Veeco Instruments Inc (VECO) 2012 Q2 法說會逐字稿

Good day everyone, and welcome to the Veeco Second 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.

Please go ahead.

Thank you operator, and thank you all for joining us today.

Our earnings release was distributed at four o'clock this afternoon, and is available on our website.

Also posted on our site is a PowerPoint version of today's results.

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

It cannot be recorded or rebroadcast without Veeco's expressed 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 annual report to shareholders, as well as in our subsequent quarterly reports on Form 10-Q, quarterly 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 made.

During this call we 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'll now turn the call over to John for opening remarks.

Thanks, Debs.

We did well in Q2.

Revenue was $137 million.

EBITDA was $20 million; gross margin at 45%, and EPS was $0.37.

All of these were right in the middle of our guidance range.

Additionally, cash grew to $540 million, and we're on track to deliver full-year revenue of $520 million to $560 million, and that implies and EBITDA of 13% to 16%.

We continue to perform well, but as we all know, we're living through a down cycle, and what Veeco has done really well was to plan for that down cycle.

Over four years ago we started building our operations strategy around a variable cost structure.

It took a lot of planning and hard work, but it's really paid off.

The fact that we can go from $300 million of revenue in an up-cycle quarter to $137 million of revenue in a down-cycle quarter and still make 15% EBITDA shows that we did a great job managing our costs.

Let's look at some macroeconomic trends.

When people go home and turn on the TV at night, they're likely to see a story about an insolvent country in Europe or the growth slowdown in China, or the delayed economic recovery in the US.

All of this has driven consumer confidence down, and consumers aren't spending.

Our customers see that and they're pulling back the throttle.

Our Q2 orders were weak at $103 million.

MOCVD orders bumped along the bottom at $70 million, and Data Storage and MBE both trended down.

On the other hand, current quoting activity and capacity levels at our customers leads us to believe that orders will improve gradually as we go through the second half of the year.

But right now it feels like customers have no real drive to step on the gas.

For the LED market specifically, it's a mixed bag of both positive and negative signs.

On the positive side, fab utilizations continue to go up; for example, in Taiwan they're about 80% to 95%; in Korea they're 65% to 80%; and in China, where we have a lot of focus, overall fab utilization is under 50%.

What most people don't know is that the top players in China are at much higher utilization levels.

Other positives include the continued reductions in LED light bulb prices, and the rapid improvement in LED lighting designs and packaging.

On the negative side, poor consumer confidence is impacting TV and consumer electronics sales, and our customers are very cautious about capacity expansion.

Let's turn to data storage.

We had record revenue in Q2 due to the Thailand flood recovery efforts, but the hard disk drive manufacturing capacity is now back to pre-flood levels, and our customers are conservative on CapEx spending.

This drove weak Q2 orders.

We expect some pick-up in the second half, but no dramatic changes.

In summary overall, we continue to execute well and deliver solid performance in a tough market.

With that as a market update, I'll turn the call over to Dave to cover our financials.

Thank you John.

Veeco's second-quarter 2012 revenues were $137 million.

That's down 2% sequentially, and ending up at about the mid-point of our $120 million to $145 million guidance.

Non-GAAP net income for Q2 was $15 million, or $0.37 per share, compared to $19 million, or $0.49 per share, in Q1.

Second- quarter GAAP net income was $11 million, or $0.28 a share, compared to $16 million, $0.42 a share, in Q1 2012.

As forecasted, second quarter gross margins were 45%, or about 200 basis points below last quarter's unusually strong 47%.

Last quarter's margins were helped by a favorable mix and larger revenue from final acceptances.

In addition, this quarter we've seen increased pressure on selling prices, as one could expect given the weaker business environment.

Excluding amortization, Veeco's operating expenses were $45 million, up from $43 million last quarter, and right in line with our guidance.

This reflects the impact of salary increases which became effective earlier in the quarter, as well as equity compensation expense.

A little bit later I'm going to talk about our plans to dial back our rate of SG&A spending during the second half of the year.

R&D was roughly flat sequentially at about $24 million.

Despite the business slow-down, we're keeping the R&D spending rate at about the same pace as 2011 levels, maintaining our accelerated product development programs.

Our Q2 adjusted EBITDA was $20 million, or 15% of sales, in line with the financial model that John showed earlier.

