Veeco Instruments Inc (VECO) 2012 Q3 法說會逐字稿

Good day, everyone.

And welcome to the Veeco third 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 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 sections of the Company's report on Form 10-K and on annual 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 take 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'll now turn the call over to John for opening remarks.

Thanks, Deb.

Given the overall challenges in the market, we delivered pretty good results this quarter.

Revenue was $127 million, EBITA was $17 million, and EPS was $0.34.

All of these are in line with our guidance.

We did a good job managing working capital and generated $46 million in cash from operations.

So cash now stands at $574 million.

Taking into account our Q4 guidance, we'll deliver about $500 million -- over $500 million in revenue and double-digit profit in 2012.

We are successfully managing through a tough year.

Bookings were weak in all three of our businesses.

In MOCVD the order recovery that we thought possible at our last announcement has not materialized.

Since Q4 of last year, our MOCVD orders have bumped along the bottom in the range of $50 million to $70 million, and this quarter was no better.

In MBE, customer consolidations caused a slowdown in production buys for wireless applications, and orders were extremely low.

And in Data Storage, the combination of big post-flood investments in Thailand that drove excess capacity and weak PC demand caused our customers to freeze capital spending.

And that resulted in weak orders.

With all of our businesses hitting down cycles simultaneously, Veeco's bookings came in at only $84 million.

While MOCVD orders remained low in Q3, there are some positive trends in LED.

General lighting is growing and customer tool utilization rates are up.

Korean customers report utilizations in the 60% to 80% range.

Taiwan is 80% to 100%, and the China leaders are over 90%.

Top LED companies are reporting more stable business conditions than they have in a while and orders are modest, but they are adding capacity.

Let me tell you about four of the deals that we've recently won.

In China, HC Sematech, a well-established LED company, is adding our newest generation system.

Our MHP offers a 20% uniformity improvement and a 5% cost of ownership advantage over the original MaxBright.

In Taiwan, the market leader added capacity with Veeco tools.

In the US, a market leader purchased our new high-performance reactors, and they said that our tools help them make more money.

And in Japan, our MaxBright was selected by a leader for their GaN-on-silicon program.

We are winning the most important deals in every region.

On another positive note, Veeco's service revenue grew 36% through the first nine months of the year.

As hundreds of MOCVD tools are coming off warranty, we are selling more consumables, spare parts, and service contracts.

And, in fact, our service revenue was better in every quarter of 2012 than in 2011.

In Data Storage, revenue for Veeco's certified preowned equipment more than doubled so far this year.

Service is a great annuity business and it now represents about a quarter of our revenue.

Despite the weak overall environment, we did a good job navigating through the quarter.

I'll now turn the call over to Dave to review the details of the numbers.

Thank you, John.

Veeco's third quarter 2012 revenues were $127 million.

That's down 7% sequentially and ending just shy of the midpoint of our guidance, which was $120 million to $140 million.

Third quarter GAAP net income was $9.4 million or $0.24 a share, compared to $11 million, or $0.28 a share in Q2 2012.

Non-GAAP net income for Q3 was $13 million, or $0.34 a share, compared to $14.5 million or $0.37 a share in Q2.

Note that our GAAP effective tax rate for the quarter was 6%, down sharply from 29% last quarter, as a result of a discrete item pertaining to R&D credits that were recognized in this quarter.

The revised projected full-year tax rate for 2012 is now 21%.

As highlighted in our July earnings call, we implemented Companywide reorganization activities during the quarter, which resulted in a restructuring charge of $2 million.

Third-quarter gross margin was 42%, below our guidance of 44% to 45%, primarily the result of a lower mix of services and components in MBE, fewer final acceptances in MOCVD, and other higher expenditures in the quarter.

Significantly lower sales volume in Data Storage also drove down the margins.

Given lower operating rates, continued competitive pressure, and the declining number of acceptances in our backlog, we expect pressure on LED and Solar Group margins for the foreseeable future.

Excluding amortization and restructuring, Veeco's Q3 operating expenses were $41 million, down from $45 million in Q2.

In addition to the impact of cost-cutting measures, Q3 benefited from a reduction in bonus and profit-sharing as well as equity compensation forfeitures.

These are one-time favorable impacts, so normalized OPEX in Q3 can be thought of as about $43 million.

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

Despite the business slowdown, we are keeping the R&D spending rate at about the same pace as 2011 levels, maintaining our accelerated product development pace.

