Veeco Instruments Inc (VECO) 2015 Q1 法說會逐字稿

Good day, and welcome to the Veeco Instruments first quarter 2015 earnings call.

Today's conference is being recorded.

And at this time, I would like to turn the conference over to John Peeler, Chairman and CEO.

Please go ahead, sir.

Thank you, operator.

Joining me today is our CFO, Sam Maheshwari.

In addition, I am pleased to introduce our new Vice President of Investor Relations, Shayne Hudson.

Shayne joined Veeco on Monday, having most recently served as Head of Investor Relations for Riverbed Technology.

Prior to that she was Senior Director of IR at Lam Research.

In addition to being an accomplished IR professional, Shayne has an engineering background, starting her career at Texas Instruments and Varian Semi.

[I am] excited to have Shayne on board, and we expect that many of you already know her.

We look forward to her getting out to meet you in the very near future.

As her first order of business, I'll turn it over to Shayne to read our Safe Harbor statement

Thank you for such a gracious introduction, John.

I'm very excited to be on board.

Today's earnings release is available on the Veeco website.

Please note that we have prepared a slide presentation to accompany today's webcast.

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

This material is being recorded by Veeco Instruments and is copyrighted material.

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

Your participation implies consent to our taping.

To the extent, that this call discusses expectations about market conditions, market acceptance, and future sales of the Company's product, 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 section 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 reconciliation to GAAP measures of performance is available on our website.

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

Thanks, Shayne.

I'm pleased to say that Veeco hit our targets.

Bookings were $102 million, as anticipated after a strong Q4.

Revenue was $98 million, near the high end of guidance.

Gross margins were at the high end of guidance at 38%.

Our EBITDA was a positive $2.7 million, and we drove EPS ahead of guidance, while cash was stable.

Overall, a solid performance to kick off the year.

Sam will fill you in on the details.

Thanks, John.

I would also like to welcome Shayne to Veeco.

With a deep semi conductor capital equipment background, I know she will ramp up quickly on our business, to be an asset to Veeco, and helpful to all of you.

I will be talking about non-GAAP results for the quarter, and a detailed reconciliation between GAAP and non-GAAP results is provided in the press release, as well as posted on our website.

I'm pleased to report that Veeco delivered at or above the guidance range for all metrics for the first quarter of 2015.

Revenue was $98 million, a decline from Q4, but ahead of the guidance mid point.

Shipments for the quarter were higher than revenue.

As expected, we shipped a number of EPIK systems in the first quarter.

Revenue for those systems was not recognized in Q1, as per the usual accounting practice for new products.

As a result, EPIK deferred revenue increased by $25 million in Q1.

This will largely be recognized during the remainder of 2015, as we receive final sign-off from the customers.

Non-GAAP gross margin was 37.7%, a slight decline from Q4, but at the top end of our guidance range.

Gross margin declined from Q4 due to significantly lower business volume, offset by a positive change in the product mix sold.

We maintain our focus on driving down manufacturing costs through supply chain management and other initiatives, and expect to see further improvement in gross margin towards the end of the year.

We're seeing improvement in margins on the deals that are currently being booked, which would flow through the P&L in six to nine months.

This nearly 38% gross margin, combined efficient spending control, and a lower-than-expected tax provision contributed to a non-GAAP diluted loss per share of $0.01, beating the top end of our guidance by a handsome $0.06.

Adjusted EBITDA of $2.7 million was also ahead of the top end of the guidance range.

Non-GAAP operating expenses declined from the previous quarter, even though we absorbed full quarter of expenses from the PSP acquisition.

We are clearly realizing the full benefit from expense reduction activities announced mid-year in 2014, which have now been fully implemented.

R&D ticked down a bit in the first quarter, due to receipt of certain engineering credits, as well delay of certain project material related expenses into Q2.

Now turning to market data.

Starting with this quarter, we will provide our bookings and revenue data by the following four markets, lighting, display, and power electronics; advanced packaging MEMS and RF; scientific and industrial, and data storage.

We cross-sell our products into multiple markets, and believe that these end markets will give you a better visibility of our business.

