Veeco Instruments Inc (VECO) 2014 Q2 法說會逐字稿

Good day and welcome to the Veeco Instruments' Q2 2014 earnings call. Today's conference is being recorded. At this time, I would like to turn the conference over to Senior Vice President of Corporate Communications and Investor Relations, Miss Debra Wasser. Please go ahead, ma'am.

Thank you, operator, and thank you all for joining today's call. With me today are our CEO, John Peeler, and our CFO Sam Maheshwari. Today's earnings call 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 of 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 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 statements. 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 this call over to John for opening remarks.

Thanks, Deb. Veeco's results were on track with our expectations. Revenue was $95 million, up 5% from the first quarter, and EBITDA was a loss of $7 million. Second quarter orders were up slightly at $104 million. It is also our second consecutive quarter of bookings over a $100 million, and our third consecutive quarter with a book-to-bill ratio of over one and increasing backlog. We generated $2 million of cash in a challenging quarter and our cash balance remains quite strong at $485 million. Q2 MOCVD orders were $75 million, down about 10% from the prior quarter. Large orders from a small number of customers are causing orders to bounce around on a quarter to quarter basis, but the order trend over the last six quarters is very strong including the following factors. The trend line from Q1 of 2013 onward shows a 50% compound annual growth rate.

First half MOCVD orders are up nearly 80% from the first half of last year. We expect Q3 orders to be higher than Q2 orders, and finally, we're forecasting second half orders above first half orders. Positive market trends continue including strong LED demand, very high fab utilization rates and solid customer quoting activity. Customer wins this quarter included large multi units deals from Changelight in China, and a top LED manufacturer in Korea.

In the case of Changelight, we beat our competitor, the incumbent supplier, by having more productive systems with a lower total cost of ownership. I expect this positive trend to continue. I will talk more about business conditions in our outlook in a few minutes. But first let me turn the call over to our new Chief Financial Officer, Sam Maheshwari. Sam joined Veeco in May. His background in semiconductor process equipment and highly relevant roles as a financial leader have helped him to get off to a great start. Sam.

Thanks, John. I'm excited to be a part of Veeco and join you all for today's call. Veeco has done an impressive job managing through and extended downturn, and it's clear to me that the best is still in front of the Company. I look forward to helping strengthen the business and capitalize on the significant growth opportunities ahead. As John mentioned, the second quarter was challenging for Veeco, but the [deliverance of our guidance on all metrics. While revenue was up sequentially to $95 million, our adjusted earnings before interest, taxes and amortization, our adjusted [EBIT was negative $7 million. We lost $0.39 per share on a GAAP basis, and $0.16 per share on a non-GAAP basis, in line with the guidance provided before. Q2 gross margin of 32% was on the high-end of the guidance, but weaker than the prior quarter.

You may recall Q1 gross margin was unusually high due to inclusion of certain high margin tools in the mix. Q2 gross margin was reflective of the tough pricing environment in MOCVD business. Q2 performance was also impacted by higher operating expenses as we rolled in some temporary duplicative spending tied to our site consolidation activities that I will explain further in a moment. R&D in Q2 was high due to the spending on Next Generation products. Within the $95 million of revenue LED and Solar segment represented $77 million or 81% of sales, and data storage was $18 million or 19% of sales. MOCVD revenue picked up about 5% sequentially to $67 million. Moving to orders, we booked $104 million in the second quarter. Up as compared with the first quarter of 2014.

LED and Solar booked in $81 million representing about 78% of orders, and data storage booked about $23 million or about 22%. There were some moving parts or large deals within the quarter with MOCVD business down slightly and both MBE and data storage up sequentially. As John commented, we do not see the slight MOCVD decline as a reversal of positive trends. It is more reflective of the fluctuations in this business and a few large deals that are being worked every quarter. In data storage when capacity additions are few and far between we had some good technology wins including a sizable order for a diamond-like carbon system from a major hard disk drive manufacturer. Turning to our balance sheet, it is good to see that our cash balance went up to $485 million this past quarter despite tough business conditions. Having recently joined Veeco, one of the things that attracted me to the Company was a very strong balance sheet.

