Veeco Instruments Inc (VECO) 2014 Q3 法說會逐字稿

Good day, and welcome to the Veeco Instruments Q3 2014 earnings call.

Today's conference is being recorded.

At this time, I'd like to turn the conference over to Senior Vice President of Corporate Communications and 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, 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 record by Veeco Instruments and is copyrighted material.

It cannot be recorded or rebroadcast without Veeco's express permission.

Your participation implies consent to our taping.

To the extent that this call discusses expectations about markets 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 discussion and analysis section of the Company's report on Form 10-K, an 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 reconciliation to GAAP measures of performance, is available on our website.

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

Thanks, Deb.

Veeco's results were on track with our expectations, and we are steadily improving our performance.

Third quarter orders were $107 million.

It was the third consecutive quarter of increased bookings, and the fourth consecutive quarter with a book-to-bill ratio over 1.

Revenue was $93 million, down slightly from the last quarter, as growth in MOCVD was offset by weakness in MBE and Data Storage.

We generated $2 million in cash, and our cash balance remains quite strong at $487 million.

I'm pleased that we're executing effectively and delivering better results.

I'll turn the call over to Sam for the details of our performance.

Thanks, John.

Good afternoon, everyone, and thanks for joining us.

I am pleased to report that Veeco delivered within our guidance range for both the top line and the bottom line.

Revenue for Q3 was $93 million, below the midpoint of the guidance range due primarily to a delayed shipment to a Data Storage customer which is now being shipped in November.

The shipment push out is a sign of the limited market pull we are seeing in Data Storage segment.

Adjusted EBITDA loss of $1.8 million was better than the prior quarter and also ahead of the guidance midpoint.

GAAP EPS loss of $0.35 per share and non-GAAP EPS loss of $0.02 per share were both significantly better than the guidance midpoint.

Gross margin improvement is a particular area to highlight as this has been an important area of focus for us.

Gross margin improved to 35% due to a favorable MOCVD mix, benefit from cost reduction activities, and higher MOCVD revenues as compared to the prior quarter.

We are focused on continuously driving down our manufacturing costs to supply chain management and other initiatives.

Operating expenses declined by $1 million sequentially to $42 million, as we continue to see the benefit from our expense reduction and business streamlining activities in Data Storage.

We recorded $2.3 million in restructuring charges in Q3, consisting of severance and related costs.

Our efforts to simplify the Company, reduce expenses, and enable a continued high level of R&D investments in growth opportunities are progressing well.

We plan to complete our Data Storage site integration activities this quarter and, as planned, you will see additional improvements in operating expenses in Q4, and then in early 2015.

On the tax side, we closed our IRS audit for fiscal year 2010 in Q3, which resulted in a favorable release of tax reserves of $2.3 million.

This audit closure positively impacted our GAAP and non-GAAP EPS by approximately $0.06 per share.

Moving to the details of bookings for the third quarter.

New orders were $107 million, up from the $104 million last quarter.

MOCVD orders increased 8% to $81 million.

China and Korea were the two biggest regions for this quarter with a few large deals making up the majority of the bookings.

Our MBE business booked $9 million.

All these orders were R&D related, and we believe we won most of the business that was there for this product line.

We also booked over 6G [half] single-chamber FAST-ALD prototype system at our key OLED display customer.

We remain heavily engaged with this customer for further product development activities.

At this time, we anxiously await the next stage of business development in this potentially large growth opportunity.

Data Storage bookings declined 38% sequentially to $14 million in Q3.

We are seeing some opportunities tied to shifts in customer production mix from lower to higher density hard disk drives, but there do not seem to be any meaningful capacity expansion plans on the horizon.

As you can see from the chart, orders in the segment have averaged around $18 million on a quarterly basis.

There were no order cancellations in the quarter.

In the MOCVD business, we are experiencing more pull-in requests than push-outs at that time.

The lead time for MOCVD tools have stretched a little bit as compared to the situation six months back.