These charts can help you track our performance on a quarterly basis going forward.

Historical revenue trends for 2014 is provided in the backup section of today's presentation material.

We anticipate future growth from the lighting display and power electronics markets, as well as from the advanced packaging MEMS and RF markets.

Note that the data storage number as reported here, is much smaller than previously disclosed under the data storage segment, as a meaningful amount of our ion beam etch and ion beam deposition products are actually sold to markets like scientific, industrial, MEMS or RF.

As you can see from the chart on the upper left, lighting display and power electronics which is primarily MOCVD, made up nearly 60% of our $102 million in bookings, with the remaining 40% split fairly equally among the other three end markets.

While we continue to expect MOCVD booking patterns to fluctuate, we are seeing a general upward trend in orders in that business.

Demand for MOCVD products continue to strengthen, and there were no order cancellations in the quarter.

Lead times for delivery are stretching, and pricing is improving as well.

On a geographic distribution basis, 45% of our first quarter revenue came from customers in China, largely related to MOCVD sales.

We continue to see strong demand from customers in that region, who are either facing capacity constraints, or anxious to monetize the government subsidies.

The total Company book to revenue ratio to for Q1 was slightly above 1, and the total backlog at quarter end was $289 million.

Now turning to the balance sheet.

Q4 cash flow from operations was $[4] million, and the quarter ended with $393 million in cash and investments.

Overall, the cash balance was stable from Q4.

Quarter-over-quarter, our AR balance increased slightly, and the decrease in inventory is related to the start of shipments of EPIK700.

Accounts payables increased, as we efficiently managed our expenditures for the quarter.

Now turning to guidance for Q2.

We began shipping production EPIK systems at the beginning of this year.

We are confident that Veeco will generally be able to migrate to a revenue upon shipment model for EPIK sometime in Q2.

This would then allow us to start taking revenue upon shipment of the subsequent tools.

However, the exact timing for this cut-over is somewhat fluid.

Given the circumstance, we are issuing a Q2 revenue guidance range of $100 million to $150 million, which is wider than our historical practice.

Actual results will depend upon the timing of this revenue cut-over, with a [noise] effect on the deferred revenue.

At the low end of $100 million in revenue, Q2 EPIK deferred revenue is expected to be $65 million.

Conversely, at the high end of $150 million in revenue, deferred revenue is expected to be $25 million.

Q2 non-GAAP gross margin is expected to be 36% to 39% range.

There are a few factors impacting our near-term gross margin performance, including a large volume purchase from a single customer with higher discounts.

Also as is consistent with new product introductions, gross margins drags a little bit until we reach critical scale with EPIK.

While these factors will prevent gross margin from reaching 40% in the Q2 and likely Q3, we reiterate our expectation to achieve gross margin of 40% or more by the fourth quarter of 2015.

OpEx is expected to be in a range of $39 million to $42 million, commensurate with higher revenue.

Incentive compensation, commission, as well as R&D expenses are expected to be higher in Q2.

I wanted to remind everybody that these are non-GAAP operating expenses, and exclude equity compensation, nonrecurring items, and intangible amortization.

Non-GAAP tax rate is expected in the 18% to 20% range for 2015.

Q2 non-GAAP EPS is expected to be negative $0.06 to a positive $0.33 per share.

Adjusted EBITDA is expected between breakeven and $20 million.

Based upon strong EPIK momentum, we expect that new orders will grow sequentially, and Veeco's total orders for the second quarter will be higher than $140 million.

With that, I will turn the call back to John for a business update.

Thanks, Sam.

LED lighting adoption continues to accelerate, and the real question is how fast it will happen?

In 2014, LEDs were 5% of lighting units shipped on a global basis.

Market research firm IHS forecast LED unit shipments to grow to be about 18% of total lighting units in 2018, and 35% by 2022.

Strategies Unlimited is more bullish, expecting 28% unit shipments in 2018, and over 50% by 2022.

In either case, there's a lot of demand to satisfy.

