Veeco Instruments Inc (VECO) 2018 Q3 法說會逐字稿

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

Today's conference is being recorded.

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

Please go ahead, sir.

Thank you, and good morning, everyone.

Joining me on the call today are Bill Miller, Veeco's Chief Executive Officer; and Sam Maheshwari, our Chief Operating Officer and Chief Financial Officer.

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 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 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 turn the call over to Bill for his opening remarks.

Thank you, Anthony.

Good morning, everyone, and thank you for joining the call.

Before we get into Q3 results, I'd like to share a few observations after my first 30 days in my new role.

For starters, I'm thankful and delighted for the opportunity to lead Veeco into our next exciting chapter.

And I say this for a few reasons.

First, and this comes as no surprise to me, we have a great team here at Veeco.

They are dedicated and capable of overcoming any challenge.

Second, when you examine our broad product portfolio, you'll see it is built upon exceptional core technologies.

We have best-in-class deposition, etch and laser-based products, solving tough customer challenges in many markets.

For example, our leading ion beam technology was originally used for etching and depositing magnetic materials in the production of thin-film heads in the data storage market.

This technology is now being applied in the front-end semi-market to produce mask blanks for EUV lithography and to etch magnetic materials for magnetic RAM, an emerging embedded memory solution.

And third, the markets in which we operate are positively impacted by fundamental mega-trends, such as the explosion of data, artificial intelligence and next-generation wireless communication.

I am excited to work with Veeco's highly motivated team as we help our customers progress along their technology roadmaps.

Having said that, it has become clear some of our prior plans have been impacted for various reasons.

The first was our forecast to grow full year 2018 revenue over 2017.

Given our current visibility, full year 2018 revenue will be lower than pro forma 2017 revenue of combined Veeco and Ultratech.

The revenue shortfall was driven by U.S. Foundry's decision to put its 7-nanometer FinFET program on hold.

We're also seeing broader China softness across all of our businesses.

The second was our plan to exit 2018 with 40% gross margin.

Our cost-reduction efforts and improved product mix have helped gross margin.

However, lower Q4 revenue and the resulting under absorption has more than offset the benefits.

And third was our plan to release a tool for the VCSEL market in the second half of this year.

We are engaged with customers on our new VCSEL platform, and have demonstrated many key requirements for VCSEL manufacturing, but commercial availability will be delayed at least 3 months as we optimize our technology.

We will keep you posted on our progress.

I will now turn to Q3 results and then Sam will take you through the details.

After that, I will talk about specific initiatives to drive growth.

Third quarter results were mixed, with revenue coming in below our guided range at $127 million.

However, our non-GAAP operating income and EPS were both above the midpoint of our guided range, coming in at $8 million and $0.11 per share, respectively.

This profitability came from better than guided operating expenses and gross margin.

We generated cash in the quarter while repurchasing 1.8% of our outstanding shares, and our ending cash balance increased to $266 million.

Bookings for the quarter were $100 million, reflecting softness in China across all of our business.

Nevertheless, we are encouraged by strong bookings growth in our front-end semiconductor market.

We are working on many promising initiatives in front-end semiconductor and compound semi, which offset the declining commodity LED business.

But this transition will take time.

Therefore, we have begun to take proactive measures to reduce expenses in such a way that we preserve our innovation capability and position Veeco for growth when our markets regain traction.

Sam will explain these actions in more detail.

Thanks, Bill, and good morning, 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, I would like to address the expense reduction efforts Bill was referring to and then I'll provide some color on bookings followed by details on revenue.

You may recall, we announced $15 million in annualized OpEx synergies when we acquired Ultratech.

A few actions are still outstanding and we expect to complete them by early Q1 of 2019.

We recently initiated additional expense reduction efforts to align our cost structure to the current business conditions.

These new actions are projected to save an additional $20 million annually to bring our quarterly non-GAAP operating expenses to $40 million by Q2 of 2019.

These expense reductions are being implemented primarily in SG&A with a minimal impact to our R&D and new product development efforts.

Now turning to booking details.

In front-end semi, we experienced a sharp increase in orders driven by 2 EUV mask blank deposition tools in Japan and an LSA tool, which is being incorporated into a leading edge semiconductor node.

In industrial and scientific markets, orders remain strong in data storage as well as our optical coatings business.

In advance packaging, MEMs and RF filter markets, we booked multiple lithography tools with a large Taiwanese OSAT who's adding capacity to provide wafer-level advanced packaging applications for their logic customers.