Calendar 2015 is expected to be a year of growth for our MOCVD business, but that said, our order visibility remains less than six months and that, too, is driven by a few customers for any given quarter.

In this landscape of consolidated customers, bookings predictability remains difficult and volatile in the short term, but steady and encouraging in the long term.

Turning to Q3 revenue of $93 million, 82% of the overall revenue was generated by the LED segment, while Data Storage generated 18% of revenue.

This trend of the LED segment contributing more and more towards our overall revenue continues, as just about a year ago it contributed roughly 75% of the overall revenue.

Book-to-bill for Q3 was 1.1 at the Company level, and we added approximately $14 million to the backlog.

As expected market recovery regains further momentum in MOCVD, we may further build upon our backlog in the coming quarters.

Secondly, for our new EPIK product, we will wait to recognize revenue for the first few units until final acceptance is achieved, as compared to recognizing revenue upon shipment for the existing products.

Due to this reason, although we would be shipping and installing EPIK2, we will defer revenue on the balance sheet for one to two quarters or so.

Our Q4 revenue guidance already incorporates this effect, and the shipments there are expected to be higher than the revenue.

Now turning to the balance sheet, our track record of solid cash management continued during Q3.

In this year, we have reduced inventories by $13 million or 22% while turning more [goods].

Q3 cash flow from operations was $10 million, and the quarter ended with $487 million in cash.

With virtually no debt on the balance sheet, I recognize that our cash metrics may be higher than the industry peers.

The priorities for cash remain in the following order.

First and foremost, we want to fund all the growth needs of the existing business, including fully funding the R&D investments, working capital needs, and any other capital investments.

That said, I recognize that our business is not a CapEx intensive business.

Secondly, we are continuously evaluating inorganic growth opportunities where the future market growth and the technology with Veeco would make it compelling for us to accretively add that business to our portfolio.

At this time, we believe we need to maintain about $150 million for operating needs.

Also, about $136 million in cash is held offshore.

Outside of this these two factors, we are continuously evaluating our alternatives for capital deployment, either to fund inorganic growth or to create value by returning capital to the shareholders as we have done in the past.

Another cash-related update on the tax side, we recently completed our 2013 calendar year tax filing through which we have requested a cash tax refund from the IRS of $20 million.

The timing of the receipt of this cash refund is somewhat uncertain.

It could be anywhere between now and a year from now, but it is a material amount of cash refund that we expect to receive from the government.

Now turning to guidance for Q4, we expect our orders to increase sequentially from Q3, enabling us to achieve the goal of second half orders being higher than the first half.

Order growth is expected to be driven primarily by MOCVD business.

Q4 revenue is expected to be higher than Q3, and in the range of $100 million to $115 million.

As John will discuss in a moment, we are seeing good initial traction for EPIK, and we are expecting to ship multiple systems this quarter.

As with any new product introduction, we do not recognize revenue on initial shipments, and you may see an increase in deferred revenue on our balance sheet at the end of Q4.

Gross margin is expected to be in the range of 34% to 36%.

We are guiding operating expenses to decline again to about $41 million.

As we have stated in the past, by Q1 2015 our OpEx should be below $40 million on a quarterly basis.

GAAP EPS is expected to be in the range of $0.25 loss to a $0.13 loss per share.

Non-GAAP EPS is expected in the range of a loss of $0.03 per share to a gain of $0.09 per share.

On adjusted EBITDA, we expect to be breakeven or better on a quarterly basis going forward.

Q4 adjusted EBITDA guidance is between $1.7 million and $6.7 million.

With that, I'll turn the call back to John for our business update.

Thanks, Sam.

Positive market trends continue as indicated by the pickup in orders and customer pull for shipments.

Healthy back lighting demand continues with new UHD TVs and iPhones featuring bigger screens and more LEDs.

We estimate that the launch of the iPhone 6 will add about 25 MOCVD systems to next year's market requirement and that the number of reactors required to satisfy UHD TV requirements will exceed 100 over the next five years.

