Veeco Instruments Inc (VECO) 2014 Q1 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the Veeco Instruments Q1 2014 earnings call.

Please note today's call is being recorded.

At this time I will turn the conference over to Senior Vice President of Investor Relations, Ms. Debra Wasser.

Please go ahead, ma'am.

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

With me today are 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 this webcast.

We encourage you to follow along with the slides on Veeco.com.

This call is being recorded by Veeco 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 make 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 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 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 events.

During this call, management may address non-GAAP financial measures.

Information regarding such non-GAAP financial measures, including reconciliations to GAAP measures of performance, is available on our website.

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

Thanks, Deb.

It is good to report that we started off 2014 much better than we ended 2013.

Our first-quarter revenue was $91 million, up 24% sequentially, driven by the growth in our MOCVD business.

Orders were $103 million and this was the highest level in nearly 2 years.

MOCVD orders increased 59% to $83 million, the highest level since the third quarter of 2011.

And for the second quarter in a row we reported a book-to-bill ratio over 1.0.

While we used a bit of cash in investing in our next generation products in growth businesses, our balance sheet remains extremely strong with $483 million in cash.

I will now turn the call over to Dave for some more detail on the financials.

Thank you, John.

Q1 was a significant improvement over last quarter.

With higher revenue, better margins and lower OpEx we reported a significantly narrower EBITDA loss of $3 million.

On a GAAP basis, we reported $19 million of income as a result of reversing the $29 million Synos acquisition-related contingency accruals.

As you may remember, those accruals were set up in line with the potential of booking OLED production orders in the first quarter and then shipping more than $75 million of ALD production systems by the end of the year.

Although we still see significant promise for the business as a whole, and we could still receive orders and ship product in 2014, we didn't get the orders within the Q1 timeframe as was stipulated by the earn-out agreement.

As a result, it is now considered very unlikely that we will achieve the shipment levels as required for the earnout by the end of the year.

Our margins in Q1 bounced back from the very depressed levels in Q4.

The higher volumes, of course, help but equally important was a very favorable mix of higher priced products as well as the absence of some of the nonrecurring negative items we spoke about in Q4.

In addition, we had a higher number of tool acceptances in Q1 than we did in Q4.

I will discuss the guidance shortly, but going forward we do see margins moving back into the low- to mid-30s for the balance of the year.

For operating expenses, similarly, in Q4 we had a number of nonrecurring items that hit us and caused OpEx to spike up.

With those items not repeated in Q1 and with the continued focus on lowering our spending, OpEx went down to the $41 million level which was composed of about $20 million in R&D and $21 million of SG&A.

Revenue at $91 million was driven by double-digit sequential gains in both MOCVD and data storage right about in the middle of our guidance range.

MOCVD revenue was up 28% sequentially, while data storage was up 20%.

Our revenue was well-distributed geographically this quarter with Japan and China leading the way and representing about two-thirds of the quarter's activity.

Although the LED and Solar segment reported positive EBITDA results of just over $2 million, it was not enough to absorb the losses in the Data Storage segment or our corporate costs, resulting in the consolidated EBITDA loss of $3 million.

And just to remind everyone, the LED and Solar segment now also includes our ALD business and, as a result, carries all of the ALD pre-revenue cost that were incurring.

In terms of orders, we booked $103 million in Q1 which exceeded the fourth-quarter bookings by over 20%.

LED and Solar booked $87 million, which was up about 37%.

MBE bookings were down from Q4, meaning virtually all of the gains in the quarter came from MOCVD.

Data storage bookings were $15 million, down from $22 million in Q4 and representing a continuation of the anemic trend that business has been seeing for a while now.

For the total Company, we built backlog this quarter, growing from $143 million at the end of last year to $155 million in Q1.

You may remember on our last call we mentioned that in Q4 we received a PO for prototype ALD systems.

This was not included in our Q4 bookings nor has it been included yet in Q1 since the revenue recognition timing on the prototype is uncertain.