Adjusted EBITDA trended down sequentially due to the lower sales volume and gross profit margins, as well as the increased OpEx.

Turning to slide 11, you can see that our reported $137 million in revenue, LED and Solar was $87 million, or 64% of sales; Data Storage was $50 million, or 36% of sales.

MOCVD revenues were $75 million, and MBE was $12 million, each slightly down on a sequential basis.

LED and Solar EBITDA was $9.6 million this quarter, versus $17.5 million in the first quarter of the year, primarily the result of lower revenue, lower margins, and higher OpEx spending this quarter.

Data Storage revenues were up 12% sequentially to $50 million at record levels.

EBITDA increased on the higher volumes to $12.1 million, up from $9 million in the first quarter.

We're very proud that both of Veeco's business segments remain healthy and profitable, even in the face of a challenging business environment.

Let me now review our Q2 bookings.

Veeco's total bookings were $103 million, with $77 million coming from LED and Solar, and about $25 million from Data Storage.

We received MOCVD system orders from all geographic regions during the quarter, but as John mentioned, orders overall were even with Q1 at $70 million.

The sequential decline in segment bookings came from MBE, which reported $7 million in orders, down about 50%.

This business tends to be lumpy, often impacted by production buys from wireless customers, and there were no production buys in the second quarter.

Data Storage orders of $25 million were lower than we had anticipated.

As John mentioned, customers continue to be extremely cautious about their capacity expansions due to the sluggish outlook for PC sales.

At the end of the second quarter, we had $241 million in backlog after a $30 million adjustment.

We took a prudent action to remove certain MOCVD systems from backlog that no longer meet our backlog criteria.

These backlog adjustments were primarily, although not exclusively, on Chinese deals.

It should be noted that these were not order cancellations and that we're still working with these customers.

At the end of Q2, MOCVD backlog was $158 million and Veeco's book-to-bill ratio was 0.75 to 1.

Turning to our balance sheet, we finished the quarter with cash and short-term investments of $540 million, up from $524 million at the end of last quarter.

Veeco generated $19 million in positive cash from operations, reflecting our continued sharp focus on working capital and expenditure control.

Accounts receivable increased to $95 million, with DSOs at about 63 days.

DSOs grew again this quarter, as MOCVD declined as a percentage of sales.

Inventory declined by $12 million to $91 million, and turns were 3.3 times, favorable compared to the 2.9 turns we reported last quarter.

We're carefully managing our procurement activities on the stalled MOCVD booking level.

I will now review our guidance for the current quarter.

Veeco's Q3 revenue is forecasted to be between $120 million and $140 million.

Gross margins are expected to be between 44% and 45%, and our goal is to keep OpEx about flat in the range of $44 million to $46 million.

This should result in an adjusted EBITDA range of about 10% to 15%, in line with our target model.

GAAP EPS is forecasted to be $0.12 to $0.29 per share, and non-GAAP EPS between $0.22 and $0.38 per share.

We currently expect that second-half orders will improve gradually.

However, given the overall weak environment and custom uncertainty, we think it's prudent to dial back our spending as we head into the remainder of the year.

We're implementing some additional belt-tightening measures, particularly in fixed-cost areas to drive operating, OpEx lower.

By the fourth quarter, we expect OpEx to be back to about the same spending run rate as we saw in the first quarter of 2012, which was about $43 million.

This should put us in good shape to continue to remain solidly profitable, while at the same time not giving up on any of our strategic priorities.

Note that for modeling purposes, our effective tax rate for Q3 is 25% on a GAAP basis and 28% on a non-GAAP basis.

I'll now turn the call back over to John.

Thanks, Dave.

Let's move on to the outlook.

The LED lighting market is going to be huge.

LEDs offer tremendous energy savings and provide great payback in many applications right now.

LED lighting chips are projected to grow at an average annual growth rate of over 40% as the market moves from less than 5% penetration to more than 70% penetration by the end of the decade.

Our business will take off as LED lighting demand accelerates.

There will be billions of LEDs made over the next five years, and we want to make sure that the majority of them are made on Veeco equipment.

If you think about Veeco in 2012 versus a few years ago, the thing that really stands out is how much we have accelerated the pace of new product introductions.

We did it again this quarter.

