Q3 2019 Earnings Call
Good day and welcome to the Veeco instruments corporate hosted Q3 2019 earnings Conference call. Today's conference is being recorded at this time I would like to turn the conference over to Anthony been serving.
Investor Relations. Please go ahead Sir.
Thank you and good afternoon, everyone joining me on the call today.
He goes Chief Executive Officer, and Sam Maheshwari, Our Chief operating Officer in Chief Financial Officer. Today's earnings release is available on the Veeco website.
Please note that we are prepared a slide presentation to accompany today's webcast. We encourage you to follow along with the slides on Veeco dotcom.
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During this call management May address Nongaap financial measures information regarding such non-GAAP financial measures, including reconciliations to GAAP measures of performance is available on our website.
With that I'll turn the call over to build for his opening remarks. Thank you Anthony good afternoon, everyone. Thank you for joining the call.
First highlight some of our Q3 results and provide an update to our transformation and finally get product and market updates.
Revenue was $109 million, which was above the midpoint of our guidance, we achieved strong revenue in our front end semi market with shipments.
Good production you'd be mask blank system and revenue from multiple let's say systems.
Additionally, sales of our IP products to the data storage market remained solid non-GAAP gross margin was 40.3%, which was higher than our guidance range.
I think from improved product mix on higher volumes and well managed census.
We're happy to report non-GAAP operating income was $4 million, resulting in earnings per share of five cents, marking a return to profitability.
Our bookings were $115 billion, which are driven by strength in both data storage and easy math like markets.
Now I will provide an update on the company's transformation.
The transformation will be completed in two phases, returning the company or profitability and driving growth.
Phase one returning the company profitability is well underway and includes our MOCVD shift and the commodity LCD markets to photonics and emerging applications.
Making general infrastructure reductions and rationalizing our product lines by Reprioritizing R&D expenditures.
On our last earnings call, we alluded to slow moving inventory, we also mentioned reducing expenses to improve profitability.
Made progress in both areas.
And we'll provide more details in a few minutes.
These two of our transformation driving growth is in the early stages, we're taking steps to grow our existing front in semi advanced packaging and data storage markets.
In addition to growing in our current markets, we're investing in new applications, such as easy mask blank production in compound semi applications with our MOCVD products.
Okay. We are transformation will be a leaner and more focused company on a path to growth.
And now for business update.
The data storage market remains strong our ion beam deposition I envy match diamond like carbon in mechanical products enable hard disk drive manufacturers to improve their aerial density as they pursue lower cost per bit to compete with solid state storage.
The next revolution and aerial density improvements is coming from energy assisted magnetic before it also known as hammer or manner, which is expected to increase the number of manufacturing steps required to produce read right heads.
This is good news for Veeco.
A recent Missoula report protested the cloud based Hyperscale data center market.
15% to 25% CAGR through 2025 with hard disk drives currently store and greater than 70% of total bids hard disk drives should remain an important contributor.
She gave recently conducted in analyst day, where they provided their technology roadmap, which relies on increasing aerial density as an accelerated pace over the next decade.
Consequently, dry storage will increase and the average number of head for drive is forecasted to increase from five its today.
Then heads by 2023.
The data storage market remained strong throughout 2020.
In their friends semiconductor market, we enable the evolution to you'd be lithography by providing ion beam deposition that create mask blanks.
Andy lithography allows more sophisticated chip designs to be made with fewer layers.
The proof points for you the market adoption continue to occur.
Do you TSMC or do you need tools recently reached production maturity with two availability, reaching target goals for high volume production.
In fact, they recently announced or seven nanometer plus you either Dougherty technology is delivering customer products to market in high volume.
E V and even though provides 15% to 20% higher density and improved power consumption versus the same node without easy.
Demand for you'd be lithography systems is strong with answer no recently announcing orders for 23 systems in the third quarter.
Accordingly, we shipped a second production you be mask blank system in Q3 and received an order for an additional system.
Another contributor to our front end semiconductor results is our laser annealing product lines industry leaders, such as Samsung and TSMC and now they are ready for production at five nanometers.
Advanced nodes reduce debates feature size and shrink area driving significant performance improvements over the prior nodes.
