Veeco Instruments Inc (VECO) 2011 Q2 法說會逐字稿

Ladies and gentlemen, thank you very much for standing by and welcome to the Veeco second-quarter 2011 earnings 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 SVP of Investor Relations.

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

Today's earnings release is available on the Veeco website.

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

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 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 our 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 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 or 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 our call.

Dave is going to start by reviewing our second-quarter results and after that, I'll provide an update of our outlook and guidance going forward, and then we'll take your questions.

Dave?

Thanks, John.

Turning to slide 5.

Veeco's second-quarter 2011 revenue was $265 million, that's up 4% sequentially, and up 20% from the prior year second quarter.

Veeco had a solid second quarter, and we met our quarterly guidance.

Timing of revenue continues to be impacted by the longer order to revenue cycle times associated with the high percentage of business currently coming from China.

Customer facility readiness and funding availability are the primary challenges there.

As John will speak about shortly, Veeco's recorded asset impairment and restructuring charges of approximately $51 million in the second quarter for our CIGS Solar Systems business.

Additionally, we recorded a $3 million loss on the conversion of debt earlier in the quarter.

These unusual items had a negative impact on our second quarter GAAP net income, which was $19 million, down from the $50 million reported a year ago.

GAAP EPS was $0.45 a share.

Second quarter non-GAAP net income was a strong $58 million, up 41% from the $41 million reported a year ago.

Non-GAAP EPS was $1.34, right in line with guidance.

Gross margin was 50%, excluding the impact of the CIGS Solar business impairment, again, right in line with our expectations.

Margins were even with the first quarter, which we believe is due to our market-leading product portfolio.

Operating expenses were $58 million, or 21.7% of sales, up from 17% of sales in the prior year, but within the range of our target of about 20%.

The increase in spending is to support the significant growth in business and R&D to invest in development of next generation MOCVD tools.

SG&A grew as a result of professional fees, equity comp, bonus and profit sharing.

Turning to slide 6.

You can see that of our reported $265 million in revenue, 83% was contributed by our LED and Solar business and 17% by Data Storage.

Veeco's LED and Solar revenues were $219 million, including $206 million from MOCVD.

LED and Solar revenues were up 2% sequentially, and up 18% from the second quarter of 2010.

We shipped six MaxBright MOCVD systems during the quarter.

As previously discussed, since MaxBright is a new product, we're not able to record revenue upon shipment for these tools in Q2, due to the accounting requirements.

Performance of the MaxBright has continued to be strong, and we expect to bifurcate revenue upon shipment on the MaxBright tools starting in the third quarter.

LED and Solar adjusted EBITDA was $71 million in the second quarter of 2011, compared to $57 million in the second quarter of last year.

Our Data Storage business also continues to report an excellent 2011.

Data Storage revenues were $46 million, up 14% sequentially and 28% from the prior year.

This was the highest quarterly revenue in five years.

Data Storage adjusted EBITDA was $13 million in Q2, that's up $10 million in the second quarter of 2010.

Turning to slide 7.

We reported $311 million in bookings during the quarter, 88% LED and Solar and 12% Data Storage.

We're excited to have achieved this new bookings record.

LED and Solar orders were a record $273 million, up 38% sequentially and 5% year-over-year.

MOCVD was about $250 million, up 34% sequentially on strong China demand.

China was about two-thirds of our Q2 bookings.

Our R&D business reported orders of approximately $24 million, up 92% sequentially.

In Data Storage, we booked $38 million, up 15% sequentially but down 25% year-over-year.

We finished the quarter with $558 million in backlog and a book-to-bill ratio of 1.17 to 1.

Note that approximately $20 million of CIGS deposition systems were taken out of our backlog at the end of the quarter.

Moving on to slide 8.

Let me now review a few of the details of our bookings for the quarter.

In MOCVD, Chinese companies represented 12 of the 16 customers placing orders, making this again the strongest region.

We saw signs of improvement in Korea, including a multi-system MaxBright order from an industry leader.

As we announced earlier in Q2, GPI of Taiwan placed a multi-unit MaxBright order as well.

In MBE, we booked a very strong quarter as wireless and photonics industry customers expanded their capacity.

In Data Storage, key customers invested for selected technology buys as they focused on completing planned consolidations.

Lastly, let's turn our focus to the balance sheet on slide 9.

We finished the quarter with cash and short-term investments of $633 million, down from $779 million at the end of the first quarter.