We launched the more compact MaxBright M and the higher performance versions of both the MaxBright and the K465i.

These products reduced the cost of making high-quality LEDs, and they helped to enable the massive adoption of LED lighting.

We plan to maintain our high level of R&D spending, and you can expect our fast-paced product introductions to continue in the future.

The flow of exceptional new products, as well as a great job with customer support and customer service, have translated into exceptional market share gains.

We've gained market share in every region of the world over the last five years.

In addition to the top market share in 2011 and the first half of 2012, we are the number one supplier to 6 out of 10 of the LED manufacturers that have the largest installed base of merchant tools.

I'm really proud that the leaders choose Veeco.

Let me summarize our business outlook.

We don't see any clear signs that the economy is improving, but we do anticipate a gradual order recovery in the second half of 2012.

We expect that to be led by three factors -- China and Taiwan MOCVD investments, Data Storage technology buys and capacity additions, and growth in services.

Our services business has been doing really well.

We achieved record revenue in Q2, and we expect continued growth here.

It is a tough market right now, but let me tell you why I'm really confident about our future.

We've delivered solid results in a tough year, and a lot of companies can't say that.

In each of our markets, we are the market leader, with exceptional technology and great customer relationships.

The LED lighting market is going to be huge.

LEDs are going to become the dominant form of lighting everywhere.

Finally, our business model is well-developed and it's proven.

I'm confident that we'll be up to scale up when the market is ready.

Our future is really bright.

Thank you operator, we will now take questions.

(Operator Instructions)

[Bill Ault], B. Riley.

Good afternoon, everyone, and nice execution in a very tough environment.

Of the $70 million in MOCVD orders, any of these orders came from the newly launched MaxBright M and the K465 HP?

Also, about what percentage of the $70 million orders are scheduled for six month or less delivery?

Both of our new products, the MaxBright M and the MaxBright MHP and the 465i, we've had orders for all of those, and they're doing really well.

The $70 million, I don't think I can tell you in six months, but it's pretty close.

It's not, there's no reason for customers to buy and spread backlog out, so I would have to say the delivery is fairly tight but I don't have the facts.

Okay, it sounds like a large amount will be delivered within six months.

Is that a fair statement?

I think it is.

Yes, six to nine for sure.

Okay, thanks so much, gentlemen.

Patrick Ho, Stifel Nicolaus.

I think, David, you mentioned gross margins felt some pressure on ASPs this past quarter.

Could you just give a little bit of color in terms of whether it was some of your older products that experienced these pressures?

Where was it coming from in terms of the product mix for you guys?

You can see that our margins actually -- they held a pretty well.

It's not having a huge impact on our margins, but it's as normal as you would expect in this environment.

Did it come in both MOCVD as well as data storage, or was it primarily one of the two businesses?

MOCVD is what we're referring to.

Okay.

Looking forward, John, in terms of the industry outlook, you're projecting orders to gradually pick up in the second half of the year.

I know it's obviously very early, but there's improving signs about 2013 being a potential recovery scenario for the industry.

What are some of the variables that need to happen tin the second half of the year to be the catalyst for a recovery in 2013?

Well, fab utilizations have been going up in China and Taiwan and Korea.

If that continues, that's certainly a key factor.

Any kind of help we could get from the global economy would be a great thing, as far as either TV sales or lighting adoption.

We base our gradual upward trend based on what we're hearing from our customers, what we're seeing in terms of quoting activity and their capacity, and that sort of thing.

I think it's been a little slower than we expected overall here, but we do think it will start to move up.

Colin Rusch, ThinkEquity.

Good afternoon, gentlemen, this is Noah Kaye in for Colin.

Congratulations on executing in tough environments.

Even with the very low order levels, you're taking share in MOCVD.

Can you talk a little bit more on your earlier comments about what the drivers are that are helping you to take share?

It's really being able to provide products that have great throughput and a lower cost of ownership for making really good LEDs.

What it comes down to more than anything else, helping our customers improve their economics with solutions that do a better job.

The products that we just announced this quarter improved uniformity significantly in the 20% range, and dropped cost of ownership by an additional 5% in addition to some of the other benefits from these products.

It's really having the best product and then doing a great job of supporting them.

That's helpful.