The base to shrink a new requires higher temperatures for extremely short and precise durations.
I would say product is ideally suited to meet these advanced requirements.
In Q3, we continue to progress and recognize revenue on another system at a leading edge node.
When our customers ramp and move into the next notes, we are well positioned to increase our market share.
Now I will move to the compound semiconductor market, which includes photonics Fiveg RF power devices ended bins display applications.
He goes a long history of technology leadership, whether gallium nitride MOCVD systems.
Robert portfolio includes a multi wafer system for Blue Green money, and Mike really knees and a 200 millimeter single wafer system for power applications.
On top of that we completed development and shipped a 300 millimeter fully automated single wafer Gan cluster system to a leading edge semiconductor fab.
This system has exceptional uniformity and outstandings on quality.
I'm excited to show that we recently obtained acceptance from our customer on this tool.
Hi quality, given some stacks, Turkey, India was for emerging semiconductor applications, including five GE RF Bluegreen micro LNG in power electronics.
In addition to again products last quarter, we announced the shipment of a beta version of our improved arsenide phosphate MOCVD system optimized for photonics applications, including Vyxeos, Regimenting, razors mini and micro knees and Red Orange ladies.
This data is going well and we are on target to receive customer acceptance in the next few quarters, we isn't working closely with other customers is well placed another evaluation tool for pixels.
When this market begins to grow well to be well positioned and gain market share.
We are confident in our products performance and we are ready with best in class MOCVD technology solutions to address the needs of the photonics Fiveg.
Power and advanced display markets.
As we come towards the end of 2019, we made significant progress we continue to ship into the E mask blank market.
Completed development in shifting 300 millimeter single wafer Gan MOCVD system to a leading edge semiconductor fab.
We're making progress with our MOCVD beta system designed for photonics applications, including vessels.
We need improvement to our next generation advanced packaging lithography system.
We made progress penetrating the sub seven nanometer with our laser anneal product.
And lastly, we achieved non-GAAP profitability.
Gross margins continue to improve and we expect to further improve the operating leverage of the company going forward.
With that I'll turn it over to Sam for further details on the financials.
Thanks, Bill and good afternoon, everyone.
The discussing or with non-GAAP financial performance.
Can find a detailed reconciliation between GAAP and non represents in the press release and on the website.
Q3 bookings were $115 million and ending backlog grew to $279 million and reminder, beginning 2020 <unk> discontinued providing bookings and backlog resides.
Revenue for the quarter was $109 million, which was slightly above the midpoint of guidance range.
Thanks to pick on industrial market made up 37% of current revenue driven by <unk> systems treatment.
Storage customers and really seems up.
I don't systems, too high and optical coating customers.
And in some markets with 31% of revenue driven by shipment off for a second production mapping system as well as things up multiple Lugano annealing systems.
And we do lighting display and compound semi less 22% or around revenue.
Rich I don't want to do them and the military MCV system and service and upgrade whatever and customers.
Advanced packaging, Mems and RF filter market made up 10% up around revenue, reflecting continued softness in this market.
By region, that's sort of the road, which includes Japan, Taiwan Korea in Southeast Asia was 51% <unk> land revenue driven by a.
Mask blank system sale.
With that storage products, and roulette, and let's say product sales.
Restaurants, 25% to it seems to do that storage market.
And.
Since I've heard all revenue driven by seems to scientific and industrial customers.
Lastly, China about 60% of all revenue driven by let's say product shipment to foundry.
Now turning to non-GAAP operating results.
Gross margin of 40.3% two percentage point sequential improvement from Q2, driven by improved product mix I read lumen and look what expenses.
Opex for the quarter was $14 million and roughly inline with where we expected to be.
We continue to take actions to reduce infrastructure costs as well as rationalized ongoing investments in cutting product line.
I wouldn't expect opex to reducing the coming quarters.
I would target is to eliminate approximately $16 million from the current run rate on an annualized basis or about $1 million per quarter.
We expect the reductions to be fully realized by Q3 off 2020 .
Tax expense for the quarter was zero point $2 million met didn't come came in at $2.6 million that you'd be at the five cents on a diluted share count up 48 million shares.
Now moving to the balance sheet and cash flow highlights.
