Veeco Instruments Inc (VECO) 2013 Q2 法說會逐字稿

Good day everyone, and welcome to the Veeco Q2 Business Update 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 thanks to all of you for joining John Peeler, Dave Glass, and me.

Similar to our April call, given our ongoing accounting review, we are unable to provide detailed revenue earnings or other financials.

Dave will start the call with some top-level, second-quarter highlights.

He will also give a brief overview of where we are with the accounting review.

Please keep in mind when we get to the Q&A session that we are limited in scope to what we can say about the matter, other than what Dave is reviewing now.

John will provide an update on current business conditions and areas of focus for Veeco.

If you haven't already done so, please visit our website so that you can follow along with the slides.

Let me briefly remind you that this call is being recorded by Veeco Instruments and is copyrighted material.

It cannot be recorded or rebroadcast without our 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, 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 our public filings 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.

With that, here is Dave.

Thanks, Deb.

My plan today is to share some of our key financial metrics; but as Deb mentioned, I'll ask for everyone's continued understanding and recognizing that with the ongoing accounting review still underway, we'll have to limit our comments and financial disclosures to just those that are unrelated to revenue, or any other parts of our financial statements which may relate to revenue.

Having said that, I think the information we can share today around bookings, cash, and shipments, may be helpful to give you some line of sight on how the business is doing.

Veeco's second-quarter bookings came in at $85 million.

That's up 20% from the first quarter, with MOCVD up 42% to $52 million.

Veeco's MBE and data storage bookings were both flat, at $6 million and $27 million, respectively.

John is going to provide a bit more color into the bookings detail in a moment.

While shipments were up sequentially, we continue to experience weak overall business conditions.

We made only a small backlog adjustment of under $2 million during the quarter.

Cash continues to be a bright spot for us.

We're maintaining a very strong financial base from which to weather this storm.

Cash declined $2.5 million during the quarter to $585 million.

We're executing very well on managing cash and working capital.

No doubt we're experiencing the most challenging business conditions since 2009, and this downturn has persisted longer than anyone predicted.

Business conditions have been weak across all our end markets for well over a year now, and pricing pressure in MOCVD has been intense, since there's so few deals available.

While I can't provide specific gross margins numbers or guidance, it's fair to say that selling prices have been under considerable pressure, as are margins and our break-even level.

We continue to focus on carefully managing our operating expenses, and we've installed strong inventory and working capital disciplines that have allowed us to continue to fund our R&D at high levels.

Now let me say just a few words about the accounting review.

Obviously a top priority of the Company is to get the review completed, to do it well, and to get back to being a timely filer again, as soon as practical.

We can't go into a lot of detail here about the review itself, but as we discussed on the last call, the review is primarily focused on several key accounting issues around multiple element arrangements for MOCVD transactions originating in 2009 and 2010.

These systems were delivered, accepted, and paid for in full.

The review is not related to any product-quality or customer-satisfaction issues.

It's about the timing of revenue recognition and related expenses.

We're undergoing a comprehensive review of similar multiple-element arrangements since 2009.

In some cases, we're going into past records up to four years old to assess whether we properly identified all the elements in the arrangement, determined the proper units of accounting, and properly allocated consideration to each of those units of accounting.

Many of you ask, why is this taking so long?

It's important to recognize that we and our auditors are reviewing over 100 multiple-element arrangements, which involve many hundreds of individual transactions.

The rules require significant interpretation and judgments.

We have been making progress, and we've achieved several key milestones.

At this time, we still have not concluded that a re-statement is required.

We recently received an extension from NASDAQ that gives us until November 4 to become current with our filings.

Of course, we're working hard to get it done before that date.

That's about the extent of what we can say today.

With that, I'll turn it over to John.

Thanks, Dave.

It's good to talk to you all today.

I'm going to provide you with an update on business conditions, and what we're seeing in the market.

The market trends are still mixed.

In MOCVD, utilization rates at many of our key LED customers are 80%, 90%, or even 100%.

All the reports indicate that LED lighting is ramping.

