Veeco Instruments Inc (VECO) 2011 Q3 法說會逐字稿

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  • Operator

  • Good day, everyone, and welcome to the Veeco third quarter 2011 earnings conference call.

  • Today's call is being recorded.

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

  • Debra Wasser.

  • Ms.

  • Wasser, please go ahead.

  • - SVP, IR

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

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

  • Joining me today are our CEO, John Peeler, and our CFO, Steve 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.

  • 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 section of the Company's report on Form 10-K and in 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 of performance, is available on our website.

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

  • - CEO

  • Thanks, Deb.

  • And thank you all for joining our call.

  • Dave is going to start off by reviewing our third quarter results.

  • After that, I will provide an update on our outlook and our guidance.

  • And then we'll take your questions.

  • Dave?

  • - CFO

  • Thanks, John.

  • Turning to slide 5, Veeco's third quarter 2011 revenue was $268 million, up 1% sequentially but down 3% from last year's third quarter.

  • As we've discussed in the past few quarters, the timing of revenue continues to be hard to predict in China, as facility readiness and funding availability continue to be significant challenges for us.

  • However, we accurately assessed these risks when setting our guidance, and we're pleased to have delivered a solid quarter, just above the midpoint of our range.

  • Please note that all of Veeco's results presented today exclude the CIGS Solar Systems business, which has been reclassified as a discontinued operation.

  • Veeco's GAAP net income from continuing operations for the quarter was $53 million or $1.31 per share, compared to GAAP net income of $94 million or $2.22 per share in the third quarter of 2010.

  • Non-GAAP net income was $53 million or $1.33 per share for the quarter, compared to $65 million or $1.55 last year.

  • EBITDA was $78 million or 29% of sales, down from $88 million last quarter.

  • These results were at the high end of our guidance.

  • Veeco's operating expenses were $50 million for the quarter, down from $51 million last quarter.

  • Gross margin was about 47%, declining sequentially as forecasted, due to a high concentration of MaxBright MOCVD systems in our quarterly revenue mix.

  • As we've commented, our first article shipments of MaxBright carry higher costs.

  • We had anticipated that these would have a dampening effect on gross margins in the second half 2011 as they roll through the P&L, and then we'll begin to see cost improvement early next year.

  • Turning to slide 6, you can see that of our reported $268 million in revenue, 87% was contributed by our LED and Solar business and 13% by Data Storage.

  • Veeco's LED and Solar revenues were $234 million, including $220 million in MOCVD.

  • LED and Solar revenues were up 7% sequentially but down 4% from Q3 2010.

  • MaxBright MOCVD systems were a very meaningful contributor to our revenue in the third quarter.

  • LED and Solar adjusted EBITDA was $73 million in the third quarter of 2011, compared to $98 million in the third quarter last year.

  • Data Storage revenues were $34 million, down 25% sequentially but flat versus the same period last year.

  • Data Storage adjusted EBITDA was $7.9 million in Q3, down from $9.2 million in the third quarter of 2010.

  • Turning to slide 7, we reported $133 million in bookings during the quarter, 84% LED and Solar and 16% Data Storage.

  • Overall, orders declined 57% from our record second quarter and 52% from the third quarter of last year.

  • LED and Solar orders were $112 million, down 59% sequentially and 54% compared to the third quarter of last year.

  • MOCVDs bookings were $103 million, and MBE booked about $9 million.

  • We completed MOCVD deals in all regions, with the exception of Europe.

  • MaxBright systems were ordered by key customers in China, Taiwan, and Japan, and several customers ordered single-chamber K465i systems, including one large multi-unit deal in China, where Veeco is the sole supplier.

  • In Data Storage, we booked $21 million.

  • That's down 44% sequentially and 39% year-over-year.

  • We finished the quarter with $389 million in backlog and a book-to-bill ratio of 0.5 to 1.

  • Note that we recorded backlog adjustments of $34 million this quarter.

  • These adjustments were primarily related to several MOCVD customers who canceled or substantially pushed out the dates for tools that were on order.

  • Lastly, let's turn our focus to the balance sheet on slide 8.

  • We finished the quarter with cash and short-term investments of $449 million, down from $633 million at the end of last quarter.

  • Significant uses of cash during the quarter included stock buybacks, as well as cash payments to settle contracts related to the discontinuation of our CIGS Solar business.

  • Veeco purchased $154 million of stock at an average price of $38.63 per share during the quarter.

  • In other balance sheet movements during the quarter, working capital changes about offset the positive cash generated from operating income.

  • Inventory balances grew by $14 million but were offset by a $13 million reduction in accounts receivable balances.