Our Q3 adjusted EBITA was $17 million, or 13% of sales, compared to $20 million, or 15%, in Q2.

Adjusted EBITA trended down due to lower revenue and weaker gross profit margins, both partially offset by the lower OPEX this quarter.

Turning to slide 10, you can see that of our reported $127 million in revenue, LED and solar was approximately $94 million, or 74% of sales.

And Data Storage was approximately $33 million, or 26% of sales.

MOCVD revenues were up approximately $79 million and MBE revenues were $15 million, each slightly up on a sequential basis.

LED and Solar EBITA was $12.2 million this quarter versus $9.6 million in the second quarter of this year.

Data Storage revenues were down 33% sequentially to $33 million.

As you may recall, our Q2 revenues in this segment were at record levels due to one-time customer equipment rebuilds related to the Thailand flooding.

Third-quarter Data Storage EBITA decreased to $4.5 million, down from $12.1 million in the second quarter of the year.

Both of Veeco's business segments remain healthy and profitable, even in the face of a very challenging business environment.

I'll now add a little more detail to the overview of Q3 bookings that John highlighted earlier.

Within our total bookings of $84 million, approximately $68 million was from LED and Solar, and about $16 million from Data Storage.

MOCVD bookings were $63 million, roughly within the same weak band we've been experiencing since Q4 of last year.

The big sequential declines in bookings were from MBE, which declined 33% to $5 million, and Data Storage, which declined 37% to $16 million.

We had no MBE production buys and, as John mentioned, Data Storage bookings were much lower than anticipated as customers froze their CapEx plans.

At the end of the third quarter, we had $187 million in backlog after an $11 million adjustment in MOCVD and MBE.

Backlog declined $54 million sequentially with all businesses showing an unfavorable book-to-bill trend.

MOCVD is almost three-quarters of our backlog.

Our third quarter book-to-bill ratio was 0.66 to 1.

Turning to our balance sheet, which held up very well in this weak environment, we finished the quarter with cash and short-term investments of $574 million.

That's up from $540 million at the end of last quarter.

Veeco generated $46 million in cash from operations, reflecting continued close working capital management and a strong focus on cost control.

Accounts receivable decreased to $60 million, down sharply from last quarter's $95 million.

DSOs returned to a more normal level of about 43 days, a decrease from the 63 days last quarter as a large customer receivable was collected according to terms.

Inventory declined by $10 million to $81 million, reflecting the decreased level of business activity.

Inventory turns were 3.6 times, favorable compared to the 3.3 turns last quarter.

Veeco has done a great job improving our balance sheet this year.

In fact, through the third quarter, we generated over $100 million in cash from operations.

I'll now review our guidance for the current quarter.

Veeco's Q4 revenue is forecasted to be between $100 million and $115 million.

Given the anemic bookings in our Data Storage and MBE businesses the last couple of quarters, we expect that Q4 revenues will decline in both businesses whereas MOCVD should remain relatively flat.

Gross margins are expected to be around 40% to 41%, and our goal is to keep OPEX relatively flat at right around $43 million.

This achieves our July target to bring OPEX back to Q1 2012 spending levels.

GAAP EPS is forecasted to be negative $0.09 to positive $0.03 and non-GAAP EPS between $0.04 and $0.16 positive per share.

This Q4 guidance ties into our previous statements that our revenue breakeven is about $100 million on a non-GAAP basis.

We are continuing to drive hard on cost reduction efforts with a goal to bring the breakeven down even further into the $90 million to $95 million range as we head into 2013.

So you can expect to see us take additional restructuring actions and charges in the fourth quarter.

Note that for modeling purposes, our effective tax rate for Q4 is 21% on a GAAP basis and 26% on a non-GAAP basis.

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

Thanks, Dave.

This has been a challenging year and we've done a good job managing the business.

As Dave outlined, we moved quickly to lower our costs and I'm really glad we did.

While a quarter ago we thought that orders would start to improve in the second half, they in fact worsened in Data Storage and MBE, while MOCVD continued at the previous low levels.

Our visibility is pretty limited, but we believe that Q3 was the bookings trough and that business will get better from here.

By cutting spending in noncritical areas, we can continue to fund our investments and remain profitable.

Although we've reduced our expense levels, we continue to fund R&D programs -- new MOCVD upgrades and systems, new MBE systems, and the advancements in deposition and etch that will enable the next-generation disk drives.

We're the leader in each of our markets and we'll stay the leader.