Major uses of cash during the quarter included the redemption of all of our 2012 convertible subordinated notes for $98 million in aggregate principal amount, the completion of a small technology acquisition for $28 million in cash.

Purchases of land and building for $8 million to support our growing presence in Asia and our growing R&D commitment, and during the quarter Veeco purchased $7.8 million in stock at an average price of $46.91 per share, under our Board-authorized buyback program.

Accounts receivable increased to $128 million, representing 44 days sales outstanding and inventory decreased by $8 million to $113 million, resulting in turns of 4.6 due to the strong performance in Data Storage.

Since the beginning of Q1, including purchases to date in July, Veeco has purchased $79.7 million worth of our shares at an average price of $42.63 per share.

Since the $200 million buyback program was authorized last August, Veeco has purchased a total of 3 million shares for $117.8 million.

These buybacks reflect our continued confidence in the long-term outlook for the Company.

We believe that Veeco shares represent an attractive investment for the Company and its stockholders with over $630 million in cash at the end of the second quarter and virtually no debt, Veeco has enormous flexibility to fund future growth.

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

Thanks, Dave.

Before turning to our outlook, I'd like to take a few minutes to discuss the Solar business decision we made, which as Dave indicated, impacted our second quarter GAAP financial results.

So turning to slide 11.

For the past several years, Veeco worked to develop systems to make CIGS Solar cells, and we've now decided to exit this business for several reasons.

First of all, the cost of mainstream silicon Solar cells has fallen rapidly and this is driving lower than anticipated end market acceptance of CIGS and second, the technical barriers, cost and time line for us to commercialize this technology, are just too high and too long for us to justify the investment.

So we will wind down our CIGS Systems business, and it will be treated as a discontinued operation in Q3.

Since this business has been operating at a significant loss, this action will have an immediate and positive impact on our profitability.

We'll continue to sell CIGS thermal deposition sources and we remain the top supplier of MOCVD and MBE tools for concentrator Solar cell markets.

Turning to slide 12, to talk about our Q3 order outlook.

We're really proud of the fact that Q2 was a record bookings quarter, both at the Company level and for our LED and Solar segment, and I wish we could do this every quarter, but I expect that MOCVD orders will fluctuate quarter-to-quarter, and in the short term we think that MOCVD orders will likely be impacted by weaker near term LED back lighting demand and global macroeconomic concerns.

On the other hand, our MaxBright system has received an extremely positive reaction from leading LED manufacturers around the world, and we see many signs of LED lighting acceleration.

This gives us real confidence in the future.

In Data Storage, Seagate is purchasing Samsung's hard drive business and Western Digital is merging with Hitachi Global Storage.

These consolidation activities are delaying capacity expansions, and as recently noted by Trend Focus, Q3 disc drive supply is expected to remain very tight.

We believe that a pent-up demand situation is developing, and equipment purchases will accelerate later in the year, but probably after Q3.

So given these trends, we forecast that Q3 bookings will be lower than our record second quarter bookings.

Turning to slide 13, I'll take you through our Q3 revenue and earnings guidance.

We currently forecast Q3 revenues will be between $235 million and $285 million.

Facility readiness issues, as well as shipment timing uncertainty due to tightening of credit in China are all factored into this very broad range.

Our first article MaxBright shipments carry start-up costs that are higher than normal, and we expect Q3 margins to temporarily dip down to 47% or 48% as these units flow through our P&L.

This will likely be a one or two quarter situation, and Veeco's overall gross margins should tick back up to the 50% level.

Operating spending remains within our target range of about 20% to 23%, and EBITDA profitability remains strong, at 25% to 29%.

And that drives GAAP EPS of $0.92 to $1.32 a share, and non-GAAP EPS of $1 to $1.40 a share.

So turning to slide 14, let me tell you about the spectacular success we've had with our new MaxBright system.

We booked over $100 million in orders for MaxBright in the second quarter and the fact that 40% of our new orders are for our latest generation new product, just a few months after launch, is fantastic.

We delivered six MaxBrights to key customers in the quarter and we also installed a new tool in our Taiwan technology center.

Orders have been received from top accounts around the globe.

MaxBright is the highest throughput and most cost-effective tool on the market.

It also has the best footprint efficiency and the best capital efficiency, and it positions us to continue to gain market share, as we have over the last two years.

So flipping to slide 15, I'd like to talk about China.