Despite the normal seasonality, Veeco's customers are benefiting from back lighting market growth, a trend that we expect to continue.

It occurred to me a few weeks ago when the inventors of the blue LED received the Nobel Prize that they had probably not imagined all the ways that LEDs would be impacting our daily lives.

General lighting demand for LEDs is also growing rapidly, driven by falling LED light bulb prices and more promotion from global lighting suppliers.

Much of the growth is in the mid-power LED category, and that's due to their attractive price versus performance, particularly for residential replacement bulbs.

LEDinside forecast that mid-power products will be 50% of the market by 2018.

We're seeing global lighting leaders who previously made all their own LEDs, source their mid-power LEDs from Asian manufacturers, and success by our Asian customers has had a direct impact on Veeco's MOCVD order trends, with orders up about 50% for the first nine months of 2014 compared to last year.

As you probably know, we officially launched our new EPIK700 in September.

EPIK features the industry's largest reactor with more than twice our previous capacity.

Its innovative features provide best in class uniformity and greater yield.

It allows our customers to easily transfer their recipes to the new system, and EPIK is the LED industry's highest productivity and lowest cost of ownership system.

EPIK is a big needle mover with performance that is ahead of our competition, and so far the feedback from customers has been great.

MJ Jou, the President of Epistar, said, EPIK's performance, reliability, and production readiness fully met our manufacturing standards, and will enable us to lower our cost per wafer.

Another beta customer said, Our testing of the EPIK700 demonstrated that it is a production worthy platform with stable process, reproducible results, and a good user interface.

Our beta testing went extremely well, and word of the strong endorsements for EPIK is spreading throughout the LED market.

As a result, excitement's building, and our lab team is very busy running customer demos.

We've received EPIK700 production orders from one beta customer and one non-beta customer, and we're in commercial discussions of EPIK orders with many customers.

We're making steady production on our FAST-ALD technology as the driver for growth in 2015 and beyond.

Our 6G [half] FAST-ALD system has the potential to optimize encapsulation process steps and improve our customers' device performance.

If we're successful, we'll have an exciting 2015 bookings ramp.

While the timing for our OLED opportunity has been pushed out, we still believe it represents a multi-hundred million dollar opportunity because FAST-ALD has the potential to increase adoption for truly foldable mobile phones, due to the unique bending radius for displays enabled by our technology.

We are also starting to engage with OLED panel makers in Taiwan and China with our 3.5G system, and we'll be ready to run demos in our lab in the first quarter of 2015.

As I look back over the market conditions of the last couple of years, it's been a really tough down cycle, but things do look better.

The MOCVD market is picking up.

I'm confident our EPIK700 will do extremely well.

Our FAST-ALD technology has great promise.

We've got more great new products on the way, and we've adjusted our expense structure and are making good progress on our gross margins.

It feels really good to have turned the corner.

We're forecasting a return to EBITDA profitability this quarter, and we expect to be able to deliver consistent profitability and solid growth next year.

With that, operator, please start the Q&A session.

(Operator Instructions)

We will go first to Medhi Hosseini with SIG.

Yes.

Thanks for taking the question.

John, what is your view on the backlog in December?

Do you expect backlog to continue to grow consistent with what you have seen in the past couple of quarters?

I have a follow-up question for Sam.

Yes.

We expect backlog to grow again in the quarter.

I think we are shipping both older products like MaxBrights as well as the new EPIK products.

I think we'll have a solid backlog leaving the quarter.

Let me rephrase the question.

Over the past four quarters, backlog has increased by mid- to high-single digit on a Q-over-Q basis.

Do you think that trend will sustain into Q4?

I don't think we want to try to pin it down to specific numbers.

We are substantially increasing our revenue this quarter, but I do expect it to grow.

Got it.

Sam, I missed your prepared remarks.

How should I think about the OpEx into calendar 2015?

In the slide, it says it should be less than $40 million.

Should we assume that OpEx is going to go flat from Q1 level, or should it continue to decline throughout the year?

Thanks, Mehdi.