Just to follow up on that, I was wondering if you could talk about GaNon Silicon specifically, what recipe changes might be required, and what are the associated throughput differences in relation to current Sapphire-based processing.

We see all of our customers -- all of our larger LED customers -- with programs to investigate GaNon silicon.

Some of them claim to be very close to full-scale introductions of those products, and some of them seem a bit further away and maybe are covering their bets to have both a silicon and Sapphire approach.

Our tools work on either one.

They work quite well, so I think we'll do very well whichever way the market goes.

Brian Lee, Goldman Sachs.

Hi guys, thanks for taking the question.

First wanted to ask about the backlog adjustments, If you could provide a little bit more detail?

Just wondering how many customers were involved there, what were some of the specific qualifiers that drove you to make the adjustments, and how much of the remaining $158 million in MOCVD backlog is tied to Chinese customers?

Sure.

It was five customers.

Without going into specifics of each one, as we've mentioned on prior calls, every quarter we go through a review of our total of our backlog, and we look at all the conditions around the order status and the customer and when they are expected to take the tools.

We do an assessment, and if it doesn't meet our booking criteria we make an adjustment, and that's what we did.

The rest of the backlog, I believe around 80% is still -- is China customers.

I'd just add to that, Brian, that over the last 2.5 years we've have had about $70 million overall of backlog adjustments.

It's less than 4% of what we booked over that period.

We have maintained very tight booking standards and our backlog adjustments have been relatively low.

In these cases, these orders didn't necessarily go away, but they didn't meet the criteria, maybe they pushed out too far in the future for us to keep them in backlog.

Hope is not lost for all of this.

Okay, great.

I appreciate the color guys.

Maybe if I can just dig into a little bit more.

Is it a funding issue, is it technology readiness?

I know in the past you guys have also talked about fab readiness.

Maybe if you can just qualify it a bit more?

We don't want to go into specific customer situations, but it's the normal things that cause order delays.

At some point, we just say it's time to take it out of the backlog, under our guidelines that we look at every quarter.

Olga Levinzon, Barclays.

Just touching base on the market share side.

It was great that you indicated that you're the number one player of the top six LED makers out there.

As you look towards this gradual LED order recovery in the second half of the year and potentially into 2013, which regions do you see the biggest potential for market share gains, and would they be primarily coming from getting a larger share of those six customers, or adding the other four to the mix as the number one supplier?

Let me take it in pieces.

We've gained share in all regions.

Our market share is very solid in all regions, and in particular over the last I'd say year and a half.

Our share grew faster in Taiwan than anywhere else, and that's because that's where our share was the lowest.

That region has balanced out a good bit versus the others, and I think we're very well positioned in all the Asian countries to do very well on any kind of a business.

I don't think it's going to be one region that will drive it.

I believe it will be a broad front, and because it's driven largely by the products.

When we say six of the top 10, there certainly is the potential for us to increase our penetration in some of those others, and I do expect that will happen.

It's been happening.

If we went back a couple of years ago, I couldn't tell you six out of the top 10.

It's been moving up, and I think we have a decent position in just about every major player in the world.

There's some that we're still the number two, but we're going to work real hard to get to number one.

Got it.

On the high productivity upgrade that you recently introduced, just wondering, are you seeing a lot of traction there in the back half of the year from a perspective of upgrading existing capacity, or is the vision to some level of LED order recovery based on customers seeing higher productivity tools and ordering full new tools as a result?

It's really, there will be elements of both, because we will sell these products -- at least the HP upgrades for the MaxBright and the 465i -- we will sell those as upgrades to existing systems, and we already have orders for those.

I think the bulk of the economics for us is going to be in new tools.

The strategy is to have the best tool that gives the customer the ability to make really good LEDs at a lower cost.

To the extent we keep putting out tools that are better and better at doing that, those are what helps us get a bigger share of the overall market spending.

That's really our drive.

We've committed to our customers to deliver a continued stream of both upgrades and new platforms, and we're following through on that.

(Operator Instructions) Krish Sankar, Bank of America Merrill Lynch.

John, if I look at your guidance for Q3 and the full year, it looks like the second half is going to be down almost 5% from the first half.

How will the data storage and the LED solar revenues trend?

