Veeco Instruments Inc (VECO) 2012 Q1 法說會逐字稿

Good day everyone and welcome to Veeco first-quarter 2012 earnings conference call.

Today's call is being recorded.

For opening remarks and introductions, I would like to turn the conference over to Senior Vice President of Corporate Communications and Investor Relations, Ms. Debra Wasser.

Ms. Wasser, please go ahead.

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

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

Today's earnings release was distributed at 4.00 PM this afternoon and is available on the Veeco website.

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

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 of management's discussion and analysis section of the Company's report on form 10-K and in a 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 adjust non-GAAP financial measures.

Information regarding such non-GAAP financial measures including reconciliation to GAAP measures of 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 off by reviewing our first-quarter results.

After that, I'll provide an update on business conditions and our outlook and then we'll take your questions.

Dave?

Thank you, John.

Starting off on Slide 5, Veeco's first-quarter 2012 revenues were $140 million, down 27% sequentially and down 45% from a year ago.

First quarter revenue was at the top of our revenue guidance range of $115 million to $140 million.

GAAP net income from continuing operations for the quarter was $16.5 million, or $0.42 a share, compared to GAAP net income of $58 million or $1.36 per share in the first quarter of last year.

Non-GAAP net income was $19 million, or $0.49 per share for the quarter, compared to $61 million or $1.44 from last year.

Adjusted EBITDA of $25 million or 18% of sales was above our guidance.

First quarter gross margin was 46.7%, above our guidance range of 43% to 45% and well above last quarter's 43.3% margin.

Gross margin strength came from a high number of final acceptances and a favorable mix this quarter.

Our team in China has done a great job working with customers to get MOCVD systems installed and accepted.

Veeco's operating expenses were $43 million, excluding amortization, down from $48 million last quarter as the Company continued its drive to reduce discretionary spending.

This included a $1.4 million reduction in SG&A.

In R&D, our 2012 strategy is to maintain our nearly $100 million annual rate of investment, which is about flat versus 2011.

That's after being hiked by over $40 million or 68% from 2010.

This sustained high rate of spending allows us to invest in new products across all of our businesses.

As you can see from our results, we're executing well during the downturn with strong performance on the gross margin line and good management of expenses.

Turning to Slide 6, you can see that of our reported $140 million in revenue, 68% was contributed by our LED and solar business and 32% by Data Storage.

Veeco's LED and Solar revenues were $96 million in the quarter, down from $215 million a year ago and off 40% from last quarter.

Adjusted EBITDA was $17.5 million this quarter, down from $81 million a year ago and roughly half the adjusted EBITDA from Q4 2011.

Data Storage revenues were $44 million, up from $40 million in the first quarter of 2011 and up from $32 million in Q4 2011.

Data Storage adjusted EBITDA was $9 million in Q1, down from $12.2 million for the prior year, but up $3.5 million sequentially.

We're proud to report solid profitability for both Veeco business segments in the midst of the challenging operating environment.

Strong margins across all of our businesses, and active management of our discretionary costs were important drivers of the strong bottom line result.

Turning to Slide 7, I'll review our Q1 bookings.

Veeco's total bookings were about $113 million, with about $85 million of that coming from LED and Solar and $29 million from Data Storage.

MOCVD orders increased 19% sequentially, to $70 million, with system orders from customers in Korea, China, Taiwan, Japan, and North America.

MBE orders increased 71% from last quarter to $15 million.

Production orders from customers supporting wireless device applications have recently been a positive driver for our MBE systems.

Data Storage as anticipated saw a sharp sequential decline in orders from the record levels we experienced in Q4, due to one-time retooling orders associated with the Thailand flooding last year.

In addition, customer consolidation activity temporarily stalled capacity investments during the first quarter causing Data Storage bookings to be somewhat lower than normal quarterly levels.

At the end of the first quarter, we had $305 million in backlog; about $193 million of our backlog is from MOCVD.

Our first quarter book-to-bill ratio was 0.81 to 1.

Moving now to the balance sheet on Slide 8, we finished the quarter with cash and short-term investments of $524 million; that's up from $492 million at the end of last quarter.

Veeco generated $42 million in cash from operations through good working capital control and some strong operating flow-through.

Deposits ended the quarter at $57.7 million, about even with the prior quarter.