  • At the same time, deposits declined from $115 million to $78 million, which roughly offset the positive cash flow from operations.

  • Note that we've completed the full $200 million of share buybacks authorized by our Board of Directors in August of last year at an average price of about $38 per share.

  • These buybacks reflect our continued confidence in Veeco's outlook, and we believe they will represent an excellent value for our shareholders in the long run.

  • With $449 million in cash at the end of the third quarter, virtually no debt, and the continuing expectation that we'll generate cash again in Q4 and throughout 2012, we believe the Company has significant flexibility to weather a downturn in business and to fund future growth.

  • Let me now turn the call over to John to review further highlights for the quarter and discuss our outlook.

  • - CEO

  • Thanks, Dave.

  • Moving to slide 10, we're proud to deliver against our guidance during a challenging time, and aside from a financial performance, we had a number of other positives.

  • Our MaxBright continues to gain wide acceptance from tier 1 LED manufacturers and represented nearly half of our MOCVD revenue in the quarter.

  • We've now trained over 200 engineers at our China training center, and we should be over 300 by the end of the year.

  • Our Taiwan technology center is staffed and operating, and we're working with industry leaders on new technologies and process development.

  • In Data Storage, our market position and key customers remains extremely strong.

  • Our customers are placing more emphasis on improving yield and reducing costs, and this aligns well with Veeco's strengths.

  • We see good opportunities for our new CVD, PVD, and DLC technologies.

  • Turning to slide 11, as Dave reported, we experienced a slowdown in new orders during the third quarter.

  • Ongoing weakness in worldwide TV sales continue to cause factory utilization rates in Asia to remain low, and reports indicate that many of our customers' utilization rates are between 50% and 70%.

  • We've seen decreased business activity in China due to credit tightening and funding availability, and in Data Storage, our customers delayed factory expansion due to weak PC sales and while they wait for regulatory approval of pending mergers and acquisitions.

  • All in all, we believe that a weak global economy and a variety of economic risk factors has caused our customers to slow or postpone capacity expansion.

  • While we have limited visibility, we currently expect that MOCVD orders will remain depressed for a few quarters but that Data Storage orders could move up as soon as the M&A regulatory uncertainty clears.

  • Turning to slide 12, I will take you through our Q4 revenue and earnings guidance.

  • Q4 revenue should be between $175 million and $215 million, and facility readiness issues and shipment timing uncertainty are already factored into this range.

  • We expect that lower volume and continued impact of first article MaxBrights will cause gross margins to be between 44% and 45%.

  • Operating spending will remain about flat, driving EBITDA to 17% to 22% and non-GAAP EPS of $0.54 to $0.86 per share.

  • We're really proud that the Company still expects to deliver $1 billion dollars in 2011 revenue and over $5 in EPS at the high end of our guidance.

  • This is a tremendous accomplishment.

  • It speaks to our technology leadership, close connectivity to our customers, and our ability to execute in a challenging environment.

  • With the slowdown in the business, we're working to decrease our spending levels, and reductions of about 100 temporary workers and contract manufacturing staff have already occurred.

  • In addition to the impact of our variable cost model, we're in the process of taking actions to reduce spending, particularly in the G&A category.

  • Moving to slide 13, while the overall environment is pretty gloomy, we do see positive signs in the LED marketplace.

  • There have been reports of rush orders for high-spec LEDs for new TV models from several top manufacturers.

  • Traction for LEDs in Japan has been widely reported, with light bulb sales -- with LED light bulb sales reaching 60% in the third quarter, as Japan is making energy conservation a national imperative.

  • Phillips recently reported solid growth in LED lighting demand, which ties to data points from around the US and Europe that indicate a dramatic decline in LED light bulb pricing.

  • And lastly, our team in China is reporting that LED product subsidies are likely to be soon rolled out.

  • According to Strategies Unlimited, whose data you can see on the right hand of this slide, 2012 and 2013 should be an exciting time for the LED industry, as LED lighting, pictured here in orange, starts to hit a meaningful inflection point, and more LEDs are shipped for lighting than for backlighting.

  • On slide 14, we have borrowed a slide from LEDinside and a few of the Wall Street firms that lays out timing for incandescent light bulb phase-outs around the world.

  • And these phase-outs will have a large impact on the LED industry, as lighting manufacturers have to ensure that their products meet a variety of energy efficiency standards.

  • You can see in that key markets, like Europe and the UK, phase-outs are already occurring.

  • And in 2012 and 2013, phase-outs will begin to occur in many other countries.

  • I think these phase-outs are meaningful, because global lighting distributors will need to increase their LED shelf content in order to maintain their space and their market share.

