes maybe a couple months longer.

So, as our bookings have increasingly become more China-centric in Q3 and Q4, that's just slid some things out a little bit.

Thanks for the color, John.

Good luck.

We'll take our next question from Bill Ong with Merriman Capital.

Yes, good afternoon, everyone.

So, my question's on the MaxBright tool.

If the tool was not being offered today, would these customers have perhaps bought, let's say, the 12 to 20 or K465i tools instead?Or, would they simply have held it off as an R&D tool?

Bill, I'm not sure I understand what your point is.

The customers interested in buying these tools, are they buying it for R&D and if you didn't offer it too, would they have bought something else instead?

This is not an R&D tool.

This is a production tool and each reactor has a 25% improvement in throughput over the 465i and there's four of them together.

So, it's five times the improvement of 465, five times the throughput of a 465i.

So, look, we've been working on this product for a long time.

It was done and it has really compelling advantages.

Obviously, our top customers have already seen it and know about it and know it's coming.

And, we thought that it was time to launch it and get it out there because there's tremendous interest.

Yes, the question is more cannibalization, would they have bought an older tool instead at this time frame?Or, was this tool just compelling and they just decided to make an incremental purchase?

Our, "older" tool is a year old and it has achieved huge market share gains during the year.

It's been improved throughout the year.

Look, if we're going to get to solid state lighting, we have to really drive down the cost of making the LEDs, and that's what our customers have asked us to do and that's what we are driving.

Our objective is to move ahead of others on the market and gain the number one position.

Understood.

And, then my last question is capital spending.

Do you see capital spending to be up or down in the country of Korea and Taiwan?

I think in Korea, I think it's going to certainly be down for the first half of the year, and we do see it picking up in the second half.

If you remember, the first half of 2010, there were huge shipments into Korea and that settled back into the second half and we see that reversing this year.

As the orders pick up, utilization is increasing and we think we'll see more orders in Q2 and Q3.

So, it may be down in aggregate for the year, but it's clearly second half.

And, on the other hand, in China we have a huge backlog for the first half.

And, so, it shapes out to a really good year for us and relatively consistent, likely to step up some each quarter through the year.

It's not back end loaded and it's not front end loaded.

So, it's a pretty good distribution for the year and I think we're confident we can make the numbers we put out.

Taiwan, I'm not sure about how it's coming but what I can say is that we're winning more and more of the Taiwan business.

So, I think that gives us some confidence that we'll have a good year in Taiwan, especially with the new product.

Okay.

Nice job, everyone.

Thank you.

Your next question comes from Daniel Amir with Lazard Capital Markets.

Thanks a lot and congratulations on a good year.

A couple questions here.

First of all, can you give a bit more clarity on the revenue guidance?

The revenue guidance range is fairly wide.

And, how much is that related to really what's going on in China, compared to your new tool that you're shipping?

It is a wider range and we had started that last quarter, because what we've seen is that it's harder to predict exactly when the customers will be ready in China.

You can get a deposit, book the order.

And, of course, we don't book the order until we've got a deposit and got a shipment schedule.

But, then, you can build the tool and find out that the customer's not ready for it and that it might slip.

So, we've put a bigger range than usual to allow for that.

And, we did the same thing in Q4 and you can see what happened there.

So, at the same time, we're shipping a lot of MaxBright clusters and we don't expect to get revenue for those for a while because we won't take revenue on any of those until we get a final acceptance.

So, it's some of both, as we pointed out.

Anyway, I think that's it.

And, in terms of China, there's obviously a lot of noise around the subsidy programs in China, et cetera.

How do you look at that right now and how do you manage your business according to that?

The subsidies come from seven different regions.

They're somewhat different practices in different regions.

There's been some pretty highly publicized comments on one of those regions stopping subsidies in the summer.

And, I expect that over 2010, maybe some of the subsidies will go away.

It's likely that some of them will go through the full year.

We manage our business based on a really tight order policy of putting orders on the books where we have deposits and building to satisfy the customers based on that.