Good progress has been made, however, and we hope to move this into backlog in Q2.

Veeco's balance sheet continues to be strong though cash and short-term investments declined as we built working capital.

Accounts receivables grew and inventory declined because of the timing of billings in the quarter.

DSOs for the quarter were 50 days and inventory turns were 4.4 times, both within our expected range and quite acceptable.

Turning now to our guidance for the second quarter, we believe orders will be similar to or higher than the first quarter with continued strength in MOCVD currently expected.

Revenue is expected to be similar to Q1 in the $87 million to $97 million range.

Margins in Q2, as I mentioned earlier, are not likely to be as strong as we saw in the first quarter.

We estimate margins in Q2 will be in the 30% to 32% range, due primarily to a weaker product mix.

OpEx is expected to temporarily tick back up a bit next quarter and includes our annual salary increases and equity compensation, as well as some duplicate costs we will be carrying temporarily as we move forward on a cost-saving geographic footprint consolidation of one of our businesses.

We are expecting Q2 OpEx to be in the range of $42 million to $43 million.

In the second half of 2014 we have plans to scale back OpEx by a couple of million dollars quarterly as the impact of cost reduction measures take hold.

For non-GAAP EPS, we're forecasting Q2 to finish with a loss between $[0.23 to $0.14] per share.

On our earnings call last quarter, we discussed our plans to bring margins back over 40% through the introduction of new products, cost reductions, and increased volume.

Although it's not likely we will get there this year, we do expect to see some improvements in our margins during the second half of 2014, hopefully moving us more solidly into the mid-30%s range.

With that, I will turn the call back over to John.

Thanks, Dave.

Let's now turn to an update on the trends we're seeing in the LED market and a review of our priorities.

For the LED lighting market, ongoing LED price reductions, environmental sensitivity, and incandescent bulb phaseouts are all driving LED adoption.

IHS now predicts a LED lamp shipment CAGR of nearly 40% through 2020.

LED penetration in units is expected to reach 15% to 20% in key geographies like China and the US by 2016 and 40% in 2020.

And considering that LED bulb prices are substantially above traditional lighting alternatives, these unit penetration levels translate into much higher penetration levels in terms of share of wallet.

It is clear that we will be watching the death of incandescent lighting just like we watched the death of phonograph records and cathode-ray tubes.

For LED fabs, our customer checks indicate high utilization rates including top Chinese customers at 85% to 95%; Taiwanese players at 80% to 100%; Korean leaders 75% to 90%; and then the US and Europe also over 80%.

These utilization rates across the board are the highest they have been in a very long time.

And in addition to the deals that Veeco booked in the first quarter, we are currently discussing MOCVD capacity expansion plans with customers in most regions.

After a long downturn in MOCVD, it appears that the worst is behind us.

LED lighting adoption is accelerating; our customers' financial performance has improved; and we are forecasting second-quarter orders to be similar or better than our Q1 orders.

I do want to urge some caution on this recovery because the timing and magnitude of MOCVD deals will be impacted by our customers' funding and financial performance, potential industry consolidation and other factors.

It is safe to assume that our order patterns will not be linearly up and to the right.

We're focused on bringing our next-generation MOCVD platform to market and we will provide you with more information when we launch it.

We expect that it will generate a good return on our investment because of its performance and the total cost of ownership advantage that it will bring to our customers.

It will offer customers a very compelling value proposition, and it will also enable us to return to attractive and sustainable gross margin levels.

We're very encouraged by the interests we are already receiving from our key customers.

I will switch gears to review where we are with Veeco ALD.

As you are probably aware, there have been some delays in the rollout of flexible OLED mobile products in the market.

We did not receive any production orders in the first quarter from our key display customer but we are making good progress.

Our [GEN VI] prototype tool has been shipped and process development work for flexible OLED encapsulation is underway.

In addition, we have launched dedicated teams to pursue two additional ALD opportunities that we think will drive significant revenue growth for Veeco.