Our strong Q2 bookings, which included 30% in better deposits and the fact that we've had no cancellations, are indicative that the vast majority of Chinese LED fab expansions are continuing.

But longer order to revenue cycles persist from customer facility delays, and the more recent credit tightening situation.

We're not aware of any project cancellations, but we are seeing some shipment schedule changes.

Despite these timing challenges, China's overall commitments to LEDs is intact.

LEDs remain one of China's key emerging industries, and the government's investment is really seed capital to fund the industry's future growth.

China's likely to focus on stimulating internal LED demand through additional demonstration projects and specific rebates and incentives, and the recent press announcement from the Ministry of Science and Technology increased China's goal for LEDs to be 30% of general lighting by 2015, that's up from 20% in the prior goal.

China will be a major LED player, and we will continue to help customers build and expand their businesses.

We've already trained over 100 engineers since our Shanghai training facility opened in May.

Moving on to slide 16, I'd like to provide an update on Korea, and this slide shows South Korea's plans to accelerate LED lighting adoption and their recently-announced 2060 plan, which has a goal of 60% of all lighting being LED by 2020.

According to industry reports, the Korean government could spend $1 billion to achieve this target, and it's clear that Samsung, LG, and (inaudible) will play a big role here.

Another positive sign for LED lighting is that in Korean stores, LG is selling 40-watt equivalent light bulbs for $13, and Samsung is selling 60-watt bulbs for about $18.

These prices have dramatically dropped.

We experienced the sequential improvement in orders from Q1 to Q2 in Korea, was up about 400%, but that was clearly off a very low base, and still represents a trough level of the business.

All key Korean accounts have MaxBright system, and this positions us well for further market share gains, as this region turns back on and while timing for true order recovery in Korea is still unclear, we think these customers will again invest to gain share, and this time it will be for the lighting market.

The Japanese market represents another bright spot for LED lighting adoption, as shown on slide 17.

Recent market reports indicate that LED light bulb sales reached about 44% of total light bulb sales, as the country's restriction on electricity consumption accelerated LED sales.

For the first time, LED light bulb sales surpassed incandescent bulb sales in Japan, and we expect further increases as the government is likely to revive its Eco Point program that offers consumers points for buying environmentally friendly products.

We also expect that many of our MOCVD customers in Korea and Taiwan will benefit from increased Japanese demand.

Moving on to slide 18.

There are clear indications that we are near the tipping point for solid state lighting.

As you can see from the chart, high-powered LED average selling prices have dropped about 50% year-over-year, which is much faster than the [heights law] historical trend of 20%.

We believe that the dropping ASPs will stimulate LED demand in this highly elastic market, and that the tipping point for rapid solid state lighting adoption is very near.

And in fact, if you flip to slide 19, you'll see another key data point indicating this trend.

Many of you have seen the pie chart on the left side of slide 19, which estimates Veeco's 2010 tool shipments by end-market application.

On the right side, we've updated this chart for the first half of 2011.

And as you can see, of our 190 reactors shipped in the first half of 2011, over 50% were for lighting.

This is a huge increase from 2010, and it's a clear indication of our customers' strategic intent to become LED lighting suppliers.

So to summarize on slide 20, while the short-term is a bit cloudy, we believe there is a fantastic growth opportunity ahead of us, as LED market adoption increases in 2012 and 2013, due to a variety of reasons that include ban the bulb legislation in the US and Europe, Japan's move to stimulate LED adoption, significant investment by Korean and Taiwanese leaders, and China's continued investment with the 12/5 year plan, continuing to highlight LED as a policy focus area.

Given this environment, we believe that Veeco is very well-positioned for continued growth.

We've gained significant market share during the last two years, and we believe we'll continue to do that throughout 2011.

In fact, in the second quarter, we estimate that we gained another 3 points of revenue market share to about 45%.

We're confident that Veeco will perform well through any short-term fluctuations in the business.

We're now a debt-free Company with significant cash, and a highly variable cost model.

We expect 2011 to be a great year, and we're on track to deliver over $1 billion of revenue and over $5.25 a share in non-GAAP EPS.

So thank you for your patience during our prepared remarks, Operator, we'll now take your questions.

Thank you.

(Operator Instructions).

We'll first go to Krish Sankar with BOA, Merrill Lynch.

Hi, thanks for taking my question.

I had a couple of them, John.

The first question is how much of the CIGS benefit is rolling through your OpEx in Q3?