I see this as tremendous asset and a tool for investments in both organic and non-organic growth. Now let me give you an update on our cost reduction initiatives. Business conditions in MOCVD have improved; however, we have seen limited improvement in our other businesses. We have been working to streamline our operations in order to simplify the Company, reduce expenses and enable a continued high level of R&D investments in growth opportunities including LED and organic LED. We are in the process of consolidating our data storage business from three sites to a remote site here in Plainview, New York.

In addition, we are streamlining sales and service facilities and reducing corporate overhead. These activities are phasing in through the year and largely impact the data storage segment. As a result we expect that as we exit 2014 our overall OpEx will decline by about 10%, and we can achieve an EBITDA break even level below $100 million in revenue. Even more importantly these actions will enable us to target double-digit EBITDA percentage in 2015. Next, our color of a current quarter guidance. As John mentioned, we currently expect orders to improve from the second quarter. We also expect that strength in MOCVD will drive our second half orders to be greater than the first half of this year. Q3 revenue is expected to be in the range of $92 million to $100 million. Although bookings have been more than $100 million for the last two quarters, the mid-point of our revenue guidance is $96 million.

It so happens that one of our customers just last week pushed out shipments from September into Q4 due to temporary funding delays on their part. This causes Q3 revenue guidance lighter than the normal expectation, and we expect to see corresponding pickup in Q4 revenues. Gross margin is expected in the range of 31.5% to 33.5%. Q3 gross margin remains flat to Q2 because of a few low margin tools that were booked previously now [flowing through the P&L. We are experiencing slightly better pricing environment on the orders we are booking currently. As have commented in the past, we expect gross margin to stay in the low to mid-30s for the remainder of this year. We believe gross margin can get back to over 40% as we see new products pick up in business volume and manufacturing cost reductions benefiting us in 2015.

We are guiding Q3 operating expenses in the range of $41 million to $42 million. The cost reduction activities I just outlined will have a modest impact this quarter but pick up speed as we exit 2014. Our GAAP EPS guidance of a loss of $0.43 per share to a loss of $0.34 per share includes the impact of $2.6 million in restructuring charge that we expect to take this quarter.

Non-GAAP EPS for the quarter is expected to be in the range of a loss of $0.15 per share, to a loss of $0.07 per share. On a separate note starting with Q3 we will be reporting earnings before interest, taxes, depreciation and amortization, all EBITDA, instead of earnings before interest, taxes and amortization or [EBIT since this is much more common, and that is the way most of your [model companies. Our team has provided historical EBITDA calculations, which you can find in the backup slides on our website. With that I will turn the call over to John to review the business outlook.

Thanks, Sam. It's been a while since we have talked about the TV market on an investor call, but the latest generation of ultra high-definition TVs demand some attention. UHDTV has delivered double the resolution and a wider color spectrum. DigiTimes forecast a 170% growth rate for UHDTV shipments reaching about 25% of the total TV market by 2017. UHDTVs used twice as many as LEDs as traditional LED TVs and require more stringent ship performance. UHD business is driving up tool utilizations at Tier 1 customers, and having a spillover effect own overall equipment demand. This phenomena is most apparent in Korea, where we have seen utilization rates of 85% or better, improved customer financials and a meaningful pickup in activity. You can find high-quality 60-watt equivalent LED bulbs on the shelves of Home Depot, Wal-Mart and Best Buy priced below $10.

And some Chinese Manufacturers are trying to break into the US market with bulbs in the $5 range. Another emerging trends is to connect LED light fixtures to intelligent control networks and the Internet of things in order to deliver energy savings and/or provide convenience features. I expect many new applications that no one has even thought of yet that will both change the world and drive LED adoption.