Inventory declined by $10 million to $103 million, which translates to about 2.9 turns.

Both inventories and accounts receivable were down in dollar terms reflecting the slower pace of business and a sharp focus on working capital management.

On Slide 9, I'll review our guidance for the current quarter.

Veeco's Q2 2012 revenue is forecasted to be between $120 million and $145 million.

Earnings per share are currently forecast to be between $0.20 and $0.40 on a GAAP basis and $0.29 to $0.48 on a non-GAAP basis.

Veeco forecast gross margins to be between 44% and 46% and operating spending to be between $43 million and $46 million.

Our adjusted EBITDA for the second quarter is currently forecast to be between 12% and 17%.

Note that for modeling purposes Veeco's effective tax rate for Q2 and for the balance of 2012 is expected to be about 22% on a GAAP basis and 26% on a non-GAAP basis.

This low rate reflects the impact of new operating structures we've put in place in Asia over the past year, as well as the higher mix of earnings coming from low tax jurisdictions in Asia.

Lastly, turning to Slide 10, I want to talk a little bit about our flexible operating model, which demonstrates Veeco's ability to drive solid profit and cash flow performance through the cycles.

Veeco's flexible manufacturing and rapidly tunable variable costs allow us to quickly respond to changing business conditions.

You can see that our EBITDA was 38% in Q4 2010 when revenues peaked at $300 million, and then in the first quarter of 2012 with about half that revenue level we're still able to report a very respectable 18% EBITDA.

Since our orders peaked in the middle of last year, we've reduced our SG&A expenses by almost 40% and have been able to maintain gross margins solidly in the mid 40% range.

This model reflects a series of carefully planned and executed strategic decisions that have been taken over the past couple of years while our business was in the up cycle.

The result of those decision is now evident in our solid earnings levels and cash flows during this current MOCVD cyclical downturn.

John will now review our business outlook.

Thanks, Dave.

While the MOCVD market is still at low levels, we're executing well and delivering good performance in a tough market.

Moving to Slide 12, I'll start with a review of our current business conditions.

So MOCVD bookings grew modestly in the first quarter; utilization rates at key customers in Taiwan and Korea have reached over 80% and our MOCVD bookings grew sequentially in both Taiwan and Korea.

Some of our top Chinese customers are seeing high tool utilization levels and we're seeing increasing quoting activity.

While all of this is encouraging, we've not yet seen a clear end selection in our customers' buying patterns.

Our LED customers remain cautious about capacity investment and it's still unclear when the MOCVD market will pick up in a big way.

Turning to Slide 13, on the other hand, there's some very positive trends.

Consumer awareness is increasing and there's growing attention from the mainstream media.

Just over the last few weeks there have been feature stories about LEDs in the Wall Street Journal, New York Times, USA Today, and on MSNBC.

And you can walk into Home Depot or Lowe's and see sections devoted to LED lighting in both the New York and Washington, DC area.

I've seen 40-watt bulbs for under $10 and high quality 60-watt bulbs for about $15 at Home Depot.

Phillips recently reported year-over-year LED lighting increases driven by strong construction growth in Asia and recovering trends in North America.

And we see more of our LED customers positioning their businesses for success in lighting.

It's actually hard to find anyone who doesn't agree that LEDs will become the dominant lighting technology.

On Slide 14, we've updated our MOCVD forecast for the lighting market to account for changes we've seen over the last couple of years.

The analysis requires complex assumptions about the output of our tools once they're in our customers' hands, as well as the demand for LEDs and the adoption rate for various lighting markets.

We accounted for the fact that TV backlighting demand evolved slower than expected, that yield and brightness have increased faster than originally forecasted, and we made some educated guesses about how the enormous MOCVD investment in China over the last two years could impact future tool demand.

There are fairly large variations from our worst-case estimates to our high-case estimates but the base case, which is shown here in the blue band, represents our estimate of what is most likely to occur.

The forecasts aren't as big as they were a couple of years ago, but all in all, there is good news here.

We think the market needs about 2500 reactors for lighting for 2013 through 2016 with an upside of about 3500.

Annual demand is expected to stay in the range of 400 to 800 reactors and the market will start growing again in 2013.

Turning to Slide 15, in any case, we remain focused on advancing our product and technology lead, on deepening our customer service and support and on using a flexible manufacturing approach to maximize our performance through these investment cycles.