Because if I look at your full-year guidance of $5.25 and take your midpoint of Q3, seems like you have to do $1.38, $1.40 in Q4 which would imply your revenue should be up in Q4 from Q3.

Is the math right?

We'll benefit about $0.12 a share by exiting the -- $0.12 a quarter, excuse me, by exiting the CIGS business.

How much of that is there in your Q3 guidance?

How much is in the Q3 guidance?

Yes.

That's baked in.

It's assumed.

Got it.

Okay.

All right.

And then the second 1 is longer term question, when I look at your margin profile you say that the gross margin is going to bounce back after a couple of quarters.

What do you think is a sustainable gross margin for MOCVD business, like let's say in 2012 and beyond.

Do you still think you can maintain 50% or do you think it's more of a mid-40s business.

When we introduced the 465-I, we went through a period of basically start-up cost, and we had a little dip in margin for a couple of quarters, and then that went away.

In the case of MaxBright, we've got a number of the first group of units were built at a higher cost, and that will push our margins down for probably 2 quarters.

And then I think we'll get back to the 50% level.

So, I think that's a good level for us and that's what we would expect.

One last thing.

Looks like your AST dipped in Q2 based on your shipment numbers.

Is there a specific reason for it?

Is it just MaxBright in the mix?

Thank you.

Remember, in Q2 we're shipping MaxBrights but taking no revenue.

So, that may be what you're seeing.

Thank you very much.

Now moving on, we will take a question from Timothy Arcuri from Citi.

Hi.

Couple things.

Dave, can you, first of all, my question's on backlog.

Can you break the backlog down and tell us how much of that's LED versus storage?

And within that, I would like to know how much China is?

I would assume that that's all LED, so if you could break down backlog, number 1, and then I had a follow-up.

Yes.

So, the China component is about two-thirds.

It's about two-thirds of our orders and our backlog.

Okay.

And Dave, how much of the 588 is storage?

The 588, the Data Storage component is -- give me 10 seconds here.

Data Storage component is 62.

That's mechanical.

I'm sorry.

62.

About 70.

70.

Okay.

And Dave, can you also tell me what the deposit number is, the deposit balance?

$115 million we finished second quarter with.

It's down a little bit because of the Solar.

We took Solar out, of course, deposits that were related to that business.

Okay.

Can you help me adjust for that?

How much came out because of Solar?

Yes.

So, about $10 million comes off because of Solar.

So, if you take that out compared to Q1, you come to roughly flat quarter-over-quarter and your next question is probably going to be with a positive book-to-bill, why didn't it go up?

Yes.

And the reason is primarily because of the MaxBrights.

Because what's happening is we take deposits on the MaxBrights and then when we ship them but don't take them into revenue, we move it out of deposits and into deferred revenue.

Thanks, Dave.

There's a couple bits and pieces outside of China for large Tier 1 customers that we don't require deposits on.

That's a much smaller number than the MaxBright component, but that's a couple million dollar impact also.

Perfect.

Thanks a lot.

Thank you.

Moving on.

We'll take a question from Stephen Chin from UBS.

Thanks.

Hi, John, Dave.

Just a question.

On the third quarter MOCVD order guidance being down, are you assuming both the China region and Taiwan regions will likely see theirs decline and maybe you can share some color on how you're planning to manage the Company for these lower MOCVD orders.

Are you thinking this is a multi-quarter pause, John, or is it kind of a shorter order pause?

Well, I think first of all, what we said is that Q3 orders were probably going to be down from Q2, and Q2 was a record, new Company record and new LED and Solar.

So, we have a very strong backlog.

Orders flip around quarter to quarter.

We built a Company with a large amount of variable cost model, so we are prepared to go up and down.

But we also have a record backlog.

So, we have plenty of product to ship, and think that we have a great growth future ahead of us.

It's been really exciting to see the increase in shipments going into lighting applications this quarter.

And it's happening fast.

Okay.

Maybe I could follow up on the backlog quality.

If you had to try to qualify, John, like the backlog across maybe riskier customers versus well-capitalized customers or those with strong joint ventures in Taiwan or Korea, any ballpark estimate on how you would kind of classify your backlog.

I think the backlog is solid.

It all comes with deposits, so all of our China backlog has deposits, 30%, some higher.

So, I think it's very solid.

We have hundreds of millions of dollars of backlog, or of orders that are not in our backlog, because we didn't get the deposits yet.

So the backlog is solid and it may -- there may be some delays in shipments.

