Veeco Instruments Inc (VECO) 2017 Q3 法說會逐字稿

Good day, and welcome to the Veeco Instruments Third Quarter 2017 Earnings Call.

Today's conference is being recorded.

At this time, I'd like to turn the conference over to Ms. Suzanne Schmidt with Investor Relations.

Please go ahead, ma'am.

Thank you, operator, and good afternoon, everyone.

Joining me on the call today are John Peeler, Veeco's Chairman and CEO; and Sam Maheshwari, our CFO.

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

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

Your participation implies consent to our taping.

To the extent that this call discusses expectations about market conditions, market acceptance and future sales of the company's products, future disclosures, future earnings expectations or otherwise make statements about the future, such statements are forward-looking and are subject to a number of risks and uncertainties that could cause actual results to differ materially from the statements made.

These factors are discussed in the Business Description and Management's Discussion and Analysis sections of the company's report on Form 10-K and annual report to shareholders and in our subsequent quarterly reports on Form 10-Q, current reports on Form 8-K and press releases.

Veeco does not undertake any obligation to update any forward-looking statements, including those made on this call to reflect future events or circumstances after the date of such 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 turn the call over to John for his opening remarks.

Thank you, Suzanne.

We're pleased to report strong results for the third quarter with revenue of $132 million, non-GAAP operating income of $6.8 million and non-GAAP earnings per share of $0.09.

Our results were driven by strong sales of MOCVD and PSP systems into the LED lighting, display and compound semiconductor markets.

While we are seeing robust demand in China for our MOCVD systems, we are also seeing increased competition.

As a result, we are seeing some pricing pressure which will impact our gross margins.

And Sam will address this in more detail later in the call.

That said, backlog improved once again this quarter, and bookings grew by more than 30% sequentially to reach $162 million in Q3.

Backlog growth was driven by multiple system orders from LED manufacturers in Asia and Europe.

Now let me turn the call over to Sam for a review of the financials.

Thanks, John, and good afternoon, everyone.

Today, I will be discussing our non-GAAP financial performance.

You can find a detailed reconciliation between GAAP and non-GAAP results in the press release and on our website.

As John mentioned earlier, we are continuing to see recovery in the MOCVD market, which we alluded in our last earnings call.

We are pleased with our Q3 bookings performance, which came in at $162 million or a 32% increase over Q2.

The main driver of the bookings growth was increase in the LED lighting, display and compound semi markets, where we received multiple system orders from LED manufacturers in China, Korea and Europe for our MOCVD systems in the EPIK, Propel and K475i family.

Additionally, we received a large multitude order in Taiwan for PSP systems to support a power electronics application.

As a result of our strong bookings, our Q3 ending backlog was $299 million, which is up by $29 million from the last quarter.

Now turning to revenue.

Q3 revenue of $132 million was up 15% from last quarter.

Sales into LED lighting, display and compound semi total $60 million and contributed 45% of overall revenue, driven by the continued shipment of MOCVD and PSP systems to Europe, China and Southeast Asia.

Sales into advanced packaging, MEMS and RF contributed 17% of overall revenue, driven by Ultratech and PSP system sales in advanced packaging area and continued sales of PSP systems for MEMS applications.

Scientific and industrial revenue contributed 25% of overall sales and was supported by shipments of ADE systems for optical coating and data storage applications.

And lastly, front-end semi contributed 13% of our overall revenue, driven by the Ultratech laser annealing and ADE photomask system.

Geographically, revenue in China excludes EPIK 868 shipments that were deferred from recognizing revenue.

We expect to record revenue from those tools in Q1 of 2018.

Revenues to rest of the world increased to 49%, primarily driven by sales into Malaysia and South Korea.

Now turning to the P&L.

Our third quarter performance was strong with all 4 P&L metrics either within or better than the ranges provided.

Q3 non-GAAP gross margin was 42.3%, up 1.7 percentage points sequentially.

This was driven by favorable product mix across many of our product lines.