We've made a big commitment to this business and we are spending significant R&D dollars to drive future growth.

And while at this point ALD is a drag to our financial performance I am impressed with and excited about the promise of this technology.

Our priority for 2014 is to take the necessary steps to transition the Company back to profitable growth and we're focused on four areas to improve our performance: developing and launching game-changing new products that enable cost-effective LED lighting, flexible OLED encapsulation and other emerging technologies; improving our customers' cost of ownership as well as our own gross margins; driving process improvement initiatives to make us more efficient; and lowering our expenses.

I am confident that this approach will enable us to build a great future for Veeco.

Before I turn the call over to the operator for questions, I'd like to announce that this will be Dave's last earnings call.

We have been recruiting for a new CFO since Dave announced his retirement last December and I'm pleased to tell you that we found a great successor and our announcement is imminent.

I want to thank Dave for his many contributions to Veeco and wish him success in his future endeavors.

And with that, operator, please start the Q&A session.

(Operator Instructions).

Krish Sankar, Bank of America Merrill Lynch.

I have two of them and also, Dave, congrats on your new endeavors.

First question, John, is you set out the lay of the land.

It looks like customer utilization rates are pretty high and you know, you are pretty -- the recovery seems imminent, I would say, but yet the customers seem to be waiting.

Curious what is stopping them from placing orders.

And along the same path, what is your leadtime today versus three months ago?

Well, first of all, the customers are still -- they are placing orders.

We have had two quarters in a row with the book-to-bill over 1. And we have had some real substantial pickup in MOCVD.

I think what is different now than maybe in the past upturn is that customers are trying to work on their own profitability.

So they are really only adding tools at a rate that the market can absorb the capacity for those -- so being more cautious.

I would say that our lead times have been extending over the last four, five months.

We have had to start managing slot plans and managing who gets which slots and things like that so lead times are going back out five months or so.

And the market is gradually picking up is overall what I would say.

Got it.

And if I just ask a quick follow-up, the last couple of calls you have spoken about a new product and I didn't hear anything about it today.

Can you give a status update on how the qualification is progressing and when you expect it to be qualified by the customers?

Thank you.

Well, I think it has been pretty widely communicated by people in the analyst community that we have multiple betas of our new product out in the market.

Normally, our betas take six months or so to complete.

And the product is doing exceptionally well.

We're getting really great feedback.

We think it's going to be a great product and when we are ready to launch we will launch it.

But generally we don't communicate launch dates in advance.

Okay.

Thanks, John, and congrats, Dave.

[Brandon Heiken], Credit Suisse.

Congratulations again, David.

It's been great working with you.

Thanks so much.

I want to ask about the margins.

It looks like the guidance is starting to downtick a little bit in the second quarter.

And then did I hear correctly that maybe it should trend toward the mid-30s range in the second half of the year?

What is leading to the trajectory and margins for the second quarter and the second half?

Yes, that is correct.

I would characterize the Q1 really as a spike.

And then margins going back down into that mid-30s range as the more normal that we will see for the next couple of quarters.

Okay.

And in the first quarter we had some -- a mix of as we said, mix of some really good selling prices in there.

Got it.

And so what is leading to the improvement in the second half?

Well -- the improvement on margins or in general?

Yes.

I would say getting back to normal, getting back to volumes in place and getting back into that mid-30s range which is about where we should be.

Okay.

I think there is a combination -- just to add to what Dave said, there are some ongoing cost reductions.

We are seeing some improvements in pricing.

I think those are all things that will help.

Okay.

And what do you think the timeline might be for the target of over 40% for gross margin?

Well, on the last call we characterized that as where we hope to be in 2015.

And I think that is still the case.

Okay, thanks.

Paul Coster, JPMorgan.

This is Mark Strouse on for Paul.

So following up on an earlier question about the next-gen MOCVD product, how are you guys managing the transition to ensure that you're eventually when you do launch the next-gen product that you are not stuck with all this inventory of the current generation product?