We expect to spend about as much on R&D in 2012 as we did in 2011.

And we'll be in great shape to win as our markets recover.

Q3 bookings represented a perfect storm.

All of our businesses experienced down cycles.

On the other hand, the thing that gives me confidence is that each of our markets has compelling underlying growth drivers.

Solid-state lighting will become the dominant lighting technology in the world.

iPhones, iPads and personal mobility will drive growth of wireless chips.

And the enormous growth in storage requirements will drive our Data Storage business.

It may be a while longer, but we will deliver great results as our markets recover.

In summary, we are proud of the way we've executed in a difficult year.

We're managing our expenses while funding our R&D to maintain our leadership.

We are effectively managing our inventory and receivables to maintain a healthy business.

And I'm confident in our long-term growth prospects.

Thank you.

Operator, we'll take questions now.

(Operator Instructions) Stephen Chin, UBS.

Thanks for taking my question.

This is Mahavir Sanghavi for Stephen Chin.

Hi, John and Dave; just a question on the order trends.

You talked about capacity utilization rates are either close to 80% or greater than 80% in all of the three regions.

Do you expect the MOCVD recovery to be more of a hockey stick on the other side of this downturn, or more of a slow and steady recovery?

It's a little hard to tell.

Korea has been moving up.

Taiwan is getting at quite high utilization rates.

And for China, I mentioned that the leaders are over 90%.

The whole country is not at that level.

The second tier and third tier are a good bit lower.

It's really hard to tell whether this is going to take off at some point or gradually recover.

I think we're going to plan on a modest and gradual recovery at first, probably followed by some acceleration.

Great.

And then maybe a follow-up, John.

You've done a great job generating cash throughout this year.

I'm wondering if, now with your cash at 55% of your market cap, do you think you can cut OPEX further to not burn cash if we get into a more severe downturn?

We don't expect to burn cash during the downturn.

Our cash breakeven rate is a good bit lower than our EBITA breakeven rate and we expect to stay profitable.

So we don't expect to burn cash.

Maybe, if I could just have one follow-up, if you don't mind.

Actually I'm sorry, we're going to have to just take that and go to the next line (multiple speakers).

A lot of people are waiting.

Okay.

No problem.

Bill Ong, B. Riley & Co.

Hi.

Good afternoon, everyone.

So my question is on the hard disk drive business.

With $60 million in orders, that implies about [four] disk drive tools, give or take.

That's comparable to the levels back in 2008 or mid-2009 when we had the global financial crisis.

So, do you think it requires customer confidence for the macroeconomic climate to be stable in order for bookings to snap back?

Or do you think hard disk drive orders could rebound on its own merit through supply constraints or technology investments?

And same question applies with LEDs.

Does it really require a macroeconomic confidence or can LED industry dynamics help lead a business recovery?

Okay.

Thanks, Bill.

So, on the Data Storage side, as the floods occurred, some of our customers built some excess capacity trying to make sure they had enough capacity to meet demand.

That needs to get used up.

And a little bit of boost in the economy or the PC market would sure help to do that.

So there are more than 1 billion terabytes of information being stored this year.

So there's a huge underlying drive toward more storage, and ultimately, the market will catch back up and orders will resume.

We are not worried about that.

It's hard to predict the timing, but we do think orders will get better soon.

On the LED market, the underlying driver is really solid-state lighting, and solid-state lighting is growing.

You might have seen Philips' announcement earlier today.

They're doing quite well in their LED lighting business.

And ultimately, as capacity utilization catches up, this market will take off.

And I don't think it needs a great improvement in the economy, but that would sure help.

Thanks, Bill.

Thank you very much.

Edwin Mok, Needham & Co.

Hi.

Thanks for taking my question.

I have a question regarding your comments about the acceptance declining on your LED backlog.

Is that just a function of the -- your backlog or your customer?

And I think on your commentary that you expect bookings to trough, do you think that was just the worst part of the cycle here?

And going forward as you look into 4Q and beyond, that decline should stop or even reverse?

So, if you look at our overall revenue trend, it's been coming down in MOCVD.

Orders have been roughly -- fairly flat, kind of $50 million to $70 million for the last three or four quarters.

But we have continued to ship more and more of our backlog.

And the result of that is there is just less systems out there to be accepted.

So that's the big driver there.

Although it's always bumpy.

Customers can try to put this off as long as possible to save a little cash, so that's that trend.