Some customers are optimistic and moving to increase capacity, while others are holding out and waiting before committing more capital.

While orders were up 42% sequentially, they're still relatively weak.

MOCVD order patterns are likely to remain choppy because of the timing of large multi-units deals can have a significant impact on our quarterly bookings level.

In MBE, the production side of the business continues to be slow.

On the R&D side of the business, our deal funnel is improving and we've booked our first new-generation system for R&D customers this quarter, the [GEN Explorer.] While we're seeing some customer pull from the research market, it's clear that the US government sequester is having impact on our customers' research funding.

In data storage, there is little capacity buying, but customers are making strategic investments for HAMR and other next-generation technologies.

It's encouraging that we're starting to see some capital additions -- some capacity additions.

Many of Veeco's top customers are reporting strong demand for mid-power LEDs for indoor replacement bulbs, and for high-power LEDs for outdoor lighting.

I'm excited to tell you that we had our first multi-unit capacity buy from Korea in three years.

While I can't tell you the customer's name, it is one of the world top LED manufacturers.

They're adding capacity to support LED growth in tablets and in lighting applications.

In another big win for Veeco during the quarter, we booked another multi-unit, multi-system order from KaiStar, one of Epistar's big China joint ventures.

We've done very well in their Xiamen fab, and they've now selected Veeco for their increased capacity needs.

And, as announced earlier today, just this month we booked a large multi-unit deal with Sunon, China's largest LED manufacturer.

Both KaiStar and Sunon selected our MaxBright M system, which offers the industry's highest footprint efficiency, easy serviceability, and flexible layout options.

Veeco's been a key enabler to decreasing LED costs, and improvements in efficiency that are driving increased adoption of solid-state lighting.

LED lighting is projected to grow at a 35% CAGR from 2010 to 2020, and this is going to drive a large multi-year MOCVD tool opportunity.

We've contributed to the dramatic decrease in the cost of making LED bulbs by introducing innovations in through-put, in yield, and in automation.

In fact, we estimate that Veeco's innovations and cost-down for the Epi process have enabled the LED industry to achieve the mid-teens price point for a 60-watt equivalent bulb a few years ahead of the US Department of Energy predictions.

We remain focused on development of our next-generation systems with an aggressive product development road map, and we'll continue to drive additional improvements to make sure that almost all of the bulbs will ultimately be LEDs, and that the majority of those LEDs will be made on Veeco equipment.

On our April call, I told you about our growth strategy to expand Veeco's leadership in our core markets of LED lighting, compound semiconductor production, and hard disk drives.

In addition, we talked about extending into new growth markets -- made some good progress in the second quarter on these new growth markets.

We booked the first order for our new MBE R&D tool, the GEN Explorer.

We booked and shipped multiple MEMS systems, and we're making significant development progress on our new ion beam deposition tool for the EUV mask market.

In services, two customers selected Veeco for substantial MOCVD service contracts.

While business is challenging, we remain focused on all aspects of our strategy to get Veeco growing again.

To wrap it up, as Dave commented, we're focused on completing the accounting review and being current filers as soon as possible.

I think we're making good progress.

While business conditions remain tough across the board, we're doing a good job controlling the things we can control.

We remain focused on managing our cash and expenses through the down-turn.

We're seeing signs of life in the market for LEDs and elsewhere, and we continue to invest in next-generation product development -- both to expand our strong leadership positions and to enter into new growth markets.

And we're growing our services business to maintain our edge as the preferred supplier to top industry players.

We'll now take a few questions.

Since we are limited in what we can say, it would be best if your questions centered on technology and market trends, since we are unable to provide further details on our financials or on the accounting review.

Operator, we'll take questions now.

Yes, thank you.

(Operator Instructions)

Shawn Lockman, Piper Jaffray.

I wondered if you could just give us some commentary on ASPs?

Obviously been a lot of pricing pressure.

If you could talk a little bit, do you think that we are starting to see a bottom in those ASPs, and that we could eventually see some recovery once orders return, or have we come to a new normal with the current pricing environment?