We will remain aligned with our customers' lighting road maps and we'll launch new products to improve yield and to reduce epi costs by a factor of 3 by 2015.

Despite a tough year in 2012, we really believe that future MOCVD market opportunity will be larger than what we've experienced so far.

So with leading technology and market share, strong customer relationships, and the lowest cost of ownership production systems, we're confident that we can deliver long-term growth in solid state lighting.

Moving to Slide 16, GaN power electronics is another exciting market that we're focusing on in our MOCVD business.

IMS Research forecasted GaN power electronics will grow by a spectacular 71% CAGR over the next 10 years and Yole Research is forecasting the overall power device market to be a $35 billion market in the same timeframe.

So, what is so exciting about GaN power devices is that they provide higher efficiency and faster switching speeds and thus they can produce end products with substantially better energy efficiency than you can get with traditional silicon-based devices.

There are about 25 companies around the world with R&D programs focused on developing GaN devices.

That could end up in power supplies, wind turbine, solar power conversion, electrical vehicles, and so on.

This is an emerging market for Veeco and we're seeing orders from key customers around the world.

Moving on to Slide 17, I'll give you an update on our Data Storage business, which is performing well.

The business will continue to be lumpy on a quarter-to-quarter bookings basis due to the small number of customers but it is healthy and it will continue to grow for many years to come.

Due to the explosion in social networking, YouTube video and other things, there's likely to be as much information stored in 2012 as was stored from 1960 through 2010.

It's an incredible statistic, and this fact drives huge growth in hard drive business.

We have strong customer relationships and far and away the best technology in market position in the industry.

Aside from serving the hard disk drive industry, our so-called Data Storage business gets about 35% of its sales from higher growth markets outside of Data Storage.

Sales over ion beam deposition and etch products to optical codings MEMS and other markets are growing.

We recently launched our new SPECTOR high throughput system for the high-end optical codings market.

This is for devices such as lasers and optical filters.

The system has a 400% faster throughput than our previous systems and will double our addressable market from about $30 million to $60 million.

Moving to Slide 18 for services, as we commented on our call a few months ago, a big focus for Veeco in 2012 is to grow the services component of our MOCVD, MBE, and Data Storage businesses.

We're already experiencing success with first quarter services sales at a record $31 million.

We're seeing strong growth in sales of parts, consumables, and of upgrades that improved the performance of our tools.

Services revenue grew sequentially in each of our three businesses with the biggest percentage growth in MOCVD and our expectation is that Veeco services will grow substantially more than 40% in 2012.

So moving onto Slide 19, as we stated in February, we're confident in our ability to deliver revenues in the range of $500 million to $600 million this year, despite the fall off in MOCVD.

Our Data Storage and MBE businesses are growing and healthy and our Service business is growing in both dollars and as a percent of revenue.

Recovery in MOCVD markets will be spurred on by customers' investment in LED lighting and increasing sales of MOCVD systems to new applications.

And, of course, any positive changes in the TV market or overall economy, would accelerate recovery.

As capital equipment veterans operating in multiple cyclical markets for many years, we understand that these markets are always cyclical and hence over the last three years, we've built a variable cost strategy and were careful with overhead and fixed cost additions.

Our approach is clearly working and I'm proud of our team's ability to execute and stay nimble and deliver solid profitability in every one of our businesses.

We're focused on keeping our infrastructure lean and discretionary costs low while at the same time developing our next generation solutions that will drive our future growth.

So moving on to Slide 20 to wrap up.

Let me tell you why I'm excited about our future.

We're the leader in all of our markets -- MOCVD, MBE, ion beam etch, and ion beam deposition.

We have exceptional technology, the people, the application, experience, process, knowledge, and the ability to design machines with the lowest cost of ownership.

We're focused on great markets with tremendous long-term growth potential.

LED lighting, GaN electronics, cloud computing, MEMS, and wireless chips.

And we've built a high-performance organization; it's fast, flexible, and has proven that it performs exceptionally well in all market conditions.

So there's great things in store for us in the future.

Thank you for your patience.

Operator, we'll now take questions.

(Operator Instructions)

Krish Sankar, Bank of America Merrill Lynch.