Our estimate of LED lighting adoption lies between the IHS and Strategies Unlimited forecast, and translates into a 43% compound annual growth rate, on top of the more traditional segments of backlighting, automotive, and signage.

In addition to this, we're seeing the unique characteristics of LEDs create exciting new growth opportunities.

For example, in indoor agriculture where the ability to vary the day/night cycle and spectrum can accelerate plant growth by 250%, and create high-quality food products with minimum water usage.

Another opportunity is off-grid lighting, to bring solar power to LED lights to areas with no infrastructure, such as India, China, and Africa, with LEDs replacing inefficient alternatives.

And in education, where there are 2.5 million schools in the world, LEDs have the potential to change the lighting in different periods of the day to increase learning effectiveness.

When we add it all up, we expect the unit growth in LEDs of approximately 21%.

Although the end market will grow 21%, the MOCVD market growth will be lower than that.

Yield and brightness improvements will lower the MOCVD total available market, while increased services, upgrades, spare parts, and replacement of older tools will mitigate that reduction.

The net result is that we expect the MOCVD dollar TAM for the LED market to have a CAGR of approximately 15%, and reach nearly $1 billion by 2019.

It's likely that there will be some cyclicality, but there is still very good growth ahead.

The near-term trends are even more favorable for Veeco.

LED Company earnings results continue to prove that those companies that can make mid-power LEDs at the lowest cost will win in lighting, and our install base and position with market leaders in greater China is extremely strong.

Customers want the flexibility to move up to larger wafer sizes, to lower their backend processing costs, and they want tools that can run reliably for long campaigns between maintenance and cleaning.

The TurboDisc architecture makes changing wafer sizes easy, and it can operate with hundreds of runs without expensive cleaning, reconditioning and downtime.

Building on these architectural advantages, our new EPIK 700 is doing exceptionally well in the market.

All beta customers have qualified the tool, and placed follow-on volume orders.

Our customers have quickly moved from our K465i and MaxBright platforms to the EPIK700, and nearly all of our shipments to LED customers are now EPIKs.

MOCVD orders are expected to be over $100 million in Q2, driving expected Veeco bookings above $140 million.

EPIK prices are increasing, and are well above the low pricing for our initial high-volume order.

And lead times are moving out, and we're challenging our manufacturing team to build tools faster.

EPIK's is a real winner, and these are exciting times.

Turning to our newly acquired Precision Surface Processing business, I am pleased to say that it is off to a great start.

Growth in smartphones, wearables, and other mobile devices are driving activity in MEMS, wireless devices, and advanced packaging.

China is starting to invest big in MEMS.

We received orders in the first quarter for a Metal Lift-Off application.

We are also seeing significant activity in the US and Europe.

Veeco's sales team is actively engaged to drive new account penetration, particularly in regions like Korea and Japan, where SSEC had limited presence.

Taiwanese foundries are also investing in MEMS, and we had an important strategic order from an Asian foundry in Q1.

In Through Silicon Via applications, we are seeing good opportunities and momentum in customer demos.

And overall, PSP orders are very healthy, with a book-to-bill ratio consistently over 1. We have great opportunities in process equipment, and services for LEDs, power electronics, and mobile devices.

In MOCVD, we're shipping products at the fastest rate since Q4 of 2011, booking orders at higher margins, and extending our market share lead.

Our customers like our products because they're reliable, efficient to operate, and lower the cost to make LEDs.

We expect to shift to a revenue-on-shipments operating model for the EPIK700 sometime in Q2.

And since that timing cannot be accurately predicted, our Q2 revenue has a wide range.

Independent of the timing of this transition, we expect second half revenue and profit to be much stronger than the first half, and full-year revenue growth to exceed 35%.

Excited about Veeco's prospects for 2015 and beyond.

Our business is improving.

We've added a new growth driver with PSP.

We're satisfying our customers, and we expect to have a great year.

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

(Operator Instructions)

And at this time we will take a question from Steven Chin with UBS.

Please go ahead.

Thanks.

Hi John and Sam, thanks for letting me ask the question.

My first question is on the wide range for guidance here in the second quarter.