  • You may have seen previous versions of slide 15, which we've continued to update in order to give you an idea of how much of our business is lighting based.

  • As we look at Veeco MOCVD shipments by customer, lighting has continued to increase as a percentage of our system shipments to be 54% through the first nine months of the year.

  • A lot of this demand comes from China, where the customer base has a strong focus on lighting.

  • Turning to our outlook, we are confident that LED pricing declines will continue to stimulate demand for solid-state lighting.

  • We expect widespread adoption of LED lighting, first led by commercial, municipal, and industrial sectors, which make up about 75% of the lighting market, and then followed by residential users.

  • Despite a large multi-year opportunity of about 5,000 MOCVD reactors from 2011 to 2015, some level of cyclicality is to be expected.

  • And after two very strong years of MOCVD demand, there's a broad expectation that 2012 will be a down year.

  • Industry data points suggest that the downturn could be very short-lived, but it's difficult to judge how the global economic environment may influence our customers' investment plans.

  • So while the near-term market outlook is a bit cloudy, our MOCVD market position is the best it's ever been.

  • Recent revenue data indicate that Veeco has closed in on the number one market position, and we're well positioned for future share gains as LED lighting accelerates.

  • In Data Storage, orders have been running at low levels throughout 2011, due to both slowed end-market demand and delayed orders related to pending data storage mergers.

  • As the M&A uncertainty is cleared, we expect some pent-up demand to be released.

  • Additionally, the recent flooding in Thailand has caused widespread devastation to important hard disk drive manufacturing facilities.

  • We're working with our customers to provide assistance and help them get back up and running, and we expect that facility repairs will require additional equipment from Veeco.

  • So to wrap up, despite the market downturn, Veeco is well positioned for solid performance in 2012 and beyond.

  • Our exceptional product pipeline and customer momentum, variable cost operating model, strong balance sheet, and proven ability to execute will continue to serve us well.

  • We expect to remain profitable in every quarter and deliver double-digit EBITDA performance during the next year.

  • Thank you for your patience.

  • Operator, we'll take questions at this point.

  • Operator

  • Certainly.

  • (Operator Instructions).

  • We ask that you please limit yourself to one question with one follow-up.

  • (Operator Instructions).

  • And your first question will come from Stephen Chin with UBS.

  • - Analyst

  • Thank you.

  • Hi, John.

  • - CEO

  • Hi, Stephen.

  • - Analyst

  • Just a question on the MOCVD orders being depressed for a few quarters.

  • What level do you think industry capacity utilization rates need to recover to before customers resume the orders?

  • And do you also think orders can increase after some of your big China-based customers raise more money?

  • - CEO

  • We have a number of customers building facilities in China that have multi-year plans for facility construction and alignments with government subsidies.

  • So, we do believe that orders will resume and continue in China.

  • I think utilization rates really only have to go up to the kind of high 80s or so at specific customers before those customers start ordering more equipment, because, of course, there's a lead time.

  • They're looking at their ramp and projecting when they will need additional equipment, and so it's hard to predict the timing.

  • But, you know, we're estimating a couple of quarters.

  • It might be a couple, might be three.

  • It's hard to tell, but we don't think it will be too long, because there is this tremendous lighting growth momentum behind the whole market.

  • - Analyst

  • Thanks, John.

  • - CEO

  • Thanks, Stephen.

  • - Analyst

  • I have a follow-up question on Data Storage.

  • I was just wondering, John, if you have an estimate as to what you think Veeco's typical Data Storage served addressable market is in millions of dollars.

  • We're just trying to get an estimate of what kind of EPS Veeco can do in 2012 just from Data Storage, if all goes right.

  • - CEO

  • It's hard to predict the served market, but I'll give you a couple of clues.

  • I think we have over 50% share in the equipment market for thin film magnetic hits.

  • So, at least in every category that we actively sell equipment in, well over 50% share.

  • So, I think you can double our -- basically double our past revenue and get an idea for the market.

  • It is cyclical.

  • It does move up and down.

  • We have heard from our customers that, "we're holding off on certain orders until we get clarity upon whether either our acquisition or our merger will be approved." So, as is usually the case when there's M&A activity, you go through this period of postponed decisions.

  • So, I think we'll get some benefit as these are approved, and I know the Seagate acquisition of Samsung's business was approved by the EU authorities a week or so ago.

  • And that's likely to follow through with the rest of the regulatory bodies pretty quickly.

  • [WD&H GST] may be a little longer, but as we get the clarity, that will help.

  • Operator

  • And next we'll go to Ahmar Zaman with Piper Jaffray.