As far as orders getting better, these were unusually low order rates in MBE and Data Storage, and we see a lot of activity in those markets and we do think they will pick up.

So we do hope this was the bottom, and we believe it is, and that we will be looking up from here.

Great.

Very helpful.

And one question on the margin side.

So if I take your guidance, you imply margin would be down a little bit more, but let's say business started to improve, especially in the Data Storage and MBE side.

How do you think about how much leverage we expect your margin to get back?

Do you think we can get back to the high 40%'s or even the 50% you achieved previously?

Yes, I mean, certainly you're seeing the effect of volume in the numbers.

So, as volume comes back, you should expect the margins to go back up.

I wouldn't predict when we'll see the high 40%'s again, but volume is certainly a big player.

And as volume comes back, the margins will be better.

Thanks, Edwin.

(multiple speakers)

Satya Kumar, Credit Suisse.

Thanks for taking my question.

I was wondering; there was one of your equivalent peers, not a competitor, but a peer, reported last week.

And they reported seeing an increase in their lithography orders for LED packaging fairly dramatically.

I was wondering why they would see an improvement in their orders and your orders are tracking more at trough type levels.

I can't say.

I'm not sure who it is, but that's kind of subjective.

Okay.

It seems like there was some cancellations in the quarter.

I was wondering if you could quantify that.

And I was wondering if you could describe what products and geographies did you see that?

It was all in China.

And, to be clear, not actual cancellations where we kept the deposit, but things in our backlog where we looked at the terms and realized that they didn't meet our criteria any longer.

(multiple speakers) To be clear, it wasn't all MOCVD.

It was MOCVD and MBE in the $11 million.

All right.

Thanks.

Krish Sankar, BofA Merrill Lynch.

Thanks for taking my question.

I had two of them.

John, with general lighting really, really running at very low levels, is it safe to assume that most of your Korean and Taiwanese customers are more catering to a more mature backlighting market, so we should see a seasonal slowdown in the utilization rates in Q4 and Q1?

I think, especially in Korea, a lot of the equipment is being used for backlighting.

But to a lesser degree, lighting -- I think in Taiwan it's more varied.

And we'll have to wait and see.

Taiwan is -- some of our customers are at 100% already.

So they are building everything they can.

We'll have to wait and see.

That lighting does continue to accelerate and use more demand each quarter.

Just a quick follow-up.

What percentage of your backlog is from China?

China is about two-thirds.

Is that right?

So it's come down from about 80% last quarter, right?

Is that fair enough?

Yes, wait.

I'm sorry.

It's more like 75%.

(multiple speakers) 75%.

Got it.

Got you.

Thank you.

That's MOCVD backlog only at 75%, not the whole Company backlog.

Got it.

Thanks, Deb.

Chris Blansett, JPMorgan.

John, I wanted to ask a quick question about market share.

Obviously, you're at pretty high levels and at levels that seem to be -- maybe there's some upward barriers from here.

So how do you view about share shift going forward?

Well, we were about 50%, 50%-plus in 2011, and I think in the last quarter we calculated 62%.

It's pretty high.

I think as you get above that point it does get harder and harder and harder to shift it more.

So we will continue to put out great products and do a great job supporting our customers and hope to grow it, but we kind of always think about market share and measurements looking backwards, so that we can do it with actual factual data.

And then I had a follow-on question related to the additional cost cuts you're going to enact.

I wasn't sure how much of these are structural that are along the lines of continued variable costs being added to the model, and how much of these will likely be added back to the business model once we do see some form of recovery.

It's a little bit of both.

But for the most part, these are costs that are taken out to reduce our breakeven point; fixed costs, as we referred to earlier.

And they're the sort of thing that if the business comes back, we may have to add back.

But it would be judiciously, depending on the recovery.

All right.

Thanks, guys.

Appreciate it.

Vishal Shah, Deutsche Bank.

Thanks for taking my question.

John, just wanted to follow up on the backlog number you gave.

What percentage of your backlog in China do you expect to ship before the year end?

And as you look into 2013, I think you had provided some targets or some sort of a range for the industry tools a couple of quarters ago.

How do you feel about the industrywide shipments for next year, based on some of the new trends that you're seeing in the market?

You want to talk about backlog, Dave?

Yes, the backlog -- by the end of the year we should see about half the backlog ship.

And as far as trends for next year, it's a little early to predict next year.

We are really waiting to see some level of uptick in the orders.