Yes, on OpEx we are guiding the low $40 million going forward on a quarterly basis into 2015.

Previous quarters, we rolled out our initiatives for expense and cost reduction.

We had talked about 10% reduction.

Most of our activities are going very well in terms of cost reductions here, and as we complete those activities, we'll give you more update again at the end of next quarter.

So far, we are very happy with the progress we are making, and we expect to be lower than $40 million on a quarterly basis into 2015.

Got it.

Thank you.

Thanks, Mehdi.

We'll go now to Krish Sankar with Bank of America Merrill Lynch.

Hi.

Thanks for taking my question.

Congratulations on the good execution.

Following up on the cost reduction, I understand that next year is going to be the real purchases for the EPIK system and that's when you're going to recognize revenue.

In the past, you've mentioned that that should improve your gross margin profile.

I am curious.

When you look into 2015, your customers have a mix of EPIK, MaxBright, K465i.

How does the cost structure work when you're trying to support three different platforms?

Are you trying to actively move customers away from one of the older platforms?

I had a follow up.

Okay.

Let me start off on that.

I think we have been selling 465s and MaxBrights for a long time.

We've been successful at continuing to drive down the cost of those.

We're introducing the EPIK.

We have designed it to ultimately provide a better gross margin.

I think we'll continue to sell a mix of products and that as we sell more EPIKs, I think over the longer term that's going to help our gross margin.

There will be some transition quarters along the way, especially as we move from the initial revenue recognition approach to a bifurcation approach later in the year.

I'll add to what John just said that our expense and cost reduction activities are in Data Storage business as we rolled them out last quarter, and they're going to help us at the overall Company level.

Along with the new product, EPIK, that we just launched that would also help us in improving our gross margin as we go forward here, post all this revenue recognition related matters are behind us.

Got it.

That's helpful, Sam.

Just as a follow-up, you mentioned that some of the orders trends in Q3 was China and Korea.

I am curious.

I think everyone understands how strong China is.

Do you think the strength in Korea is a one-quarter phenomenon?

Do you expect it to continue to next year?

How do you look at the other regions like Taiwan and Japan?

Thank you.

We have seen some positive orders out of Korea throughout the last year.

This is not a one-quarter phenomenon already.

I think it's going to be bumpy, and up and down, but we do expect more growth out of Korea over the coming year.

I think Taiwan's hard to separate from China at this point because many of the largest Taiwanese customers are investing in China with joint ventures and their own fabs there.

I think a lot of the Taiwan country's growth may show up in China.

I think there's also growth opportunities for us in Japan also.

I think we'll see some business there.

Thanks, John.

Thanks, Krish.

We will go now to Edwin Mok with Needham and Company.

Hi.

Thanks for taking my question.

First question on EPIK, you made an announcement about qualification at Epistar.

I was wondering if the 4Q shipment is just this one customer, or if that you would start to ship to other customers in the fourth quarter?

In terms of the qualification, are there any customer update on where we are in the progress, any targets you can provide for us?

A couple of things; we've had sign-off from two of our beta customers and we expect the third one to come shortly.

We've had orders from both beta customers and non-beta customers at this point, and certainly expect a lot more of that.

We're already seeing a mix.

The product's done really well.

The customers who have evaluated it have given us really great feedback on it.

I think that we're in the building product and shipping it phase at this point.

Okay.

Great.

That's helpful.

Then second question I have is in terms of how do you think about pricing or value of this new product as more customers adopt this product over K465i or MaxBright?

As customers buy this product, I would imagine they gets some value out of it.

Does it mean incrementally because of the improved (inaudible) product, and that the pricing is not priced at the (inaudible) increased incrementally, it actually reduces the size of the market?

How do you think about that?

In terms of your competitors' also having a product in the marketplace, are you seeing them being aggressive in pricing?

Any color on pricing would be helpful.

Okay.

When we develop and launch a new product, we always bring some value to the customers in terms of improvements in throughput, uniformity, cost of ownership, footprint, all of these variables.