  • - Analyst

  • Hi there.

  • This is Shawn for Ahmar.

  • You talked earlier a little bit about dialing back OpEx.

  • Can you walk us through a little bit about what your expectations are there for dialing back your SG&A and other expenses there?

  • - CFO

  • Sure, this is Dave.

  • I can take that.

  • Yes, I mean, there's a natural part of our operating expenses that are variable, and if we see potential for a downturn, we can turn some dials and make those go away.

  • John mentioned that we've already released a number of our contract and temporary workers, so those sorts of things.

  • Just to decompose a little bit of an example of what you saw in the third quarter, you saw that our OpEx was down $1 million.

  • That's actually composed of R&D spending being up as planned, but SG&A actually pulled back about $4 million, is how the $1 million is composed.

  • So, and a lot of that is just turning the dials and slowing things down, as we mentioned.

  • - Analyst

  • Great.

  • Just one follow-up.

  • When we look at next year or the next few quarters of depressed orders, when we see orders returning, do you anticipate they'll return from sort of a ramp in general lighting, or do you think it will be more sort of a return of backlighting demand?

  • - CEO

  • I think there will be a -- the overall larger growth driver is going to be general lighting, but I think that backlighting has been relatively depressed for quite a number of quarters here, maybe four.

  • And if we get some pick-up in the consumer electronics markets for LED TVs, laptops, things like that, that will help too.

  • So, I would expect it's going to be a combination, but as we get farther and farther out in future quarters, lighting is going to make up a more -- a larger and larger piece of the total.

  • - Analyst

  • Great.

  • Thank you.

  • - CEO

  • Thanks, Shawn.

  • Next question.

  • Operator

  • From Citi, we'll go to Timothy Arcuri.

  • - Analyst

  • Hi, John.

  • I had a couple of questions.

  • First on inventory, can you give us, Dave, maybe a mix, finished goods, raw material, and WIP?

  • And then I also wanted to, on inventory, find out how much of that is MaxBright versus K.

  • And then I had another question.

  • - CFO

  • Well, I can give you the WIP breakdown and finished goods, but we don't actually report the MaxBright versus K, Tim.

  • So let me just give you the pieces here.

  • Actually, I don't have right at my fingertips the breakdown by finished and WIP.

  • Let me get back to you on that.

  • - Analyst

  • Okay.

  • All right.

  • Then my next question, if I may, is, Dave, you have talked about being able to break even, even if revenue came down by half or something in that range.

  • So, I'm wondering at this moment if you could give us some sense of what break-even is.

  • I know that it's variable based on mix and things like that, but it seems like that mix has now shifted almost totally over to MaxBright anyway.

  • So, what is your break-even, or your operating break-even?

  • - CFO

  • First, to clarify, it really hasn't switched almost totally over to MaxBright, but we have done a little bit of refinement of our break-even look and -- through our scenario planning this quarter.

  • So, let me clarify where we see things today.

  • We believe that today we could be break-even on an earnings basis at levels above $100 million a quarter and break-even cash at levels above $75 million a quarter.

  • So, that should frame out a little bit, and that's with some assumptions of things that we would do and actions that we would take to address the situation.

  • The higher number that we were discussing before kind of assumes that just the natural variable cost comes out of our picture, and we don't really take any affirmative action.

  • What we've done is we've kind of -- since this is our planning cycle right now, we've sharpened the pencil a little bit and made some assumptions about things that we would put in place in the event we were faced with that.

  • - Analyst

  • Just to kind of clarify, what action would you have to take to get to that break-even, I.e., what sort of charges would you have to take to get break-even down to that low?

  • - CFO

  • That's not significant restructuring.

  • That's -- again, we talked before about letting temporary and contract workers go.

  • There's still more in our numbers.

  • It's slowing down programs, a variety of things like that.

  • That's not a significant restructuring assumed, though.

  • Operator

  • (Operator Instructions).

  • As a reminder, please limit yourself to one question and one follow-up.

  • From Morgan Stanley, we'll go to Atif Malik.

  • - Analyst

  • Hi.

  • Thanks for taking my question.

  • Can you guys talk about tool reuse?

  • Are you kind of seeing any tool reuse in the industry, your tools or Extron tools, given that the demand is slowing down, either third-parties or your customers?

  • - CEO

  • We have not seen significant examples of tool reuse so far.

  • I think we're prepared to help customers recertify older equipment, refurbish older equipment and move that to different markets and assist with that.

  • But there's not really any tool reuse going on so far in the market.

  • - Analyst

  • Okay.

  • And maybe I missed it.

  • Can you quantify cancellations for MOCVD in the backlog?