In the LED lighting, display and compound semi-market, bookings continued to be weak as expected.

Orders from China were weak across all of our product lines with no bookings for blue LED MOCVD tools.

As such, China made up only 5% of our total bookings.

Scientific and industrial orders were 39% of Q3 bookings, front-end semi was 37%, LED lighting display and compound semi was 13% and advanced packaging, MEMS and RF filters was 11%.

Now turning to revenue details.

LED lighting display and compound semi was the largest portion of our revenue at $59 million or 46%.

The majority of this market's revenue was in compound semi-area, including MOCVD systems sold for specialty LEDs, automotive, photonics and power electronics applications and PSP systems sold for RF device manufacturing.

Blue LED MOCVD system sales in China were 21% of total Veeco revenue.

And as highlighted before, we expect this percentage to decline significantly going forward.

Advanced packaging, MEMS and RF filter revenue was $25 million or 19% of total revenue and included lithography and Wet Etch systems sold to IDMs and OSATs for advanced packaging in automotive, memory and other areas.

Front-end semi revenue was $13 million or 11% and included sales of STT-MRAM and 3D inspection systems.

Scientific and industrial revenue was $30 million or 24% and included shipments to various data storage and optical coating customers.

Geographically, China was 31% of total revenue, EMEA was 24%, U.S. 23% and rest of the world was 22%.

Going forward, we expect the proportion of revenue from China to decline significantly.

Q3 ending backlog was $276 million.

Typically, more than 2/3 of our backlog turns into revenue in the subsequent 2 quarters.

However, less than half of Q3 ending backlog is expected to turn into revenue in Q4 or Q1 of 2019, primarily due to EUV systems, which typically ship with a lead time of 10 to 12 months.

We expect these EUV tools to begin shipping after Q1 of 2019.

Now turning to P&L highlights for Q3.

Revenue of $126.8 million was below our guidance range due to broader China softness and a U.S. foundry discontinuing its 7-nanometer program.

Non-GAAP gross margin was 38.2% higher than guidance due to favorable product mix and lower spending.

Non-GAAP OpEx sequentially improved and was better than guidance at $40.4 million.

Please note, Q3 benefited by a one-time credit of reversing previously accrued incentive compensation of $2.2 million.

Non-GAAP taxes were $0.8 million.

And finally, non-GAAP EPS was $0.11 on a diluted share count of 47 million shares.

Now moving to the balance sheet.

Cash flow from operations was $18 million, and we ended the quarter with $266 million in cash and short-term investments.

Cash increase from Q2, driven primarily by reduction in accounts receivable, improving our DSO to 64 days.

Inventory remained elevated as we continued to ramp EUV systems-related manufacturing and also invest in new products for MOCVD.

Consequently, days of inventory increased to 173 days.

During this quarter, we purchased $10 million of our common stock or approximately 1.8% of our outstanding shares at an average price of $11.58 per share.

Long-term debt on the balance sheet was recorded at $284 million, representing the carrying value of $345 million in convertible notes.

Now turning to Q4 guidance.

Q4 revenue is expected between $85 million and $105 million.

Q4 now contains negligible revenue from blue LED MOCVD system sales in China as compared to 21% in Q3, thereby contributing to a sequential revenue decline.

As compared to the previous outlook, Q4 became weaker due to pushouts of non-MOCVD products from China-based customers as well as an unexpected discontinuation of 7-nanometer program by a U.S. foundry.

Non-GAAP gross margin is expected between 36% and 38%.

Our product mix is shifting away from low margin blue LED MOCVD systems from China, helping improve our overall gross margin.

However, the overall decline in business volume is offsetting the mix driven improvement, preventing us from achieving our previously stated goal of 40% gross margin by Q4.

We continue to target 40% gross margin or higher as volume picks up.

Non-GAAP operating expense is expected between $41 million and $43 million, the midpoint of which is a sequential improvement from Q3 when adjusted for a one-time credit of $2.2 million in Q3.

Non-GAAP operating loss is expected between $10 million and $3 million.

GAAP EPS loss is expected between $0.56 and $0.40 per diluted share.

Non-GAAP EPS loss is expected between $0.25 and $0.09 per diluted share.

Please note, we currently carry approximately $300 million of goodwill on our balance sheet.

The carrying value of goodwill may potentially be impacted based on our market capitalization.

Given the recent market price of our shares, it is possible that our stock's trading pattern could result in a noncash goodwill impairment charge.

The GAAP guidance I just provided you does not take into account any such impairment charges.

And now for some additional color beyond Q4.