The customer has to get some benefit, or they wouldn't actually adopt the new product.

We also expect to share some of that benefit and get some improvement in our profitability and gross margin from the product, so that's generally how we target it.

I would say it continues to be an aggressive pricing market from our competitor, but I think our product is well positioned, performs well, and will help us to do very well over the longer term.

Great.

Thank you.

Thanks, Edwin.

Thank you.

We go now to Vishal Shah with Deutsche Bank.

Hi.

Thanks for taking my question.

I'm just clarifying your comments on the bookings and backlog for Q4.

Could you maybe talk about what the push out was?

Was it single digit, million, small number in that was back to Q3 bookings?

Also, would you say that your bookings are going to be up sequentially in all segments, including Data Storage in Q4?

Hi, Vishal.

This is Sam.

When we talk about push out, it was on the revenue side.

My comment was not related onto the booking side.

It was simply a tool that we were planning to ship in Q3.

It got pushed out into Q4.

That was only a revenue impact, not a bookings impact.

Can you remind of the next question?

Sorry, Vishal?

I am curious if bookings in the Data Storage segment will also be up sequentially.

You mentioned that your backlog is going to grow in the fourth quarter.

Is that going to be across the board, or is it going to be skewed towards one particular product category?

In Data Storage, our bookings, Vishal, in Q3 were on the lower side, as I said in my prepared remarks.

This segment has been booking around $18 million, $19 million, $20 million on a quarterly basis.

Based on the pattern that we have seen in the recent past, I think that would seem to indicate that our bookings would be higher in Q4 in Data Storage as compared to Q3.

Okay.

I appreciate that.

John, taking a stab again at the market size question, you have provided some size estimates in the past.

Now with the introduction of this new tool, can you maybe talk about what you think the market size is going to look like?

We're expecting the market to grow next year and going forward for a number of years after that.

I think that's pretty consistent with what we see from the industry analysts also.

The market is going to need well over somewhere between 1,000 and 2,000 chambers going forward.

I would say those chambers, though, the measure we use is a 465i chamber.

With a new tool at a bigger reactor, you have to scale that.

The market has a lot of need for a lot more capacity to ultimately fulfill lighting.

I think we're confident that's going to happen.

I appreciate that.

Thank you.

Thanks, Vishal.

Thank you.

We will go now to Michael Klein with Piper Jaffray.

Hi.

Good afternoon.

How much your R&D is focused towards OLEDs relative to the total R&D spend?

Does the market opportunity and competitive dynamics make it such that we should expect the R&D here to ramp in coming quarters?

We are spending in the order of $5 million a quarter on OLED-related R&D.

We think that's the right amount.

We see a huge opportunity here, hundreds of millions of dollars of business in multiple segments.

There are some close in opportunities, and there's some opportunities that might take another year or more to hit.

But, obviously, we're investing heavily.

We think we'll get a great payoff from that.

Okay.

Just from an industry perspective, what's your sense of utilization rates and your take on end market demand?

Do you notice customers are now more willing to purchase new tools, or are they still hesitant to make major capital purchases?

Thanks.

I believe you're talking about the MOCVD market.

The utilization rates there have come down a little bit since the last quarter.

In general, we would see, and these are always rough figures, but China, Taiwan, Korea, coming down about five percentage points, all in the 85% range.

They have dropped off.

We believe that's normal seasonality.

These are high rates.

These are rates that I think will cause people to buy more tools, and I believe there is some degree of pent-up demand based on customers waiting for new tools.

I think we don't read too much into a dip in utilization that, frankly, we usually see this time of year.

Thanks, Michael.

Thank you.

We will now go to Paul Coster with JPMorgan.

Thanks for taking my questions.

John, I sense a different kind of tone with respect to the ALD equipment, so what's happened?

Is it that you're suddenly seeing some, a bit smaller, but additional, customers taking a look at this technology?

Are you getting some evidence from your big customers that we're getting closer to a real adoption of this technology?