  • - CFO

  • For MOCVD only -- just a moment.

  • We had 34 million in total.

  • Most of it was MOCVD.

  • Yes, that was 33.

  • That was virtually all MOCVD.

  • - Analyst

  • Great, thanks.

  • Operator

  • And your next question will come from Srini Sundararajan with Oppenheimer.

  • - Analyst

  • Just wanted to ask you whether -- am I correct in interpreting that you think that orders will remain at these levels, given that you did a lot of buyback?

  • Or was the buyback just now necessary to get the $5 EPS?

  • - CEO

  • I think there are two separate events.

  • We think that orders will remain depressed, not necessarily at these levels, for some number of quarters.

  • And hard to project that, but whether it's two or three quarters would probably be our estimate, and depressed just means significantly lower than they've been.

  • I would say it means below $200 million type of thing.

  • So, that's where we think orders will be.

  • - Analyst

  • Okay.

  • Just a quick follow-up.

  • What portion of your backlog is from China?

  • - CEO

  • Pretty large piece of the MOCVD backlog is from China, and, Dave, do you want to --

  • - CFO

  • It's about 90% for MOCVD.

  • And how much non-MOCVD backlog do we have?

  • - Analyst

  • The non-MOCVD -- so it's about 85 million non-MOCVD.

  • 303 is the MOCVD component of the total 390.

  • - Analyst

  • Okay.

  • Thank you very much.

  • - CEO

  • Thanks.

  • Next question?

  • Operator

  • From Bank of America Merrill Lynch, we'll hear from Krish Sankar.

  • - Analyst

  • Hi, John.

  • A couple of questions.

  • You said utilization rates for industry is around 50% to 70%.

  • Would you agree that Veeco's customers' utilization rate are below that average, or are they in line?

  • - SVP, Finance & Corp Controller

  • I don't see any reason that they're below that average.

  • I think our market share is 50% or better in Korea and solid in China and has been moving up pretty quick in Taiwan.

  • So, I would say it's probably in line.

  • - Analyst

  • Got it, okay.

  • Then my follow-up, when I look at -- in terms of your gross margin guidance, is this all due to just volume and initial MaxBright?

  • Or should we assume that this kind of like the new reality of gross margin.

  • I'm just trying to understand if this pricing had any impact in it.

  • - CEO

  • Yes, I think first of all, we have said in the past that the first 20 or so MaxBrights were going to carry a higher price level and -- or higher cost levels, and that would depress margins, kind of for the rest of this year, and that additionally, volumes come down.

  • So I wouldn't call it the new reality, but they are certainly going to be lower when we're not shipping at quite so high of volumes.

  • - CFO

  • If you remember, last earnings call we guided 47%.

  • We're just a few points or a few fractions under that, 46.6%.

  • The MaxBright costing was about on target.

  • The reason we're down a little bit is we had a few -- slightly fewer acceptances than were planned originally.

  • - Analyst

  • So, the pricing environment is pretty rational, still.

  • - CFO

  • It's as we forecast.

  • - CEO

  • Pretty much.

  • I mean, when you get market downturns, people fight harder, so there tends to be some price pressure.

  • Operator

  • And from JP Morgan, we'll hear from Chris Blansett.

  • - Analyst

  • Hi, John.

  • I just wanted to ask you about momentum for MaxBright into the downturn.

  • Obviously, you would assume that there would be more customers wanting to evaluate this product if they haven't or maybe bring it up on-line, more so than maybe older generations of equipment.

  • So, one is, how is that momentum continuing, even though there is a business slowdown?

  • And two is when do you think you will get to those 20 units of shipment and then we can start to see the gross margin on the product pick back up?

  • - CEO

  • Well, the momentum is very good.

  • I mean, we've had a great reception to the product in -- really, in every region.

  • We've had them purchased in every region.

  • We've had them purchased by the top companies.

  • The who's who of LED manufacturing have purchased this product, with few exceptions that maybe just haven't done any recent purchases.

  • So, overall product acceptance is good.

  • Interest is very high, and I don't think we could be any happier with a new product introduction.

  • And when you think about it, we just introduced it back in January.

  • So -- but well received by the market.

  • Dave, do you want to comment on when the initial units run out?

  • I believe it's Q4.

  • - CFO

  • Yes, Q4.

  • We should start seeing cost -- meaningful cost improvement in Q1.

  • - Analyst

  • Okay.

  • And then the second question is, you guys did a good job of buying back shares and went through that funding.

  • So how should we look at future share repurchase?

  • - CEO

  • You know, we finished the initial $200 million Board-authorized plan.