Well, first of all, our side, we manage our inventory pretty carefully aligning our slot plan with committed orders with inventory purchases.

We have a pretty fast cycle time so we are managing that carefully.

So that we don't end up with excess.

And that is one of the things that is pushing out lead times and tightening up supply.

I guess I would add to that if you look over the last five years at Veeco's inventory performance -- write-offs have been a very small percentage of sales over that period.

And we have actually mastered this quite well.

So we are confident that we can walk the line on that.

Got it.

And then going back to ALD, a couple of questions.

Can you just remind us what the competitive landscape is there, and if you have seen any changes since the last time you spoke?

And then second, just even in generic terms if there's anything you could provide as far as total revenue for the year from ALD.

Okay.

Well, on the competitive landscape I think what we have been seeing is we are competing with some older technologies that will work in the shorter term to make basically unbreakable phones that we don't think are viable for the longer term to make truly flexible product.

I think the uncertainty in our part is when actually the cutover from one set of technologies to the other happens.

I think as far as 2014 revenue, we're not expecting 2014 revenue for ALD.

We built our plan that and our earn out around getting some Q1 orders and being able to ship those and get revenue in the year but we think that is pretty unlikely at this point.

So our plan has no ALD revenue in 2014.

Okay, that is helpful.

Thank you very much.

Patrick Ho, Stifel Nicolaus.

Thank you very much and best of luck to you, Dave.

First of all, John, in terms of the gross margins and the decline that you're going to see in Q2, is that purely a product mix and volume or are there still pressures coming from your competitor in terms of pricing or are you seeing less of that?

It is product mix and acceptances predominantly.

I think these are orders that we took a while back so you're not going to see any pricing improvement there.

But it is product mix and acceptance.

Volume is about the same.

And the fact was that, I think Dave was trying to point out was that Q1 had some anomalies that actually put it the other way.

We had a lot of acceptances and some special mix things that actually pushed it out.

Anyway, it is going to be down a little bit into the low 30s.

Okay.

And then maybe moving to just going back to your new product and its rollout, I know you don't want to give the timing, but do you see the customers as they are qualifying this potentially delaying some near-term orders of some of your older products as they wait -- final acceptances and qualifications -- with your new product.

And that is when you may see orders pick up once again?

It is possible, but think about it this way.

Most of the top players in the industry are running at close to 100% utilization rates.

So the guys who are beta testing our products are very heavily utilized in their factory.

So I do think they will continue to place orders for -- of their products as they go through their valuations.

If they don't do that, then they have to give up some market share and that's a pretty hard thing for them to do.

So not too worried about delays, but there's always some chance of it.

Thank you very much.

Mark Heller, CLSA Investments.

Just on the bookings so including the June quarter book-to-bill would be above 1.0 again so when should we see stronger revenue growth?

Is it just timing of when those bookings translate into revenues and maybe that happens in the second half of the year?

Yes, I think you are generally add a quarter to two quarter lags onto bookings and you will see the pickup.

And given that there have been two in a row, you are going to start to see some more of that.

And can you provide any color on linearity?

Have orders continued to improve through the quarter and are they continuing to improve through the second quarter?

And one question on the Q2 orders.

Does that include an OLED order or does that -- does the guidance for flat orders exclude OLED?

That does not include an OLED order.

And I don't think we have enough information or data points to tell whether linearity is really improving or not.

There are not that many different customers in the market at this place.

If you go back two or three years, we had a lot of smaller customers participating and basically a lot of different orders during the quarter.

Those numbers have decreased substantially.

So it's pretty lumpy and I don't think I could comment on linearity improvement but I hope I will be able to, but not yet.

Thank you.

Edwin Mok, Needham & Company.

Good luck with you, Dave.

So I also have a question on the bookings.

Just want to know, if a customer placed some orders with you right now and they are doing an eval with you, too, and they qualified it, too, can they translate those orders into a new tool, and you help them able to get the new tool based on the bookings that they are placed?

And then I think you mentioned there is a pretty big Japanese revenue this quarter.