Q3 non-GAAP OpEx was $48.9 million, up $11.7 million sequentially, reflecting the full quarter impact from Ultratech and slightly below the low end of our guided range.

Q3 non-GAAP operating income was $6.8 million, which was toward the high end of our guided range.

Q3 non-GAAP taxes were $0.5 million.

Our annual non-GAAP tax expense is approximately $6 million.

Annual cash tax expense is around $3 million, and our total NOLs are $244 million in the U.S., including Ultratech.

And finally, Q3 non-GAAP EPS was $0.09 based on a diluted share count of 47.3 million shares.

I would also like to mention that our manufacturing consolidation initiative in New Jersey is largely complete at this time.

We are realizing close to $4 million in annualized synergies beginning towards the end of this quarter.

Now moving to the balance sheet.

We ended Q3 with $321 million in cash and short-term investments, an increase of $18 million from Q2, driven by a strong cash flow from operations of $25 million.

Approximately $144 million of our cash is held offshore, which may be subject to taxes in order to repatriate.

Accounts receivable was $114 million, up from $108 million in Q2 and inventory ended at $114 million, down from $120 million from last quarter.

Long-term debt on the balance sheet was recorded at $273 million, which represents the carrying value of $345 million in convertible notes.

Now turning to guidance for Q4.

We are guiding revenues in the range of $135 million to $155 million.

Q4 non-GAAP gross margin is expected in the range of 39% to 41%.

Q4 non-GAAP operating expenses are expected between $49 million and $51 million.

GAAP EPS is expected between negative $0.33 to negative $0.17 per diluted share.

Non-GAAP EPS is expected between breakeven and $0.16 per diluted share.

Now for some additional color beyond Q4.

Generally, Q1 revenues are lower than Q4.

However, due to strong backlog and deferred revenues, at this time, we expect Q1 revenues to be higher than Q4.

Secondly, given the current competitive environment in MOCVD business, we may see gross margins temporarily in the 30% to 35% range as we move beyond this calendar year.

Overall, we expect calendar 2018 to be a growth year in revenues for us.

Despite MOCVD-driven gross margin pressure, we expect operating income as percentage of sales to be better in 2018 than 2017 due to operating leverage, synergy execution, new product releases and completion of certain initiatives.

And with that, I'll turn the call back to John for a business update.

Thanks, Sam.

The MOCVD market continues to be robust.

LED demand remains strong with continued penetration of LEDs in general lighting, growth of fine-pitch LED signage and LED backlighting, driven primarily by larger TV sizes.

Importantly, continuing to win business in China despite increased competition, and we feel confident in our ability to maintain our lead as we execute on our technology and product road map.

During the quarter, we formally released our latest MOCVD system, the EPIK 868, the most productive and cost-effective tool in the industry.

Based on Veeco's proven TurboDisc technology, the newly developed EPIK 868 offers customers a 4-reactor platform for the highest productivity and a 35% reduction in footprint compared to the competition.

Furthermore, the wafer carrier capacity can be increased for even greater throughput per batch.

The EPIK 868 has 20% better cost-per-wafer savings compared to the previous generation of MOCVD systems and was designed to meet the needs of our customers in China, demonstrating our long-term commitment to this important region.

We're also very pleased to announce the completion of the strategic initiative with ALLOS Semiconductors to demonstrate 200-millimeter GaN-on-Silicon wafers for blue and green micro-LEDs using our Propel single-wafer platform, which we believe will help to accelerate the adoption of micro-LED production.

We're also excited to report that we are seeing continued adoption of our K475i product into red, orange and yellow LEDs and photonics applications.

The photonics market, which includes VCSELs and lasers for optical communications is growing rapidly and represents an exciting opportunity for Veeco.

We're engaged with multiple key customers and have recently achieved sales to a leading photonics company for the development of next-generation VCSELs and other lasers.

In advanced packaging, we're very well positioned for growth when the market strengthens.

As we discussed last quarter, our AP business is currently in a pause mode following large system purchases in 2016 and early 2017.

Additionally, in the high end mobile phone supply chain, certain companies have delayed the adoption of Fan-out Wafer Level Packaging either through product design or lower unit volumes.