We sure have seen a lot of pricing pressure.

We do expect prices to go back up as we get a little bit -- as we get some stronger order flow and some stronger growth in the industry.

I think it's hard to call the bottom.

I sure hope it's the bottom where it is, but hard to tell on that side.

But we do target getting prices back up to the point where we can have better margins in the future.

Thanks, Sean.

Sure.

Can you give us a sense of how you guys think a long-term normalized MOCVD market might look like from a reactor-count kind of number?

For example, longer-term are we going to be looking at a 400-reactor annual market, a 250 market, a 600 market?

How are you guys thinking about it as once lighting comes back, and we get out of this slump we've been in for the last several quarters?

Thanks.

Well, it could be anywhere in that range you predicted.

It's hard to tell, and it depends on how fast the market recovers.

If the market recovers faster, we're going to see an overall higher need for more reactors over the next five years.

It's going to range from 200 and something to 400 -- in that range, would be probably an average reasonable range for it.

Great.

Thank you very much.

Edwin Mok, Needham and Company.

Quickly on pricing, can you explain, is that coming from your prime competitor, or is it -- are you guys seeing some Asian local supplier that is putting pricing on your products at all?

Yes, we're actually not seeing any Asian local competitors in the deals that we've been competing for.

So it's really a Veeco and AIXTRON dynamic here.

There are no deals that I'm aware of that have been won or seriously competed for by anyone else.

Okay, great.

That's helpful.

Maybe talk about third-quarter or second-half outlook?

I understand you guys can't give any numbers on revenue, but at least on new booking trends, how do you see your booking trends going into third quarter and second half?

It's hard to tell.

The bookings are at a relatively low level, so deals shifting around can affect quarter to quarter pretty substantially.

We haven't really called an up-tick here.

We did grow orders versus the last quarter.

We hope that Q3 orders will be stronger than Q2, but we are not expecting any major up-tick here.

We hope it will get better.

But it's really too early to predict when we've got a real recovery in the market.

Great, thanks.

Thanks, Edwin.

Brandon Heiken, Credit Suisse.

I was wondering if you could comment -- you mentioned that you hope these third quarter orders will improve, but they could be lumpy.

What does that mean for next year on an annual basis?

Do we reach a normal range next year, or is it really too early to talk about later this year and next year?

I think it's too early to call next year.

As long as the orders are very low, single deals shifting quarter-to-quarter has a big impact.

I think we expect continued lumpiness in the business.

We do hope it will get better, but we're not calling 2014 at this time.

Okay.

You mentioned the time between quotations to order is relatively long now.

How long is that time, and what do you think it should be?

Or what do think a normalized rate could be on that, if orders strengthen?

I don't think it was us that mentioned the time between quotes and orders was long, but it really depends on the dynamic in the industry.

Right now, we're in a down cycle.

Competitors have some inventory available.

So people -- that makes people feel like they can hold off on purchases, and still be able to get equipment fairly quickly if they really need it.

I think that is why we see the trend of, we've got customers at very high utilization rates and some are ordering more for capacity, but some are still sitting there and saying, I'm going to wait and see what happens over the next quarter or so.

I think when people see a real serious need to add capacity, they'll start moving faster.

But right now, I think everybody's pretty cautious.

Thank you.

Krish Sankar, Bank of America Merrill Lynch.

Thanks for taking my question.

I had two of them.

Number one is John, a technical question.

When you look at the general lighting LED chips between high power and mid-power, is it true that the mid-power LED chip is fungible with the back-lighting chip capacity?

Yes, I think it is.

We see the mid-power chips going into back-lighting, but also into indoor replacement bulbs; and the higher power chips being better for outdoor lighting or other applications.

If that is the case as back-lighting slows down in Q4, in theory you don't need to add more additional capacity, because you can translate that into general lighting mid-power, right?

If you are a company that has the designs for both applications, and you may be able to move some capacity around -- we're not seeing a lot of quick moves of capacity from one application to the other.

