Veeco Instruments Inc (VECO) 2018 Q1 法說會逐字稿

Good day, and welcome to the Veeco Instruments First Quarter 2018 Earnings Call.

Today's conference is being recorded.

At this time, I would like to turn the conference over to Anthony Bencivenga, Investor Relations.

Please go ahead.

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, and 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 recording.

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 Peeler for his opening remarks.

Thank you, Anthony.

Results were very strong in Q1.

We maintained our historically high backlog with a book-to-bill ratio of nearly 1, and all of our P&L metrics came in strong compared to our guidance.

Revenue increased by 14% sequentially to $159 million.

Non-GAAP operating income was $11 million and non-GAAP earnings per share came in at $0.20.

Bookings grew in the advanced packaging, MEMS and RF filter market as well as the front-end semi market, and we're pleased with our progress towards building a more diversified company.

We also accomplished an important milestone in our Ultratech integration as we're now live on a common ERP platform.

We remain encouraged with our growth prospects, which I'll get into later.

But for now, I'll turn the call over to Sam for a financial update.

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.

First, let me give you some color on our Q1 bookings and then I'll provide revenue details.

We had solid bookings of $155 million, which were seasonally in line with Q1 norm, and we are pleased to see orders improve in advanced packaging and front-end semi.

In advanced packaging, MEMS and RF filter markets, we booked multiple lithography and wet etch systems supporting fan-out wafer-level and other advanced packaging applications.

Additionally, we booked multiple systems in the MEMS area.

In lighting, display and compound semi markets, we received a large multisystem MOCVD order in China.

We continue to win business in China where higher performance is expected by our customers.

Separately, consistent with our expectations for growth in compound semi outside of general lighting, we received orders for GaN power as well as photonics applications.

In front-end semi, there was a sharp increase in booking driven by follow-on order for 3D wafer inspection systems from a large 3D NAND device manufacturer in Asia and orders relating to STT-MRAM Ion Beam Etch solution.

Advanced packaging, MEMS and RF filters made up 19% of our booking.

Lighting, display and compound semi made up 34%, front-end semi was 21% and scientific and industrial orders were 26% of our total Q1 booking.

This profile is consistent with our expectations of a more diversified company from second half of 2018 onwards.

Now moving to revenue.

Please note we adopted the new revenue recognition standard, ASC 606, on January 1 of this year and recast 2017 financials to reflect this new standard.

The recast figures can be found in the back up section of this presentation.

The differences from previously released financials are immaterial.

Q1 revenue improved 14% sequentially to $159 million, driven by advanced packaging, MEMS and RF filters as well as lighting, display and compound semi markets.

Our advanced packaging, MEMS and RF filter business grew to $27 million as we shipped multiple lithography tools to Tier 1 OSAT customers.

We are seeing OSATs add advanced packaging capacity selectively focused on copper pillar and fan-out wafer-level packaging, whereas IDMs and foundries are still absorbing capacity while developing new higher density applications.

Lighting, display and compound semi market grew slightly to $90 million.

We shipped many MOCVD systems in Q1, resulting in a revenue mix which was unusually heavily weighted towards this market at 57% of revenue.

We're also pleased with our continued momentum in photonics and RF device applications as we shipped our products for use in VCSEL and sensor production.

Sales in front-end semi were $9 million this quarter.

While this is down quarter-to-quarter, it included revenue from STT-MRAM and 3D wafer inspection systems.

These are 2 areas of growth for us and so we are pleased with this progress.

Scientific and industrial revenue was flat at $32 million from sales in data storage industry as well as optical coatings.

Geographically, China was 47% of revenue; U.S., 15%; EMEA, 10%; and rest of the world was 28% of total revenue.

Blue LED MOCVD sales in China were high at approximately 39% of total Veeco revenue in Q1.

And ending backlog was $331 million or roughly flat to the prior quarter.

Now turning to P&L highlights for Q1.

Non-GAAP gross margin was 36.5%, higher than the guidance due to higher sales volume, better product mix as well as favorable service cost experience.

Non-GAAP OpEx was in line with guidance at $46.5 million.

Non-GAAP taxes were $0.3 million.

And finally, the non-GAAP EPS was $0.20 based on a diluted share count of 47 million shares, primarily driven by revenue and gross margin upside as well as well-managed expenses.