According to IDC, overall smartphone unit shipments actually declined by approximately 1.3% in Q2 of 2017.

As you all know, smartphones and tablets will continue to account for the majority of advanced packaging needs in the near term.

And as the market leader in this space, we believe our current offerings, coupled with our exciting product road map and a resumption of capacity additions, will allow us to capitalize on these opportunities.

Looking further ahead, we see high end smartphone manufacturers continuing to expand their utilization of Fan-out Wafer Level Packaging for devices such as baseband processors, RF transceivers, switches, PMICs and more, all of which positively impacts our advanced packaging business.

And beyond smartphones and tablets, advanced packaging is expected to see increased utilization in emerging applications, such as automotive, high-performance computing and artificial intelligence, all of which will clearly strengthen our business.

With regard to our front-end semi and our LSA business, China continues its buildout of 28-nanometer fabs where LSA is well positioned.

We also expect one of our customers in China to begin focusing on 14 nanometers next year, which could lead to additional orders.

In Korea, we're actively supporting the 10-nanometer ramp and the 7-nanometer process development for a major customer.

And for 7- and 5-nanometer nodes, we now have 2 next-generation melt systems installed in the field, and our customers are actively working to integrate our tools into their processes.

The initial data is very encouraging, and we're excited about the potential of our melt tool and firmly believe that our unique technology architecture will have advantages in meeting our customers' process requirements.

We're also seeing positive traction for our Ion Beam Etch system for patterning MRAM.

Our Ion Beam technology is well-suited for etching the multilayer magnetic stack used in MRAM.

And we have placed systems at multiple customers and expect high-volume manufacturing to start next year for embedded memory applications like automotive, multimedia and display panel.

We've made tremendous progress in a number of key areas as it relates to the integration of Ultratech.

All duplicative public company expenses have been eliminated.

Our sales forces have been successfully merged.

And our field service organizations have been integrated.

As a result of completing these actions, we have a stronger sales force and services organization than either of us had alone.

Very pleased with where we stand today.

We're also working hard to extract greater R&D efficiencies and remain on target with our expense synergy goals.

I'm proud of what we have accomplished to date, and we'll continue to update you on our progress in the quarters ahead.

In closing, we had a solid third quarter with strong sales and profitability on a non-GAAP basis.

Bookings continue to grow, and we delivered key new products that provide us with greater clarity towards future growth, completed much of the heavy lifting of the integration process with Ultratech and are enthusiastic with the progress.

Our teams are executing well, and we're making excellent progress in the transformation of Veeco into a more diversified company positioned to lead in multiple growth markets.

Additionally, our customers are very happy about the combination of Veeco and Ultratech.

As we look out to 2018, we anticipate a strong year of top and bottom line growth despite the competitive environment.

And finally, as you may have seen, this afternoon, we issued a press release announcing that we have won a preliminary injunction in a patent infringement suit against SGL Carbon.

SGL Carbon is a supplier of wafer carriers to Advanced Micro-Fabrication Equipment Inc.

or AMEC in China.

This ruling takes effect immediately and prohibits SGL from shipping wafer carriers using Veeco's patented technology without Veeco's expressed authorization.

We believe this ruling affirms the strength of Veeco's intellectual property and its worldwide patent portfolio.

We take enforcement of our IP seriously and will not hesitate to protect our significant investment in research and development, including patents in the U.S., Europe and Asia and in particular, China.

And with that, Sam and I will be happy to take your questions.

(Operator Instructions) We'll take our first question from Krish Sankar with Bank of America Merrill Lynch.

This is Chirag Odhav on for Krish.

Could you give us some update on China and your local competitors in that region, just how you see your market share about a year from now.

And I have a follow-up.

Sure.

So the China market is going through a strong investment at this time, and there are large investments in new capacity from multiple key LED manufacturers.

It has become a more competitive environment as AMEC begins to ship systems and compete with Veeco.

As you can see from our backlog, we continue to do well.