Does that also show up on the bookings side?

Is it still very concentrated in Chinese bookings or have you seen bookings in other regions, as well?

So on the translation of orders from current products to new products, that is something we very much try to avoid.

And basically we do a build to order, so when the customer orders the current products they are going to really need to take them.

So generally don't want to translate.

Although I would say one thing that gives us some maybe comfort in a product transition is that we don't expect to hold the existing products to just go away.

For instance, similarly, when we introduce MaxBright, the K465 I continue to sell at quite good levels because they were people that had qualified it; they liked it; they were getting great results.

And that always makes the transition much easier when you don't have a total replacement and we don't.

Regarding Japan, so Japan was a strong region in both bookings and revenue in the quarter.

So it was a significant place and was actually number 2 behind China so that was a good thing for us.

Great.

That is good color.

And then in terms of the ALD tool, I'm just curious what milestone or what you guys need to get to to book the tool that you have shipped to a customer?

And are we just at a point where we really are waiting -- going for the qualification process and customer decision to transition to the new process, that is preventing you guys from booking and therefore revenuing these tools?

So for the tool that we shipped to the customer that -- we are just waiting to be confident since it is a first of its generation tool, that would revenue within 12 months so -- before we book it.

That is really the only milestone we need and I think we're going to get there quite comfortably.

So that was -- what was the other part of the tool --?

Is there another ALD tool question in there?

Yes, the other question is just in terms of when you say being confident you mean just customer completing qualification or is it just waiting for the customer to make the decision to switch to the new process was, I guess, is just the question.

Well, the first thing the customer has to do is they have to launch a major new fab expansion.

So that is step 1. And then they have to have enough confidence in our product to order it into that fab expansion.

So those are the milestones.

Great.

Very helpful.

Thank you.

Andrew Huang, Sterne, Agee.

I had a follow on to that previous question about Japan.

I think you said that after China that was the next strongest geography.

Was that for MOCVD or MBE or Data Storage?

That was for MOCVD.

In Q1.

Okay, got it.

And then the other question I had was when I hear about the new tool, it seems like customers will benefit significantly from the higher throughput.

So my question is, is that part of the reason why you think gross margins will increase in the back half of this calendar year or is it still a little early for that?

Well, we're not predicting new tool timing at this point but the new tool is designed so as is generally the case in this market and in many capital equipment markets that it has some major benefits for the customer in order to switch, and will improve their economics in terms of making an LED, which we think will also help to spur overall lighting demand.

And look, what we do, what we expect out of that is we're going to give the customer some benefit and we're going to retain some benefit.

And by doing that we're going to improve our gross margins as we start to ship that tool.

If you don't mind, one quick follow on.

I think you said 63% of either orders or revenues of MOCVD orders were from China.

Can you give us a sense, is that going to be primarily 2-inch or 4-inch or even 6-inch at this point?

I don't know where you heard that 63% because I don't think we provided any breakdown by geography, but in China more and more customers are moving up in wafer size.

More moving to 4. A lot of customers started at 2. But most of them, especially the leaders, know that they need to move to 4 -- 4 economics over the long term.

And keep in mind that the Veeco architecture given a tool, however it is initially configured, it's very easy to move it from one wafer size to another.

So it doesn't matter a whole lot to us.

But China is moving up in wafer size, I think overall, and I think all companies that are strong know they will have to do that or have done it.

Thanks very much.

Steven Chin, UBS.

Just a follow-up question on the guidance for the second-quarter sales.

I, too, thought sales would be guided a little bit higher from the strong bookings last quarter in the second-quarter bookings guidance.

So is Veeco capacity constrained now and you just don't feel comfortable expanding the number of shipping slots?

Or just curious if you had more shipping slots would you have guided say a little bit higher?

It is more when the customers are prepared to take the tools.

The shipping slots in Q2 were really determined mostly in Q4.

So they were determined a little while back.

And we are managing our inventory carefully to not end up in any kind of situation.