The main question I had is you're clearly seeing utilization rates improve on the customer side so what do you think is the apprehension for them to keep wasting orders.

Is there something else they're looking at?

Are they looking at a final demand picture?

Or why is there reluctance for them to place more MOCVD [tool] orders?

Thank you.

I think it's been a tough year in the market for a lot of our customers and they're going to wait until they're really sure that the market's going in the right direction.

They're all trying to improve their profitability, and everybody's just going to be a little more cautious than usual.

Stephen Chin, UBS.

Hi, John, nice results in guidance.

Just a follow-up question on the MOCVD base case in 2013.

If we assume Veeco has 50% market share in MOCVD and we make a conservative assumption, we get a base case EPS for Veeco just from MOCVD of well over $2.00 EPS in 2013.

Just wanted to make sure we were drawing the right kind of conclusions on your 2013 industry view on Veeco?

Well, I'm not going to forecast EPS for 2013 here but the fact is, the signs are there that the market is going to pick back up and we expect 2013 to be a growth year.

So, the projections here are not -- they're relatively conservative.

Bill Ong, B. Riley & Company.

Good afternoon.

Can you tell me about how many different customers make up about 80% of your overall revenue a year ago when the business was strong, and what is it currently given the more challenging environment?

And then how many LED customers, if any, dropped out due to bankruptcies or consolidation or other related events?

Thank you.

Dave, you want to take a stab at that?

I'm not sure we've got the facts.

On the customer content.

I don't know the facts year-over-year compared.

I can tell you we have not lost a lot of customers to bankruptcy or other events like that.

That's been relatively limited.

There has been some that -- and I don't know if they went bankrupt or not but they just kind of faded away, but --

In the third tier.

None of the tier one or tier two.

Yes.

I can't give you a distribution change in top customers though.

Edwin Mok, Needham & Company.

Hi, thanks for taking my question.

I was wondering off the MaxBright that you guys have talked about.

Have you seen -- given that you talked about customer utilization is picking up -- have you have seen customers start looking into buying MaxBright to replace existing equipment because to drive down lower costs and if not, then you talk about tripling or reduce your cost factor by a factor of 3. How long till you think you can achieve that goal?

So, you know, we have seen customers trading in or replacing older equipment with newer equipment, and as of this point in time, our 465i as a single reactor, or MaxBright as a multi-reactor system, they both have very good performance and we've brought the upgrades through on both systems.

So we are seeing customers upgrade but it's a relatively small number at this point and we've had a philosophy to enable customers to upgrade older generation systems to newer versions where possible.

And if you go back though two generations, we can't upgrade those, you have to replace those.

We're seeing some replacement and we're seeing some upgrade activity and so I think that's moving forward pretty well.

Our objective over time is to continue to deliver systems that have a lower and lower cost of ownership and ultimately put the older systems at a significant disadvantage and have customers replace those with newer systems.

Over the last few years, we've launched tremendous improvements in productivity and yield and we expect to do the same over the next three years and that's how we'll get the additional reductions in epi costs.

Colin Rusch, ThinkEquity.

I guess this is a follow-up just on your last answer.

Can you talk about your customers' pricing power with declining prices and how you see the tool service and upgrade pricing, tracking that, and where you might see that flow through the [payonology] as you move forward?

So, clearly in a down cycle everyone competes harder for the business that's available and that generally puts pressure on our margins and on the industry margins.

That's happened.

On the other hand, the customers can also go down the upgrade path and if they have systems that are two years old or so or three years old and they want to bring them up to the current generation, they can do that.

There's not tremendous pricing power there, because the alternative is to hold out and sell them a new system.

So, I would say they have less pricing power there.

On the Services front, for the first year while systems are under warrantee, there's a lot less Services content for those systems, but as more and more of these reactors come out of warrantee it gives us a bigger install base to sell in, and that's one of the reasons you'll see our Services' revenue growing.

The second reason is we've put a lot of focus on this and we've come out with a lot of new services products that are really attractive to our customers.

So, kind of two factors that are driving the growth we're getting.

(Operator Instructions)

Carter Shoop, KeyBanc.

Good afternoon and congratulations on the nice quarter.

Thanks.

When we look at market share the last three quarters or so, you've been receiving orders at about twice the rate as your closest peer on the MOCVD side.