We've recently launched the new EPIK 868, which we think will be a tremendously successful product.

And we expect to do well in China over the long term.

We don't forecast forward-looking market share, though.

Okay.

Got you.

And there's also been a lot of interest in power semiconductors like gallium nitride, gallium arsenide and some VCSEL-based applications in self-driving cars.

AIXTRON has a strong position in this space.

I was just hoping you could help us understand your position and how you value the potential market opportunity.

Sure.

We do think there is a good opportunity.

And we've been working hard to develop new products like our Propel product and our K475i to diversify our offering and to expand into new markets.

I think in GaN power, that is a market that is moving forward.

We participate and -- with our Propel series of single-wafer reactors.

And we think there's a really good future for that looking forward.

We'll now take our next question from Brian Lee with Goldman Sachs.

This is Hank on for Brian.

And maybe just a follow-up to that.

Do you guys have any exposure to the silicon carbide market opportunity?

We do not play in the silicon carbide area.

We have products for GaN power, GaN RF and opto segments for VCSELs and lasers, but not silicon carbide.

All right.

And then maybe switching gears a little bit to advanced packaging.

Is kind of the quarterly run rate we saw in 3Q what we should expect moving through '18?

Or when do you guys expect that advanced packaging market to recover?

Sure.

Well, look, I think, as we predicted last quarter, the advanced packaging market is in a bit of a pause.

There were very strong purchases in 2016 and early 2017.

And after that, the market has slowed down.

We are talking to key customers in multiple regions and activity is picking up.

They are telling us that 2018 should be a growth year.

So we do expect a pickup.

It's hard to predict exactly which quarter that will be, but things are looking better as we look out.

Okay.

And then maybe I'll squeeze one more directly on the injunction.

Does this change anything in the competitive dynamic in China?

Or what do you expect then to realize from this?

Well, look, I think, first of all, we just received the ruling today.

So we haven't factored it into all of our results, but it's actually a -- it's a very powerful thing.

It's a reaffirmation of our technology and our patent portfolio.

Wafer carriers are a consumable required to operate our MOCVD systems and AMEC's MOCVD systems.

Customers need a reliable supply of qualified wafer carriers to run their MOCVD systems.

And we've invested a lot of R&D in this area, and I think it's great to see that it was upheld by the court.

And I think it will have a lot of impact on the competitive environment.

We'll now take our next question from Edwin Mok with Needham & Company.

First, actually just a quick follow-up on that -- the last question.

Does that mean that your competitor can ship too now?

Are they kind of prevented by the court from shipping or just have to go through some kind of appeal or legal proceeding before we kind of get to that point?

Well, the ruling is against SGL.

And we believe that SGL was infringing on our patents and providing infringing wafer carriers to AMEC.

And they've been stopped from doing that.

In high tech patent infringements, preliminary injunctions are rarely granted.

And they're only granted when the legal case is extremely compelling about the infringement and about the damages.

So they are a major source of wafer carriers, and that supply will go away.

Okay.

Great.

Thanks for clarifying that.

I have a question on gross margin.

Sam, just to clarify, you mentioned this 30% to 35% range.

Is that the range for 2018 full year?

Is it for first quarter?

And then you -- I think on the same commentary, you talk about your operating -- you talked that the operating margin will increase, right, partially, obviously, with the top line growth.

But if I do the math, I mean, if full year gross margin is down that much, obviously has to come down quite a bit.

Are you accelerating your synergy plan?

Or can you give us some color on that?

Sure, yes.

So first of all, in terms of operating income as a percentage of sales, that comment is related to entire full year 2018 as you compare that to full year 2017.

So again, to repeat, we expect 2018 operating income as a percentage of sales to be better than the same metric for 2017.

Now coming back to the first part of your question in terms of the gross margin, that I'm highlighting more as a temporary effect.

What's happening is that the MOCVD business in China, there, the margins have degraded significantly due to the pricing pressure.

But at the same time, it's proportion in the overall mix of company revenue has also gone up.

So that compresses the gross margin at the company level and that I expect it to be temporary.