Overall, we expect the CAGR for the LED lighting to be around 40% on a unit basis. There are still some trends such as industry consolidation and some underutilized equipment coming online that have put a damper on the recovery overall. But overall LED market trends are positive for both backlighting and lighting, our Tier 1 customers are doing better. They are at close to maximum capacity and reporting improved financials. Some have started to invest in MOCVD equipment with a few even requesting urgent delivery dates.

With first half MOCVD orders up 80% versus last year, and projection for stronger second half orders along with first half MOCVD revenue up 30% over last year, it's clear to us that the MOCVD business recovery is well underway. In addition to MOCVD I'm confident that we have identified another growth engine for Veeco with FAST-ALD. While the business isn't gaining economic traction as quickly as we had hoped, we see huge potential.

The timeline for our key customers' investment in truly OLED flexible mobile phones is unclear, but we believe they plan to ramp production sometime in 2015. We're' working closely with a customer to develop processes for Next Generation thin film material stacks that solve encapsulation challenges and deliver major performance enhancements. In addition to OLED mobile displays, we're engaging potential new customers in OLEDTV and lighting, and are making excellent progress as we validate other potential markets for Veeco's highly differentiated ALD technology.

On our last call we reviewed our priorities to get Veeco back to profitable growth, which included 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 gross margins, driving process improvement initiatives to make us more efficient and lowering our expenses. Since that call we have made excellent progress in Beta testing of our Next Generation MOCVD platform and are on track to launch what I believe will be our best product ever in the second half of this year.

We have built our first Gen-6 ALD prototype tool and the customer has completed initial acceptance testing. And we launched the programs to streamline our organization, reduce expenses by 10% and make us more efficient. We have set the stage for a significantly better performance in 2015 and have established a 2015 goal for double-digit EBITDA profitability. With that, operator, please start the Q&A session.

Thank you. (Operator Instructions). We'll pause for just a moment to allow everyone an opportunity to signal for questions. We'll go first to Edwin Mok with Needham & Company.

Great. Thanks for letting me go first. So, I have a question on demand. You mentioned there's some pickup in demand on TV and high utilization (inaudible). I was wondering have you seen kind of broadening of demand beyond to just a few large -- or to a large customer? I think in last quarter you guys talked about still being pretty concentrated in terms of order. Have you (inaudible) seen broadening demand and is it still very concentrated in China, or have you started to see some pickup in Taiwan and Korea?

Demand is still fairly concentrated into relatively small number of customers. It's not the same customers each quarter, but we're -- it is a small group. We had strong demand in China, but we've also seen pickups in Korea and some progress in Taiwan. So although a lot of the Taiwan expansion is going on through Chinese joints ventures, so we kind of consider that in China.

Great. If I can just squeeze a quick follow-up. So on ALD you mentioned that you still expect customers that have ramp production sometime in 2015. Can you remind us where you are on the qualification? I think last quarter you guys shipped two. Should we still expect an order -- that you to recognize an order for that two, so that eventually becomes revenue sometime in '15?

Yes. We did -- we did book that tool in Q3 though not Q2, but the tool was booked and there will be revenue in probably this year for that tool. We are not counting on any kind of major ALD revenue in our 2014 plan, and we're' not really counting on major ALD orders in 2014, but they certainly could be there probably in the fourth quarter.

Great. That sounds great. That's all I have. Thank you.

Thanks, Edwin.

To our questioners currently in the phone queue, please allow yourself to one question and one follow-up question. We will go next to Stephen Chin with UBS.

Hi. Thanks for taking my call. Just a quick follow-up on Q3 orders. If you could elaborate a little bit more on the order recovery, whether it's still a relatively modest recovery or you think, you know, [following sequential improvement, quarter to quarter going forward, and if you could just maybe elaborate a little more on whether you see there being a situation where there are rush orders coming in one quarter and maybe (inaudible) other quarter.