So maybe you can further explain the revenue recognition transition on these EPIK tools leading to this large guidance range.

I wanted to make sure I understood what the revenue recognition is.

Sure.

Thanks, Steven.

So the revenue level is really driven by us achieving the revenue upon shipment status.

And this status is achieved when we have a number of production tools signed off.

We are working with our customers to achieve this goal and it is difficult to predict when exactly this would happen as it depends upon customer situation including customer facility readiness, customer technology readiness, and other logistical matters as well.

The sooner we achieve this status the higher the revenue or vice versa.

From a business perspective this is really irrelevant because we are continuously shipping the product and we are collecting the cash.

It is really a timing issue; it has nothing to do with product performance issue or as I said, it has nothing -- it does not impact the business situation at all.

Hopefully that answered your question, Steven.

Yes, thanks for that, Sam.

My follow-up question is on the EPIK tool, John.

You sound pretty optimistic on the EPIK performance, especially with the second quarter guidance for MOCVD orders.

So maybe you could share some color on what the customers are saying about the tool and how that ties into some of the order visibility for EPIK.

Thanks.

Well look, the tool's operating very quickly in the field.

I think part of that and part of how well it is doing is shown by the fact that all the beta customers came back and placed substantial follow-on orders.

We've received several large orders from other customers and some smaller orders also.

The fact that customers quickly changed who had been buying MaxBrights and 465is quickly changed over to the EPIK is another kind of evidence of how people like it.

It has great throughput, great footprint efficiency, the best cost of ownership, and it can really run for hundreds of runs between maintenance and reconditioning and those things; it's an order of magnitude better than the competition in that area.

So they recognized a great product and that reception's been extremely positive with really no negatives.

Okay.

Thanks, John.

Thanks, Steven.

At this time we will hear from Krish Sankar with Bank of America Merrill Lynch.

Hi, thanks for taking my question.

I have two of them.

I'll ask them both upfront.

First, Sam, thanks for the color on revenue region by region.

I'm kind of curious, on the rest of the world breakdown, how does this look between Japan and Korea in Q1?

And then as a follow-up, you spoke about [wait] larger [vapor] prices for LED and it looks like Epistar and even [lexor] are talking about it.

Is that actually new tool potential, do you think?

Or is it going to be a bridge to existing install base for 6-inch?

Thank you.

Thanks Krish, I will take your first question in terms of the geographic distribution.

The rest of the world here for us is really Japan, Korea, Taiwan, and Southeast Asia.

And as you know, we have customers related to LED in Korea, Japan, and Taiwan for sure.

And then the customers related to data storage business in Southeast Asia are also in there.

So this [worse than page or] our exposure to the rest of the world could change quarter to quarter as we obtain business and ship products to Japan and/or Taiwan and Korea.

So that's really the color that I can provide you on that.

I don't know if that is what you were wanting to know or something else.

That's fine.

And then the question on the 6 inch?

Yes, so there has been a trend of, first of all, in China customers moving from 2-inch to 4-inch and then industry leaders in multiple regions working to move from 4-inch to 6-inch.

For Veeco, that's a very -- it's not a new tool.

It doesn't enable new tools.

The customers want to move up to lower their backend processing costs.

So when they move from 4-inch to 6-inch, they get some real efficiencies in the packaging side of the business.

It doesn't have a whole lot of impact on MOCVD throughput or efficiency; it is really backend savings that they get.

With Veeco tools, that's very easy to do by just really changing the wafer carriers.

Now, you have to tweak your recipe and you have to do some other things to be able to run at 6-inch but it's easy with our tools, and our new EPIK is very well-proven at both 4-inch and 6-inch, and we'll make that an easy transition for the customers.

Thanks, John.

Thanks, Krish.

Next question will be from Brian Lee with Goldman Sachs.

Hey guys, thanks for taking the questions.

First, Sam, on the OpEx, I was wondering, can you quantify how much quarterly OpEx you're still incurring related to the Synos business?

And then what your thoughts are around further rationalizing the spend in that segment and then what the potential timing for that could be.

And then I had a follow-up.

Thanks, Brian.