So there are these increased orders sometimes end up -- they may increase in Q1 and end up in Q3.

And all it takes is July -- boundaries move around a little bit, all of those things.

Also remember Q1 was a little higher than we predicted and that probably took a little bit out of Q2.

So it's just a bumpy business and I wouldn't read too much into it.

I think the overall trend is positive and it is going up and I think we're getting back to healthy levels.

We see that as very positive.

And then my follow-up question is on the June quarter guidance.

So just looking at last quarter, you guided orders to increase.

We actually saw orders up significantly.

So maybe you could share what happened last quarter and if you get the sense that could happen again this quarter.

Is it just a matter of getting comfortable that customers will get deposits for you at the end of the quarter or is it more complicated than that?

Deposits are a big part.

You have to get the deposit for it to be in order if it is in China.

And secondly, these are not huge levels, so one order for a couple of tools moving between one quarter and another quarter makes a big difference.

And you just don't want to be in a situation where -- first of all, you don't want to be in a situation where a customer can put a gun to your head and say, I am not giving you the order here at the end of the quarter unless you give me a bigger discount, or whatever.

We just try to be careful.

These things are -- there are significant deals in here that if they move one way or the other then it varies around.

The good news is is we did over $100 million for the first time in quite a while and first had an MOCVD bookings order, best since 2011.

And I think we're going to do it again in Q2.

So I think that is quite positive as far as where the trends lie.

Okay, thanks, John.

Vishal Shah, Deutsche Bank.

Just wanted to clarify a couple of things.

Did you say you are going to book the OLED tool, you will have it in your backlog in Q2 and it's not included in your bookings guidance for flattish or maybe slightly up bookings in Q2?

We didn't say that but I think we pretty much got pretty close to saying it.

We didn't book it in Q1 and I think Dave alluded to it was likely to book in Q2 but it's not in our guidance.

It is a single-chamber tool; it is not a full-size cluster tool.

So it is not a quad-chamber or five-chamber tool.

Okay, I appreciate that.

That is helpful.

And then just wanted to get some more clarification on the bookings, the breadth of bookings from [desk] customers.

You said you mentioned you are seeing a couple of big deals, but is that the trend that you are seeing or expect to see in the next couple of quarters?

Are you seeing more customers coming in?

We are seeing increased interest in quoting activity and the front end of demand from each of the major countries in Asia, I think.

So it is really all the main market for the tools.

So we're seeing that across the board.

And it is what you would expect from the utilization rates that are out there.

I appreciate that.

And then one last question, you have talked about your breakeven levels in the past.

Can you maybe just provide an update on how you think about breakeven now in light of the new pricing environment as well as you would launch the new product?

Yes, Vishal, this is Dave.

When we look at the whole of 2014, we expect breakeven levels should be probably about where they were for 2013.

That is about $80 million on a cash basis and about $110 million to $115 million on a EBITDA basis.

Should look pretty similar for the whole year.

Okay, thank you.

Mike Ritzenthaler, Piper Jaffray.

With customers, with MOCVD customers focused more on their own profitability as you had said in your prepared comments, the focus that we've heard about in those channels on improving yield technologies in -- and recipes and things like that, how does their discussion of new tools versus yield enhancement effect pricing on tools either in the existing portfolio or on new tools?

Well, the customers -- clearly, they are focused on their own profitability and whether it is better use of an existing tool, a better recipe, or a shorter runtime.

These are all things that have enabled them to get their capacity up at a rate faster than buying new tools.

I think when they look at a new tool they are looking at -- does this improve my economics?

And they are expecting it to improve their economics and if it doesn't, they're not going to buy it, basically.

They will stay with whatever they have been using.

And that could improve their yield.

It could improve gas consumption, throughput, capital efficiency.

There's a lot of different variables that it ties to.

And those are things that they are looking at, which is why we are confident that our new tool will do extremely well for our customers in terms of cost of ownership.

And I guess that led into your comments earlier about pricing being more or less neutral this year.