We ended the quarter with cash and short term investments up $232 million, which included $42 million up cash and offshore.
Cash flow from operations was negative $15 million due to buying interest payment on our debt.
And an increase in contract that sits on the balance sheet.
Greetings contract that the driven by and I'm really pleased to shipment.
Which was recorded as cc revenue recognition rooms.
Inventory declined $235 million.
Made progress reducing overall inventory however, a portion of the inventories slow moving which is related to the M.D. business and that's another products.
We believe the slow moving inventory no more than $25 million and pursue steps to sell this inventory.
Long term debt on the balance sheet was recorded at $297 million that presenting the carrying value up $345 million in convertible notes.
And lastly, our capex during the quarter was $1.7 million.
Now turning to Q4 guidance.
Revenues are expected to 200, and hundred and $20 million, but non-GAAP gross margin between 39% and 41%.
We expect non-GAAP opex to be at Oncotype do $9 million.
Happy its is expected between a loss of 32 cents and the loss of 10 cents diluted share.
non-GAAP EPS is expected between a loss of three cents and 18 cents per diluted share.
And now for some additional color beyond Q4.
At this time being done over current visibility, we see QM trending similar to Q or 19.
Additionally, as I mentioned earlier, we expect Opex to decline to road, though a target of $36 million per quarter by Q3 of 2020 at current revenue levels.
And with that then I will be happy to take your questions.
Operator, please open the line.
Thank you.
Ask a question.
Please signal by pressing star one in your telephone keypad, if you're using speakerphone. Please make sure. Your mute function is turned off to allow your signups reach or equipment.
Again press Star one to ask a question well pause for just a moment to allow everyone the opportunity to signal for questions.
My first question comes from Patrick Ho Stifel. Please go ahead.
Oh, Thank you very much a nice work on the quarter getting back to non-GAAP profitability.
Bill maybe my first question in terms of Eliseo business, you mentioned that you saw some strength there. It's just what the same application that you are one previously and you're just seeing increased capacity buys or have you broaden its actually just no applications and that's why you're seeing the screen.
I think it's actually both Patrick.
It's a we saw some order activity in business activity.
As that node ramps and we're also.
Working with that customer on their next node, where we will have an opportunity to to broaden out beyond the one application to two or three applications.
Right and that's my follow up.
Actually no.
Target of $4 million a quarter are those additional facility consolidation or how can I characterize what type of opex cuts easily beat.
Sure Patrick This is Sam I'll take your question there. So what is happening there is.
We we have been working on a number of products and product development efforts. So.
There is a little bit of facilities and administrative oriented or signing an optimization that we are going to be working through but a larger portion of the reduction is going to come from the R&D line and that is really driven by.
Optimizing and reducing consultants contractors and project material related spending as a number of four products.
Our getting towards the late stages in terms of their development cycles.
Great. Thank you very much.
Thank you Patrick.
If you find question's been answered you maybe move yourself from the Q by pressing star Q once again, if you'd like to ask a question. Please press star one.
Our next question from Brian Lee of Goldman Sachs. Please go ahead.
Hey, guys. Thanks for taking the questions Sam maybe first just on the the the out quarterly guidance you know always appreciated when you gave it a bit more forward color just wanted to clarify so when you say similar Q1 similar to Q4, that's top line and gross margin I guess that in the first part of question then.
Can you I suppose you start to see some of the Opex reduction coming in in Q1 as well as you get some portion toward that 4 million dollar quarterly reduction.
Yes, Thanks, Brian Yes, I think are you have a good understanding there my color in terms of.
Q1 trending similar to Q4 is in fact around gross margin and topline like you just said.
And then in terms of Opex as I said, we are targeting up to by targeting $36 million by Q3 of 2020 . So in a linear fashion or in some sort of whats cherokee's down the spending in Q1 is expected to be lower than Q4, we won't hit all the way to 36 by Q1.
But it's expected to be lower than Q4.
Okay Fair enough. That's helpful. And then maybe just from a modeling one the a I might've missed this but the cash flow from operations in the quarter. It was.
Negative mid teens number.
Can you can you can outline what what's going on there I didn't see anything meaningfully off from a working capital perspective, and I know the inventories staying in the same range.