Now moving to the balance sheet.

We ended Q1 with $311 million in cash and short-term investments, a decrease of $17 million from Q4 driven by investments in working capital.

Long-term debt on the balance sheet was recorded at $278 million, representing the carrying value of the $345 million in convertible notes.

Now turning to Q2 guidance.

Q2 revenue is expected between $145 million and $170 million.

At the midpoint of Q2 guidance, our first half sales are up 15% compared to the second half of 2017.

Non-GAAP gross margin is expected between 33% and 35%.

Assuming Q2 guidance midpoint, first half gross margins are higher than 35%, which are higher than our previously stated expectation.

Non-GAAP operating expenses are expected between $46 million and $48 million.

Non-GAAP operating income is expected between $2 million and $11 million.

GAAP loss is expected between $0.45 and $0.26 per diluted share.

Non-GAAP EPS is expected between $0.01 and $0.20 per diluted share.

And now for some additional color beyond Q2.

Overall, we are on track for strong growth in 2018 sales over 2017 with year-over-year growth expected in all 4 of our market segment.

Blue LED MOCVD system sales in China generate low margins for us, and we expect these revenues to reduce in the second half of the year.

On the other hand, sales from the rest of our businesses are expected to grow in the second half as substantiated by our Q1 booking.

This shift in revenue mix should help improve gross margin for the company.

With our current visibility, we see Q3 revenue tracking flat to Q2 revenue, but with higher gross margin.

Additionally, we continue to target gross margin of 40% as we exit the year.

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

Thanks, Sam.

In computing applications where high performance is critical, advanced packaging is the method manufacturers use to optimize their products.

We see this in servers for big data analytics where speed and lower power utilization are essential.

We're also seeing advanced packaging used in applications like advanced driver-assisted systems where processing speed is vital for safety and in graphical processing units used to mine cryptocurrencies.

Regarding the well-publicized delay in adoption of fan-out wafer-level packaging by certain mobile device manufacturers, we believe this will end as more mainstream mobile devices incorporate advanced packaging solutions to provide better performance, and this will positively impact the advanced packaging market.

In the MEMS and RF filter markets, we remain optimistic about growth drivers, such as the adoption of 5G RF.

As mobile data demands continue to increase and drive the need for next generation of wireless communication, each mobile device will require more RF filters and other components manufactured with Veeco systems.

In summary, there are many growth drivers for the advanced packaging, MEMS and RF filter market, and Veeco sells systems for multiple applications.

Our Q1 revenue in this market more than doubled versus the prior quarter as we saw MEMS device manufacturers add to their etch production capacity and OSATs add capacity for fan-out wafer-level packaging and copper pillar applications.

Turning to the LED lighting, display and compound semiconductor market.

Our strategy is focused on delivering value through differentiated technology which offers customers a competitive advantage in high-performance applications.

Our deep technology, coupled with our broad portfolio of products in MOCVD and wet etch and clean, position us to capitalize on the high-value applications, such as automotive, mini and microLEDs, photonics, GaN power and GaN RF devices.

We're seeing multiple high-growth opportunities in these markets.

According to third-party estimates and our own market intelligence, we expect the photonics market to grow at a 25% CAGR over the next 5 years and reach $1.5 billion.

This market includes VCSELs, laser diodes and edge-emitting lasers and is supported by high-growth drivers, such as 3D sensing and optical communications.

We're starting to see 3D sensing applications in facial recognition used to unlock smartphones and the technology has potential to further proliferate and include automotive and other biometric applications.

As this market begins to accelerate, our TurboDisc MOCVD technology has the attributes that align well with high-volume production requirements, such as high uptime and improved yield.

And these capabilities will enable our market penetration.

When EXALOS, a European manufacturer of superluminescent LEDs for imaging, detection and sensing applications looked to achieve new levels of innovation, they turned to our MOCVD TurboDisc platform, a solid endorsement of Veeco's technology.

Looking at the GaN power device market, third parties expect this market to grow at an 80% CAGR and become a $500 million market by 2022.

The capabilities of GaN power device brings to end products are smaller form factors and lower power consumption.

These capabilities are sought out in applications for mobile devices, automotive electronics and the Internet of Things where form factor optimization and better performance are essential.

