Q4 2019 Earnings Call

Good day, everyone welcome to the Veeco instruments in corporate hosted Q4 in fiscal year 2019 earnings call. Today's conference is being recorded at this time I'd like to turn the conference over to anybody that's being Guy head of Investor Relations. Please go ahead Sir.

Thank you and good afternoon, everyone. Joining me on the call today, our Bill Miller, because chief Executive Officer, and joint Kiernan, Our Chief Financial Officer today's earnings releases are available on the because 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 dot com.

This call is being recorded by Veeco instruments is copyrighted material it cannot be recorded or rebroadcast without veecos expressed permission.

Your participation implies consent to our recording.

The extent that this call discusses expectations about market conditions market acceptance in future sales of the company's products future disclosures future earnings expectations or otherwise make statements about the future.

Such statements are forward looking at our subject to a number of risks and uncertainties that could cause actual results could differ materially from the statements need.

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.

[noise] 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 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 will turn the call over to build for his opening remarks. Thank you Anthony good afternoon, everyone and thank you for joining the call.

I'll be talking through our financial results and discussing our markets, but first I'd like to provide an update on our previously announced company transformation.

We characterize our transformation in two phases. The first phase returning the company to profitability is well underway and includes reducing costs and de layering the company.

As part of the de layering process, we eliminated the COO role when some ours Rory announced his resignation from the company last December I'm excited to announce that I promoted John Karen to the position of senior Vice President Chief Financial Officer as at the beginning of the year.

John it's been it veeco for 25 years, leading just about every finance function and we work together for the last 15 years I'm happy to be partnering with John as we continue to our transformation and prepare the company for growth now I'll take you through our 2019 progress and high level financials.

Then I'll turn the call over to John for more detailed financial review.

For 2019, our priorities worth to innovate.

Penetrate markets and improve profitability.

Regarding our innovation objective, we executed very well.

We shipped multiple ion beam deposition systems for you'd be mask blank production.

We optimize our MOCVD platform photonics applications and shipped our first beta system to a premier compound semi customer.

We developed a 300 millimeter single wafer fully automated MOCVD cluster tool and shipped with acceptance to a major front in semiconductor fab.

We updated our advanced packaging lithography product to improve its performance and we need major enhancements to our laser annealing product to improve our competitiveness at the next those.

Regarding our market penetration objective, we had mixed results.

We enjoyed great success in that you'd be mask blank market with our ion beam deposition systems, we have promising traction at very advanced nodes with our laser annealing product at two semiconductor industry leaders.

In advanced packaging, we are still experiencing soft market conditions for lithography products and into photonics market. We are disappointed with weak market condition for vicals.

And lastly regarding our objective of returning to profitability.

Throughout 2019, we improved our non-GAAP gross margin. Our Q4 2018 gross margin was 36% and we exited 2019 at 40.2%.

Our non-GAAP operating expenses have been declining.

Entering 2019 were at $43 million in quarterly Opex and are now at 38 million at the end of the fourth quarter.

We also returned to non-GAAP profitability by posting two consecutive quarters of positive Vps in Q3, and Q4 of 2019.

On our balance sheet, our inventory improved throughout the year as well, we opened 2019 with $156 million in inventory and reduce that figure to $133 million by the end of Q4 29 team.

And now for Q4 results.

We capped off 2019 with solid execution in the fourth quarter revenue was $113 million, which was above the midpoint of our guidance. We achieved strong revenue in our front in semiconductor market driven by shipments of our easy mask blank and laser annealing systems.

Additionally, sales of our ion beam products to the data storage market remain solid.

Non-GAAP gross margin was 40.2% which was in line with guidance.

We are happy to report non-GAAP operating income was $7.4 million, resulting in earnings per share of 11 cents.

Importantly, we generate a $14 million in cash and we enter 2020 with positive momentum.

Looking at the full year 2019, non-GAAP results, our revenue was $419 million. During this transformational year, where we lost over $100 million of commodity Ltd revenue, we were able to generate $5 million in operating income.

Our 13% second half revenue growth over first half exceeded our 10% outlook.

And as forecasted we exited the year with 40% gross margin and return to profitability with positive non-GAAP EPS in Q3 in Q4.

Throughout the year as part of our de layering, we eliminated over 30% of vice president level and above positions, while trimming approximately 7% of our individual contributor positions. This was an intentional approach to our infrastructure reduction and preserves our ability to execute.