We hope that will start soon, but we are not really predicting where things will end up in 2013.

And just one follow-up one.

On acceptances, how should we think about the margin impact from greater acceptances?

In other words, let's say at similar revenue levels next year would margins be, say, 100 basis points lower or 200 basis points lower?

It's hard to tell because, as you know, our policy is the acceptance is the last 10% on the tool revenue and it carries no cost with it.

So it's hard to tell.

It really depends on the mix of acceptances against how many initial shipments there are.

That's what drives the margins one way or the other.

But if revenues flatten out, generally acceptances will be fairly constant and -- until it starts to pick up again.

Thank you very much.

Ahmar Zaman.

Thanks for taking my question.

My first question is around the competitive dynamic as we go through this downturn.

And as you said, John, that it's taking longer than you expected.

How should we think about the competitive landscape in MOCVD, given that your business model is significantly more flexible and you're in a better position than your primary competitor?

Well, it has taken longer than we expected, but we are confident that the market will come back, which is why we have continued to fund our R&D and make sure that we keep the leadership position in having the best products that have the lowest cost of ownership in the market.

So I think we've been able to do that.

And we've been able to do that without dropping into a loss position or building up years of inventory.

So I think it's proven our model, and our model has done exactly what we expected it to do.

And the operations organization has performed as we expected.

So I think we are pretty happy about that.

I guess what I was trying to get at is, coming out of this downturn, do you envision yourself being in a better position -- or being better positioned than your competitors, and essentially continuing to gain share because of that?

We do anticipate being in a better position.

We think we are in a better position and have the strategy that enables us to maintain that, so, yes.

Olga Levinzon, Barclays.

Thank you for taking the question.

Just wanted to touch base on the service outlook.

You know, you've had two very strong years and it looks like your service revenues are tracking probably up close to 30% this year.

If we assume no meaningful recovery in either the Data Storage or the MOCVD market, how should we think about your service trajectory into 2013?

You know, I think our service revenue will continue to grow.

And it is fairly dependent on installed base, so we have increased our installed base here.

And in particular, it's mostly dependent on out-of-warranty installed base, which looks back a year.

And so out-of-warranty installed base will grow again next year.

And then, secondly, we've gotten more effective at selling services and at coming up with services that our customers want to buy.

So that's a good source of our growth is coming from the changes that we made inside our business.

So I think service will continue to grow next year.

Got it.

And then on the cash side, clearly we continue to bounce along the bottom from an earnings standpoint, but you've done a great job in generating cash.

With $15 in net cash on the balance sheet, can you talk about what percentage of that is actually related to customer deposits?

And off of the remaining balance, what are the priorities that management is thinking about right now?

Customer deposits is relatively small.

It's about $40 million of the total.

And our cash priorities really haven't changed.

We like to think of the cash as keeping a cushion for -- a very conservative cushion for the downturn.

And our top priority after that is M&A focused.

Got it.

Thank you.

Thanks, Olga.

Aaron Chew, Maxim Group.

Thanks so much for the question.

Good evening, everyone.

I wondered if you could just comment on the pricing environment in the quarter.

I know you mentioned most of the gross margin impact was volume, and I assume underutilization driven, but how has pricing been trading?

Has it been actually keeping the same pace throughout most of the year, or has the down directionally led to a bit of an acceleration this quarter?

There is a lot of pricing pressure out there in the environment (technical difficulty) and -- but in this type of situation, we've got not as many deals as we'd like and we are all fighting over them.

So that tends to cause some pricing pressure.

On the other hand, we've continued to work to drive down our costs and to drive down our manufacturing costs.

And that's had a pretty positive impact, to be able to mitigate any impact of the cost -- of the pricing.

Fair enough.

And one follow-up, if I may.

Could you touch a little bit on customer concentration and maybe how this has been trending over the last few quarters?

How much is your top three or five customers represented of revenues, let's say, in the back half of last year and how has that changed into third quarter this year?

Well, if you -- first of all, if you look at this quarter, we talked about deals and leaders in every market -- in Japan, in North America, in China, and in Taiwan, at least the top four markets.

So it's been pretty well spread out.

And if you look at our overall bookings on a geographical basis, it's less than half in China.

So our business has become more diversified.

And maybe Dave will want to add something, but I don't think -- it's not gotten more concentrated, I guess, from a picture of what we've looked at.

It is more focused on leading players in each market, because those are the people that have continued funding and continued ability to spend.