At this time, based on our backlog and current visibility, we see Q1 sales tracking slightly above Q4.

We expect OpEx to continue declining towards the $40 million target by Q2 of 2019.

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

Thanks, Sam.

We have several market opportunities in front of us, and I will focus on a few of them today.

The first opportunity I will focus on is our EUV mask blank deposition systems.

In the front-end semi market, IDMs and foundries have been continually investing in next-generation technologies to advance Moore's Law.

The next investment inflection in this evolution is EUV lithography.

We have been working on EUV mask blank deposition systems for the front-end semi market for many years and are excited to finally see this technology become adopted.

Every EUV lithography step requires a photomask.

And every photomask starts as a mask blank.

Our ion beam deposition systems are proven to produce EUV mask blanks with the lowest level of defects.

We have 3 EUV systems in backlog and expect to book another one in the fourth quarter.

On a go-forward basis, as EUV lithography adoption continues, we believe we will have a sustainable business in EUV mask blank systems.

These are complex systems with nearly 12-month lead times, and we are focusing on delivering to our customers as we grow this business over the coming year.

The next opportunity I'm focusing on is our laser spike anneal or LSA system, which is at the cutting edge of front-end semiconductors.

Our LSA system serves a critical function in front-end semi-manufacturing and has been a process tool of record for manufacturing advanced logic devices from 40 nanometers down to 14 nanometers.

We have been working with leading foundries and IDMs for insertion in our leading-edge nodes.

During this quarter, after an evaluation period, we received an order for an LSA system from a market leader for their upcoming node.

We believe this order may lead to multiple follow-on orders from this customer and other foundries and IDMs for their leading edge applications.

The last opportunity I will touch on today is our advanced packaging lithography system used for DRAM packaging.

Advanced packaging of semiconductors such as fan-out wafer-level packaging through silicon via or copper pillars are methods for designers to enhance performance in applications such as Big Data analytics and artificial intelligence.

According to TechSearch International and IC Insights, the number of wafers processed with advanced packaging techniques is expected to grow at an 11% compound annual growth rate through 2021.

Our advanced packaging lithography systems are performance optimized for these applications and afford our customers a superior cost of ownership.

Primarily, advanced packaging has been utilized in logic applications for application processors and GPUs.

However, more recently, DRAM manufacturers have adopted this technique as well.

You will recall last quarter we announced a major DRAM producer purchased 2 of our AP lithography systems.

Memory performance is a limiting factor as artificial intelligence proliferates into both commercial and consumer devices.

To enhance performance, top DRAM suppliers are transitioning from traditional wire bond to flip chip, utilizing copper pillars.

This enables finer pitch devices with better electrical and thermal performance.

We are seeing increased interest in this application from our customers and have recently placed systems into high-volume manufacturing to support this expansion.

In closing, the slowdown in our markets we spoke about is keeping us from growing year-on-year.

In the interim, we are proactively taking actions to align our cost structure to the current revenue run rates.

We are doing this in such a way as to preserve the customer evaluations and product development programs that are currently underway.

I would like to reiterate that while we are in a soft revenue environment, we expect conditions to improve and we will return to growth.

As I said when we started the call, we have an exceptional team with extraordinary technology and are positioned to serve customers in exciting markets with many years of growth ahead.

And lastly, before we take your questions, note that Veeco filed an 8-K this morning reporting that we have recently discovered an attack on our computer systems by what appears to be a highly sophisticated actor.

We have notified law enforcement of the attack and have retained forensic experts to assist with the investigation.

I refer you to the 8-K for more information.

As the investigation is ongoing, we will not be able to answer any questions at this time.

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

Operator, please open the line.

(Operator Instructions) We will now take our first question from Mr. Brian Lee from Goldman Sachs.

I had several here.

So maybe if we could just start big picture.

Bill, you sound like you're setting the expectation that we're going to be in this soft revenue environment for you, for a bit of time and you do have pretty tough comps into the first half of '19, given how strong revenue trends were for you in the first half of '18.

So just when I put all this together, you're annualizing the $400 million top line heading into 2019.

What's sort of the end-markets that are going to put you back on to a trajectory for year-over-year growth?

And is that something that you could see materializing by Q3 of next year?

Or is this really going to be all the way into the end of the year where you obviously would have the easiest comp looking at Q4 guidance right now?

Yes, great question, Brian.

I think we could take this from a couple of different directions.

If I look at, say, Q2 bookings, I'd say $130 million and Q3 bookings at $100 million, those numbers have very, very little China business in them or blue LED.