I think if you remember back on the -- when we came into this year with a huge backlog, and we've shipped, that's gone down as we've shipped more than we've booked each month, so that's probably why we had a bigger quarter at the beginning.

For the last couple of quarters, in the MOCVD business, the bookings have been fairly flat.

That's what tells us, you haven't seen a recovery yet, but they've still done fairly well.

Dave, do you want to add to this?

No.

Yes, I think that covers it.

If I could just squeeze in one more.

The $70 million in MOCVD bookings, how many customers will it include?

Thank you.

It's fairly broad-based.

It's not one or two deals.

It's not --

It's across the regions, too.

Carter Shoop, KeyBanc.

First question is, I didn't notice a slide showing your outlook for 2013.

I think you guys introduced that slide last quarter talking about 460 tools in industry for 2013, 540 for 2014 in a base-case scenario.

Any kind of updated thoughts on that and where you're viewing the industry trending would be helpful?

We haven't -- what we were showing last quarter was a longer-term projection of the MOCVD market.

We haven't changed that projection.

I would still say -- and we still think it's valid.

I think the thing that I would add is we might be sliding out a little bit.

We had hoped that Q2 orders might have been a little stronger than they were, and that maybe Q3 would be yet stronger.

We haven't, we will know that when Q3 is done, but we think the forecast is still valid and we will do well in that market.

One more quick one if I may, and this might be a little bit of a stretch, but I think a lot of investors trying to better understand where the utilization rates are in China.

I think there are several customers where utilization rates are quite high.

Have you had a chance to maybe go back and look at your backlog which you said is 80% from Chinese customers, and get a kind of weighted utilization rate based on your backlog from those customers?

Do you have any sense on what that kind of weighted utilization rate would be?

We have not done that.

It's an interesting idea.

What I can tell you, though, is that when we look at the top customers in China and the top five or six or seven, the utilization rates are surprisingly high.

A lot of them are above 80%.

There are some other customers that may be running at 80% of what they have installed, and there we're going through pretty rapid installs for them of equipment they've bought but haven't, are just moving it into their fab.

At the leaders, the utilization rates are high.

Then there's a mixed bag as you as you get down into the tier 2 and tier 3. Some of the tier 2s are doing quite well, some are doing pretty poorly.

The same thing on the tier 3. It is mixed, which is why we wanted to not just talk about overall China utilization, because I think it doesn't give you a good picture of what's really going on.

Operator, before we go to the next question, I just want to answer something that we left open.

We had orders in Q2 from over -- system orders -- from over a dozen customers in the quarter from MOCVD.

We'll take the next question.

Edwin Mok, Needham and Company.

A quick question on data storage side.

I understand you think orders will start to improve.

Are you saying data storage revenue will come down as customers finish these flood-related installation?

I think most of the revenue for this year is in backlog at this point for data storage.

We're not counting on a lot more.

There's a number of contrary, contradicting trends here.

On one case, some of the customers spend a lot of money on flood recovery, and they got through that.

They may try to hold off on CapEx spending until they get to a real high utilization rate.

On the other hand, it's still a healthy business.

It's not growing really fast, but one of the good trends is that the number of heads per disk is growing faster than the overall disk drive rate.

Disks, hard disks are getting larger and the heads per disc is increasing.

That's what we really make, the equipment to make the head.

The growth prospects for heads is a little better than the overall growth prospects for hard disk drives.

That's helpful.

Just a quick follow up on MOCVD.

Your competitors reported this morning, sounded a little more positive about back half, but they said it was just not take orders for one particular or few particular customers.

How are you seeing the order trends in your customer, too?

Is it mostly concentrated in a few big customer who has high utilization, or is it more broad-based?

It's more broad-based, but there are some larger customers that we expect to place larger orders as they wrap up their funding and move to the next level.

Satya Kumar, Credit Suisse.

Thanks for taking my question.

This is [Firhan] on behalf of Satya.

I wanted to ask you about the mix between the MOCVD.

Can you talk about what terms you are using on the power electronic side and what portion of the MOCVD went toward that's market?

Yes.

We sell MOCVD systems into, or scan LEDs on Sapphire; again on silicon for LEDs and again on silicone for power electronics.

We don't provide splits between the markets, but we continue to do well in all three markets, and I think all three markets have a great future.

It's pretty broad-based there.