Our Propel single-wafer MOCVD platform was designed specifically to meet the requirements of GaN power device manufacturers and was recently ordered by ON Semiconductor to manufacture high-voltage power management devices for automotive and other applications, a strong endorsement of our technology and product superiority.

In addition to building momentum in the compound semi growth areas of photonics and power electronics, we continue to win business in China in a disciplined manner.

During Q1, we booked multiple EPIK 868 tools from one of our large LED lighting customers.

Our EPIK platform has inherent advantages over the competition and provides customers with long campaign runs and low cost of ownership.

Currently have a broad portfolio of products to address the LED lighting, display and compound semi market, including batch and single-wafer tools for GaN and arsenic phosphide chemistries, along with wet etch and clean tools.

Even so, we continue to innovate to address evolving customer requirements and to expand our position in emerging applications and currently have product development initiatives underway to further strengthen our product line for VCSEL and GaN RF markets.

With regard to our front-end semiconductor business, orders grew sharply in Q1 as customer interest in our Superfast 3D inspection system accelerates.

As 3D manufacturing approaches are implemented, along with shrinking device dimensions, the ability to deal with high wafer stress is becoming more important for our customers' yield improvement initiatives.

By introducing wafer shape control in the various stages of the manufacturing process, customers can improve wafer yield and drive better financial performance.

In Q1, we received a follow-on, multi-tool order from a 3D NAND device manufacturer.

We're pleased with this success, and we have a healthy pipeline of opportunities with other customers involved in various stages of product evaluations.

In the STT-MRAM market, we continue to be encouraged by our customers' interest.

As we have mentioned for some time, we've partnered with a leading semiconductor capital equipment manufacturer to apply our Ion Beam Etch technology for magnetic memory development.

The company is recognized for front-end semi etching applications, while Veeco brings Ion Beam Etch technology leadership in processing of magnetic materials.

Together, we have achieved the development tool of record status with leading memory manufacturer, and we're now seeing strong interest from multiple other IDMs.

STT-MRAM has great potential as a memory solution due to its non-volatility, high performance and high reliability.

We expect initial use cases in IoT devices and automotive applications, and we're pleased with the results so far.

Turning to our scientific and industrial market.

In Q1, we maintained healthy revenue and bookings.

Demand for our ion beam optical coating systems was very robust as customers placed orders for industrial laser, medical imaging and material processing applications.

For the fourth time in 7 years, Veeco has won a compound semiconductor industry award.

This time, we won the CS Industry Innovation Award for our new MBE GENxcel system.

This award recognizes the year's most successful breakthrough supporting compound semiconductor research, and we're pleased to be acknowledged by our customers.

In closing, we remain focused on our 2018 objectives.

First, we're making progress towards growing in all of our markets by growing bookings in the front-end semi and advanced packaging, MEMS and RF filter markets, we're poised for growth in 2018, and we will be a more diversified company as a result.

Second, new product development is the core of our innovation.

We have incorporated Ultratech into our product life cycle management process and reprioritize product development programs.

Across Veeco, we have the strongest product development pipeline in our history with exciting new products for our MOCVD, lithography, PSP and ion beam product lines.

Third, we completed another step in our Ultratech integration.

Ultratech is now live on our ERP system.

And I want to thank the cross-functional team here at Veeco for their dedication and hard work.

And last, our solid Q1 results are a good step towards demonstrating our ability to improve operating leverage.

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

(Operator Instructions) And we'll go first to Edwin Mok with Needham & Company.

So my first question is on front-end semi and advanced packaging.

I remember last quarter, you guys had kind of laid out some targets.

I think both those you expect to grow double the business or close to double those businesses.

Is that still on track since you guys have a good start for advanced packaging and front-end semi is kind of slow this quarter at least?

Sure, Edwin.

This is Sam.

Yes, things are looking good for both of those segments.

We had a pretty good start to the year with good bookings in those segments.

And at this time, as I said, we are expected to grow in all 4 markets.

And so we are looking good to achieve what we had said in the last quarter's call.

Yes, just to add.

Edwin, just to add on to that, we talked about the STT-MRAM opportunity and Superfast, but we also see more potential for our LSA and melt products.

And with EUV taking hold, we're getting -- we've received additional orders for our LDD Ion Beam Deposition system, and we think there's some good potential for growth there also.

Great.

Yes, answered my next question.