But I suppose it's possible.

Got it.

Just a quick question.

Do you guys have a regional split for the bookings?

A what?

A regional split for your bookings?

No.

We do not.

We don't provide that.

But last -- this quarter, clearly we had substantial orders in Korea and China and Japan and North America would be the top players.

Got it.

Thanks, John.

Stephen Chin, UBS.

Just a follow-up question on the Korean MOCVD order.

Would you describe this Korean order as a market share gain?

In general, how would you describe the trends of utilization rates at some of the other customers in Korea?

Thanks.

Well, I think in this customer's case I think they have gained some market share in some new applications for them or new customers for them.

That pushed their utilization to 100%.

They really basically had to walk away from business or buy more systems.

So that's really what's happened there.

Other Korean players are at lower utilizations in general, probably 80% to 90% would be probably more typical.

That would be what you'd see in the other two key customers.

Okay.

Maybe just a follow-up question on the higher shipments that you saw in the quarter for MOCVD.

Do you have any general estimate of what percent of the shipments are going towards back-lighting versus general lighting?

We don't.

But I would say most of the growth is driven by general lighting.

The places where there is back-lighting growth is really driven by China, and people trying to feed the new TV and tablet manufacturers in China.

But we don't really have that split, because our customers can use the tools either way.

Thanks, John.

Vishal Shah, Deutsche Bank.

John, wanted to understand what percentage of your bookings would be serviced in the second quarter?

Will it be comparable to historical levels, or different?

We don't have that split for you, but I can tell you that services grew sequentially from quarter to quarter.

Of course, so did bookings, but don't have that split.

We did win a couple of pretty major service contracts.

I think we're making good progress on services.

That's great.

The cash position in the second quarter looks pretty impressive despite some of the low levels of bookings, and then pricing environment being so challenging.

I'm wondering how much of the cash balance is a function of working capital improvement, and maybe some up-front cash payments from some of the bookings that you're receiving versus the match of profitability in the business?

Well, this is Dave.

We've done a great job managing working capital, and that's certainly helped.

Deposits that are sitting out there about $27 million of the balance.

Okay, great.

Thank you.

Jed Dorsheimer, Canaccord.

First, a strategic question.

If I look at the market, you have 2/3 of the market share.

You have a fairly decent advantage from a cost of ownership over your competitor.

Looking at the bookings, your competitor is booking 20% of the number of tools that you are.

I'm curious why you feel the need to match in terms of pricing?

We actually don't match in terms of pricing.

The customers are willing to pay a price premium for our product.

Frankly, we've walked away from some deals because either the pricing was so bad or the terms and conditions were so bad that we just said, you know what?

We're not going to take that business.

Okay.

As a follow-up, in this current market environment, I'm curious, any update on -- not expenses, because that would be related to the P&L -- but could you give some general updates on what you may have done to reduce your cost structure?

Well, we have a cost structure that includes a fair amount of variable costs in not just in manufacturing, but in R&D and other groups.

We've rolled that variable cost down, maybe contractors or subcontracted R&D in those areas, as well as we've had some reductions in force.

We brought our costs down to align with what we see as the longer-term reality of the business.

Our cost was relatively high.

I would say we have reduced costs in just about all groups across the board, but R&D and SG&A.

Dave, do you want to add anything?

No.

That's a continuing program that's been going on for a number of quarters now, but --

Thanks, guys.

Looking forward to when you get current.

Thanks, Jed.

Brian Lee, Goldman Sachs.

First off, wondering how much current ASPs are down versus the average you saw during most of last year, and what your thoughts might be around preventing this from becoming a new normal?

It seems like customers which bought subsidized machines a few years ago and are now getting low pricing today, they may well be getting accustomed to this ASP range?

Any thoughts on that would be helpful?

Okay.

Well, we don't actually provide details on where the ASPs are, but I think everyone knows they've been under a lot of pressure.

There's been a pretty clear message to the customers that this is a temporary thing, and they shouldn't expect this to stay, especially as new tools get introduced.