And that's an average of $115 million.

So I think kind of where we are, that would be a place for us to target kind of looking at our bookings.

But to answer your growth question, I think we will see growth in EUV with our mask blank business.

As we said in our prepared remarks, this is a long-lead item, kind of looking at nearly 12 months.

And so we won't see any of that revenue until Q2 of '19 and continuing throughout the rest of 2019.

So I think that would certainly be something that would be a growth driver.

The second area that I think is a bit of a growth driver for us, as we mentioned, is the win we add in LSA in kind of a cutting-edge node.

We haven't been in that space since 28-nanometer.

So this is I think a big win for us and will give us an opportunity to win other applications with this customer as well as provide us an opportunity with other customers to gain share.

And so this, as you know, will take some time to be adopted and won't be a quick panacea.

But certainly further growth there will drive our business longer term.

The other area of growth for us is in VCSEL.

As I said, that business has been pushed out and will be not impacting us in the short term positively.

So I would kind of see that more later in 2019.

Okay, great.

No, that's helpful.

Maybe on that last point, second question was going to be around VCSEL.

Can you maybe elaborate a bit more on what's driving the delays there?

Is this just technical qualifications?

Is it a slowdown in the overall end-market where maybe your offering is coming in at a bit of a wrong period in time in terms of the adoption curve?

Or is there some competitive dynamics playing out there?

And then related to that, just what's sort of the -- even if it's rough ballpark figures, what's your revenue opportunity for that category as you think about it holistically?

Sure, Brian.

I would say, I have to place the blame squarely on us here.

The market is robust.

We do have a tool running in our lab in Somerset, New Jersey.

We are making VCSELs today.

We are closely engaging with customers.

Many of our customers, all of the main players, really are trying to pull us into this market space.

They really want us to be there because of our production performance and high volume.

At this time, we're meeting most of the specifications.

But unfortunately, we do need more time to iterate the process to achieve all the requirements.

I would say, this market is a $150 million market where we have very little share today.

So I think once we have our product out on the market, I would think we do have an opportunity to gain share kind of in a rational manner.

The market is pretty significant, and I do believe we are in very early innings here.

I mean we're seeing adoptions in facial recognition, but there are opportunities for world-facing VCSELs, which require higher power and different wavelengths, opportunities in automotive.

And so I think, although we kind of have a short-term bump here, the opportunity is pretty significant over a number of years.

So we certainly remain bullish on this market over the long term.

Okay, great.

Appreciate that.

Last one from me on the gross margins, maybe for Sam.

I appreciate the updates around OpEx and the quantification around how that's going to flow through over the next several quarters in terms of your savings initiatives.

But if you guys do see this revenue run rate sort of linger in the $400-million-plus range through a decent part of '19, is there any actions being contemplated or underway for the manufacturing cost side of things where you can get to the 40% levels or above even without a meaningful expansion in the top line?

Or is that not part of the game plan at the moment?

Yes.

Thanks, Brian.

Great question, again.

So look, we have been reducing cost on the OpEx side quite a bit.

As we look at last few quarter's trend, and as we -- as I guide towards the next few quarters it's continuously coming down.

So I think what we are trying to do here is to reduce cost in a measured manner and in a way that we can consistently keep on executing towards it.

So overall, right now, we're guiding you midpoint $95 million and midpoint of 37% gross margin.

But we started the initiative of reducing manufacturing costs in Singapore, it is more than halfway done, but the savings are not yet coming in through into the P&L.

And towards the midpoint of Q1 '19 that would be completed.

So gross margin side, cost-reduction initiatives are yet to play out fully.

We remain squarely focused on 40% or higher in terms of our gross margin.

I do believe the $95 million run rate on revenue is causing headwinds for gross margin from a volume perspective.

So I would say, $100 million or more, say $105 million, $110 million, we should be in the 40% range in terms of gross margin in 1 to 2 quarters because our cost-reduction initiatives would be completed.

So I get a little bit of benefit from volume, $95 million is somewhat low.

And then we also get a chance to complete our cost reduction.

So again, overall, we continue to target 40% gross margin or higher at the levels you talked about.

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

Bill, maybe just first to start off, looking at the bigger picture of the red, yellow LED market and the MOCVD opportunity there, you just mentioned about VCSEL being a 2019 story.

But if you look at the big picture for that segment, do you see new customer gains as a driver in 2019?

Or are some of the customer wins that you generated in 2018 turning into volume, will that be the bigger driver?

Thanks, Patrick.