It might last 1 or 2 quarters and do not expect it to last for the entire 2018.

Okay.

Great.

That's very helpful for clarifying.

Last question I have, John, you mentioned VCSEL.

It sounds like you guys just started some development with a customer.

Can you give us some kind of -- a framework around that?

How long do you think this would take before this becomes a real revenue opportunity?

And any way you can kind of think about the opportunity there long term if I look out a few years?

How do you think about that potentially becoming a revenue opportunity for the company?

Sure.

Well, look, for quite some time, we've been working to diversify our revenue stream in the MOCVD business.

And at the company level, our goal is to continue our leadership in the lighting and backlighting market, but at the same time, to grow our revenue in other MOCVD opportunities.

We are -- last year, we launched the K475i product.

That has been doing well.

We also launched a family of single-wafer reactors targeted at applications like laser diodes.

And we're growing our business now with revenue related to VCSELs, laser diodes, power electronics and RF devices.

So it is revenue now, and I think we expect to continue to broaden our revenue streams.

Do you think that the -- some people or some analysts who project this VCSEL eventually, ultimately could be as big as the LED kind of -- (inaudible) market, right?

Who knows what will happen in a few years.

But where do you think your market position is in VCSEL right now?

And do you foresee that at some point down the road you can kind of get to this market-leading position?

Yes.

Look, I don't think it's going to become as big as the LED market.

And I don't know how you'd get to that conclusion.

I think we are #2 in the market.

And we have been introducing products and have a strong product pipeline that I think will allow us to do very well in this business.

And as always, our goal is to become #1.

We'll now move on to Vishal Shah with Deutsche Bank.

John, on the guidance for next year, what are your assumptions for the MOCVD market?

Do you expect the market to grow as well?

And then I have a follow-up.

I think the market will grow in 2018.

I think it's a growth year.

You can look at the orders we've been receiving.

And the growth in our book-to-bill ratio we expect to move into 2018 with a very strong backlog.

And the market should grow both in 2017 and 2018.

Remember, if you think back, half of 2015 was a real trough for MOCVD as well as most of 2016.

So we're coming out of that period.

There's been a lot of adoption of LEDs in lighting and other growth.

So we expect a solid growth year.

So just to clarify, I mean, there were some reports out recently that suggested that the MOCVD market this year was somewhere around 440 tools of K465 kind of reactors.

Is that consistent with how you guys are looking at this year?

And then what do you think next year looks like?

And also on China, is the competition really mostly focused on the Chinese market?

Are you starting to see evidence of similar pressure, competitive pressure in other markets as well?

Yes, I think, first of all, I think on the last call -- and we've been moving it up as we went through the year, we were talking about up to 240 to 260 reactors this year.

Clearly, the market is a lot hotter than that, and we're going to be well above that.

440 sounds pretty optimistic.

I haven't seen that projection.

So that would probably be a little higher than I would pick it.

But look, I think there is a lot of business happening, and we do think that 2018 will be a bigger year in the market than 2017.

And we think we'll do very well in that.

Let me go back to your part 2, and that is, are we seeing competition from Chinese players outside of China.

And I would say, we have not seen that.

And I think from my conversations with people and customers, I think a lot of customers would be very concerned about taking a Chinese tool and bringing that into their fab and risking their IP and their recipes and other things.

So we have not seen that.

Okay.

Great.

And just one last question.

What's the percentage of your total MOCVD revenues would be China roughly this year and next year?

Yes, so generally, Vishal, the China blue LED market roughly is about half of our lighting display and compound semi market.

Generally, that has been the trajectory.

However, it probably is looking like it would be more than that in the near future just because of a significant market or business activity in that part of the region.

We'll now take our next question from Paul Coster with JP Morgan.

A few quick ones.

Sam, I apologize for going back to the same subject.

But the low to mid-35% -- mid-30% gross margin, is that related to MOCVDs only, is that correct?

It is largely correct, but I would also suggest that at this time, we've also talked about the advanced packaging market going through a pause.

So that does have an impact on the overall company's gross margin.