Dave, did you want to add some (multiple speakers)?

Yes, just to answer your original question, the top three customers, for instance, represent about 30% of our revenue this quarter.

On a bookings basis, it's a little bit more than that, but that's probably not an unusual trend.

And it tends to be a different three most every quarter.

You're saying that's relatively stable with the second half of 2011?

I don't have the top three number in front of me right now.

(multiple speakers)

That's okay.

Okay.

Thank you guys.

(multiple speakers) Thanks much, guys.

Daniel Amir, Lazard Capital Markets.

Mr. Amir has disconnected.

Brian Lee, Goldman Sachs.

Thanks for taking the question.

I just had two.

First, a follow-up on someone's earlier question about half the backlog shipping in 4Q.

So, just to clarify, does that mean about 70% of the 4Q revenue guidance here is going to be from MOCVD customers in China?

And can you compare that to the mix this quarter?

We don't give guidance that detailed, but roughly speaking, yes.

The backlog we say half shippable, so that's about right.

Okay.

Fair enough.

And then on the $30 million -- (multiple speakers)

Just to be clear, that's half of the MOCVD backlog is shippable by the end of 2012.

Exactly.

Okay, okay.

And then on the 2012 revenue guidance, I guess about $30 million is coming out.

So I'm just wondering what transpired over the past three months given that your third-quarter revenue was actually in line with the guidance.

And then also why maybe the backlog adjustments are not higher given what seems to be a pretty meaningful revenue push-out here.

Thank you.

Well, we started the year with revenue of $500 million to $600 million and then we tightened it to $520 million to $560 million.

And so we're really -- we are probably a little under the $520 million range, but it's not so much.

So I wouldn't say $30 million have come out.

What has happened, or has not happened, is when we last put this together, we expected that orders were going to pick up.

We expected a bit stronger Q3 orders and we expected orders to continue to ramp through the year, and that's kind of what we told the market.

Q3 orders were not as strong as we expected, and that impacts this year as well as next year.

I think on the backlog adjustments, we think the backlog is really solid.

And we do look at it every quarter, every single order about -- does it meet our criteria for backlog, is it likely to ship within 12 months, and all of the other factors.

And so we think it's pretty clean.

And actually, if you look at the backlog adjustments we've taken over the whole downturn, it's a very, very small percentage of our orders.

Okay.

Thanks, guys.

Andrew Huang, Sterne, Agee.

Thanks very much.

Just two questions.

First, I'm sorry if this was already asked, but could you elaborate on what could drive Data Storage and MBE bookings higher in Q4?

Yes.

MBE, the systems are relatively expensive and we tend to book a few each quarter, so winning an extra deal or two will push MBE up $5 million or more.

And in Data Storage, there is underlying demand there, and both technology buys as well as any kind of improvement in the utilization and the need for more equipment.

But certainly in line for some technology buys which will enable the next wave of disk drives.

Okay.

So your comment that you thought that Q3 bookings could be a trough would imply that you expect bookings from these two segments to increase as well as for MOCVD and for LED?

They are both very lumpy segments, but we believe that Q3 was a trough and that it's quite likely that both of these segments will pick up in Q4.

Okay.

And then my follow-up was that LED lighting is taking a little bit longer than I think any of us would like.

But are there any other technologies or markets that look attractive to you right now?

Sure.

Power electronics is another market in MOCVD that we think is pretty attractive.

It's in its very early stage and mostly selling into the R&D applications as opposed to production applications, but I think that's one that we think has a lot of potential over the long-term.

Okay.

Thank you.

Thanks, Andrew.

Patrick Ho, Stifel Nicolaus.

Thanks a lot.

Can you comment a little bit in terms of how the used tool marketplace could impact the recovery scenario that you guys are looking for in 2013?

You know, we haven't seen much in the used tool market to date.

We do have a Veeco-certified equipment business, where we can take equipment and refurbish it for customers and resell it.

That business did grow this year, but most of its growth came from the Data Storage side of the business as opposed to the MOCVD.

So I think there is underutilized capacity in China, more so than anywhere else in the world, and some of that capacity could be transferred and slow in overall recovery.

We've built a lot of assumptions about how that will work into our forecast, so that could occur with one company buying another company, and we've seen some of that in the market.

But we don't think there is like a huge and quick impact and we have seen little action in this area.

Great.

That's really helpful.

My follow-up question in terms of the MaxBright and the traction you've gotten to date.