In terms of your service revenues, compared to the last quarter were they up or down, and considering that utilizations are up this quarter, is it fair to say that you should have got higher service revenue on the MOCVD side?

We are having trouble hearing.

I can repeat the question.

The question was, do we expect service revenues to go up again in Q3, and with utilization rates, shouldn't they go up more?

First of all, our overall service revenues are a combination of our MOCVD services and our data storage.

We had a bit of a kind of upward pressure on data storage services in Q1 and Q2 due to flood recovery.

Although MOCVD services continue to grow quarter over quarter, and we expect that going forward, there is, we'll be a little bit taken away from that as the one-time events in data storage don't proceed.

Just to add, I don't think we put it in the press release or what you've seen so far, but the number for services this quarter is about $33.5 million.

If you remember at the beginning of the year we said we do expect it to grow over the course of the year by 50% compared to last year.

It should be ticking up.

Chris Blansett, JPMorgan.

This is Bill Peterson calling on behalf of Chris.

Wondering if there's any product that's already been shipped.

Are there still products that remain to be signed off, particularly in China?

How does that look?

Sure.

We normally ship standard products with a 10% remaining that gets signed off that gets paid on sign-off.

In China, we can probably average, I don't know, a couple of months before getting that.

There's always a lagging component of revenue that relates to what you've shipped previously.

That will continue to happen.

You remember in the last quarter we had kind of unusual numbers -- and last quarter meaning not Q2 but Q1 -- we had an unusual number of acceptances, and it pushed our gross margin up by, I don't know, 1 to 2 points.

Q2 was more normal in that respect.

It's hard to predict when you might get a little bubble of those, but there always are some and there always will be.

Vishal Shah, Deutsche Banc.

John, I wanted to get attention from you on your cash, and the use of cash -- whether you're looking at any kind of dividend or announcing any buy-back?

We did well on cash.

We grew it to $540 million this quarter, so that was a good result.

We haven't announced any buy-backs, we'll if the Board moves forward to do that.

We are certainly continuing to prioritize keeping a large chunk of cash there just as a safety net for the Company, and then would also certainly look for acquisitions that fit with our products and our expertise and our strategies.

No real news to report there other than that we did a good job growing our cash.

Great, thank you.

One other question.

The MOCVD orders for this quarter, what percentage of the orders came from customers that may be looking at the segment from a strategic standpoint out of Korea or Taiwan?

Are you seeing in some of those big guys coming back and placing orders, or is it still evaluating?

Thank you.

Yes, there are certainly -- orders are coming from big and important customers and right now you have to be pretty solid to be buying and getting funding and moving forward, so absolutely.

Thanks.

Andrew Hong from Stern Agee.

Hi, this is John Chen in for Andrew.

Thanks for taking the question.

I was wondering what the revenue and order exposure is from China?

It has -- what do you mean by exposure, the content?

The order exposure, sorry.

A percentage?

That's right.

The percentage is about 80% of MOCVD.

That's remained kind of constant for us.

Got it.

How about MOCVD backlog?

It's about the same.

Stephen Chin, UBS.

Hi John.

I just wanted to follow up with you on what you think gets China to order significantly more tools.

We agree with you that utilization rates in China are higher.

We think they're around 70% by just analyzing Sapphire demand.

Do you think utilization rates is all that's needed to drive China orders, or do you think they need the LED lighting subsidy, or even more funding before releasing the larger orders that they've planned over the past few years?

I think they need all of those.

Hopefully if there are to be subsidies that help spur demand, then that obviously drives utilization and drives the business.

There are a number of customers that do need funding, and of course that can delay things, or whatever.

Things seem to be moving along in a positive way, and utilizations keep going up, the customers keep getting better at making LEDs.

I think it's hard to say exactly how it's going to play out, and will it play out as a nice linear adoption rate, or will it swing up quickly.

Historically, we've seen both.

We've seen things flip in this market very quickly.

We have to be prepared for that in case it happens.

A follow-up question on the possibility of orders improving slightly.

Can you share any color on which regions you expect to possibly share that improvement in the second half?

Is it still just China, or would you expect Korea, Taiwan to also show modest improvement?

Thanks.

We mentioned both China and Taiwan.

Korea, it might take a little longer in Korea.