  • The Board has not authorized any additional purchases at this time.

  • If we get a new round authorized, we'll be coming back to you with that news.

  • Operator

  • And moving on, we'll hear from Vishal Shah with Deutsche Bank.

  • - Analyst

  • Yes, hi.

  • Thanks for taking my question.

  • Can you talk about the type of orders that you expect from customers over the next couple of quarters?

  • Are you expecting any large orders, or do you expect smaller volumes of orders?

  • And then also, can you quantify the impact of Thailand flooding on the potential upside in Data Storage orders?

  • - CEO

  • Okay.

  • Well, you know, I don't think -- I think there will be some larger orders or mid-size orders.

  • Maybe large gets a new definition during the downturn.

  • I know a few years back, we used to think of 5 units as a really large order, and that got kind of swamped out over the last few years.

  • But I think there are -- there will be significant orders.

  • They may not be 50-unit orders, but there will be significant orders on an ongoing basis.

  • And it may be a little lumpy, which is one of the things that makes it hard to predict.

  • But I think there will be significant orders and there will be significant orders from multiple regions.

  • This is not just a China phenomenon.

  • In Thailand, the flooding basically damaged certain customers, and I think it's pretty well publicized that WD took a lot of damage from the flood.

  • But beyond that, there's a fairly large -- there was a lot of supply based -- component supply based in Thailand that was also impacted.

  • So that makes it a little harder to predict just how quickly this can come back.

  • Obviously, we can't give out any kind of single-customer type information, but clearly the situation has done -- the floods have done a lot of damage, and there is still flooding going on in Thailand.

  • So, this is not a case where everything can be determined quickly, because in some cases, some of the suppliers, you can't get to their facilities.

  • And they are underwater or a couple of feet underwater.

  • So it's going to take some time to play this out, but we're committed to provide people and anything else our customers need to help them with this and get the supply back up and running.

  • Operator

  • We'll go to Bill Ong with Ticonderoga Securities.

  • - Analyst

  • Good afternoon, everyone.

  • My questions are how we go deploy the MOCVD tools over the course of time?

  • So, can you tell me for giving customers their own K465, K465i, and the MaxBright tool, how do they deploy these tools with a given customer's road map?

  • So in other words, if it was semiconductors, all tools are running 65 (inaudible).

  • So, can you give me a sense of how old and new tools are being deployed on your products?

  • - CEO

  • Boy, it really depends on the customer situation and their strategy and their approach.

  • So, it varies a lot.

  • Keep in mind that customers can take a 465 and upgrade it to a 465i.

  • And that's been one of the real advantages of our product line, is that we've been able to upgrade older equipment and bring it up to new standards.

  • We expect to be doing some of that over the next year, as we bring some of that along.

  • But the fact is, with the upgrades, you can get world-class performance out of anything that we've sold over the last three years or so.

  • So, there's no reason to be sitting there with an old product.

  • Now, some customers may not take advantage of the upgrades, and they may use the old product in a application that doesn't require as much uniformity or things like that.

  • But the ability is there to bring the equipment up to the state of the art.

  • - Analyst

  • So what it means that, even though the old tools are still running state of the art, relative to that customer, along side by side with MaxBright?

  • - CEO

  • They can, if the customer chooses to upgrade them.

  • Absolutely.

  • You know, we have a lot of customers that are buying 465i's.

  • We've brought the -- we're currently shipping 465i's.

  • We have brought them up to the same performance levels as MaxBright, and there are customers that prefer single tools.

  • We do not see this as moving all the MaxBrights.

  • I think we are going to have a good balance of single tools and cluster tools.

  • Operator

  • Next we'll go to OIga Levinson with Barclays Capital.

  • - Analyst

  • Thanks for taking my question.

  • I wanted to probe your guidance for the December quarter.

  • Can you talk about what kind of mix it embeds in terms of Data Storage versus LED and Solar?

  • And within the LED and Solar's aspect -- part of it, what percentage of that is MaxBright?

  • You mentioned that it's close to 50% in the current quarter.

  • I just want to get your thoughts on what the outlook is.

  • - CFO

  • Well, we're -- we usually don't get as granular in our next quarter outlook, in terms of which products are being sold.

  • I don't know how to answer that.

  • I don't -- I guess I wouldn't want to comment at this point on what component is going to be MaxBright and --

  • - CEO

  • I think there will be a healthy mix of MaxBright and 465is, and I think you should expect to see that onward into 2010.

  • So, it's not going to be a radical shift there, and the overall mix is probably pretty similar to what it's been in the past.

  • There's no huge shifts here.

  • - Analyst

  • Got it.