Can you tell us what the drivers were there and then what we should be thinking about free cash flow.
In in Fourq you.
Sure. So I covered that a little bit in my prepared remarks, or Brian . So what happened is ER as you look at that comps receivable line you see that but then there is another line, which is the contract assets line and essentially what that is it went up by about $10 million there. So.
Quarter over quarter.
And I still following that revenue recognition rules you know we shipped a tool to a Japanese customer and we are following the Japanese business practice. The tool is shipped a but then we invoice the customer only when the tool has been received by the customer installed and then except.
Did by the customer at that time, we invoice the customer.
But following the GAAP rules here when we ship it we recognize the revenue and be recorded as contract asset. So essentially it is kind of and on Invoiced accounts receivable. So when you add that to the accounts receivable line you would see that all call. It proxy accounts receivable include.
During the two we are in the contract I said, it's gone up.
And that is in line with over growth here. So that is there are a significant amount of cash rent in terms of cash flow from operations.
The second piece I'd like to highlight or provide some color is that in our business.
Cash kind of moves from quarter to quarter. It is lumpy depending upon the timing of the machine shipments and the proportion of the machines that ship incurred month wess plus month of the quarter and some of those factors.
So if you put all of that together essentially this quarter in Q3, we consumed cash but in Q2 regenerated cash in Q, when we consume cash and in Q1 in Q2, we are also.
Generating operating income loss, so I expect Q4 with that type of a background essentially what I'm trying to say, it's cashes lumpy in our business and in Q4, I'm expecting cash to be neutral to positive from here on up compared to Q3.
Okay. Great appreciate the color and then maybe just one on the the product side the the Vixel opportunity. It sounds like you last quarter, you had a the customer take debated tool. It sounds like you have one more customer lined up for made it too if I heard your right do you anticipate that that that occurs in.
2019 or is that a 2020 event and then I guess given that six to 12 month beta conversion cycle, you've talked about in the past is is it fair to assume.
There really isn't a piano impact from big so tools until until probably 2021.
Thank you guys.
Sure sure Brian just so just follow up on your your question, we did say that we shipped one.
Arsenic phosphide tool to a customer as a a beta evaluate cream it that's actually going very well, we've actually turned the tool over to the customer and there are actually putting it through its paces and going to the qualification process I would expect that to revenue.
Early Q excuse me early 2020 is the first quarter second quarter of 20, I did not saying we have a a second a beta customer we're working with a number of customers I tried to close an agreement or commercial sale.
And have not been successful with that today, obviously, that's a very high focus for the company.
And then remains as such.
I think the final point was what other material impact on.
I was in 2019 piano.
The answer is no.
It will not.
Alright fair enough. Thanks Kathy.
Our next question comes from David Deadly Steelhead Securities. Please go ahead.
Thank you. Thanks for taking my question I guess first question is on the backlog could you give us some idea about the relative breakout of the backlog and and it's I guess, it's more than a couple of quarters now.
Is there anyway that you might be accelerate the delivery of this backlog.
Sure. David This is Sameer. So a you know we've been growing backlog, although the pace of growth of backlog has moderated.
And are what has happened is.
We've been shipping tools up the reason for.
Significant growth growth in backlog say six months or nine months back was really driven by you read tools and a lot of bookings in the data storage side of the business in that part of for business. The lead times run anywhere from nine months, all the way up to 12 months.
So we just started shipping you we tools beginning one tool in Q2, and we shipped another tool in Q3.
And we know you know already in a position that we keep on servicing this demand at the at a measured pace, how how over customer is able to digest this demand and how we are able to supply. This these orders [noise].
So that is the reason or backlog has has been growing.
I'm going forward I hope that our book to Bill remains greater than one again, we are doing pretty good in Q3 that greater than one point, though in terms of book to Bill.
So it's always a good situation or good set up for us that we are increasing the revenue in at the same time over book to Bill is greater than one.
So that's to set up will be on how we are entering 2020 and seems to be a good set up for us.
Can you give us the rough breakout of and within the four segments that you report.
Or any sort of idea.
The relative size of the pieces just.
For reference point sure.
Yeah, I generally we do not provided and quantitatively the breakout of the backlog by the four segments. We report however, I would say that the backlog contribution of.