In terms of OpEx related to our ALD business, we are still in the $10 million to $15 million range in terms of what we are spending on an annual basis.

We had announced expense reduction activities in that area, partially, last quarter and we have now completed those.

We are excited about this technology and we are working on a number of things there.

And as we said last time you can expect to hear from us towards the end of the year in terms of progress on ALD.

Okay.

Great.

Fair enough.

And then John, you suggested, if I heard the numbers correctly, a $1 billion MOCVD market by 2019 with a top-line CAGR of around 15%.

So I know you're saying it won't be linear but that would imply somewhere around the order of 300 to 400 tool/chambers in 2016.

So curious is that the right way to think about how you are sizing the market opportunity in the next one to two years in that segment?

It is; first of all a couple of clarifications.

The $1 billion is revenue, or the 15% is revenue CAGR.

I think on average the number of units is 300 to 400 or more.

I think the only thing I didn't totally align with you on is 2016 is not exactly clear yet.

We think it will be a strong year, we're seeing some indications from leading customers for orders placed later this year that will run into 2016.

So, I think other than cyclicality, these are reasonable numbers and it's expected to progress ahead.

Okay.

Thanks.

That's helpful.

Okay.

Next question will be from Vishal Shah with Deutsche Bank.

Hi, thanks for taking my question.

I guess my first question is on the market share progress you're making.

Can you talk about if over the last couple of quarters, have you gained share at any of the customers that your competitor had a strong position?

Well, I think if you look at the revenue levels of us and our competitor, you'll see that we did gain share, and coming from an overall revenue market share in 2014 of better than 60% to probably closer to 68% in Q1.

So, I think we've done very well on market share.

That's helpful.

And then maybe talk about where you think the lead times are today and what is your view of what lead times could do.

Also what percentage of your MOCVD orders were EPIK?

So lead times have been moving out.

We have a lot of customers that really want to receive units as quickly as possible and are pushing us to send units to them as opposed to send units to others, probably in the six-month range now, and we have been ramping our manufacturing, and as I said, shipping at a rate that we haven't seen since 2011.

So that's pretty significant.

And what was the last piece of your question?

Vishal, I believe you were asking in terms of EPIK sales as a percentage of MOCVD sales?

Yes, on the (multiple speakers)

Orders, sorry.

It's mostly EPIK.

Okay.

It's mostly EPIK on the LED side, there are some exceptions where customers need to use a different tool, but it's mostly EPIK.

I would like to add there that we've been ourselves very positively surprised by the strong adoption of EPIK, and as we look towards our second half and in the outer quarters here, EPIK, there's a lot of EPIK in there, and that's really good.

We -- compared to where we are talking to you today versus how we were talking to you three months ago, EPIK has really surprised us positively on its adoption.

That's helpful.

Thank you.

Thanks, Vishal.

At this time we will take a question from Edwin Mok with Needham & Company.

Hey, thanks for taking my question.

So on the orders that you guys talk about on the MOCVDs, did you put down how much of the $105 million order was MOCVD?

If I missed a number I apologize.

And then in terms of that order and how you guys think about -- because I think you talk about orders going to go up in the second quarter.

Is that order now broadening with previously just one large customer ordering, but now you're seeing much broader number of customers buying increased numbers of 2s?

Is that where you can give us some color or size of those orders?

On your first question, Edwin, the bookings were about $59 million.

If you see on the chart slide number 7, 59% of $102 million in bookings, that is largely MOCVD.

And then coming back to your second question in terms of broadening of customers, yes, we are definitely seeing broadening or the widening of the customer base across multiple countries and we're working with all the leaders and we are seeing order activity with all of them.

So, definitely, it's not one customer-driven activity.

Okay, great.

And I would like to remind you that one large customer order we booked, most of it in Q4, so activity in Q1 and other projected activity in Q2 is from other customers.

Great.

Thanks for clarifying that.

And then, on the PSP I was wondering, I remember PSP was highly concentrated in the US when you bought the business, right?

How has that changed now versus when you bought the business, and how do you think that can evolve as we go through this year?