As I think about it, I think this would largely be, as it relates to VCSEL, new opportunities for us going forward.

We do have little share in that space today.

And so this would be a lot of new customer opportunities for us.

Although some of them actually are also ongoing customers.

But I would say -- on an 80-20 rule, I would say most of these would be new customer opportunities for us.

Okay, great.

Moving on to the LSA segment, it's very encouraging to hear you get a leading-edge win, given how muted that business has been for some time now.

I guess, what's been the change because it has been several nodes where customers have not employed LSA at a high-volume basis.

I guess, what's the change or what are some of the manufacturing challenges that helped you at least get this qualification win at this point?

Yes, thanks for the question.

And you and I have had a few conversations about this over time.

And we see this as a big win for us.

And what we needed to do was do a better job of basically listening to our customers, understanding their needs, supporting them and then delivering the results.

And there is nothing overly magical other than listening to our customers and doing things well for them to get this win.

So we're quite proud of it.

And it has been a number of nodes since we've been here near the leading edge.

So we are excited.

This is a first step for us.

I think this is a milestone that we can certainly leverage with this customer as well as other customers as well.

We also see opportunities with our melt technology to make some inroads in terms of reducing contact resistance as well.

So we're finally delivering on some of our commitments there.

Great.

A final question maybe for Sam in terms of the OpEx cuts.

They obviously make a lot of sense in the near term, but you've been in the industry, especially on the semi-cap side where things can turn very quickly.

I guess, given the cuts now, how flexible or how reactive can you be if business suddenly turns to have, "enough manufacturing capacity as well as people to meet a potential turn in demand?"

Sure.

Yes, Patrick.

Thanks.

So as I said, most of these cuts are coming through into the SG&A area and so it's mostly general and administrative functions.

So we're trying to keep all of our manufacturing capacity other than places where we do know it is in excess, for example, in Singapore.

So we are keeping sufficient upside capability for the industry to turn up and then we should be able to meet it.

We also have a number of relationships with outside contract manufacturers and outside partners.

We are preserving those as well and those are very valued partners.

So I think we would have that capability.

The one thing I'd like to add and make sure we all realize that the businesses that we are now getting, particularly in terms of EUV, they come with a long lead time, so it gives us a lot more visibility.

Then also with ion beam technology we get a lot longer lead times from our customers as opposed to quicker book and ship in the same quarter or any such thing.

So it gives us more visibility.

The business is higher margin.

The business is much more value-add and a quick turn, less than 6 months, or 5 months type of visibility that we would -- we used to get on the LED side, that business as the overall proportion of revenue is declining.

So I continue to feel good about our ability to turn and be able to address, should the demand pick up.

(Operator Instructions) We'll now take our next question from David Duley from Steelhead Securities.

I wanted to ask a few questions on the advanced packaging market.

There have been lots of OSATs and IDMs talking about ramping up fan-out, different volumes.

And I was wondering what you are seeing there.

Is that something that's -- that you're participating in?

And also -- and that's more on the foundry logic side.

You mentioned advanced packaging being adopted more in memory, I think, for high-bandwidth memory applications.

If you could just elaborate a little bit more on what's going on in that segment of the market, I would much appreciate it.

Sure, David.

No problem.

We are seeing growth in fan-out wafer-level packaging.

We recently received some orders from a very large OSAT for this exact market.

So we are still very much a major player in this.

We still have a very strong market share and don't see that eroding.

So we will be participants in that market.

I think if you just -- that's kind of more for the Taiwan market, Korea, et cetera.

But in China we have seen some softness in kind of the OSAT space, but -- that's a little bit more color I'd like to add there.

As it relates to high-bandwidth memory, what we are seeing is customers move towards advanced packaging techniques to eliminate wire bonding, et cetera.

And we have been successful in winning business there.

So I think that will provide an additional market opportunity for us going forward.

And David, I'd also like to add there that with the new iPhone, the size of the chip is higher.

So one of the key foundries in advanced packaging who's been our customer we're seeing utilization improve.

Their utilization, as we were seeing, was running low, but now that has picked up, maybe not enough to demand a significant capacity upgrade, but the utilization has gone up.

And so from a technology change perspective, it's definitely been helpful to us, this change.

And if the capacity gets a little bit higher, then there is a possibility of capacity upgrade.

And we remain hopeful of that.

We're not there yet, but nonetheless I would say that has been a positive marker.

Okay.

Well, that was one of the next questions I was going to ask.