The question is, once we see a recovery in tool in the 2013/2014 time frame do you think that level of market share is sustainable?

Hard to say.

We're hesitant to predict market share because we know it's a competitive market and we're always in a fight to gain more, but I think if you look at the track record over the last three years we've done -- or last two years, we've done exceptionally well and the curves are fairly consistently moving up to the right with our market share and clearly in this quarter we increased our market share even farther.

So, we focus on providing the best system and the best support to our customers and let the rest happen.

Brian Lee, Goldman Sachs.

Hey, guys, thanks for taking the question.

John, I was wondering how much visibility do you have on the utilization rates that you're talking about have picked up, them actually remaining at current levels going forward?

And I guess quick follow-up question if I may, is just if I look at the updated MOCVD demand outlook that you provided, you're implying a higher peak versus what we saw last cycle.

Just wondering how much impact you're incorporating from the potential transition to larger wafer sizes over time.

Thanks.

So, as far as visibility into utilization rates, we get that both from our customers and from industry data.

It's pretty well reported at least on China -- excuse me, on Korea and Taiwan.

That's pretty available information.

They have been moving up and we hope they'll continue to move up, I think they're at -- they're starting to get to the regions where customers usually start to think about buying more equipment.

So, I think that's a good sign.

Our model assumes that, as far as our forecast model, it assumes that customers will increasingly move to larger wafer sizes that they will improve their yield and that they will improve brightness and therefore need less LEDs in various applications like TVs or a given size light bulb.

So we put all of those factors in there and then estimate what will be required.

It's a lot of assumptions, but we think our model is reasonably good and we've drawn the nuclear winter case on the bottom where if lighting demand gets really stretched out and yields go up at the same time and lots of things happen how bad it could get.

We don't think that's going to happen, and we've also drawn an upside case that if things -- if we get rapid adoption of lighting and maybe some government help or power company help or whatever, it could go pretty fast.

So, we try to focus on what's most likely, which is our blue band there with the line down the middle.

Timothy Arcuri, Citi.

Hi, John, just wanted to point out how great you guys are doing relative to your peers.

Definitely obvious.

Two things from me.

First of all, I was looking at an investor presentation from last May and you were talking about the general lighting market being 5,000 tools at the time and now it's about half that.

So, I'm wondering in the model, what was the biggest factor that changed during that period.

That's the first question and the second question is, we heard out of Taiwan there were some -- I thought maybe some customers that traded some tools in at least the customers were sort of indicating that.

So, if you received a trade in, how do you account for that in terms of the bookings and in terms of where the trade in goes?

Does it go into inventory, I guess?

Thanks.

Yes, so, first of all last May investor presentation the 5,000 was for five years, and the 2,500 is for four years.

That's a chunk of it but clearly the market -- I think what we've seen is that our customers have gotten faster brightness improvement than we had predicted, and better yield improvement.

We've also seen a TV market that has evolved slower.

There's been slower penetration into the LED TV and the manufacturers are more and more getting at basically being able to build TVs with less LEDs.

So, if you look at our new forecast versus our old forecast, the old forecast is a little higher than our upside on our newer forecasts.

So it's not half but we clearly did drop it down.

On the other hand, it still represents some spectacular growth, and a tremendous amount of business to come and we're confident that we can get a big share of that.

So, Tim, this is Dave.

I'll comment on your inventory question or your trade in.

When we do a trade in like that and I'll just first point out that the case I assume you're referring to is for variable machines.

They're not any of our recent models.

Basically what we do is we look at them and divide them -- in that case we divided into three parts.

Some are so old that they're really just scrap value.

Others we figure to be used for parts in our parts and consumables business.

And then some can be refurbished and sold and we review each of those on a basis of fair value.

So anything that goes into inventory is an estimate of the fair value that we get.

I think -- I would just add to that.

We valued these tools at a relatively low value because they were very old tools, but we have taken some trade-ins.

Vishal Shah, Deutsche Bank.

Yes, hi, thanks for taking my question.

John, you mentioned that your utilization rates at some of your key customers in Taiwan and Korea are up.

It seems like some of your Taiwanese customers are running at almost 100% and your orders were up in those two regions sequentially in the first quarter.

It would appear that those two regions should be strong in the second quarter as well and then you also reported a big order from a Chinese customer.