Well so, PSP was certainly strong in the US.

But it also had a solid position in other regions, including Europe and Asia.

I think it has continued to be strong in the US and Europe, and to win deals in Asia.

I think we are going to be able to add some value by opening up some new countries in Asia where PSP didn't have a strong sales organization.

So Korea, for instance, is a new opportunity for us to add.

So I think it's going to be a pretty well-balanced business between Asia and the US and Europe.

Any way you can kind of put numbers around those, maybe, in terms of how (multiple speakers)

It's probably a little too early.

We've had it for four months.

Or one quarter plus one month in Q4.

So, we'll give you a little more color as we get a little more time with it.

Edwin, I'd like to add that they are ahead of what our acquisition plans were, so they are definitely doing good.

And we, as John just mentioned, we are opening new doors for them in places that we have a very strong sales channel, and that is definitely helping.

Great.

Thank you.

Thanks, Edwin.

Next questions will be from Patrick Ho with Stifel Nicolaus.

Thank you very much.

First, on the LED side, John, could you give a little bit of color in terms of industry utilization rates and where they're trending and whether, if they continue to keep rising, you could see another step up in orders sometime later this year or even into early 2016?

Can you just give a little bit of color on that?

Sure.

I think we've seen utilization rates overall tick up in almost all regions over the last quarter.

I think we're at 90% or so in China, kind of close to that in Taiwan, probably up 3 to 5 percentage points in each of those countries.

Korea's come up by a similar amount, probably 85% US and Europe, probably close to 90%.

So, they are high and they have been moving up.

It's hard for us.

We're pretty comfortable to say that Q2 orders are going to be up significantly from Q1.

We do see some significant orders in the second half of the year but it's hard to quantify it in total.

Certainly could happen that they could be larger.

Great.

That's helpful.

And then moving to the PSP business, traditionally with the strength in, obviously, recent years has been on the MEMS, the powerless electronic devices.

How do you see advanced packaging applications potentially driving that business in 2015, or are we still a little bit early in terms of the TSV adoption where that could be a bigger growth driver, say, in 2016 and beyond?

Well, we've seen a lot of activity in TSV demos and evaluations and interest.

And customers looking at a web process versus a dry process in that.

And at least one major customer has told us that they both work well, and we think our process has a significant cost advantage.

So we've got some advanced packaging orders this year already.

We're expecting some more.

I think 2016 will be bigger than 2015 because it still is a little early in the adoption.

And then beyond the advanced packaging we expected to continue to maintain strength in RF devices, MEMS, and those areas which we traditionally had strength in.

Great.

Thank you very much.

Thank you.

Moving on to Mark Heller with CLSA.

Thanks for taking my question and congratulations on the good results and outlook.

I was wondering, you talked about over $100 million in orders for MOCVD in the second quarter and also promising orders for the second half.

Can you just talk about where you're seeing most of that order -- where those orders would come from?

Is it mostly China, or Taiwan, Korea, can you give some geographic color on where those orders are coming from?

Well, as Sam said, the orders have been pretty well distributed across the regions.

Clearly, if you look at our business, we've had a very strong business in China for a long time and we expect that to continue to be a major area of strength with multiple customers in China, and it's really driven by lighting and mid-power LEDs that are the largest portion of the lighting market.

So, clearly that will be the largest region, but we see activity in Taiwan, Japan, Korea, Europe are all opportunities and we expect some reasonable geographic distribution.

Got it.

And then, I know it's a bit early to talk about 2016, but for 2015 obviously Sanan is a big chunk of the industry's shipments.

I'm just wondering, assuming they're not going to repeat order for next year do you think the industry still grows in 2016?

I think there's good potential for growth in 2016.

It's too early for us to call that or give you guidance, but we do have customers talking to us now about substantial orders in the second half that would flow into 2016, and so I think we're going to have a healthy industry in 2016.

Thank you.

Next question will be from Srini Sundararajan with Hambrecht Summit.

Hi guys, thanks for taking the call.

Could you help me on this time, what is the average sign-off period for EPIK?