Well, a couple of things there related to orders. There's a graph in our package and when we look at the graph of the overall kind of bigger picture order trend for the last six quarters, basically, they -- compound annual growth rate is 50%. Secondly, we looked at the first half of 2014 versus the first half of 2013 and there's 80% growth in orders there. We were down, you know, a little bit in Q2 with -- it's really corresponds to a couple of tools so that's just statistical deviation. I think we expect both the Q3 orders to be up, and Q4 or the second half to be up versus the first half.

So we're going to see this bumpiness. Some of the orders are significant and, you know, one -- one order slides a little bit and it means whether you're growing a lot or growing a little. So I think the overall demand trend is quite strong and when you look at the actual curve over the last couple years it's pretty impressive. I think we even maybe surprised ourselves at how strong it was.

Got you. Thanks. Just a -- maybe a sort of follow-up to that as well. Just, you know, a question on the overall LED industry and capacity utilizations that have been very high in (inaudible), and very high in this call as well. What were the utilization rates in Q2 versus Q1? Were they a little bit higher in Q2 and --?

Yes. I think they were -- they were a little bit higher and, you know, it varies by country and by customer, but overall they're moving up. So we're in a situation where customers -- the industry knows there's new tools coming from Veeco and new tools coming from Axtron and so people are going to order things just as they need them and -- and hold off a little bit but the trend is good.

Got you. Thank you.

Thanks, Steven.

And we'll go next to Krish Sankar with Bank of America Merrill Lynch.

Good afternoon, everybody. This is Andrew Hughes on for Krish. Just in terms of the order pushout you had from a customer from Q3 to Q4, is this something you view as pretty specific to the customer, or any concern that could be indicative of problems outside that could slowdown order flow?

Thanks, Andrew. This is Sam. No, this is just one customer and they just recently informed us of funding on their part. The order is good. We have received advance cash deposit already and we are talking about late Q3 previous shipment plan to early Q4 type of a shipment plan.

So this is just one very specific customer in China. Most of the -- most of the other customers and their demand we are seeing strong demand from other customers and these are a few MaxBright tools, and we were able to reconfigure our slot plan to other customers but not 100%. As you know, it costs us some money and it also requires some time to reconfigure the slot plan for other customers, and so with some of these pushouts and backfill by some other pull ins this is where the guide is. I would say that the guide is a little bit lighter than what we would have expected or what would our normal expectation be, but this is where we ended up for the guide for Q3.

Thanks for that detail, Sam. And then just a question on competition for you guys. You mentioned Axtron. Obviously, it always seems to be Veeco and Axtron. Is there any update that you think is worth giving on where you see your Chinese competitors in terms of performance or is it still a pretty big gap?

I think it's a pretty big gap. We've seen Chinese competitor evaluation tools in some of our customers. They're -- they're not -- we haven't seen them participating in any sort of financial transactions or actual sales. From what we've heard the performance is still behind the Veeco and Axtron tools that were introduced several years ago. So not a lot of new news, but that's what we've heard.

Okay. Thanks guys.

Thanks, Andrew.

And we'll go next to Mike Ritzenthaler with Piper Jaffray.

Yes. Good afternoon. I was interested, John, in some of your comments in your outlook on the consolidation and in particular the -- in the LEDs. I was wondering if you could and some more color on how you think that a impacts your business. I guess I would have thought it would have been a positive.

It could be a positive. I mean there are -- there is, if we look at this industry three or four years ago, there were 50 players or there's really a large number of companies getting into it. We're' now starting to see them merge together. We have seen Epistar buy Forepi and those type of things. I think, you know, it's -- I don't see it as a negative. I do think that it -- in the case of when two companies merge and one of them has a bunch of excess capacity then it can free up some capacity and slowdown tool orders.

I don't think that was the case in the Epistar/Forepi consolidation, but we'll see some others where larger companies will buy smaller companies and maybe get a little more out of the tools than they've been getting, and so we just see that as it's one of the natural ways that any unused or partially used tools get used up and it's, you know, if it weren't happening people would be buying more MOCVD tools. So it's not an unexpected thing. It's just kind of one of the negatives. I think there are a lot more positives than negatives, which is why we're seeing this ongoing growth over the last six quarters.