Is it fair to assume that your Q2 bookings at least for the MOCVD business are tracking relatively strong at least sequentially compared to Q1?

And how should we think about some of your other customers in China particularly given that they're also on the road trying to raise money?

Are they coming back and is that the reason why you're seeing an increase in quote activity?

Thank you.

The utilization rates are up in Korea and Taiwan.

They're also up with key customers in China.

So, those things are happening.

We're not predicting bookings for Q2.

And Q1 clearly ramped versus Q4.

We can hope that Q4 will be the trough and we'll have all that behind us and we'll be ramping up, but we've kind of promised ourselves internally that we only call upturns in the rear view mirror.

We'll run the business conservatively and we're ready to flex up and meet any demand that's out there, but we're kind of waiting for the real orders with real deposits and then we'll be there.

There are a lot of good signs, though.

Chris Blansett, JPMorgan.

Yes, hi guys.

This is Bill Peterson calling in for Chris.

Thanks for taking the question.

I think last time you talked about a revenue level of around $100 million being a breakeven point.

Are we below that now and if so what level is it now and what can we expect it to be even throughout the year.

I think the -- to be clear, what we said was at a level of $100 million we're profitable.

So the breakeven point is actually a little bit less than that.

But still the same.

Patrick Ho, Stifel Nicolaus.

Thanks a lot.

John, in terms of your comment about the FPD and the TV market should that recover, it could accelerate the MOCVD recovery, can you give a little bit color of whether you believe there's enough capacity in place or is there still excess capacity in that marketplace or do they need to add new tools should that industry turn?

You know, our customers use the tools for lighting as well as backlighting.

So, you kind of have to look at the two markets together and we see ongoing growth in demand for lighting, general purpose lighting, and we see more and more reactors dedicated to that.

So they are picking up the slack and using up unused capacity.

I think all in all, if you have a region with 80% capacity, that is being used to satisfy both lighting and backlighting, and if either market -- as either market moves up, the excess capacity goes down.

So, one thing we know is that lighting will continue to ramp; it will continue to use more of the MOCVD capacity.

And so if the TV market gets better at the same time either people buying more TVs or there's a higher penetration in LED TVs, that's going to accelerate the overall buying so they're really tied together.

Olga Levinzon, Barclays Capital.

Hi, thank you for taking my question.

Two questions.

Regarding your longer term MOCVD forecast, was wondering how much of that 2,500 tool demand represents replacement of existing tools?

So, most of it is new tools.

There is some replacement built into that but the vast majority is new tools without replacing older tools.

There's some small percentage where our customers will replace tools that are four years old or older, but in that case one new tool replaces a bunch of old tools.

It's mostly just plain old new equipment buys.

Got it.

And then touching on your gross margins, clearly very strong results in the current quarter and you indicated that part of that had to do with an increase in final acceptance and it seems like your guidance embeds mid-point of about 45%.

Is that the level that we should be assuming in the second half of the year given your full-year revenue guidance assumes a similar-type of mid-point or will the gross margin be higher or lower due to the product mix between Data Storage and MOCVD?

Yes, Olga, I would focus on the guidance that we're giving forward.

One thing that happened this quarter -- to be clear, it's a combination of higher level of acceptances as well as mix.

We had a favorable product mix this quarter.

The other thing to realize is with the number of acceptances we had in the first quarter for instance, the proportion of acceptances to our total revenue has an impact on the margins as well.

But going forward, look more towards the second quarter guidance we're giving is what you would expect going forward.

David Duley, Steelhead Securities.

Yes, what percentage of service revenue do you think in the MOCVD business, can it be up to 15 or 20% of the equipment sales?

And did you have any 10% customers during the quarter?

I'll take the first part.

It can be up to 15% or maybe even more of the out-of-warranty equipment.

If you think of Services revenue, it's more related to install base that's out of warranty than it is to current revenue.

But over a long period of time, it's not uncommon for companies in the semiconductor business to get to 20% plus of sales in overall or even 30% of sales in services.

So, MOCVD market, I believe will be lower, because of the nature of the customers and the nature of where they are right now, but clearly there's a growing opportunity and we think we'll do well in that and clearly we're doing well because we're gaining more and more of that business.

And, Dave, why don't you take the other part.

Yes on the 10%.