And then -- in your prepared comments.

We commented that pricing was starting to get a little better and I think that, plus some of the other things we are doing, will help but to move from where we have been in the low 30s into the 40s is going to take some new product to get us there.

Sure, okay.

Just another quick follow-up on the lowering expenses piece of your priorities.

I was wondering if there had been enough work done that you could at least order of magnitude what you are looking at doing.

The business already seems pretty lean, I guess.

But maybe if you could just help us with the targets of where you are looking.

Well, I don't think we are quite ready for -- to put down a target.

Maybe Dave can add to what I say in a minute, but I can give you an example of what we have done.

We have a Data Storage business that was located in multiple sites.

And we have launched an initiative to move one of those sites into the main site.

And that will put all of our ion beam technology into one location.

It will obviously, give us some management efficiencies and overhead efficiencies.

But in the meantime, what it actually does is it causes us duplicate experience.

So in Q2 we have extra expense as we build up one site to take the product and go through that transition.

So that is a type of example.

We will have some number of quarters with some increased expense, Q1, Q2 maybe somewhat into Q3.

But in the end we will have a lower expense rate and a more efficient organization from a lot of perspectives.

So, that is one of the things that we're doing.

That is why we can say that the second half expenses are going to be lower than first half.

Okay, thanks, John.

Jed Dorsheimer, Canaccord.

Two questions.

I guess the first, John, on the new tool, some of the beta tools that are out there are in cluster form.

I'm just curious, is this a new platform?

In other words, will this be available in single chamber configuration as well as multi-chamber clusters?

It is a new platform and I think you will have to wait for the announcement to see the form factor and specs.

We are just not ready to put that out there.

But it is an entirely new platform.

Okay.

And then on Synos, the missed targets in terms of the acquisition.

I am curious, is that at all tied to Samsung's decision to cancel its OLED TV facility?

It is not.

It is not tied to OLED TVs because the bigger opportunity for the opportunity that we were pursuing with Synos and continue to pursue is for really flexible mobile devices.

So the TV was secondary.

We have talked about potential future TV applications, but that was not the impact of this.

Are you at all concerned that you purchased this business from Samsung, and Samsung is starting to push things out in terms of missing the earnout?

Or what level of comfort do you have that this business won't go sideways?

So, when we worked to formulate a strategy to bring this business into the Company, there was a lot of variability, the biggest being how quickly will flexible OLED phones be adapted; and then secondly, what role would we play, how big a role and things like that.

And because of that, we structured the earnout in order to take some of our risk out of this thing.

And if it went off very quickly they would get a higher price, and if it took longer, we would get a lower price.

So we tried to structure the deal around that.

I think as we have worked on this technology, a couple of things have happened.

First of all, we think it works well and the technology is very good and it has real advantages in terms of deposition rate, ability to lay down films that other techniques can't do, economics of material utilization, temperature, low temperature that allows it to go into a lot of applications.

So we have become probably more impressed with the technology over the last six months then when before we bought it.

And the second thing, if you think back to the last earnings call and when we did announce this deal, we talked about we were going to go into another adjacent market opportunity.

And we actually have decided during the last quarter that we are actually going to go after two adjacent market opportunities because we thought the opportunities were compelling and that the technology had some real unique advantages for those.

And so we have put more people on the products to develop more products than we have taken some of those people a lot of other areas of the Company that were not growing as fast were not growing, and moved it to ALD.

So we think we have bought some really great technology and it will pay off for us.

It may take longer to pay off than we thought at the beginning, but at the same time, the value we paid for it has been dropped off, also.

Just maybe one other little clarification.

We didn't really buy it from Samsung.

Samsung was an investor and owned a small piece of it.

But we bought it from a group of investors.

Okay, thank you.

Colin Rusch, Northland Capital Markets.

Receivables increased pretty significantly on a percentage basis.

It's still within some realm of reasonable levels at 51 days, day sales outstanding.

Can you just talk a little bit about if there's any changes in the terms you are providing customers or shipments in the latter part of the quarter?