Yes. That makes sense. Thanks for that color. And then on sort of the debate of new tools versus working on yield improvements with existing tools. I know you work closely with your customers on that. And I guess how would you characterize the current, you know, potential uplift from other technologies things like that for enhancing yield versus orders here as we look at the back whatever of 2014?

Well, let me answer that and I'm not sure I've got the whole answer, but let me tell you a few thoughts and then we can see. You know, our customers have been working some of the key customers are -- have not been making LEDs for ten years, and over the past three or four years they've brought their yields up quite a bit and that's one of the things that's prolonged this industry downturn because the customers have been able to either shorten their recipe times or get more yielded chips and find ways to basically get more out of and MOCVD system. At first you know as they get better those productivity improvements come pretty quickly, but the overall market has gotten much better now, so the pace of productivity and yield improvements has slowed down quite a bit and the easy stuff is gone.

So I think that's also a positive for the industry for us at least in that, you know, it's time to buy new tools that will actually further give you a better yield and a better productivity, and customers kind of need to buy new tools or at least more of what they've been buying, but there's not this kind of easy yield improvement to be had.

Okay. Excellent. Thank you.

Okay?

We'll go next to Brian Lee with Goldman Sachs.

Hey, guys. Thanks for taking my questions. First one I had was on your outlook, John, for better orders in the second half versus the first half can you provide a few clarification points? Does that view include any ALD orders at all and does it include any orders for the new MOCVD platform?

Well, it does not include any ALD other than what we just booked, which is less than $5 million. So it's really focused on being driven by MOCVD, and I can answer the second part once we launch our new product but I can't really comment on that yet.

Okay. Fair enough. I guess on the new tool platform can you provide us some historical context? I know you're talking about launching this in the back half the year. How does that compare from a qualification timeline standpoint to let's say the K 465 or the MaxBright tool, which were some of your more recent Next Generation products before you saw your first PO?

Yes. So it's pretty similar. Maybe it's a little longer because it's a more complex or a larger system overall, but I say it's pretty similar. What we normally see is that Betas from thorough customers take over six months, so I think the qualification time is pretty similar. I can tell you that the Beta tests are going well with all of our three Beta sites. Each of those customers has engaged us in discussions of potential purchases. One of the customers told us it was by far the best tool we ever made, so we're pleased with that progress and think that the timing is good and we will launch a great tool here.

Okay. Thanks, guys.

Thanks.

We'll go next to Paul Coster with JPMorgan.

Thank you. A couple of housekeeping questions first. The can you just be a little bit more specific about the 10% reduction in OpEx? What is the base for using that? Is it 2013, or the 20 -- Q2 '14 run-rate, and related question is the commitment to get double-digit EBITDA in '15 that gives a lot wiggle room as to when. What's your thinking there about achieving that kind of margin?

Thanks, Paul. This is Sam. In terms of the cost reduction, we are saying 10% OpEx reduction from the Q2 run-rate so to say. So we expect, you know, when all the cost reductions are completed say it will take us three to six months, so by the time we exit 2014, say Q1 '15 and onwards, we believe OpEx in the range of around $38 million to $39 million, somewhere in that range. That's our target for OpEx reduction. In terms of EBITDA percentage and break even levels, again, this is EBITDA different than [EBIT, which Veeco has used in the past.

As you know, we are working on cost reductions, and at the same time the pricing environment has improved. And with the pickup in business volume the EBITDA percentage can actually, indeed, vary so what our target here is that the current levels of revenue that we are in we ought to be able to generate double-digit EBITDA percentage and as the volume picks up, of course, that would pick up on the operating leverage and we would be able to produce a much higher EBITDA percentage.

Okay. Got it. So my follow-up question relates to this notion that gross margins can expand pretty significantly. I -- and, you know, on current revenue levels, so it's a little bit counterintuitive, but I can see how volume might yield margin expansion, but and also how pricing might, except how can you increase prices from one year to the next? I'm not quite sure how that works. So if you can just walk us through how the margin expansion there might play out that would be helpful, please.