That's really an annual measurement that we do for the 10-K.

We don't track or report that on a quarterly basis.

So, we'll see how the rest of the year unfolds and at the end of the year on our 10-K we'll report the 10% customers.

Daniel Amir, Lazard.

Thanks a lot.

Can you give a bit of commentary on what this current situation in China is in terms of for your business and kind of what your best thought of maybe when China has a stimulant plan for demand of LED lighting?

Thanks.

In our business we sold a lot of tools over the last two years.

We continue to sell more tools.

We've got a number of large customers who are making very good LEDs, and ramping their business and planning to continue to invest.

We've got other customers who are at an earlier stage and still improving their performance and learning to make better and better LEDs.

One thing you saw in the last quarter is we got a lot of acceptances.

So, people are installing our tools and using them.

They're installing them and accepting them and well over 80% of what we've shipped into China has been installed and accepted.

So, I think there's a good trend there and things continue to move along.

We do hear about incentives for end-market demand in China.

We expect that those are coming and I think that's going to help drive growth even more, but I think the business conditions are improving from what we see and they're going to be a major supplier of LEDs.

Ahmar Zaman, Piper Jaffray.

Thanks for taking my question.

Most of my questions have been answered but recently, we've heard some of your Chinese customers have had issues with staffing and finding qualified engineers.

Can you give us an update on that?

And then I have a quick follow-up.

With a country that's taken a lot of MOCVD tools in the last couple of years, clearly there is a challenge with staffing and various positions are in high demand.

We see China kind of pulling people out of Taiwan and other regions to accelerate their performance.

We started a couple of years ago building a training center in China and that center -- because we realized that with the equipment sales that were going in, that we were going to need to train a lot of people.

And just recently we trained our 500th person on our products and we'll continue to do that.

But it takes time to solve this problem, and it is -- we are feeding a lot of talent into the country and helping to bring up the knowledge base.

Thanks.

And then in the second half of 2011 you had some issues with recognizing shipments or actually shipping tools given I think part of it was the fact that your customers weren't ready.

Going forward, as orders begin to pick up and utilization levels go up, what's different this time around in terms of your visibility and your ability or your customers' ability to accept tools?

Yes, hi Ahmar, this is Dave.

I'm assuming that the 2011 revenue recognition issue you're remembering is probably related to bifurcation.

Which wasn't a problem or an issue with the tools, it was the fact that it was a new tool and under the accounting rules we didn't recognize revenue until we had a track record of a few acceptances on the MaxBright.

And then we got that by midyear and, of course, those things have all been flowing through revenue now it's shipped.

Yes, I think the other thing that's different is, a lot of companies have built a lot of fabs.

So what we did find ourselves facing a year ago was that people ordered tools and they were building a fab.

And the fab got delayed by three months and they took a tool, but the fab wasn't ready to install it and turn it on.

So we had some delays there.

I wouldn't call it revenue recognition but we had some customer facility readiness delays.

There's been a tremendous amount accomplished in terms of building LED fabs in China.

That's probably the biggest thing that's different.

Mehdi Hosseini, Susquehanna International.

Yes, John, going back to Slide 14, talking about the base range.

How should we think about overall building material for the finish lighting unit and how do you see that bill of material coming down and is that -- are those assumptions dialed into MOCVD procurement that goes into the cost of the LED chip?

Yes, they are absolutely dialed in because it's actually -- the decreasing cost of the LED and the whole bill of materials that really drives adoption.

So as those price curves come down, we get a lot faster adoption.

I think the biggest driver on all of this is brightness level.

When our customers achieve higher levels of brightness, if you achieve a 25% brightness improvement, you tremendously reduce the bill of materials.

You don't need as much heat sink; you don't need as much of a power driver; you don't need as many LEDs.

So brightness coming up will really help this and will continue to help it, and we've certainly factored those things into our forecast.

I think what we're seeing in the stores around here, and that is walking into the store and buying stuff, is that the prices are coming down pretty fast, and that there is a real change going on.

See that online also.

So, a lot more availability, more brands, big name brands that you never saw their light bulbs before.

I saw LG light bulbs before, somewhere; I'd never seen an LG light bulb.

There's more product, there's more education of the consumers, both Home Depot and Lowe's have displays that teach you what color temperature is.