So, that gives us a lot of protection if things change, but we think there's another really good year in front of us.

Thanks a lot.

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

Hello, John.

A few questions.

Number one, sitting here we're at the midpoint of Q1 at this time.

Can you tell a little bit about the linearity of bookings you're seeing so far in the March quarter?

I don't have any kind of mid-quarter update on distribution, so I actually don't have that information right now.

It is just the end of Chinese New Year also, so probably not the best time to predict.

But, the overall environment is very good.

And, with regards to these 12 to 20 new products you're seeing in Q1 that's going to be delayed, when should we expect the revenue to be recognized?

Should we see a spike up in Q2 and Q3?

And is there any associated cost with it?

This is Dave.

We should not expect to see it in Q1.

We know we won't see it in Q1.

And, after that, it's just going to depend on when we get acceptances.

Got it.

Okay.

And, I know you guys don't break it out by region but can you just give us some idea of what your book-to-bill in China was for MOCVD in Q4?

We don't break it out by regions but I can tell you, obviously, we had a very strong order in quarters and we had record installations for China.

And, we had a huge number of installations in the country.

So, it's probably not too far off of our overall Company book-to-bill.

Final question.

Year-over-year do you think Data Storage revenues will grow in 2011 over 2010?

Thank you.

I do think Data Storage will grow, revenues will grow in 2011.

We hit the year with a very strong backlog and our products have been winning in the key new technology areas to increase aerial density.

So, thanks.

Next question.

Our next question comes from Timothy Arcuri with Citi.

Hi, John.

I had two things.

First of all, I wanted to ask on the MaxBright, what's the average configuration of those 12 to 20 tools that will ship in Q1?

Is it going to be mostly two reactor configurations or mostly four?

And, then, I wanted to find out what you thought the mix of MaxBright would be exiting 2011.

So, if you look at it, it looks like it's basically one-third roughly of your shipments in Q1 and I'm wondering how quickly you think that mix will shift over to MaxBright.

Yes.

I think first of all, in Q1 the mix is going to be really all or mostly all C4s, or four unit clusters.

We offer it in two units in case people want to buy a smaller unit.

But, if you're really building a large fab and you really want to buy the C4, it gives you some real space efficiency advantages.

And, some of our top customers have told us, they've laid out their new fab with our product versus a competitor's product and they can get dramatically more throughput out of a fab with our product.

So, most people are interested in the C4.

Also, the C4 gives you the multi-chamber growth option and we see some customers that really want to run a cluster tool with basically four independent LED cycles, and others that are really interested in taking a multi-chamber growth approach.

And, so, I think that's another advantage for the C4.

I can't give you a 2011 exit percentage.

I wish I knew for sure but it's a great product and I think it's going to do extraordinarily well.

Thanks, John.

Our next question comes from Bryan Lee with JPMorgan.

Hi, guys.

Thanks for taking the question.

Two quick ones on guidance.

First one, what would your revenue guidance have been assuming the MaxBright shipments in Q1 were able to be recognized?

We didn't assess that because they're not going to be recognized.

Maybe, asking it a different way, can you give us a ballpark sense of how the ASPs on those systems compare to the 465?

That's a different question.

No, we're not talking about ASPs yet.

Look, the ASP's going to be market-based.

It's based on the value of the product.

So, we will determine that as we roll it out.

Okay.

Fair enough.

And, then, on the margin front, can you talk about what's driving the gross margin sequentially higher in Q1 on the lower revenue base and where you think they could ultimately go as you start to recognize MaxBright revenue?

Thanks.

Yes, it's going to be the same drivers.

The one driver that will be added into the mix this year in 2011 is we've got some programs for some pretty aggressive cost downs in the materials area.

We spent most of 2010 dealing with making sure we had the capacity in place and doing the ramp.

And, 2011, now that we've got the capacity stabilized, we're going to put a hard focus on driving down some of the costs.

That, and, of course, you have acceptances.

As your acceptance mix comes into play, you have that last 10% comes in at full margin.

So, all those things are taken into consideration.