Yes. So there are tools that are flowing through the P&L now, these tools were booked a few quarters ago and at that time the business conditions were challenging. For sure we are seeing better pricing environment and the margins that we are booking on the tools -- that we are booking currently they are higher. So that is one element that would help support improvement in the gross margins when the tools that we are currently booking would go through the P&L. The second is, of course, the new product. The new product is much more productive and has a good feel for the customer, but we hope to share that between customer and Veeco and that should also help improve our gross margins as we go forward.

Okay. One last question for me. The introduction to now MOCVD machine was sort of contingent, at least, based on prior conversation, the sort of clearing out of all inventory in the gray market of MOCVD machines. So, I assume that you basically think that the market will be pretty cleaned up by the time you introduce that new product.

Well, let me see. First of all, we have never had excess inventory or any of that on our side. I think maybe Axtron had that issue. As far as the gray market there's not a lot of product moving around or -- already. I mean there are some where a larger company will buy a smaller company, and I think we'll see some of that to go on for some more time, I -- but we just don't see a lot of gray market inventory. Once in a while somebody buys a couple tools from somebody or somebody gets out of the business, but we haven't seen a lot of that so thanks, Paul.

I want to go back to I think it was Brian Lee's question because maybe I didn't answer it quite as well as I could have and that was did the second half orders include [Red Bull and I think, you know, we have told everybody we would launch Red Bull in the second half, and just to be clear as soon as we launch it we will take orders. So, I think, obviously, our second half orders up would include the new product that's coming out so maybe I wasn't quite so clear but hopefully that helps. We'll take the next question, operator.

We'll go next to Jed Dorsheimer with Canaccord.

Hi. Thanks for taking my question. I guess maybe away from the MOCVD and just on to the data storage. Is this the new level of activity in that business or should we expect further declines in the data storage business?

Well, we've, you know, the business has been fairly low for the last year or so or more and we don't expect further declines. We think, you know, it's at the lower -- the lower side of that it would get. What we did make the decision to do this year is that at this size where we have seen it we do perfect it bounce back and give us some growth in the future. But at this size it makes sense for us to run it as a single site business, which is why we chose to consolidate our satellite sites in for Fort Collins, Colorado and Camarillo, California into Plainview to get the efficiency, the cost efficiencies and the resource sharing efficiencies that we get there. So we're not expecting it to decline further, but I think we are creating a more cost-effective business. And I would add one more thing.

We've named this business the data storage business and that's become a little bit of a misnomer at this point because about 40% of the business is coming from non data storage customers related to Ion Beam technologies for optical codings and other things and many of the growth opportunities for this business come from outside of the data storage industry whether it's FTT, magnetic ram or EUV mask blanks, both of those areas are, we think, pretty compelling. So, I think as aside from the data storage customers bouncing back at some point there's also some good opportunities for our Ion Beam technology in other areas.

Thanks. That's helpful. And then just on the ALD. I know previously, I think there was commentary of $80 million in that business. I'm assuming that that's off the table. I think that was supposed to flow into 2015. So just given the nature of that business any update in terms of expectations, you know, are we -- I think you had mentioned one order in sort of Q4 time frame, but how should we think about that for 2015 time frame?

I mean we're still thinking that we can get some substantive revenue in 2015 for the ALD business. The technology we have is very unique. It has big benefits and I think it will drive 2015 growth. Whether we get orders in Q4 or Q1, I think there is a good growth opportunity for us here next year.

Okay. Thank you.

Thanks, Jed.

We'll go next to Andrew Huang with Sterne Agee.

Thanks for taking my questions. I guess the first is can you give us a sense of how many Beta customers you have that are testing the Red Bull system?

We have three Beta customers.

Okay. And I mean not as a follow up, but can you give any clarification as to like what countries they're in, or are they concentrated in one or are they kind of split around the globe?