And also how much of the 35% up revenues in 2015 based on product shipped into 2014?

Let me take the first one.

On the average sign-off period, it's usually three to six months for most of our products, not just EPIK, and it may take a little longer for a new product, but that's pretty typical.

The things that can impact that are, is the customer's fab ready and do they have everything prepared?

We've had some cases where that's taken a little longer than expected.

But three to six months is typical and I'll let Sam answer the second half.

Thanks, Srini.

On the second question, there would be very little revenue in 2015 from product that was shipped in 2014.

It would be more than zero but it would be very, very minimal, maybe $10 million, $15 million at the most.

I just don't remember that number, but that is not at all a driver for 2015 performance.

Okay, thank you.

As a quick follow-up, could you tell me how you got to the high end of EPS?

My back-of-the-envelope calculation found that a little bit wanting.

And second part of the question, would you -- given that you are doing better now, would you consider a dividend?

Well, I will try to answer the second question first.

In terms of our cash balance, we definitely have a very good cash position, about $220 million of that cash is kept in foreign locations.

But that said, if you look at our performance we have been cash flow positive for many quarters here, and so I would agree that we do have some excess cash and we continuously evaluate our alternatives for deploying this cash, and as it comes down to practical matters for us, there really are two choices.

One is to return the cash back to shareholders through a buyback program, or deploy the cash for additional M&A.

As such, as of now we do not have any buyback program approved by our Board, otherwise you might have already heard about it.

And to give you some idea on the M&A side, we do have an active M&A program, and in our M&A funnel there are a portion of these that look good.

So both those choices are very valid choices, and we discuss with our Board both, and as and when any decision is made, you would know about it.

And then remind me what was your first question, Srini?

How do you get to the high end of the EPS?

I'm having some problem getting there with the back-of-the-envelope calculation.

Perhaps I'm wrong.

But could you give me a little bit more color?

Sure.

The way we done our math on the high end, obviously gross margin would be higher, and then at the same time, you take our range on OpEx and use the tax rate between 18% to 20%, you use the tax rate on the lower side, you would get to the EPS which is the high end of the Q2 EPS that we are guiding.

So, based on that we did our math and you can get there on the high end of EPS.

Okay.

Thank you so much.

Thank you, Srini.

At this time we will hear from David Duley with Steelhead Securities.

Thanks for taking my question.

Earlier talking about the revenue recognition of the MOCVD tools and the new tool, and how that can put the book and ship is sometime in the Q2 is the cutoff.

Maybe you could clarify things and help us understand what the shipment levels have been over the last few quarters or what they're going to be going forward as that is much more relevant than this timing of when the revenue -- when it hits the revenue.

Thanks, David.

Sam here.

We typically do not disclose our shipment numbers but I will nonetheless try to answer your question.

If you look at other revenue range for Q2, we are providing -- indeed we are providing a wider range, $100 million to $150 million.

But at the same time we are providing a deferred revenue range of $65 million to $25 million, so $65 million is product that is shipped in Q2 but could not be recognized for revenue.

So if you add the two up, you are looking at $165 million in shipment on the low end, and if you take $150 million in revenue and add $25 million of deferred revenue, you're looking at $175 million in shipment.

So, a crude math without disclosing the real exact shipment numbers here, what you can see that we're talking about $165 million to $175 million of shipment in Q2, and this is quite an elevated shipment level for us.

I do not quite remember an exact math for my Q1 numbers but based on what we disclosed previously for Q1, you could do the math and see where the shipment numbers are.

Does that help you, David?

Yes.

And then I have a couple other questions.

As far as the gross margin improvement for the year goes, hitting 40% by year-end, what are the key metrics that need to have happen to achieve that target?

Sure.

Great question, David.

There are a number of things that are going through our P&L right now.

First of all, we are shipping EPIK at quite a high level and we are ramping the product up, whereas on the revenue side all that shipment is not being recognized.

So, right now we're seeing a little bit of a drag in Q2 and Q3 because of product ramp-up.

But all this is supposed to work its way through by the time we are in Q4.