We've seen the China government tightening the credit policy, slowing down some customers from getting LCs ready to receive their shipments, so that their shipments slide, because they don't get the LC as early as they'd like.

But, I think it's solid.

Okay.

And then 1 last question on the stock buyback.

Looks like there's about $82 million left.

You've expressed confidence in the LED industry longer-term, so are you thinking about increasing the buyback, or considering a dividend at this point?

Thanks.

Well, you remember the Board approved it, the buyback we have right now, the $200 million last August.

So, that's a Board decision.

All right.

Thank you very much.

Moving on, we'll take a question from Christopher Blansett with JPMorgan.

Good afternoon, everyone.

Hi, Chris.

How are you?

I wanted to ask about the Company you purchased.

You mentioned that this was a critical component supplier for MOCVD.

Does this help your gross margins, or expose you to new markets or revenue opportunity through this acquisition?

It really does 2 things.

It gives us a superior technology, a technology that we found gives our MOCVD systems a competitive advantage, and it will ultimately help our gross margins.

But it is technology for making a better MOCVD system, and that's why we bought it.

It really provides competitive advantages in the product.

Is it fair to say other MOCVD equipment makers do not purchase parts from this new acquisition?

Yes, it's fair to say that.

Okay.

And then lastly, you mentioned in your MaxBright bookings are going up significantly overall as a percentage of the bookings.

I wanted to get a feel.

Are these really kind of displacing K 465-I orders or are we starting to see some actual competitive wins against Aixtron equipment?

Well, I think we're definitely seeing competitive wins because we've been gaining share consistently, at least on an average basis, quarter per quarter versus Aixtron for 2 years now and have dramatically changed our share.

So, definitely it's the best product on the market.

It's the best product in terms of cost of ownership.

It's the best product in terms of throughput.

It's the best product in terms of automation.

Just about any metric.

It really is superior.

So, it's helping us gain share in a big way.

I had 1 last question.

You mentioned that you get $0.12 a quarter benefit from the discontinuation of the CIGS business.

How much of this are you going to roll back into, say, R&D or accelerating development for MOCVD?

Because I assume not all of this is going to come to the bottom line.

Well, we've built a great R&D organization, and we continue to expand that.

We have a product pipeline that we think is superior to anything in the industry.

It's what will help us make sure that nobody else gains against us, and we believe that it will continue to help us on the share gain path that we're on.

So, we will fund that as aggressively as needed, and certainly some of that money will go there.

We felt that, for a long time, that CIGS was a good market opportunity.

We found that there were some more technical barriers to entry than we expected.

And when we looked at it, we also found that we could better use that money somewhere else.

So, that made us make a tough decision.

All right.

Thank you.

Appreciate it.

Thanks, Chris.

Thank you very much.

Moving on we'll go to Satya Kumar with Credit Suisse.

Thanks for taking my question.

I notice that you did not specifically mention China subsidies as reasons for Q3 order declines.

I know that the subsidies are very different by different provinces, but it appears that maybe 2 of the provinces, Jiangsu and Anhui are taking a disproportionate amount of assistance.

I was wondering if there are changes you're seeing in the equipment subsidy environment in these 2 regions and if that's having a role to play in the order declines?

We're really seeing the changes on the credit availability and basically the funding availability.

So, I wouldn't peg it on the subsidies.

Clearly, there will be some changes in subsidies over time, as various regions make decisions of whether they've achieved their growth goals or not.

But it's really credit and facility readiness that is the big impact we're seeing.

We've got customers with fabs that are 90%-built, but they don't have electricity or they don't have gas or something like that, and so we just have to wait a little bit for them to catch up.

So, I think that's the bigger drive that we're seeing.

Okay.

Earlier this morning, Aixtron reported an it appears that they're offering price discounts to some of their larger customers and their gross margins were also down in Q2.

And they're talking about a new product with a bigger platform.

Was wondering if that is a potential threat now for MaxBright?

And just a bookkeeping sort of question.

If you can let us know what utilization rates you're seeing across the different regions, and if you have a sense of utilization rates by BLU versus lighting, that would be useful.

Thanks.

First of all, we've been gaining share against Aixtron for the last 2 years and we've been doing that because the product technology, the productivity, the cost of ownership models of the tools that we've been delivering have been better, and have been growing our share of the business.

So that's what's driving that.

I think in a situation where a Company is losing share, they typically get more aggressive on discounting, and those things, and I think you may be seeing some of that.