They are -- they are in three different countries and they're all absolutely world-class customers, so that's about probably as far as I can go, but they're top -- top industry players in -- all with slightly different characteristics.

Got it. Okay. And I guess the other question I had is I know your tools are configurable like by two inch, four, six inch, but do get -- or you have any sense of kind of like what size most of your tools are going out at? Is it like four inch or is it six inch or is it two inch?

It varies and it varies by country and it's changing with time. You know, in general, and first of all, you know, it's very -- one of the advantages of our tools is it's very easy for the customer to buy them at one -- at four inch and then move to six inch later or -- or, you know, to move up and change and that's actually and advantage of our platform. Historically, China has been -- had a lot of two inch, a lot of leading customers are moving up to four inch and, you know, in some places we have customers that are -- that are six inch. So I can't really give you a breakdown. It's pretty easy for the customers to change after they buy, but in general the industry is moving up. That's -- and I don't think people are -- people will stop buying tools at two inch in the not very distant future.

Okay. Thanks very much for taking my questions.

Thanks, Andrew.

And we'll go next to Andrew Abrams of JG Capital.

Hi. Just a little question on price pressure. You have kind of indicated that the pricing pressure has eased a bit as you have taken more recent orders. Is it a function of both of you guys kind of being -- being more benign or is it the fact that Axtron is running through their inventory and doesn't need to discount as much as they were before or is it coming from the demand side?

I think the demand side helps it is a realized first of all, as orders come up and then, secondly, we've realized that -- or not realized but, you know, we're -- we basically are -- our Company -- our products have an inherent advantage in productivity and uniformity and cost of ownership for the customer. The customers know that, and we've just had to stand more firm to not sell product at prices where we previously would have sold because this industry doesn't work at those prices for the long-term.

And when the new products come out, yours and Axtron's, I'm assuming, are going to be fairly close to each other when they come out or timing-wise when they come out. Is it going to be a pricing issue again, or do you think that there's enough of a difference between the two tools that you can still command kind of the premium pricing or the better pricing that you're getting now?

Yes. We expect to command the premium pricing. I think our product is a superior product, and the turbo disk technology is an inherently cleaner technology, which gives our customers many advantages in running really large scale factories.

And just last on the ALD are you seeing customers that -- are most of the customers that you're talking to, or the customers that you are talking to, totally focused on the flexible side or are you also talking to customers who are thinking about using a scaled up system on production of TVs or notebooks or whatever other type of display?

So we -- you know, we started out focused on flexible display encapsulation, but we've also moved on to talk to customers for TV production, OLED lighting production and other applications and the reason for that is our FAST-ALD technology, first of all, it can be scaled up to very large substrate sizes, so it works well and that gives it a lot of economies. It has very good material utilization, so it can go into applications that you just couldn't do with other ALD approaches and it can operate at a very low temperature, so it can work year over top of substrates that are not tolerant of high temperatures. So, we are talking to customers in many applications and actively working on several.

Okay. Thanks very much. Appreciate it.

And we'll go next to Vishal Shah with Deutsche Bank.

Yes. Hi. Thanks for taking my question. I was wondering what you think the competitive environments is going to be with the respect to some of the [eval tools. I mean are you competing, head-to-head, with your customers? You know, when you talk about these three (inaudible) customers, is the Axtron also giving the tools to those same customers or are they different? And is your -- in your understanding of the inventory situation at Axtron improved at all, or how do you think inventory levels are (inaudible)? Thank you.

Yes. We are in some common customers with Axtron, but I believe we're in more customers, and I can't tell you about their inventory situation. It, frankly, it lasted a lot longer than I expected it would and there just seemed to be a whole lot of it there. I think it's about gone, but I -- all I have is little pieces of information from the marketplace as opposed to real info.

That concludes today's question and answer session. At this time I would like to turn the conference back over to Mr. John Peeler for any additional or closing remarks.

Thank you for joining us and we'll look forward to seeing you in the coming months. Thanks.

Thank you.

That does conclude our conference. Thank you for your participation.