I think that will be the biggest change as new tools come out, and that we do expect to get better pricing on those.

I've been told that that message has been very clear to the customers from AIXTRON, also.

Okay.

On re-gaining compliance, what happens logistically on November 4?

Are you guys able to file for an additional extension, or are there other proceedings that would have to occur?

Well Brian, let me first say we're working very diligently to get through with the review before that date.

In the event that the date were to be missed, though, we would effectively go on to the pink sheets on OTC.

Okay.

But we're working really hard to not be there.

Of course, fair enough.

Last quick one if I could squeeze it in.

When you say shipments were up in MOCVD this quarter, is that on a dollar basis or unit basis, or both?

Thanks.

Both.

Okay.

Thanks, guys.

Craig Irwin, Wedbush.

First question I wanted to ask was about the trajectory of the pricing pressure that you've experienced.

Is this deteriorating or improving versus the first quarter?

How do you see this developing so far in the third quarter?

I think it's been bad for quite a while, so -- but it's been bad for a while.

I can't say that it's deteriorating, but it's at low levels.

We're not sure when we'll get past it.

But it's bad for now.

Okay, understood.

My second question was more accounting related.

Has the Company maintained its stock-based incentive compensation during the accounting review period?

The Company has not made its ordinary grants to the team during the accounting review.

We have continued to make grants to the new employees for recruiting purposes.

Thanks again for taking my question.

Andrew Huang, Sterne Agee.

I apologize if this was asked already.

The first question is, do you foresee a situation where pricing for existing tools returns to prior levels?

Or are you going to have to convince your customers to pay up for a new higher throughput tool in order to get prices higher again?

I think -- I don't think they're going to -- that prices will go back to previous levels.

I think there's a natural trend in this type of industry where the prices drop each year, you get really premium prices during very large buying periods.

Then the customers expect you to do better and better based on your learning curve of how to make that product.

In our case, we have always had programs going on to drive the cost of manufacturing the tools down.

So that has helped to mitigate the decline in prices, but I don't think they're going to go back to where they were.

Our goal will be to get back above a 40% -- get back to a more normal gross margin.

That's what we'd like to see.

Got it, okay.

The second question is, I was wondering if you've seen any of your older, more established customers take a step back during this down-turn and look at their installed tools and say, it's about time we shut down some of these older tools?

Let's replace them with new higher through-put tools.

I was wondering if that's an upgrade cycle that could happen?

We have had some upgrades throughout the down cycle, and we've had customers go back to even just middle-aged tools, and order some substantial upgrades to those tools.

I think it's been a while since we really did anything with a really older tool, but there is an upgrade opportunity in here.

As the customers get larger and more mature, they don't want to be running a lot of different variations of tools.

At least within a fab, they'd like to have all the same tool or maybe two types of tools, but they don't want to have a lot of really old stuff, so there is an upgrade opportunity in there.

That's one of the things that drives our services business.

Thanks for taking my questions.

Colin Rusch, Northland Capital Markets.

Can you give us a sense of the nature of the accounting review milestones?

Just give us a sense of what's been accomplished, and how much is left?

Yes.

Sorry, Colin.

We really can't comment on the details of the accounting review.

But as I mentioned in the comments, we have reached some milestones that are positive.

Okay, great.

Can you talk about the volume of customers that you're quoting on 1Q, 2Q to 3Q, and the shift in terms of the number of customers that were actually ordering 1Q to 2Q?

I think the best thing we can tell you there is the orders, and that in the case of MOCVD orders, they were up 42%, and overall orders were 20%.

I think that's a good -- that's your best indication of what's going on there.

But you can't -- you're not able to give me the volume of customers at this point?

No.

Okay, great.

Thanks so much.

Patrick Ho, Stifel Nicholas.

John, maybe a little color in terms of the market-share position.

You guys have been out-performing on the bookings front versus your competitor.

Do you believe that there's still an opportunity to increase your share when 2013 plays out?

Well, we have -- we closed last year in 2012 at over 60% market share on bookings or revenue.