We also reorganized a long product lines, where the central R&D organization, which enables us to better allocate our R&D spend to our highest priority projects across the company.

This allows us to improve our customer focus and operational efficiency.

In addition to prioritizing R&D spend on projects with the highest financial and strategic importance to the company. We are evaluating our existing product lines were similar set of criteria.

You will notice in our financials in asset held for sale, which is an indication of our intent to divest a certain noncore product line.

At this time I would like to address the recent Corona virus outbreak, our priority is to health and wellbeing of all our employees and stakeholders and we hope the situation is resolved quickly.

In the interim we're monitoring the situation carefully and if implemented appropriate travel restrictions.

With that I'll turn the call over to John for reviews. The financials, then I will provide a market uptick.

Thanks, Bill and good afternoon, everyone today, I will summarize our revenue by market and geography cover our P., you know balance sheet and cash flow and then take you through our outlook for Q1.

I will discuss non-GAAP financial data and would encourage you to refer to our reconciliation between GAAP and non-GAAP results, which you can find in our press release or at the end of the quarterly earnings presentation.

Revenue for the quarter was $113 million.

The front end semiconductor market was 35% of our revenue due to multiple you be mask blank and laser annealing systems.

The scientific and industrial market made up 28% of our revenue and was led by buying being system shipments to our data storage customers.

LTV lighting display and compound semi was 23% of revenue.

We have multiple wet etch and cleaning system shipments to RF device customers for Fiveg related power amplifiers.

Revenue in this market also included the sale of slow moving lead the related inventory.

The advanced packaging, Mems and RF filter market made up 14% of our overall revenue, reflecting the continued softness we're experiencing in this market.

By region.

Rest of World, which includes Japan, Taiwan, Korea, and Southeast Asia was 48% of overall revenue.

Driven by our you'd be mask blank and let's say systems.

You asked was 23% which included sales to the data storage market.

China was 22% of overall sales mainly from multiple wet etch and clean systems.

And finally.

EMEA was 7% of overall revenue.

Now turning to non-GAAP operating results.

Fourth quarter gross margin of 40.2% was flat from Q3.

We are happy that we are exiting the year at 40% as forecasted.

Please note.

Selling off a portion of our slow moving inventory there was a slightly negative impact to gross margin.

We do expect to continue to sell off to slow moving inventory in 2020.

Which may provide gross margin headwinds however.

We're still targeting 40% gross margin or better going forward.

Opex for the quarter was $38 million and favorable to our forecast.

We are beginning to see the impact of the infrastructure cost reductions ahead of our target plan.

Tax expense for the quarter was approximately $600000.

Net income came in at $5.4 million with S. of 11 cents.

On a diluted share count of 48 million shares.

Our GAAP net loss widened in Q4, principally because it included a 21 million dollar.

Non cash charge associated with our investment in Katoomba.

As of December 31st 29 team, we determined there were certain impairment indicators.

Which led us to conclude that our investment was fully impaired.

And now I'll provide a few full year financial numbers.

The fiscal 2019 depreciation was $17.3 million.

Amortization was $17.1 million.

And our equity comp expense was $15.3 million.

Capital expenditures for the year were $10.9 million.

Dilution rate from employee equity was approximately 1% of outstanding shares.

Cash interest expense on our debt was $9.3 million and cash taxes were $2.9 million.

At the ended the year, we had federal and all wells of $271 million.

Which are fully reserved.

We ended the year would Q4 bookings of $110 million.

Backlog of $268 million.

As we communicated throughout the year, starting next quarter, we will no longer be providing quarterly backlog and booking results.

Now moving through the balance sheet and cash flow highlights.

We ended the quarter with cash and short term investments of $245 million.

Cash flow from operations was $16 million due to earnings in the quarter and a $7 million reduction in working capital.

Accounts receivable decreased due to the timing of customer payments, resulting in 36 days sales outstanding.

Which is lower than our historical average.

While we lowered our accounts payable, resulting in 28 days of payables outstanding.

Inventory declined $2 million, we made progress selling slow moving inventory in Q4.

Which has been a focus of ours for some time and given order activity in this area. We expect to continue to monetize this inventory throughout 2020.

Long term debt on the balance sheet was recorded at $300 million, representing the carrying value of out $345 million in convertible notes.