And then send me and a scientific <unk> industrial and data storage segments. Those two segments are very strong in our revenue reserves for the recent quarter and similarly is the case as you look at our Q3 ending backlog.
I would say that the advanced packaging segment or in terms of for backlog makeup is weak and then.
The lighting display in compound semi sector is also I would say somewhere down the week side, we are trying to penetrate.
A number of opportunities in power Sami and also you know about over commentary on the VIX outside.
And certain other arsenic phosphide wide applications, including including a edge amusingly lasers and photonics related applications. So with all of that we are providing over those progress there, but the backlog is weak and similarly in there.
It's packaging the backlog continues to remain weak driven largely by.
The smartphone.
Smart tune a unit related softness a there is a little bit off an improvement in this in the smartphone driven business in Q3, but overall I would characterize it as a still soft.
I guess I would just add David that the advanced packaging market does work on more of a book in turn so we wouldn't expect to be carrying large backlog there but.
Okay.
Very helpful color now.
Could you help us understand perhaps.
What the E V opportunity.
Incremental opportunity might be next year or the next couple of years, however, you'd like to characterize it.
So that we can understand what sort of growth driver. This is for the overall business.
Yeah, we've been in denim working with our customer to to understand that model a it is a bit of a challenge to model it out.
It varies pretty significantly obviously based on the number of you be steps the lifetime of a mask blank the yield of mask blanks and and obviously the number of tape outs or applications that are are using you V can really caused this number.
To to move around a lot.
What we've.
Well, we think booking business it kind of around.
40, 50 million dollar kind of range. This year, we're expecting to be in a lot that size range next year.
Have you added by those four or five variables take just a but I just mentioned to you. So I think the number.
The number could move around a fair amount.
Yes. It now is continuing I think that you're going to ship 26 systems. This year 30 next year.
The demand demands real the demand is there.
I want to keep monitoring it to see.
How this this industry matures here, but I, we're sizing it and at $40 million to $50 million range next year.
And.
Since you had the relative orders this year, that's kind of what you would expect for revenue next year just.
Just to be clear, yes, yes.
Final thing for me.
Yes, it's a little bit of a follow on from Patrick's question on the LSAG business.
Yeah, I know you've penetrated at least one customer added advanced node or did you mention that you have now to customers at advanced though I guess 10 nanometers or 40 nanometer some below holler, we'd like to characterize the advanced node.
Yeah, David that's actually great clarifying question actually I'm Patrick's question I was kicking myself, we're not mentioning that so thank you for bringing that up we do have a second customer and I would say in advanced node is seven nanometer or or better.
And we are working with the second customer as well. So we were a and each of those customers today, we have a one application and at the next node. We are working to qualify a second or third application at each of those customers I wouldn't expect.
That node to be a significant volume for another few years out though.
Okay.
Just final question for me I'm, sorry, leveling the but the overall Tam of the annealing market do you have a number there on an annual basis. So we can just understand.
But the overall potential opportunity is.
I would say that's about 100 million dollar opportunity.
Thank you.
Thank you.
Our next question comes from that's Richard of Northland. Please go ahead.
Yes. Thanks for taking my question, just a little bit color on the and MOCVD market.
When I step up in the quarter and I was just wondering if you could give us a little sense of.
Whether that was RF where that was.
More power.
Yeah and my Thanks, guys. Good question in my prepared remarks, I did I didn't mention that we.
Have shifts and the customer has accepted a 300 millimeter single wafer gallium nitride cluster tool.
But it does make up a probably most of that step up that you're seeing in demo CBD.
The the end application is pretty confidential, but I would say that the began tool is capable for Rs fiveg as well as Oh Micro Ltd, Blue Green applications as well as power.
But.
Okay and is this in a development environment or is it in a moving into our production environment.
So today, it's in a I would call it a development Ah pilot production, maybe a environment and we are working with the customer to see how this application.
Matures.
Got it and then on.
The rise business you know that's running quite strongly it's still find beam etch and dep.
He is it better for you if you had some hammer or is it better for you it's hammer.
Were actually pretty pretty agnostic either way.
Got it and are you seeing multiple customers ramp energy enhance.
Pads.
Recording.