Regarding utilization rate by region, that's pretty hard to peg, and it's hard to measure in China because it's a place that's in so much transition that it's really -- I don't think anybody has a real utilization rate for China.

In Korea, we've got some customers that have ticked up significantly, got others that are still a bit stalled.

But overall, it's getting better and we think that second half of the year will be better than the first half of the year, and I think the fact that you can now go and buy a Samsung light bulb or an LG light bulb is a real positive sign there to help the Korean market.

Thank you.

Thanks.

All right.

Thank you.

Moving on we'll go to Ahmar Zaman with Piper Jaffray.

Hi, thank you for taking my question.

I guess, my first question is, you mentioned that there were 3 MaxBright tools that were shipped this quarter, but revenue was not recognized.

Last quarter I believe you shipped -- sorry, last quarter you shipped 3.

This quarter you shipped 6 or 7.

How should we think about the revenue recognition for those tools, and is the revenue recognition for those tools already baked into third quarter guidance?

So, we'll start recognizing revenue on the ones that are out there for customer evaluation as the customers complete their evaluation.

And then the new ones that are shipped in Q3 will be taken into revenue under the bifurcation model in Q3 and that's all assumed in our guidance.

Okay.

So, in terms of timing, can you give us some color on what the current period is from order to revenue recognition that you're seeing today?

It depends.

Customers, the tools under evaluation, it really goes by the customer's schedule.

So, I mean, we have our estimates, and we build it into our forecasting and our guidance, but at the end of the day, it's under the control of the customers, not us.

Okay.

And then in terms of your long-term outlook for general lighting, the 5,000 tool estimate, how should we think about the development of that in 2012, 2013?

Which year -- when do you expect that demand to peak?

That's a good question.

We think the 5,000 is a good number.

We think it's reasonably conservative.

It's hard to tell exactly where the peaks and valleys are.

I think there is a situation now where backlighting, TV, LED TV sales are a little slower than expected.

Backlighting market for LEDs is a little lower than expected.

But, lighting is picking up.

So, at least on the equipment purchase side.

So, hard to predict a peak.

It may be a ways away.

But a peak could be really significant.

I think the good point is that we need an average of 1,000 reactors a year over the next 5 years, and that assumes -- that number assumes major efficiency -- major improvements in yield, major improvements in throughput, and all kinds of productivity improvements in the industry.

So, in today's tools, it would be significantly higher if we said the technology in the market was frozen, how many reactors would it need.

It would need at least probably 1,000 more.

But, we continue to improve the product and improve the efficiency of the industry.

Actually, might need a couple thousand more, if we froze the technology at this point.

Thank you very much.

All right.

Thank you.

Now we'll go to Jed Dorsheimer with Canaccord Genuity.

Hi, thanks.

A couple of questions, John.

If we just go back a quarter, you were pretty clear in terms of comments that as China subsidies sort of slowed, and you might see a transition in the back half of this year, where Taiwan and Korea would sort of be the driver for second half, and I think you alluded to this earlier.

I just wanted to confirm.

Is this how you're looking at the business, that Taiwan and Korea are the back half drivers in terms of orders this year?

I think we're still expecting significant orders out of China.

We're still seeing a lot of activity there.

We're seeing some large projects being planned, where the products haven't been ordered.

So, I don't think China is going away.

I do think that Korea will begin to ramp back up.

So, from an orders standpoint, we have a huge backlog, so of course shipments is a different thing.

And then just jumping into sort of the 5,000 tool number a little bit more, if we just look at some comments from Epistar, 1 of the leading suppliers of chips and obviously a customer of yours, they have on order roughly 200 tools, and at current yields, which are only increasing as you mentioned, they've said that they have capacity to supply 1 billion light bulbs.

So I'm just curious, in terms -- what is your lighting in terms of sockets, 5,000 would be roughly 10 times what the world has.

Well, look, I don't want to work through the math on the phone, and I also don't want to disagree with Epistar, but we've done a thorough market analysis and we think the 5,000 number is relatively conservative, that there is -- there are other estimates on the market that are a lot higher.

So, we think our number's --

Okay.

That's fair.

And then 1 last thing.

Did I miss the 8-K on this acquisition?

I'm just curious.

Sounds like it's a great buy for you, and that it's going to help the cost structure and fairly material.

Is there a name of the Company or is there an 8-K I can look at?