I think we've been holding pretty well to that trend.

I think we've done better in some cases, so I wouldn't necessarily call an increase.

We like to kind of report market share in the rear-view mirror once we've done it.

We generally don't project ahead, but I think we're doing really well on market share.

Okay, great.

Then maybe a follow-up question for me in terms of the excess capacity that's still out there, particularly in China.

How do you see that environment?

How do you see that playing out, probably over the next six to nine months?

Are you still getting quotes when you -- systems?

Or does that still need to play itself out in terms of the excess capacity there?

In China, the larger customers are running at relatively high utilization rates -- 80% plus for the top guys, some of them over 90%.

I think they're doing pretty well.

On the other hand, there are some smaller customers that are still struggling to get started, and there is some excess capacity there.

What we haven't seen is a large used tool market.

We haven't seen any significant numbers of tools moving around from province to province, or that sort of thing -- although we've heard that there were some offers made.

I think overall, eventually this capacity will be used up.

The big guys are going to keep either buying more new used -- new tools, or perhaps taking over some of the small companies, and probably a combination of both of those things.

Great.

Thank you.

Mehdi Hosseini, FIG.

John, could you elaborate on the trends in wafer size -- the migration to larger wafer?

How do you see that impacting your business?

Well, the -- China is largely 2-inch and 4-inch, a whole lot of 2-inch and some 4-inch.

Korea and Taiwan, you get into more 4-inch and 6-inch.

There is a trend of people over time moving up to larger wafer sizes.

It doesn't matter a whole lot to us.

They do get some better efficiency or yield, due to the edge effects on the larger wafers.

But they also have some challenges related to being able to do a process that provides lack of too much bowing and other things on the larger wafers.

There's a trend to move up.

It doesn't have any massive effect on us.

It does give our customers some better levels of yield.

The good thing about the Veeco product is our product works for 2-inch, 4-inch, or 6-inch without any modifications.

A customer knows when they buy it that they have the flexibility to change over time, and they don't have to go pay for a big change to the equipment.

I think that's an advantage for us.

Could you elaborate, either quantitatively or qualitatively how much of a business this migration could provide for you, either through retrofit or outright new MOCVD tool purchase?

It doesn't require that with our tools.

They can buy new wafer carriers.

I'm not sure I'm answering your question, but if a customer is using 2-inch -- using our tools at 2-inch, and they want to move to 4-inch, they buy new wafer carriers.

It's not a retrofit.

It's a easy change.

But that wafer carrier costs the customer a lot less than purchasing a new MOCVD tool system, right?

Right.

That's my point.

I'm just wondering to what extent the migration to larger wafer is preventing you to see the kind of a booking growth that we would have seen at current utilization rates.

Well, because the migration to larger wafers only gets them a little bit of additional through-put.

These reactors run either a smaller number of larger wafers or a larger number of smaller wafers.

The customer does not see -- it's not a single wafer reactor.

The customer does not see a huge change in going up in wafer size.

The wafer carriers are consumables.

They wear out and they buy new ones.

It's kind of a natural trend in the industry that we expected, and we expect to continue.

Got it.

Thanks so much.

All right, we'll take one more question.

Srini Sundararajan, Summit Research.

Just had one question on your adjacent markets.

What are the sizes of your adjacent markets that you are attempting to break in to?

It's really -- I don't really have a solid answer for you on that, but I can tell you the EUV market, for instance, could turn into a $50 million or $100 million market for us.

The power electronics market a few years out could become a $100-million-plus market.

The MEMS market in the applications that we're selling in to today, it's a smaller market.

It's maybe $50 million or so.

But we do see new opportunities to go in there.

The MBE R&D markets, probably $20-million, $30-million levels.

The kind of range from -- I'm going to say $20 million to over $100 million would give you a sense of them.

Okay, thank you.

Okay, thank you.

Well, thank you all for joining us today, and we appreciate staying connected.

We'll talk to you soon.

Take care.

Thank you, that does conclude our conference.

You may now disconnect.