Yes, no significant changes.

It is basically timing within the quarter, timing of -- in the quarter.

You saw at the same time inventory went down.

The two are related, as well.

Okay.

And just as we think about the flowthrough of some of these orders in the back half, I know we've talked about this a little bit, but the gross margin trajectory as we get back into the latter part of the year, confidence level -- has anything changed from where you were a quarter ago when we last spoke on the earnings call?

I think, we think -- we believe that we can bring margins up in the second half of the year.

I think earlier we were probably in the 31% to 32% kind of what like Q2 is looking at for the full year.

We think we can do a little better than that at this point.

And I think our overall confidence has improved since last quarter.

Okay.

Thanks so much, guys.

Brian Lee, Goldman Sachs.

I will echo others' sentiment in congratulating Dave.

First question here for Dave, I thought you mentioned last quarter that gross margin improvement in Q1 was going to be driven in part by a lower cost MaxBright platform.

And so given the gross margins are coming back down in Q2 also targeted for low- to mid-30s for the back half of the year, was that mix shift only a one-time impact?

And how should we think about mix in the impact going forward?

Yes, we did see the cost reductions that we talked about last quarter.

The mix, however, the favorable selling price mix in Q1 outweighed that.

But there is a positive effect of cost structure.

Remember, last quarter we're coming off a 21% margin in the quarter.

So those cost reductions that we have put in place we will see for the balance of the year and that is what is helping bring our margins up into that plus -- north of 30% range, mid-30%s.

I'm just trying to maybe delineate the 1Q to Q2 shift, because it sounds like the cost-reduction impact does push the margin profile higher in the back half of the year.

But from 1Q to 2Q it doesn't seem like it is having the requisite impact.

Yes, there's a lot of things that go on in margins.

You've got the timing of acceptances; the mix with selling prices; the impact of cost reductions.

In last quarter you remember, we talked about unusual, unfavorable things.

So there's a lot of things that go on.

And each one of these can be a couple of percent.

Okay, that is helpful.

And I will squeeze a last one in, if I could.

With your expected gross margin and OpEx chance moving through the back half of the year, how should we be thinking about cash flow?

I would assume it is still going to be negative again in Q2 but any expectations around the back half of the year?

We do expect that the first half we're going to be cash negative.

We should see it improving in the second half, though.

Okay, thanks a lot, guys.

Hopefully breakeven for the year.

Thank you, Brian.

One more question, operator.

Absolutely, thank you.

We will hear from Andrew Huang.

I was wondering if you could give us an update on what your MOCVD tool capacity is per quarter right now.

I think a while back, you said it was 100 per quarter.

I'm just wondering where it is right now.

Well, it's -- I hope we will really need to focus on this, but it is pretty flexible with a little bit of notice.

It was actually peaked around maybe 120, 110 type of capacity.

And we have the facilities and the capital infrastructure to handle that level again.

What we have to do is we have to order materials enough to have a flow of materials.

And that usually takes a little bit of time to ramp.

And in some cases, we have to bring on some more temporary workers.

So I can't give you a specific number, but I think any limitations that we place that are there are going to largely be placed by just getting the material supply coming into the right place.

And so, that can cost you a quarter if you get behind the curve.

But I don't think capacity is going to limit anything for us.

Okay.

And then just to clarify, can you double check?

Because I thought you said maybe two-thirds of your revenue or bookings came from China.

Is that correct or no?

In your prepared remarks.

No, the two-thirds --

It was in my script.

Right.

It wasn't absolutely China, though.

We said Japan plus China is two-thirds of the activity.

Sorry if that was confusing.

Okay.

If you add Japan and China together, that was two-thirds of our bookings is what we said.

Got it.

Okay, thanks for that clarification.

I appreciate that.

Okay.

Thanks, Andrew.

And thank you all for joining us tonight.

Take care.

Thank you.

And again, ladies and gentlemen, that does conclude our conference.

We thank you for your participation.