The second reason is we took a large volume order from one customer two quarters ago, on which the discount was slightly higher and that business is going to flow through the P&L during Q2 and Q3 timeframe.

The margins on that business, that order, is a little bit lower than corporate average and so it keeps our gross margin range-bound.

The third situation here is that we are making very good improvement.

I'm very pleased with the progress we are making on our cost reduction efforts on the material side.

Now as you know, we've already obtained lower cost on the material but it takes some time to flow through the P&L, so by the time Q3 ends, the cost reductions will also start to show up on the P&L and that gives us the confidence that Q4 we would see a significant pickup in gross margin.

Okay.

That's very helpful.

Thank you very much.

At this time we'll take a question from Mehdi Hosseini with SIT Investment Associates.

Yes, thanks for taking my question.

I joined the conference call late so I apologize in advance if I'm repeating -- this question has already been asked.

Can you please help me understand what is driving the upside to year-end guide, specifically what is the key segment of these driving most of these upside?

And I have a follow-up.

Okay.

Well, we had said in the last quarter that we expected to grow over 30%; we've increased that to over 35%.

I think there are a couple of drivers behind that.

Obviously the addition of PSP adds some significant growth to the year, but aside from that, the MOCVD business is doing very well and we have a very strong backlog, we're expecting strong additional orders, and so that business is delivering some exceptional growth and then the third factor is in the mobile applications.

We've seen good growth in that segment related to RF and MEMS and advanced packaging.

So I think those factors in both order trends, product success, are what are enabling us to push up our overall number for the year.

Sure.

That's fair.

So John, last time you guided to PSP revenue up around $68 million for the year.

Your commentary suggests that it's going to be about $70 million.

Is that fair?

And to that end, is it going to be well above $70 million or how should we think about it?

Because last time you provided a specific guide for that specific segment.

Mehdi, I'll take that question even though you're asking John.

We guided PSP business to be $65 million for 2015 and we are seeing good order activity there and we expect it to be ahead of that plan.

But not much more in the sense our reason to increase our growth for 2015 is largely driven from the MOCVD strength.

Yes, the PSP business is doing better than $65 million, but it is not crossing $70 million.

Got it.

Thanks for deeper color.

I appreciate it.

Thank you, Mehdi.

We have time for one more question.

This will be from Paul Coster with JPMorgan.

Thanks very much.

So I'm sorry, I was also late to the call so if this has been asked, apologies.

But the new EPIK machines that are being sold, are they adding to the client customers' fleets, or are they replacing old equipment and what's happening to the old MOCVDs if the latter is the case?

And one follow-up.

They are predominantly adding to the customer fleets and bringing on additional capacity.

I think on the other hand, we do see customers starting to think more about replacing older units, and we do think that over the next year or so that replacement activity will pick up due to the benefits of the new products and that will help to give us a little bit extra growth.

But right now they're adding capacity.

Okay.

And my follow-up question really is about M&A.

Is there a sort of unifying vision here, John, beyond obviously trying to promote growth and profitability?

Do you see yourself at some point becoming a kind of complete solution set for specific industries' sectors?

Well, I think if you look at the PSP acquisition, it's a good example of what we've been trying to do.

In that case, that business was a healthy business with good financial metrics all around, really, gross margin, profit, and those things.

It had a good overlap with our existing customer base, and we could bring value to it.

So in the case of PSP, we're able to take those products into some customers where they probably would not have connected with.

So it's a business that added revenue and profit, we could positively impact it and we had a good bit of confidence that we could be successful because we knew the customers in many cases already.

Does give us more products to sell to the customer base, but I wouldn't go star so far as complete solution.

I think that's -- most of our customers want to buy best-of-breed products and that's our focus.

So, maybe another element of it, at least in the sectors it serves, we tend to be the number one or number two in each of our markets and we're looking for companies that really have compelling technology leadership and are going to be the leader in a defined niche.

So not quite complete solution but partially there.

Okay, thank you.

Okay, thanks, Paul.

All right.

With that, operator, we'll wrap up for today.

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

And again, this does conclude today's conference call.

Thank you all for your participation.