Yes, Jed.

It was a great buy for us.

Given the size of the acquisition, an 8-K was not required, so we didn't issue an 8-K on it.

Can you provide the name of the Company?

No, we're not disclosing the name.

Okay.

Thank you.

Thanks, Jed.

All right.

Thank you.

We'll now move on to Bill Ong with Ticonderoga Securities.

Good afternoon, everyone.

My question's on capital intensity.

How are you doing?

My question's on capital intensity.

So, the LED capital intensity right now is running about 25%, and that's CapEx divided by LED revenue, much higher than semiconductors at 15.

I do understand that China is investing LED infrastructure but a quarter of LED revenue is still very difficult to get your payback.

So, maybe you can help us understanding what's the ROIs of a power plant or other metric that helps justify why China continues to spend at this high level.

Sure.

Capital intensity of 25% is way higher than revenue but that's pretty common to see in the early phases of huge growth markets.

As they mature, and the growth slows down, you get down to more normal levels.

In China, there's a situation now where there's just not enough power to go -- to satisfy the needs of their growing economy, and so you have a situation of -- we have facilities and customers have facilities where power is cycled off for their factories for a day a week, or 2 days a week in order to balance things.

There's just not enough power.

So, the fact that you can spend money and build LED light bulbs and drive down the energy consumption instead of just building more power plants, which are already being built as fast as they can build them, is a real just huge economic benefit to them.

So, they're buying coal, buying energy from all over the world, but they're also working on their own demand side, and this is a relatively small investment that has a huge payoff, and probably better payoff than just about anything else they could do.

Great.

That's helpful.

Nice job on MaxBright.

Thanks, Bill.

Thank you.

Now moving on we will go to Mehdi Hosseini with Susquehanna International.

Thanks for taking my question.

On the guidance, I assume this already includes discontinuing the Solar business; correct?

Yes.

Okay.

And then what is the age of the backlog?

The age of the backlog?

I'm not sure how to answer that.

The percentage of shipment out of backlog over the next six months.

Percentage of shipments over the next 6 months.

One moment here.

We should see -- I would expect in the second half -- the second half we should see about 2 -- well over two-thirds coming out of backlog.

Okay.

And then it just comes down to the revenue recognition.

Right.

Okay.

And then just 1 more thing.

On DSOs going up, how should we think about the cash cycle?

Is it going to come down to Q3?

The DSOs are about in the range where we are.

If you remember from the first quarter, we had an unusually low DSO.

That was because of timing of when we get LCs with most of the business in China.

But 44 days is about the range where we are.

We're usually about in the low 40s.

That's actually pretty good compared to peers as well.

Great.

Thank you.

All right.

Thank you very much.

Moving on we'll go to Olga Levinson with Barclays Capital.

Hi, thank you for taking my question.

Just to follow up on the previous question, can you talk about either how many tools or the magnitude of the MaxBright revenues you're embedding in your guidance for the September quarter?

No, no.

As I mentioned before, when those things come into revenue are under the control of our customers as acceptances come in.

So, I wouldn't want to venture into giving the amount in our guidance, just suffice it to say we have made some estimates in our forecast and that's what's out there.

Okay.

And then in terms of the flexibility in the business model, excluding the impact they're going to see from MaxBright over the next 2 quarters, can you help us think about approximate gross margin levels we should expect at differing revenue levels, such as around $200 million or $150 million, just so we have a gauge as to the flexibility there.

Well, we've given guidance in the third quarter that we expect it to tick down a couple points temporarily to 47%, 48%.

In our modeling, I mean, 1 of the things that we've said is even if our -- because of the variable cost structure we've set up, we expect that even if our business dropped off substantially, we'd see margins still well above 40%.

And that's a significant drop in our downside modeling.

Okay.

Thank you.

All right.

Thank you very much.

Now moving on we'll go to Andrew Abrams with Avian Securities.

A couple of questions.

Can you give us some indication on MaxBright, if your customers are using it for multiple process, or are these just 4 single process units put together?

Do you mean multi-chamber growth?

Is that what you're referring to?

Yes, different process in each chamber or in 2 sets, let's put it that way.

Most of our customers, other than maybe trying, experimenting, are using it independent, as independent chambers, and not doing multi-chamber growth.

Some are experimenting and seeing if they can get a benefit from a multi-chamber growth.

But at this point, it's really single chamber growth.

And in your chart on the customer breakdown, in terms of lighting versus back lighting, how do you define your lighting customers?