So, there are a lot of things happening that I think are positive and will help drive this adoption.

Satya Kumar, Credit Suisse.

Yes, hi, thanks for taking my question.

Want to go back to an earlier point on market share.

First off, I think you're doing a spectacular job on that front.

If I take a look at your orders or revenues, whatever metric and compare that to Aixtron, it seems like your market share might have moved closer to the mid-70s and if I take the mid-point of your freer revenue outlook it seems like you're thinking the second half is sort of flat with a Q2 run rate.

So I just wanted to get a little bit deeper into whether you're thinking your market share gets closer to this 50% rate in the back half or stays at this pretty high level at the mid-70s in Q1.

And a separate second question, I like the plate on power electronics that you guys gave us.

Wondering if you could also talk about how many tools might be needed to convert say $1 billion of power electronics chip revenues over to the MOCVD process?

Thanks.

Yes, so, on the market share, it's hard for us to project market share for 2012.

Have you seen an Aixtron forecast for what their revenue is for this year?

We haven't seen that.

(technical difficulty) looking at your forecast so it's obviously pretty important for us to understand what you're thinking on market share because it's pretty high right now.

Yes, well, we're focused on winning.

We're focused on building great products, delivering them to customers, supporting the customers, and doing a good job.

I think beyond that I believe we've shown over the last couple of years that we can do a really good job of that in many, many ways and we expect to continue to do that.

On the power electronics, we hope to have that for you in the future.

Right now, the challenge is how quickly GaN electronics will take off.

We see a lot of R&D and we're winning a lot of R&D.

Our reactor runs much cleaner than other reactors in the industry.

So we have an inherent advantage in low particles for any kind of applications with large dye sizes.

So we're doing really well and we're winning lots of really key customers in the R&D stage, but the challenge here so far is how quickly is GaN going to take off and the outside forecast in the current side vary by an order of magnitude.

So we're working to tighten that up.

I think there are, as far as how many reactors per billions of dollars are required, it really depends where you are on the S curve.

So in the early stages of market adoption, the capital intensity is very high and you can have -- well, right now we have capital spending that's well above any kind of revenue that's there, and so the capital spend will be very high until the market really gets up to a volume size and then it will come back down, but we'll work on getting you that number in the future.

We'll take one more question.

Aaron Chew, Maxim Group.

Thanks for the question.

Why don't you comment on the MOCVD pricing environment?

Aside from differences in mix and given the gross margin performance, is it safe to assume your ASPs have really hung in there the last two quarters and it's just really tools driving the revenue decline?

And as a quick follow-up, I wonder if you can comment quickly on what is driving the rise in DSOs in the quarter.

And maybe talk generally on how financing terms have changed since last year.

Thanks so much.

Yes, I'll take the first one and Dave will take the second one.

Pricing environment is tough.

In downturns when there are not a lot of orders to be had.

We all fight hard for those orders and our margins have dropped significantly from where they were before.

So there has been pressure on ASPs and there has been a move to give the customers more for their money.

So, clearly that's had an impact on margins.

I think on the DSO, Dave, why don't you cover that?

So, first to point out on the receivables, of course, the dollar value has gone down.

When you're looking at the DSO, what you're seeing is the effect, again, let me answer directly your question.

We haven't really changed much in our pricings -- our receivables policy at all.

But what you're seeing is, as the MOCVD business comes down and Data Storage and MBE, our other businesses, kind of maintain their level of sales, the proportion of MOCVD gets less and less.

In that business, we have much shorter days turns because they're typically sold -- a large proportion of the MOCVD business is in China.

Those are typically on -- or are virtually all on letters of credit and letters of credit turn very, very quickly because after the shipment when you liquidate the letter of credit it's really just a matter of a couple of weeks, the timing it takes to clear the LC.

So, as MOCVD becomes a smaller proportion of the total it's expected that you'll see that DSO tick up.

You're seeing Data Storage and MBE and the services business become a larger component of the total.

We don't generally get deposits from our Data Storage customer and the payment terms are much longer.

So with that being bigger, our receivables DSO is not going to look as good.

Yes.

But terms and policy are still the same as they've always been.

Okay, all right, well thank you for joining us today and we look forward to seeing you in the future.

And everyone that does conclude our conference call for today.

Thank you all for your participation.