And we are expecting that, that business to come back in 2018.

But so far, looks like it's -- there are some indications that it may be beginning to come back, but not solidly yet.

So what's happening here in the near term is that we have gross margin pressure due to low activity in Ultratech and at the same time pricing pressure in the blue LED China and MOCVD market.

And then once we are beyond the near-term future, so to say, I expect that the proportion of business from China MOCVD as the overall company's mix should improve, meaning it should go down.

So that should lift gross margin.

And also additional exposure to the new MOCVD markets that John talked about, particularly VCSELs and RF and red LEDs and other areas where we are also looking at gaining greater exposure.

So that should also help our overall gross margin.

Got it.

And I think I heard John say that you had a power PSP -- a power application success in Taiwan.

Can you just be a bit more specific with this?

A SiC-based technology that it's being applied to?

Yes, I think this was -- that was actually in our script related to PSP.

And one of the things that's been good with PSP, we sell into LEDs, we sell PSP products into LEDs, we sell into the power electronics markets.

In addition to MOCVD, we sell PSP there.

So we are able to kind of sell both product lines in a number of markets.

This was not a silicon carbide opportunity.

Was not silicon carbide.

Okay.

Got it.

That's helpful.

And then I think maybe the last question I've got is, as we think about your revenue mix a year out from now, how do you think it will be relative to today?

Do you think the MOCVDs will have diminished as a percentage or increased, for instance?

Some sense of the shift would be helpful.

Sure.

Well, look, I think a year from now, our Ultratech business will be seeing some strong growth over the current mix.

That's what I would expect as the AP market comes back and as we get some traction in the LSA and Superfast business.

I think, secondly, our PSP business, which has done reasonably well this year, has been weak in advanced packaging also because of the market conditions.

I expect that to come back, and we'll get some growth there.

Our new front-end semi products in Ion Beam Etch will be gaining more revenue.

So I think some of our non-MOCVD businesses should show some substantial revenue growth.

And then we'll see how long the MOCVD ramp lasts.

And clearly, it's going to last for a while, but I think we've got other good sources of growth.

So -- and we do see MOCVD having some substantial growth.

We'll now take our next question from Patrick Ho with Stifel, Nicolaus.

John, maybe first off in terms of the advanced packaging and maybe specifically on the lithography buys that you're projecting for 2018.

Based on some of your comments, is it correct for me to assume that you believe it will still be primarily focused towards one potential customer versus a broadening out of the Fan-out applications that are potentially drivers for additional advanced package litho sales?

We definitely see a broadening out as we talk to customers and talk to other key people about their expansion plans in OSATs and other IDMs.

So I think there will be a broader customer base next year.

And that will be beneficial and probably provide a little less lumpiness.

Okay.

Great.

That's helpful.

And maybe going back to the MOCVD side of things in terms of the competitive environment in China and then how that's evolving.

You did mention you saw a broad mix of different system sales from EPIKs to -- I believe you said 465i.

Given the technology advantage your EPIK tools have, are these new Chinese systems, from a price perspective, targeting all of your products or towards some of your older products?

How does that shake out from a competitive perspective?

The Chinese competition is really targeting the mainstream LED lighting applications and targeting our EPIK products.

So that's where the intense competition comes, and that's where we launched the new EPIK 868.

Our next question comes from Mark Miller with The Benchmark Company.

Again, getting back to the competition in China, certainly appears that pricing is a competitive issue.

Do they have any other advantages with respect to tool operation, throughput, reliability, uptime yields?

Or is it primarily through pricing they're getting their foot in the door?

Look, it's still very early in the market.

And if we go back a few years, we had a -- maybe a similar situation where we had a competitor launching a new product and we were launching a product.

And we both did some heavy discounting and fighting for market share.

And what happened in that case is the competitive product, although it looked very good at the beginning, over time, it failed to deliver and it had poor performance in terms of uptime and a number of other factors.

So it's really much too early in the market to make conclusions on all of these factors.

So their product does look a lot like our product.

And our customers have told us that they copied our product in some cases.