We'll take our next question from CJ Muse with Barclays Capital.

Yes, good afternoon.

Thank you for taking my question.

First question, John, when you talked earlier about expected linearity or stair step approach to revenues throughout 2011, I'm curious when you're thinking about the Q1, Q2 stair step, are you including all of those 12 to 20 tools in the second quarter?

No.

And, we're leaving it open.

We haven't given second quarter guidance.

We have said we expect to beat $1 billion, and we do expect to beat $1 billion.

So, if you take a midpoint of this quarter's guidance and look at some other quarters, you would expect the other quarters to be bigger.

So, it may not be a stair step.

It may step up and I can't predict Q4 at this point.

But, what we know is that we have a strong order environment and we have a very strong backlog and that we have exceptional products.

So, that combination gives us a lot of confidence.

We are more interested in maximizing our overall market share gain and being the lead player in this than micromanaging each quarter to be in some particular range.

We're really looking for a long-term perspective, how do we win in the market, and that's where we will drive our strategies and everything else.

That's helpful.

If I could ask a quick follow-up.

On the gross margin side, curious just to follow on the prior question, the sustainability at this current 51%, 52% that you guided to for Q1, I know there's acceptances, as you talked about.

But, I'm curious as you think about your shipment plans where you have visibility to, is that rate sustainable or should we see that potentially a tad lower as you get less acceptances in the out quarters?

The acceptances can certainly play a role but we're looking at taking the noise of acceptances out.

The margins where we're at are probably about reasonable.

And, then, like I say, adjust for those, the noise of acceptances.

But, generally speaking, we're about where we expect to be.

Great.

Thank you.

Our next question comes from Ahmar Zaman with Piper Jaffray.

Hi.

Good evening.

Congratulations on a great year and the guidance for 2011.

I have a question on the CIGS business, just to change things around a bit.

How much CIGS revenue are you embedding in your full year guidance for 2011?

We've currently got about $20 million of revenue in the 2011 plan, our first systems in a flexible structure.

Took us a little longer to get to where we thought they were suitable for shipment.

And, it's a slow process on a boat overseas and installation.

So, only about $20 million.

Now, we are expecting a whole lot more bookings than that for the year because we're achieving some great results, both on our flex line and our pilot line for glass.

So, we're getting great efficiencies and I think this ultimately will turn into a really good business for us.

It is taking longer than we projected a year and-a-half ago.

Thank you for that.

And, then, as you get further along in this business your lead times for recognizing revenue, is it fair to assume they'll begin to shrink?

Yes.

As we get past the initial systems, we will shift our manufacturing strategy and the time between an order and actual revenue will improve.

But, we've really got to get past the first few systems before that happens.

Should we expect those in the first half or the second half?

You're going to expect that in the second half.

I think orders in the second half turning into revenue in 2012.

So, I think this could be a significant contributor for us in 2012.

And, then, just finally, if I may, on your forecast for MOCVD for the next five years, the 5,000 tools, what sort of linearity should we think about over the next five years?

Is it 1,000 tools a year, is it how you're thinking about it, or is it a higher ramp as we go out to the further out years?

Our model says it's not crazy up and down.

It's not a real slow start.

It obviously is less in 2011 and picks up in 2012 and 2013 and 2014 and accelerates a little more as we go through it.

But, it's not like a very slow start.

On the other hand, this is pretty hard to predict adoption rates.

And, adoption rates for residential applications are driven by different buying factors than adoption rates for outside lighting, street lighting, those types of things.

But, our model is pretty conservative compared to other models in the industry.

It also assumes that LEDs continue to get brighter each year and 20% or more gain in luminous efficiency, it assumes backlighting in TVs goes to less bars as we go forward.

It assumes that we continue to put out systems every year that are dramatically more efficient.

If we built this model on last year's system efficiency, it would be a lot more reactors.

But, this is assuming that the reactors get a lot better each year and that's actually what helps drive down the cost and trigger the tipping point and the adoption of lighting.

So, it's reasonably linear but still starting.