  • And then, within your revised new break-even model, can you talk about what -- at that 100 million per quarter level, what the implied gross margins are and how we should think about the mix between R&D and SG&A?

  • - Analyst

  • Well, again, to get to that level implies a lot of decision making that we would have to make.

  • But we see margins even at the lower levels.

  • With the model -- with the operating model we have, margins should still be in the north of 40% range, and you would -- you should expect to see that we would be a lot more cautious about taking R&D down.

  • And a disproportionate amount of that reduction is going to come out of SG&A, not R&D.

  • Again, because we are under -- a lot of it depends on how far out we see the downturn.

  • But right now, we're looking at -- this is not a protracted downturn, and we wouldn't be aggressive about taking R&D costs down, because the future -- the longer-term future is still there.

  • - Analyst

  • Got it.

  • Thank you.

  • - CEO

  • Thanks.

  • Operator

  • From CLSA, we'll hear from Mark Heller.

  • - Analyst

  • Thanks for taking my question.

  • One, I know it's a bit far out, but you ballpark MOCVD demand for 2012?

  • I mean, is it going to be down 50%?

  • And two, can you discuss your assumptions behind the 5,000 MOCVD unit number between 2011 and 2015?

  • I mean, does that assume larger reactor size and larger wafer sizes?

  • - CEO

  • First of all, on 2012, MOCVD demand, we haven't put out a forecast.

  • You can look at the analyst estimates, and they range from 200 to 600 units, so obviously, a wide variability in forecasts.

  • And we will put out some more information as we get closer into 2012.

  • The 5,000 reactors is really -- in order to bring some sanity to that, it's 5,000 465i-equivalent reactors.

  • So it's a -- you could think of it as a standard reactor, something that we're shipping today.

  • And if we shipped a reactor at some point in the future that had twice the capacity, that would count as 2 equivalent reactors.

  • Obviously, if we ship the reactor that has twice the capacity, we would expect it to sell for more money.

  • So -- but it is an equivalent reactor.

  • The analysis assumes penetration rates of lighting and yields improving from where they are in every region.

  • And, of course, they're quite different country to country.

  • So it's not like they all move up uniformly, but each region goes up the learning curve, improves its yields, reduces costs, and that -- also, that future generations of equipment over this period lower the overall LED manufacturing costs.

  • And that spurs demand.

  • So, it's based on a lot of information.

  • We think the model has held up pretty well over our last year and -- year-plus, since we developed it, and hopefully that helps.

  • - Analyst

  • Okay.

  • Can I ask one quick follow-up?

  • The number of engineers that you said you trained, over 200, I assume these are operators.

  • Is that really the bottleneck, or is the bottleneck process engineers or people that actually developed the LED recipes?

  • - CEO

  • They are mostly operators.

  • The bottleneck is both.

  • When you sell a lot of equipment into a region, you need a lot of operators, and you need a smaller number of very highly skilled process engineers that develop an LED stack and that sort of thing.

  • Of course, a small number of really highly skilled process engineers can support a large number of tools within a given customer.

  • So, kind of different ratios, and we expect to help on both sides of that front.

  • - CFO

  • Thanks, Mark.

  • Operator

  • And next we'll go to Satya Kumar with Credit Suisse.

  • - Analyst

  • Hi.

  • Thanks for taking my question.

  • I was wondering if you could give a little bit more color on the backlog cancellations in the quarter.

  • Wondering if they are primarily from backlighting or general lighting, and from which regions were they primarily from?

  • - CFO

  • Backlighting -- well, it was multiple regions.

  • We're not going to comment country by country, but just thinking through, I'd say it was companies that fall in the category of -- if you remember our pie chart, where we identify our customers, they fall into both categories.

  • Those that are producing just general lighting, and those that are backlighting as well.

  • - Analyst

  • All right.

  • And (inaudible) at the 70% utilization comment you made, I was wondering if you could give a flavor as to perhaps if you could perhaps rank the regions in terms of where you see the highest utilization rates and where the reorder rate could be sooner, versus where you might see lower utilization rates.

  • - CEO

  • Probably Taiwan at the top, and then onward to Korea and China.

  • - Analyst

  • Got it.

  • Thanks.

  • - CEO

  • As far as utilization.

  • But I guess I would caution that it varies significantly, customer by customer, within these regions.

  • So, not as simple on a regional basis.

  • Some customers are getting up there, where they have plans.

  • Operator

  • Our next question will come from Daniel Amir from Lazard Capital Markets.

  • - Analyst

  • Thanks a lot.

  • A couple of questions here.