Utilization rates are coming up, there could be some orders later this year out of Korea.

There have been some orders already, but I think the big movers will be China and Taiwan from our perspective.

Aaron Chew, Maxim Group.

It's certainly encouraging to see the pick up and sell-through among your customers and utilization for that matter, primarily with the big ones in Taiwan.

Just been hearing a lot of chatter amongst some of your customers that their own demand, their own sell-through for LED, not necessarily MOCVD equipment, but their LED's actually been ebbing a bit in looking ahead deeper into 3Q.

Some of the explanations attributed to this have been maybe the coming into the Taiwan TV subsidy, and maybe just the second slowdown in the back-lighting market.

Just wondering if you can comment on that.

I know I'm asking about your own customers, but if you can just contest or maybe corroborate anything you're hearing, it would be appreciated?

We haven't really heard that.

I think what you can see, though, is that as utilization rates are moving up, the customers are very cautious, and they're not springing into a buying pattern as quickly as they would have a year or two years ago.

I think they know that lead times on equipment are relatively short, and that they can get equipment pretty quickly, and there have been some kind of peaks and valleys locally within years over the last year or two.

I think they're waiting to make sure where they're going.

That's what we think is happening.

If I could have a quick follow up.

Are you able to highlight -- I know you generated $19 million in operating cash in the quarter.

What was CapEx free cash, and maybe what were the big components moving operating cash would be helpful before the queue's up?

Thanks.

Free cash flow is about $10 million.

The big movers driving the $19 million -- is it you had some more inventory draw-down, receivables, or just any -- the big components would be helpful, thanks.

It is mostly operating and then working capital changes.

You saw that inventory did go down, offset a little bit by accounts receivable.

Nothing unusual given where we were at in the cycle.

It's mostly driven by operating.

It's everything you can see in the balance sheet.

Our CapEx was finishing up the Korea operation, the Korea building we've been in the process of.

David Duley, Steelhead.

Just a couple quick ones from me.

When orders do return in the second half of the year do you think -- in the MOCVD space -- do you think it will be driven by back-lighting or general lighting?

As far as your total cost structure goes now, what percentage is variable, and which percentage is fixed, and what are your targets there?

Thank you.

I think I'll take the first part of that question.

I think both back-lighting and lighting are both driving the overall utilization.

I don't think it'll be one or the other.

Ultimately, the general purpose or general illumination will be the bigger driver of growth, but a little bit of help from the economy and TV sales would sure help on back-lighting and push things along.

Dave, do you want to take the second part?

Yes, on the variable fixed, we've said in the past that our break-even point is about $100 million of revenue per quarter, and that pretty much holds.

We have a very flexible -- that's one of the reasons we've been able to deliver the results we have in this environment.

We have a very flexible fixed asset, or fixed cost structure.

About 90% of our cost of goods sold is variable.

That is certainly helping us now on the margin.

Ahmar Zaman, Piper Jaffray.

The first question I have is David, on your commentary earlier about SG&A potentially trending back down in the fourth quarter to a $43 million run rate.

How should we think about that in 2013?

You mentioned you're taking some fixed costs out.

Any color on 2013 on the SG&A would be helpful?

Right now we're looking at the order pattern and we're right-sizing ourselves for what we see.

We mentioned -- you go back to the fall of last year when we dialed down at the first pull-back we saw in orders.

We said we've got a lot of, we do have a lot of dials that we can turn to manage that, so we kind of manage it based on what we see coming up in the next few quarters.

You wouldn't be too far to take the Q4 savings and annualize them into next year.

Thank you, that's very helpful.

John, can I ask you a little bit about the OLED market and OLED opportunity there.

Your competitor has mentioned this morning that's one of their focus areas going forward.

What is Veeco doing on that front?

We have a couple of initiatives in OLED.

We do not have a OLED system at this time.

We do have an investment in another Company and we have some OLED work going on with some top customers.

It's nothing we've announced, and it's nothing anyone should count on for significant revenue this year.

We are working on it.

When we have a product to announce, we'll talk about it.

It appears there are no further questions.

I'll turn the conference back over to our presenters for any additional or closing remarks.

All right.

Well, thank you for joining us today, and we'll look forward to delivering another great quarter in Q3.

Thanks.

This concludes today's presentation.

Thank you for your participation.