I think there are actually three things happening.

We're making good progress at our big customer, and that continues.

Obviously, it's taken longer than we thought it would take nine months ago or so, but we are making good progress there.

Secondly, we're starting to see pull from other customers in other regions for flexible LEDs and that type of product.

Third, as we've worked on more adjacent market opportunities, we continue to find a real strong desire from the customers to sample this technology and try it out.

They see they have unmet needs that our OLED technology can provide, and we've got lab tools coming up in Q1 that will allow us to engage with the customers and see if we can take it to the next level.

There's a lot going on, and that's what's maybe driving things.

All right.

We might actually see some, albeit modest revenues in the first half of 2015, it sounds like?

I hope to have revenue in 2015.

I will say that.

I wouldn't comment on preciseness of when.

Okay.

Then, Sam, a quick question on the OpEx.

The $40 million target, that is including stock comp, excluding amortization.

I want to make sure I'm on the right track there.

That is correct, $40 million includes stock comp, equity compensation.

Yes, it does.

Okay.

Thanks very much.

Thank you.

We will go now to David Duley with Steelhead Securities.

Yes.

Thanks for taking my question.

I was just wondering, you had a customer giving you a major customer endorsement on your new MOCVD tool.

If you could share with us what productivity improvements or cost improvements or any metrics that you are hearing back from the customer in real-life production settings?

We stated in our press releases that there is typically a 20% cost of ownership, potentially more.

There is a fairly dramatic improvement in footprint efficiency, almost doubling the amount of LEDs you can put out of a given space in the fab, and a lot of other metrics.

Capital efficiency and things that are better, but beyond just the metrics, the product works well.

I think that's really important.

It's stable and performs well.

Our products are highly automated.

They've had a reputation in the market of having very high uptimes and being real workhorses in people's fabs.

It's the type of product that you really want to use when you're going to have a high-volume fab to make lighting applications.

Will most customers take a beta first and an evaluation before they start to order, or do you expect customers just to order without doing a long evaluation?

First of all, we're done with betas, so there are no more betas.

We've done three betas, and that's what we do with the early.

Beyond that, some of the beta customers are already ordering more for manufacturing.

I know one of the beta customers has moved their beta unit into production situation, and many customers will just buy the product.

I don't think we are going to go through a real long period of evaluations.

Just so I get it right, you shipped the tools that have been shipped into production with these beta customers or moved into production, the amount of time it will take to see revenue from them is how long?

What quarter next year do you think it will be?

The beta tools, as John just mentioned, we have three beta tools, and we have received acceptances on two of them already.

We expect to get the third one accepted soon over here.

In terms of production tools, as we ship the production tools, we would need to wait until a broader pattern of system acceptance is established in the field, at which time we can recognize the revenue upon shipment.

In short, it would take about two quarters or so for us to go from a final acceptance-based revenue to shipment-based revenue on this new product.

Okay.

The betas are already revenued in Q4.

The betas that are already revenued, yes.

Great.

I guess I had two questions there, and you answered them both.

Thank you.

Final thing from me is you mentioned you saw a seasonal downtick in the utilization rates out there.

What time of year do you typically see the seasonal uptick in the utilization rates?

Is that late in the March quarter, early in the June quarter, or typically when is that?

Probably we may begin to see that, since China is a large part of our business, right after the Chinese New Year, we begin to see that, so, say, mid to late spring and onwards.

Thank you.

Patrick Ho with Stifel Nicolaus.

Thank you very much.

John, in terms of the EPIK700, can you characterize the customers that you're getting the initial traction?

I going to assume that they're existing customers of Veeco?

What are some of the opportunities with customers that are not either lead Veeco users or even ones that don't use Veeco's predominantly?

How do you see the opportunity versus transitioning existing customers to potentially new ones?

First of all, we sell to most of the customers in the market.

There are not many customers that are doing substantive expansion that don't buy Veeco tools at this point.

We have over a 50% share in every region of the world, expect Japan.

Generally the leaders around the world have been big buyers of our tools.