Yes, yes, we're seeing.
We are seeing a number of customers have had a hammer and ma'am or programs going on.
For years, maybe even coming up to a decade I've been in Boston of various programs with was off with many of these customers.
So they each have their own integration schemes, but.
There are there all actively actively working it and I think it's really important because historically over the last five years six years. The the CAGR of aerial density growth has been less than 10%.
With that hammer, ma'am or they can increase that aerial density growth to over 20% not so they can really start driving.
Performance.
And cost per bit down to stay competitive with a with a other memory storage types.
Right and you, Okay, and then that we're where what inning would you say we're in terms of there the upgrade to enhance the energy enhanced recording we first inning 10th ending.
Are you doing so what would I would say.
Yeah I'd say this is a very long baseball game, we've been in for a long time, but unfortunately I would say we're very much in the early innings I think she has a.
Has said that they shipped a Kevin we're the number of drugs, but not very many drives that there are just starting to ship.
Got it and then barrier last well.
Yeah. The the last one for me.
In terms of your list so offering.
You know, what's the competitive environment.
You know in China and elsewhere.
Oh, we do see some competitors in China.
Most of our business a lot of our business for advanced packaging lithography is not in China today.
It's really a the larger a idea sims and osats predominantly in ER in Taiwan, where we still maintain we think a a very strong market share.
Okay and use it for.
Just a what what are the applications driving it does it is a fan out a high bandwidth memory is it slipped chip can you give a little bit of color there as well.
Sure.
I would say guys.
We've had some success with high bandwidth memory.
This year or having a winning a key memory customer there.
We've also seen some order activity.
This year from Osats.
Oh for IDE for GP, using AI type applications.
We have not seen a lot of ER.
Follow on activity in a fan out wafer level packaging as Sam mentioned, a this when the smartphone market the 80 lithography.
There's a lot fair amount of excess capacity that need to be worked down.
Got it that's it for me. Thank you so much.
Thanks, guys.
Once again, if you'd like to ask a question. Please press star one and we'll take our next question from Mark Miller of the Benchmark Company. Please go ahead.
Thank you for taking my question.
Talking about your back backlog trying to break that down do you said that the A.P. was fairly weak in terms of the backlog distribution does that mean, if you look at the margins of the tools and backlog they'd be somewhat lower were about the same in what you had last quarter.
Mark I think margin profile I assume you're saying gross margins a margin profile versus a the backlog situation that quite different in the sense for the advanced packaging business the way that industry works at least for other products. There is that we get a.
We get very well I would say low lead times and when I say lead times, meaning from the time to get the order to the time be ship the tool and that typically for advanced packaging side is three four maybe maximum five months and I was just contrasting there that compared.
Compared that to the you, we and data storage industry, we get upwards of eight or nine months or even 10 months.
So you're projecting a 3 million dollar or lower terms, a non-GAAP op. That's been a third quarter next year, how does that breakout between Cogs and expenses operating expenses.
Mark that is largely related to opex.
Okay. So most of it it was that split equally between R&D industry.
Correct, and a little bit more towards a skewed more towards R&D then as Ginny.
Right.
Tax next year, 10% pick tax rate, 8% tax rate what can we model.
So from a modeling perspective for taxes, you know we have about $280 million, then a U.S. and the wells so really percentage a tax doesn't really work forever PML. A you know we pay very small amount of taxes because of the unoiled position you know you couldn't more.
I do.
Anywhere from half a million do a million dollar of taxes for non-GAAP purposes, a quarter. So it could be two to 4 million dollar of DOCSIS barrier.
Thank you and and we really do not pay taxes in the U.S. or whatever taxes. These are that is really driven by the taxes, we pay in foreign jurisdictions and depending upon which specific jurisdiction. The sale is and what the tax rates in those countries are that's why it varies but we.
Really on paying taxes in the U.S. due to the into a position.
Thank you.
It appears there no further questions at this time I'd like to turn the conference back to Bill Miller for closing remarks. Please go ahead Sir.
Oh, yes, or we're excited that we got back to non-GAAP profitability and we look forward to.
Meeting with you again next quarter to discuss our progress. Thank you.
This concludes today's calls thank you for your participation you may now disconnect.