This is the first big year.

We did relook at some of our statistics and try to identify better on a share basis of how much of our shipments are going to lighting.

And, we came up with some statistics that, first of all, about 28% of our units are going to customers who are predominantly lighting customers.

And, about 43% of our units are going to customers that are predominantly backlighting customers.

And, then, there are about 23% that are both, and that's the hard piece to break down.

And, then, there's 6% that are solar, electronics, red LEDs, different things like that.

But, so, if you look at all that, you might think that percentage of units going to lighting is mid-30s type of thing, looking back to 2010.

And, so, obviously we're going to see that shift pretty dramatically in 2012 and out years.

But, it is growing fast and lighting is happening.

And, then, if I may, sorry, last question.

How do you see the competitive landscape evolving over the next few years?

Our strategy is to move ahead.

And, we started working on our product development and our product strategy three years ago for this market.

We changed a lot of things in the Company.

We changed leadership.

We added a lot of resource when business got tough and we cut other businesses.

We either didn't cut or we took a much more investment approach in our MOCVD business.

So, we've been working on this for a long time and what you're seeing -- I think you saw the first step forward at the beginning of 2010 with the 465i.

This is another step forward.

And, what you're going to see from us is more really high impact products and changes later in the year, in 2011, and another generation system in 2012.

So, we think that we can out-run and outperform the competition and that's what motivates us to go fast.

Obviously, there's lots of people that want to get into this market, big companies and little companies, and our objective is to do a better job for the customer and to outperform the others.

Thank you.

We'll take our next question from Andrew Wang with Sterne Agee.

Thank you.

Can you hear me okay?

Yes.

Okay.

Just a first question.

What's the risk that some of your Chinese customers convert their existing K465i orders to these new tools?

There will probably be some of that and there may be customers that convert.

I think we're prepared to deal with that, but most of our customers want to get the product pretty quickly and get installed and get running.

And, we will offer upgrades to 465is at some point in the future to increase their capacity also.

So, we've got a balanced approach to managing that.

For some people 465i with an upgrade will be the best choice and for others the cluster tool MaxBright will be the best answer.

Okay.

And, then a follow-up to one of the earlier answers.

Did you say that roughly 30% of your tools are being used in the general lighting market?

We said that 28% were going to -- in 2010 -- to customers whose primary business was lighting.

And, 43% to backlighting, with 23% to customers that were really highly into both.

And, so, we were just estimating that maybe 35% would be a reasonable estimate for tools into the general illumination market.

Okay.

The question is, do you have a sense of -- of those tools that are being used for the general lighting market, what percentage of those tools are being used to address demand in the US, Europe, or Japan, places where IT is a little more sensitive than others?

Don't really have a breakdown of that at this point.

So, I can't really tell you that.

Okay.

Thanks very much.

Our next question comes from Jed Dorsheimer with Canaccord Genuity.

Hi.

Thanks for taking my questions and congratulations on the announcement of the MaxBright.

The first question, just on MaxBright, John, you may have mentioned but was wondering if you could give us a little bit more color on what you think geographical concentration may look like this year?Presumably you're seeing eval ramp right now and I'm guessing you're spreading that out.

But, as that ramps, do you think that will have any specific region that's more concentrated than another or do you see that as a more evenly spread tool?

I don't think there's anything that causes this to be more bought in some regions than others, other than the fact that, whether it's Chinese are buying now or Koreans are buying now or other -- or Taiwanese or what.

I think it's going to depend more on demand from the regions.

I would say many of the Chinese subsidies are written now on a per tool basis.

So, that may be a benefit to some customers to buy individual tools, although we've heard from others that they expected that they could get that changed at some point in the future.

So, with that point aside, there's nothing to drive this to see more sales or less sales in any given region.

Got you.

And, second question, was wondering if maybe you could just help on revenue recognition.

Could you help me with how you define sign-up?

I'm just wondering, does this differ per customer?

Does it include shipment and arrival at a facility but not operational?

Or does it include operational but not with stated yields?

Or is it stated yields?