Okay.

So maybe move on to the MOCVD power market.

I guess, first, I want a clarification.

You mentioned the photonics market could potentially go to $1.5 billion and the GaN, $0.5 billion.

Are those just the device market size or are those the MOCVD market?

And I have a follow-up on that.

Those are device market sizes.

And depending on the stage of adoption, you could translate that into equipment values.

Earlier stage, obviously, much higher percentage equipment per device.

And then as the market matures, a lower percentage, maybe down to 10% or so.

Okay.

Great.

My follow-up question is actually on the photonics.

So I understand you guys have the Propel, which is targeted to RF or the GaN power device market.

And I think on your prepared remarks, you mentioned you are doing some development on actually both of these markets, right?

So for the photonics market, do we have to wait until you have a new tool to come out?

Or where do you stand in terms of kind of tool capability to address that market?

And for the customer that you mentioned that you sell tools to, what do they use right now?

They just use their existing MOCVD or they already make a -- they use a specific tool just for that market?

So first of all, in the photonics market, we are selling arsenic phosphide systems currently to address a number of photonics applications as well as Propel systems.

So we have a family of products and are selling current products, but we also have some very exciting new products on the way.

I see.

Okay.

Great.

That's helpful.

And then the last question I have for you, Sam.

I might have lost your second question there, Edwin.

Actually, you answered my question.

I was just wondering what kind of tools you are selling into that market right now.

And then my last question, actually, for you, Sam, if I could comment on guidance, seems like you had taken up your OpEx by a little bit, maybe $1 million or so.

Just how do you kind of think about OpEx trend this second quarter and going through second half?

Sure, yes.

So in terms of OpEx for the second half of the year, with the continued Ultratech integration and putting Ultratech also on the same ERP system, so we are expecting SG&A to come down as part of natural synergy.

However, John mentioned we are going to be releasing a number of new exciting products in second half.

So what's going to happen here is that I'm seeing R&D tick up a little bit in the second half generally associated with releasing our new products.

So overall, OpEx is expected to remain in the same range, $46 million to $48 million, per quarter going forward into 2018.

And we'll go next to Brian Lee with Goldman Sachs.

Maybe first off, I just wanted to clarify on the guidance and the additional color, Sam, on 3Q, which is appreciated.

If top line is going to be flat with 2Q, gross margins are up off of the lower gross margins that you're guiding to for Q2.

It sounds like Q3 actually will look a lot like Q1 where your gross margins are 150 basis points higher than the mid-30s here that you guided to.

So I guess, is that the right read for Q3 that you're trying to provide here?

And then secondarily, again, on sort of the model and the outlook.

When you're exiting 2018, Q4 presumably at 40% or higher on gross margins, how much of that is mix driven versus volume?

And then if it's a lot to do with mix, which it sounds like it is, can you give some color on the geographic and business mix you're expecting and how that compares to sort of where you're tracking to right now?

Sure.

Sure.

So in terms of taking your first question in terms of views on Q3.

I think Q3 flattish to Q2, but with higher gross margins, as I said.

And mix should play a big part in there.

And it should be somewhere between where I'm guiding for Q2 and between that and 40%.

So high 30s in gross margin for Q3 would be a natural thing to think about here for Q3 gross margins.

So you can think about it that way.

And then in terms of overall gross margin improvement all the way and through to Q4, I think you're right.

Clearly, mix is the biggest portion here, but we are also working on cost reduction.

And volume may play a role, but I think the lion's share of the contribution in margin improvement -- gross margin improvement is going to be coming from mix essentially.

We have a number of new products coming out.

We also have a number of products being sold over in U.S., Europe, et cetera.

So as the mix towards non-China geographies increases and the mix towards products outside of blue LED MOCVD increases, that should naturally help our gross margin performance as we go through into later part of 2018.

Okay.

Appreciate that insight.

And then just maybe the last one, quickly for me, I'll pass it on.

I know, John, you alluded a little bit to the microLED opportunity during your prepared remarks.

Can you update us as to what tool platforms Veeco specifically has that addresses the opportunity?

And then what specific front end steps you're in position to compete for future design wins?

And then what sort of new tools you may have to roll out in order to address other front end steps that you're not currently exposed to?

Yes.

So let me start with microLEDs.