So I'll go on to the -- the other one is, as far as the advanced packaging market, when you look into 2019 for Veeco, do you think you'll see more growth from the memory side or from the fan-out foundry logic side?

I would say, David, the answer is both.

We do see opportunities in memory, for sure.

I think there's a significant opportunity for Veeco.

And we do see -- as Sam just said, the utilization is picking up kind of in the mainstream fan-out space.

And we are seeing OSATs add capacity as well.

So I think it's an opportunity in both spaces, looking out into 2019.

And I would add, David, to Bill's answer there that in memory -- I think in logic it's more driven by technology change as well as capacity, whereas our initial thinking in memory is that we have a tool that has a unique ability, provides a really good cost of ownership advantage to our customers.

So at least our initial view is that our technology is coming in in initial applications.

And it's a big market, typically we've not sold AP tools in memory in the past.

This is what changed in the last 6 months.

So we remain hopeful, and we hope we are able to crack into more applications in memory.

But I would say, it's mostly around technology and capacity on the foundry logic side and somewhat about much more unique to Veeco, unique to Veeco tools on the memory side.

Okay.

And final question from me, Sam, I think you mentioned something about valuation triggering another impairment charge.

If you could just elaborate a little bit more on that particular statement?

Sure, absolutely.

So Veeco reports their numbers in 1 segment, so to say.

And so we are carrying about 300 -- approximately $300 million of goodwill on the books.

I think it's $307 million to be exact.

And there are certain GAAP guidance where the carrying value of goodwill on the books cannot be higher than the market value of equity and then there are some adjustments to it.

So without going into too much complexity, in simple terms, the value of numbers of my goodwill that I carry on the balance sheet is linked to the market cap of the company.

And the market cap obviously is changing based on how the share prices change.

And then every year on October 1 we do a goodwill test and we did this year as well, and we passed the test.

However, the cushion was small.

It was about $60 million.

So what that is telling me is that from that day onwards as we close the quarters in the coming quarters, if the share price trading pattern is such that the market cap of the goodwill -- market cap is lower than the amount of goodwill we are carrying, then we'll have to take a noncash charge to our P&L.

Now it is completely a noncash charge.

It does not impact our operations or liquidity in any manner.

This is something we would exclude from our non-GAAP financials, but nonetheless we will follow the GAAP guidance and report financials accordingly.

And since the cushion was low on October 1, I thought I would go ahead and provide that advanced information or advanced notice to the investors.

We appreciate that.

And unlike the impairment charge you took I think last quarter, which was directly tied to Ultratech's business performance, this isn't necessarily tied to that.

This is purely tied to the market cap of the combined entity.

Yes, your understanding is completely correct.

And then that way -- it's in a way simpler than the Ultratech situation, which was dependent upon performance and bookings and revenues, et cetera.

We'll now take our next question from Gus Richard from Northland.

On the LSA tool order, is -- what node is that?

I'm really not at liberty to say.

I would tell you, it's the next node.

Okay.

All right.

That's quite all right.

I get it.

And then you haven't mentioned your strain measurement business this quarter.

I was wondering if there are any sign of life in that business, or is that equipment sort of dead for a while?

We actually are in the midst during 2018 of addressing some product issues that we've had with our customers.

And we are expecting to come out with a series of product improvements and upgrades to that.

And we are certainly seeing very strong customer interest in that.

I just don't want to get too far ahead of ourselves in that space.

But certainly, the technology is -- customers find it quite interesting.

We just need to make sure that we can meet all the -- all of the requirements to meet their product roadmaps, so.

Gus, I would add that that product is generally focused around the memory side and the memory side has been running weak.

There are certain product advances we need to make that Bill just mentioned, but at the same time the overall memory market in these last 6 months have been soft as you very well know.

And so that's what we're going through right now.

Okay.

Will the product enhancements move that beyond the memory market?

Or is it still going to be primarily focused there?

It will probably -- it will stay probably in the memory market, both NAND and potentially DRAM.

Got it.

And then on the EUV business, have the mask makers moved beyond pellicle issues so that EUVs can be used on other layers other than via?

That's my understanding.

Obviously, resist and pellicle issues have been an issue, but we are seeing customers starting to tape out EUV.

So we are following that market very closely, obviously.

There are no further questions over the telephone at this time.

I'd like to turn the conference back to our hosts for any additional or closing remarks.

Thank you, operator.

And thank you, everyone, for joining our call today.

And I look forward to giving you an update next quarter.

Thank you.

Ladies and gentlemen, this concludes today's call.

Thank you for your participation.

You may now disconnect.