  • First of all, can you break down or give us an idea whether contracts in maintaining tools in terms of servicing the tools over the life of the tool, is that meaningful?

  • Should we be looking at that at all as something that could impact your model going forward?

  • And I have one follow-up.

  • - CEO

  • We expect that our overall services in after-market -- components, after-market services to grow significantly in the coming year.

  • It is meaningful, and we generally provide a 1-year warranty on all of our equipment.

  • So, the real range or the total available market that we go after for our equipment is delayed from shipments by about a year.

  • As the products come out of warranty, then we have an ability to serve them from a parts and additional services point of view.

  • So, parts, consumables, and services, we do see it as a significant part of our business and growing substantially over the next year.

  • So, it's a little different than some other industries in that the LED business is still a pretty early-stage business.

  • There's a lot of secrecy.

  • There is a lot of desire of customers to protect their IP, and we have to respect that.

  • And sometimes that puts a little bit of a damper on what kind of services you could provide -- that you might provide in a different industry.

  • But it's a significant business for us, and we're paying a lot of attention to it.

  • - Analyst

  • Is there any way to look at what percentage of your business is actually -- percentage of the tool would be the maintenance and services?

  • - CEO

  • It's going to come up -- it's going to increase over time.

  • In our Data Storage business, it's over 30% of the business, is parts, services, and consumables.

  • I wouldn't be expecting MOCVD to get there anytime soon.

  • And each year we move forward in these large shipments that we've shipped in second half 2009 and 2010 come out of warranty, the more they basically market areas for us.

  • So, it's going to get to double digits.

  • It's been way less than double digits on MOCVD business this year.

  • It's going to be double digit percentages of the business next year, and I think as we get kind of into the year a little bit, we'll try to provide some more color.

  • But it's still a little early for us to do that.

  • - SVP, IR

  • Operator, we want to take one more.

  • But before we do, I think maybe we need to get back on that one.

  • - CFO

  • Yes, I'll just get back on Tim.

  • Sorry, Tim.

  • I didn't have the numbers at my fingertips.

  • But breakdown of inventory, of the $127 million in inventory, it's $62.7 million raw materials, $28 million WIP, and $36.8 million finished goods.

  • - SVP, IR

  • Okay.

  • And then, operator, I think we'll take one more before we close.

  • Operator

  • And your final question will come from Andrew Huang with Stern Agee.

  • - Analyst

  • Thank you, guys.

  • Just one question, going back to the break-even analysis.

  • When you said gross margins in the -- I guess, north of 40% at $100 million revenue a quarter, would R&D in dollars get down to around $20 million a quarter?

  • I'm just looking for a ballpark range.

  • - CFO

  • We wouldn't put a number out there that granular.

  • Like I said before, there's a lot of decisions that we would make on what we would pull back.

  • So, we've kind of, not at a granular level, but at a total Company high level, said these are the things we would do.

  • - CEO

  • So, Andrew, one of the things that would be involved in that would be kind of the length of the downturn, whether we think the business is going to stay there for some extended period of time, or whether it's going to pick back up.

  • That would shift our thinking on whether we should be reducing our R&D or not, and so it's pretty -- we can reduce it if we need to, but our philosophy is to invest very heavily in R&D.

  • We think it's served us extremely well over the last couple of years, and we believe it will allow us to maintain our lead.

  • - Analyst

  • Okay, great.

  • And then just one follow-up.

  • If you look back to Q1 of '09, which I think was the bottom of the last downturn, there are quite a few chip makers that were actually taking tools apart and then using them for spare parts.

  • So I guess my question is, have you seen any of that yet?

  • - CEO

  • No, we really haven't seen any of that.

  • And Q1 of 2009 was a pretty special time, and I don't mean special in a nice way.

  • But there clearly were a lot of drastic measures.

  • I think, though, you could learn something from Q1 of '09, and that is by Q3 of '09, the market was roaring back.

  • And although the downturn went deep -- and actually that particular MOCVD downturn started in the summer before the Lehman bankruptcy and kind of went through the second half of 2008.

  • I mean, it wasn't drastic until -- of course, Lehman filed for bankruptcy, so we were already seeing a downturn in the third quarter of 2008.

  • And then Q4 of 2008 was bad, Q1 of 2009 was bad, and then in the middle of 2009, we booked our biggest order in history and had to go from figuring out how to build a few units a quarter to how to scale on a real massive scale.

  • So, anyway, I think it is a good indication of how things can shift so quickly.

  • So with that, thank you, Andrew, and thank you all for joining us tonight.

  • Take care.

  • Operator

  • Ladies and gentlemen, that does conclude today's presentation.

  • We do thank everyone for your participation.