MicroLEDs are a new type of display that use individual, 3 different LEDs for each pixel point.

There are consumer electronics companies, I would say, around the world working on developing different approaches to microLEDs.

And there are different types of transfer technology and different approaches that require different characteristics of the LEDs.

So some of the approaches would use tools that we make today for either arsenic phosphide or GaN tools.

And we have sold tools into those applications already.

And other approaches would use a Propel or a variant of one of the existing platforms due to certain characteristics that people are looking for in the LED.

So it's early to tell which approaches -- approach or approaches will win.

And it's early to tell on that.

But I think our point is, is we're working closely with the industry leaders.

We know the attributes of each approach.

And we're prepared to deliver the product that meets the needs.

And this may be -- we could see a product, a microLED product as early as next year, but it may also take a number of more years before this really hits high volume mainstream applications.

I think that was the first question.

And then you were asking about front-end semi applications, is that correct?

No, John.

You answered my questions.

I was just asking about the front-end steps in microLED because I know there's -- because there seem to be a few process steps as opposed to just the one in traditional blue LED.

Yes, yes.

Absolutely.

(Operator Instructions) And we'll go next to Patrick Ho with Stifel.

John, maybe first off on the MOCVD environment.

You saw some strong bookings in the second half of '17 that's leading to the revenues in first half '18.

Based on some of the commentary in your prepared remarks, are you seeing the second half as kind of the capacity digestion period that may pick up then after we get through the second half of the year and maybe pick up and accelerate once again as we enter 2019?

Yes, to some extent.

I think we also had a solid quarter in MOCVD bookings in Q1.

The industry bought, we believe, over 400 tools delivered last year, K465i equivalents.

In 2018, I think we're going to see more than that delivered this year.

And at some point, there will be a digestion period and there will be some time needed to use up all the capacity that's installed.

I think the positive thing for us is that we're seeing a lot of new MOCVD applications that, whether it's VCSELs or laser diodes or 5G RF, that are emerging that create demand in new areas with new customers and we think will be -- will keep the business in a healthy state for us.

So we're kind of expecting, and it's always hard to call when these shifts happen, but we're expecting more of a transition to some new markets for our business.

Great.

That's helpful.

And maybe as my follow-up question on the front-end semi market that you detailed.

I didn't hear LSA as part of the driver in the first quarter.

One, I'm wondering if LSA is starting to pick up; and two, how you specifically look at that potential market opportunity as it relates to the Chinese semiconductor market given that there's going to be a lot of new opportunities for 28 nanometers and then eventually below as they start to build out their marketplace?

How do you see LSA playing into that potential marketplace?

Sure.

So yes, we didn't mention LSA.

And let me cover it from 2 perspectives.

First of all, there's the current approved product line that is the market leader and I think has a lot of potential at 28-nanometer fabs in China.

We have a unit in backlog there and we're expecting additional orders.

The fab build-out has been somewhat slower than we might have expected a while back.

But the product is there.

It's well positioned.

And I think it has a bright future.

Secondly, we have a new LSA tool called melt.

And that product is for 7- and 5-nanometer nodes.

It is in evaluation at 2 customers now.

And we have very strong pull from another customer that's anxious to get a unit.

So I think that will add on to the opportunity and give us a new way to grow this business over the long term.

And we're quite hopeful of that.

So I think that will have good potential for us.

And we'll go next to Daniel Baksht with KeyBanc.

Just a couple of quick questions for me.

First, on the MOCVD order strength that you saw in Q1, is that strength coming predominantly from China?

There was substantial orders from China.

There were orders from other regions.

We also delivered product to 5 customers in China in Q1.

Okay.

Great.

And then a second question.

Just on your new products that you're planning to release in the second half, could you provide maybe a little bit more color in terms of the end markets, segments that you're targeting for these products?

Sure.

We have new products coming in MOCVD, in lithography, in ion beam, in ALD, to name a few.

We have a very strong product pipeline.

We maintained a high level of R&D during the weaker previous years and have a lot of great things coming.

Probably more -- certainly, more than any time in the company's history.

At this time, I will hand the call back over to John Peeler for any additional or closing remarks.

All right.

Well, thank you for joining us today, and we look forward to seeing each of you soon on road trips and other events.

Thanks.

Thank you.

That does conclude today's conference.

We thank you for your participation.