Are these pure lighting customers, or are these customers that could potentially do both back lighting and lighting?

They're really more pure lighting customers, or let's just say at least predominantly lighting customers.

Because we have a group of customers that do both, and if we went back a year in the same quarter of a year ago, that back lighting and lighting really customers that are big suppliers into both areas was much bigger and it got smaller as 2010 shaped out.

This 48% of lighting, those are customers that are doing predominantly lighting applications, and that's the big change.

Got it.

A lot more equipment going to that market.

Just 1 clarification.

In the decline in orders for third quarter, did you say that you expect China orders to decline in third quarter or -- ?

We didn't provide any detail.

We just said that we set a record in Q2, that there's some headwinds in Q3 in both the Data Storage and the LED business and so we probably wouldn't set another record in Q3 is really what we said.

Oh, okay.

So it's a combined Data Storage and LED and no specifics on breakdown of LED.

Yes.

Thanks very much.

Thank you.

All right.

Thank you.

Now we'll move on to David Duley with Steelhead.

Thanks for taking my question.

A couple of questions on MaxBright.

Did you say that the MaxBright tool shipped in the third quarter will be recognized in that quarter?

We will bifurcate revenue for tools in the third quarter, but a tool that's shipped as an evaluation unit may not take revenue in the third quarter.

But if it's shipped under normal conditions, then we would book it in the third quarter.

And when we say bifurcate, we'll take 90%.

We'll take 90% until the final acceptance.

In the third quarter.

Okay.

Would it be a reasonable assumption to assume that the tools shipped in the March quarter would also hit the September revenue recognition?

Going back to what we said before, it depends on customer acceptance.

Yes.

So, that might not be a good assumption.

Some of those might take until the December quarter to get there, depending on the customer's facility and that sort of thing.

Okay.

Some of those probably will be Q4.

And you planed mentioned that you gained a couple points of share.

How did you account for these unrevenued MaxBrights in your share calculation?

We didn't count them.

We took our revenue in MOCVD versus Aixtron's reported revenue.

We arbitrarily picked a number of about 5% for Nippon Sanso and computed it that way.

I think -- so, any MaxBrights we shipped have not been counted in our market share.

So, we've been gaining without that.

Okay.

So, I guess theoretically if you recognize them, those systems, then your share would be even higher?

Yes, it would be possibly over 15%.

Okay.

And just kind of a final question from me on the MaxBright is once you've qualified a MaxBright, is there any reason on earth that you would buy a standalone tool?

Sure.

The standalone tools have gone through a number of upgrades over the last six months, so if you're a smaller facility or if you have your process of record on that and you're a Company that doesn't want to change too fast, we have a lot of very good customers continuing to buy 465-I, because that product has not been standing still, and it hasn't received all the fanfare, but it's a great product and it does well.

It depends on your situation and whether you need footprint efficiency or you don't care about that and a lot of other factors.

So, we expect that we will have a balanced -- a balance of shipments between MaxBright and 465-I.

One final thing from me is what part of the geographically of the world do you think that you gained market share in recently?

I don't think I have a breakdown, but we've been gaining probably in all regions.

Korea?

Well, Korea -- Korea has been doing minimal buying, so I can't speak for Korea, but we have a very strong market share position in Korea.

Thank you.

Thanks, David.

Operator, we'll take 1 more question.

All right.

Thank you.

That final question will come from Andrew Huang with Sterne Agee.

Thank you.

Just a quick question on the backlog.

I think Stephen Chin asked earlier, but if you look at the kind of big well-capitalized customers in China, can you give us a rough feel for like what percentage of the backlog those kinds of customers would account for?

I don't think we have a breakdown.

I know we don't have a breakdown here with us.

But I can tell you that we've done really well with big, well-capitalized customers in China.

I think we have a strong position there and position at some of these companies that have been in press releases would include Sanan and Elek-Tech and others.

So, we are doing well in the large companies there in China.

And along those lines, have you had any discussions with those large well-capitalized customers about what their plans are should the subsidies end abruptly?

Absolutely.

We have discussions with our large customers everywhere and obviously can't share that but we've got companies that we expect to see expand and grow for years to come, subsidies or not.

Okay.

Great.

Thank you.

Thanks, Andrew.

And operator, we'll close the call at this point.

Thank you all for joining us.

Thank you very much.

Ladies and gentlemen, that does conclude today's conference.