So it's a little too early to tell in this situation.

But look, we have a great track record of introducing products, having them perform well, having them either take or sustain the leadership position.

And we just launched a new product.

So I think we have a lot of experience in this type of situation.

In terms of the expected growth in the MOCVD market, are you seeing increasing replacement of older tools?

Or is this because San'an is significantly expanding their capacity?

I'm just wondering what are the drivers you expect in that market.

It's a little hard to read on replacement.

Traditionally, tools, after they get 7 or 10 years old, they start to become less reliable and sometimes people replace them at that point.

On the other hand, as what's happened over the last few years, these tools that we're shipping now are much more productive than things that were shipped 10 years ago.

And so frankly, anything that was shipped kind of before 2009 is pretty much obsolete from just a plain economics basis.

In this case, we know customers have been turning off older tools before 2009.

It's not clear exactly what's happening now, but more than anything, the market is adding capacity because it can't make enough LEDs.

The question is, do they also start turning off old systems going forward?

And I think we'll see that.

And we'll see more and more of that over the next few years.

And your estimate for the tools, these older tools, 200 to 300, is that in the ballpark?

It's -- well, of course, they're lower capacity than the reactors of today.

Most of the reactors we're shipping today are twice the capacity of reactors we shipped before 2015.

And it's actually more than that.

It's quite a bit more than that.

And we know some have already been turned off.

A lot of times, the way this happens is customers with older reactors that haven't invested recently kind of fade away.

And they go out of business or shrink and become insignificant because they don't have the scale to compete.

So it's not always a replacement.

It may just be somebody goes out of business and the newer products pick up the real market supply.

(Operator Instructions) We'll hear now from Daniel Baksht with KeyBanc Capital Markets.

Wondering if you could comment on how you're allocating R&D expenses now between your different segments now that you have Ultratech under one roof for a whole quarter and you've recently launched your latest MOCVD system.

Are you more focused on, say, your MOCVD programs or advanced packaging or front-end semi businesses?

Any kind of color would be great.

Let's see.

So look, we're making significant investments in each of these areas.

In MOCVD, we see quite a new -- quite a number of emerging market opportunities that we have been investing in for some time.

In Ultratech, we have been focused on improving the effectiveness of our R&D spending.

We are spending certainly substantial amounts in lithography, but also spending in front-end semi because we see some great opportunities there.

And we are investing in line with what we see is the market opportunity.

So it does move around.

But we're also very focused on getting more out of our R&D and getting more products to market.

So I think we're going to have a very good year over the next year in new product introductions.

All right.

And then you mentioned pricing pressure in MOCVD.

Is that limited to China or are you also seeing that outside of China as well?

It's all limited in China, Daniel.

Okay.

And then just on customer concentration, did you have any customer that represent more than 10% of sales in the quarter?

I don't think so.

I don't think so.

We definitely announce that in the 10-K, but not the 10-Q.

We'll now take our final question from Tom Diffely with D.A. Davidson.

So you've talked a lot about some increasing competitive pressures in China.

Have you seen increases in competitive pressures on the lithography side as well?

It sounds like there are several players in that space now.

We've done well -- very well over the last period in lithography.

There, we've had a market share of 70% to 80%.

And when you're at that kind of market share, there are always people coming and trying to get into some niche here or there.

So there's always competitive pressure, but we have been very focused on moving our product forward, addressing the new needs of our customers and really having the best cost of ownership and the best performing platform in terms of doing what the customer needs it to do without costing too much and with a very high reliability.

So I think we're in a really good place there.

Okay.

So the margin structure is still sufficient that once advanced packaging comes back, it's a nice adder to the overall blend?

Yes.

Thank you.

And that concludes the question-and-answer session for today.

I would now like to turn the conference back over to Mr. Peeler, Chairman and CEO, for any additional or closing remarks.

Thank you for joining us tonight, and we look forward to seeing you in the near future.

Thanks.

Thank you.

Thank you.

And that does conclude today's conference.

Thank you all for your participation, and you may now disconnect.