Some customers are dual sourcing customers, and some are single.

If you're asking can we penetrate some accounts that we're not yet in at all?

Possibly, but there's not a huge group of those customers.

The customers that have accepted or purchased the tool at this point are global leaders, and they're some of the most important guys around.

Yes.

Maybe I should have clarified a little more just a follow up on that.

If your dual source with the specific customer that's evenly split, are there opportunities where you can then become, quote, the more lead or dominant supplier with this tool?

Sure.

Absolutely.

Yes.

Absolutely.

Great.

My final question, in terms of product bake-offs that you're seeing, it seems like you are getting the traction that you talked about.

Can you characterize in terms of the bake-offs that you're now seeing, are you seeing it against a new product or your competitors' older products?

I think if we're running our new product, it's against our competitors' newer product, but the market's quite aware of both products, and that's really what we're competing with.

I'm not sure if I answered your question.

Thank you very much.

Okay.

Thanks, Patrick.

Thanks, Patrick.

We will go now to Brian Lee with Goldman Sachs.

Hello.

Thanks for taking the questions.

Maybe to follow up on Patrick's question, your main competitor did announce a big order with one of your traditional customers in China.

I am just wondering, was this a competitive bid process, or is there any pricing precedent being set here on these next-gen tools, given that both you and Aixtron have new platforms out?

It would seem that they are potentially being aggressive in trying to get back shares.

So, curious to hear your thoughts on that.

First of all, Synos has been a good customer of ours in the past.

We expect they will be a big customer of ours in the future also.

Clearly, Aixtron has been aggressive and continues to be aggressive to try to win where they can.

I can't comment a whole lot on any specific account though, as I think you understand.

Yes, fair enough.

Second question I had was on the ALD order, maybe just to clarify, if I get it right, you had two beta tools, which got sign-offs.

Those were booked.

Is it fair to assume that both of those tools are for Samsung?

Are they for production, or are they still R&D?

Then last question on that would just be, the $3 million that you did book in orders for ALD, is that representative of the tool ASP as those tools will be configured to ship going forward?

The ALD order was not for a production system, but was for a laboratory system.

The price is not representative of the manufacturing pricing, and it was really one tool.

It was a prototype system, Brian.

Okay.

That prototype system is still in Long Island, or is that in Korea?

It's in Korea.

Okay.

All right.

Thank, Brian.

Just checking.

Thanks a lot.

Thank you.

We will now go to Srini Sundararjan.

Hi.

Thanks for taking the question.

My first question is what particular applications do you think will give you an edge to gain market share with Aixtron in MOCVD?

That's my first question.

Meaning, if you're going to increase your market share next year, what gives you the confidence that you will be able to?

Okay.

The applications are really back lighting and really general illumination.

I think those are the markets.

The longer term growth market at this point is general illumination, and I think our tool is extremely well suited for that market.

I think what gives us the confidence is the quality of our new tool, the innovation levels that improve both throughput --

Srini, I think your phone is giving a lot of feedback on the line.

Srini.

You have a problem with your line.

Okay.

The tool has a number of new innovative features that both improve throughput and uniformity and cost of ownership, and basically helps our customers be able to make more LEDs for a given price.

As a follow-up, on ALD, what kind of applications that you're looking at other than the flexible cell phone-related applications?

Flexible displays, obviously, OLED lighting, certain semiconductor applications, and a number of other areas.

Okay.

Looking back in retrospect, do you think that you underestimated the timing it would take for it to be revenued?

We certainly would have liked it to revenue earlier.

We thought it had a good chance of revenuing earlier, but we also knew there was a significant probability that it would revenue later.

I think the important part is, is it's really great technology with compelling benefits.

That's what we feel good about.

Thanks.

Thanks.

(Operator Instructions)

All right.

I think we'll wrap up at this point.

Thank you for joining us, and we'll look forward to speaking to you individually where we can.

Thank you.

Thank you.

This concludes our conference.

Thank you for your participation.