Or does it differ on a customer by customer basis?

And, then I have one follow-up.

It doesn't differ on a customer by customer basis.

Basically, sign-off comes when the tool has been delivered, installed, and then passed a set of tests that the customer and the Company have agreed on in advance.

So, it's not accepted until it's up and running and proven to make good LEDs.

So, there's no variation there.

But, when you're signing the contract initially, those set of standards, are those identical per customer or does it change basically customer by customer?

They're generally a standard set of specifications and sign-off procedure that we've developed and used for a long, long time.

So, it's not a customer by customer thing.

Got you.

And, then, if I could tuck one more and I'll jump.

Dave, just on the accrued expenses, looks like they jumped down $10 million.

I think that's where you classify your deposits.

Was it fewer deposits or is it something else that's going on in that account?

Thanks.

Yes, it's not fewer deposits.

Deposits are about where they've been.

Go to the next question and I'll get back in just a few seconds.

Okay.

Thank you.

We'll give it to you later when we talk to you.

All right.

Next question.

Your next question comes from Patrick Ho with Stifel Nicolaus.

Thanks a lot.

In terms of your order flow for the December quarter, you obviously had the largest MOCVD customer base you've had I think in your history.

Can you characterize whether these were the volume orders coming from some of the new customers you signed on or repeat orders from ones that you had already gotten in prior quarters?

There really were both, both repeat orders, some new key accounts which we mentioned.

And, again, I would say that when we looked at our orders, 70% of them are from companies that are pretty experienced at making LEDs.

So a mix.

Great.

In terms of the MaxBright, both in terms of the configurations for the customers as well as for your own operations, how much commonality did you get from the K465i where you were able to leverage off the technology, and also probably more importantly on the manufacturing side that will keep the margin profile as high as it is?

There is a lot of commonality in parts and subsystems.

And, there's a good bit of overlap but we made a lot of advances in the MaxBright.

So, a lot of commonality to help us well over 50%, probably well over 70% to help us drive the supply chain costs and really produce manufacturing efficiencies.

So, 465i's been a great product and there was a lot of overlap in what worked really well.

Great.

Final housekeeping question.

Dave, is the 33% tax rate something we should use for the year?

Yes, we're of course going to refine that in the first quarter when we do the full effective tax calculation.

But, with some of the structures that we're putting in place, that's where we see it for this year as we stand now.

Great.

Congrats on a great year.

All right.

We'll take one more question, Operator.

Our next question comes from Mark Heller with CLSA.

Thanks for squeezing me in.

Just to circle back, one more question on the China issue.

Can I just confirm that it has to do with the fabs not yet being completed on time or does it have to do with customer acceptances of the equipment in the fabs?

It absolutely has to do with fab completion and not customer acceptance.

Because what we're selling into China is 465is and those products are bifurcated.

We get paid 30% before we take the order and 60% on shipment.

And, we recognize the last 10% on acceptance.

So, it's really just is the fab done and ready to take tools and is the customer ready to take the next step in building or expanding their plan.

Okay.

Got it.

And, on the OpEx, it ticked up a bit above -- I think it came in a little above guidance for the fourth quarter, coming back down.

Can you give any sense as far as how much is variable, how much is fixed on the OpEx line?

We don't break it out by variable and fixed.

But, what you're seeing is a catch-up of spending to support the MOCVD growth that we're finally getting in at the end of the year.

It's basically a catch-up of expenses to the sales growth that we've seen.

Okay.

And, one more question, sorry.

Any thoughts on the OLED market?

I know you don't necessarily participate in that market today but companies like Samsung are starting to move more aggressively toward OLED.

Can you talk about your thoughts on that market, as well?

Yes.

We think it's a really exciting market in the nearer term for display and in the longer term for lighting.

We do have OLED strategies and products and we have not rolled those out yet but I can tell you we're working with top customers in the world on those.

Thanks a lot.

Thank you.

Thank you all for joining us tonight.

We'll end the call here.

That concludes today's conference.

Thank you for your participation.