I assume that's a lot.

It has to do with some of your leading-edge customers that you mentioned.

Can you just comment a little bit in terms of how that's impacting the transition that we're going to see in terms of the wafer size?

Are a lot of those MaxBright solutions, these technology buys that are looking forward to when the wafer sizes increase?

Both of our systems really work with 2, 4, 6, or 8-inch wafers.

So both the MaxBright and the 465i.

So it's relatively easy for a customer to change and move up from one size wafer to the next.

And that's one of the -- frankly, that's one of the benefits of our systems and one of the reasons our customers like them.

They can do that without spending a lot of money or doing a more complex change-out.

So they are ready to do that as the customers move up, and we see that as an ongoing process each year.

Some customers move from 2-inch to 4-inch and some move from 4-inch to 6-inch depending on how expensive the wafers are at different sizes and how ready they are to move up.

Great.

Thank you.

Thanks, Patrick.

Jed Dorsheimer, Canaccord.

Thanks for taking my question.

I've got two.

I guess the first one, John, I'm curious about your utilization comments.

I spent the month of September in Asia, meeting with a lot of the LED customers in the various geographies.

And one of the things I found interesting was, after hearing some of these high utilization rates, we sort of scratched our heads in terms of why they weren't purchasing more.

And it turns out that a lot of companies were quoting the utilization numbers on a two-shift basis.

So are your numbers normalized, or is that based on just sort of what the companies are saying?

They're the best data we've been able to get from the market, from the customers, talking about what their utilizations are.

I think the customers, on one hand, it's a very uncertain economic environment.

Everybody is waiting a little bit to see what happens there.

Secondly, most of the customers believe they can acquire new equipment relatively quickly if they need it.

So I think that's allowing them to hold off longer than they usually would.

Okay.

And then as my follow-up question, with $15 a share in cash on the balance sheet and only $40 million of that tied to customer deposits, was wondering, obviously, you don't have anything to announce right now, but it sounds as if you are looking -- and M&A is sort of one of the top priorities.

Could you give us any additional details in terms of scope?

Or should we be looking at more of a transformational type of deal?

Is that the type of deal that you are looking at, or are we looking at more smaller technology buys?

First of all, the $15 a share we got the old-fashioned way.

We earned it, and off of a lot of hard work.

So we treat that very carefully and we think it's important to have that as a buffer in case we need it someday.

We are looking at acquisitions.

We've been looking at acquisitions for the last several years and intend to be very selective.

We've done some technology acquisitions already that have been successful for us as a Company and some tuck-ins.

But we'll keep looking until we find the right deal.

We don't really have any feeling of urgency to spend our money.

Thanks, Jed.

I think we have time for one more, Operator.

We will take our last question from Mark Heller, CLSA.

Thanks for squeezing me in.

I guess, again, just to follow up, last quarter you said that MOCVD orders would likely pick up.

I assume you were talking to your customers when you made that remark.

Obviously that didn't materialize, so what are they saying now in terms of what exactly caused it to -- for the orders not to pick up versus your expectations?

Well, you know we won a broad diversity of deals from kind of key leaders around the world.

So they are spending.

They're just being pretty careful and pretty constrained with their additions.

So, some of them are waiting for funding.

And some of them are waiting for improvement in the overall end market, a little more pickup in utilization, a little more pickup in lighting.

It's not pinned on any one thing.

And each of our -- you know, our quarter comes together out of 8 or 10 customers in MOCVD this quarter, and will likely to be similar in the future.

So, no kind of clear or specific, but what we can say is it didn't happen, so that's caused us to be cautious and just make sure we're well prepared if this recovery drags out a bit more.

Okay.

Can you give us any color on the mix trend on MaxBright versus K465i at this point?

They are both very successful products and, as you could see as we roll out upgrades and advancements, we tend to roll them out in both product lines.

So we keep the 465 up to date as we develop new technology for the MaxBright.

We've done well selling MaxBrights in the recent couple of quarters, so they are picking up, but I'd say we have a real balanced mix between the two.

And a lot of it depends on customer preference of single systems versus cluster systems, customers' fab space availability and a variety of different things.

So I think MaxBright is doing well, but we will continue to be a Company with two very balanced product lines.

Thanks Mark.

Thanks, guys.

At this point, operator, we'll wrap up.

Thank you all for joining us.

And ladies and gentlemen, that does conclude today's conference call.

We thank you for your participation.