And lastly, our capex during the quarter was $2.7 million.

Now turning to Q1 guidance.

There's still a significant level of uncertainty from Corona virus related travel restrictions and factory shutdowns in China. Accordingly, we have widened the low end of our guidance range to accommodate give some uncertainty.

Q1 revenue is expected to be between 95 and $120 million with non-GAAP gross margin between 39% and 41%.

We expect non-GAAP opex to be around $37 million.

GAAP EPS is expected to be between a loss of 24 cents and a loss of one cents per diluted share.

Non-GAAP EPS is expected to be between breakeven and 22 cents income per diluted share.

And now for some additional color beyond Q1.

At this time based on our current visibility, we see Q2 revenue trending similar to or slightly higher than Q1.

Please note that this Q2 outlook.

Incorporate any potential corona virus impact, which is unknown at this time.

Additionally, we are ahead of plan with Opex reduction and reiterate that.

At current revenue levels.

We expect non-GAAP opex to decline toward our target of $36 million per quarter by Q3.

And with that.

I'll turn it back over to Bill.

Thanks, John and now for a business update.

We are seeing positive indicators in semiconductor markets wafer fab equipment spending is forecasted to increase in 2020 to somewhere around $50 billion. This capacity increase is driven by leading nodes semiconductor fabrication and advanced packaging in areas such as artificial intelligence and.

High performance computing.

Fiveg wireless infrastructure deployment.

Cloud computing and big data and autonomous driving.

Generally speaking these market trends and the capacity our customers require bode well for our technologies like high end being laser annealing lithography and MOCVD.

More specifically in our front end semi market, we are experiencing strong demand for ion beam deposition systems from an easy mask blank customers. This is consistent with recent messaging from may assemble which reflected 26 you'd be lithography scanners shipped in 2019 plans to ship 35 says.

Items in 2020 and capacity improvements underway to ship between 45 and 50 systems in 2021.

We also continued to do well with our laser annealing products in the front end semiconductor market.

In the fourth quarter, we recognize revenue on multiple laser annealing systems at leading edge nodes.

As these customers continue to ramp these leading edge nodes and begin to invest for their next nodes, we hope to gain share given our laser annealing advantages and ability to meet our customers advanced requirements.

In our advanced packaging, Mems and RF filter market, we achieved co production tool of record status that a major owes set for a fan out wafer level packaging application with our lithography product. We are encouraged by this accomplishment as it validates our lithography technology and ability to compete in this market.

The lithography portion of the advanced packaging market has been soft for well over a year. However, we believe the softness as a result of overcapacity and the drivers such as AI and high performance computing will persist and in time this market will resume growth.

We are largely complete with our new lithography system targeted at advanced customers in packaging.

We improved the products field size uniformity and depth of focus and we expect to ship evaluation systems to leading semiconductor manufacturers in the coming quarters.

And the compound semiconductor market Veeco has a long history of technology leadership in the CBD and offers a breadth of products to address many applications.

We havent automated gallium nitride single wafer cluster tool, which can accommodate wafer sizes up to 300 millimeter.

This will be used for power and RF device manufacturing.

And we recently announced alumina arsenide phospholipid platform, which is ideally suited for photonics applications. The alumina system is currently being evaluated by a leader in photonics and we are achieving excellent feedback.

Additionally, during the quarter, we received an order from another customer for the Lumina system.

We are confident in the performance of our entire MOCVD portfolio and we are ready with best in class technology solutions to address the needs of the photonics.

Fiveg RF power and micro display markets.

And finally in the scientific and industrial market data storage dynamics, driven by cloud computing and big data continue to be positive for veeco.

Sales to our data storage customers were again strong in the fourth quarter and we expect sales to remain strong at least through the end of 2020.

Looking ahead to our priorities in 2020.

We are focused on prioritizing R&D spend on the projects that are strategically and financially most impactful to the company.

And strengthening our foundational businesses.

We also seek to extend our core technologies into the front end semiconductor and photonics and RF markets.

And we're starting to see the operating leverage benefits of actions taken to improve gross margins and reduce our operating expenses. We expect to continue to reduce operating expenses and deliver strong gross margins throughout 2020.

And with that John and I will be happy to take your questions. Operator. Please open.

Thank you at this time, if you do have a question placed and loss by pressing star one on your Touchtone phone again that well be star one for questions, we'll pause for just a moment.

Yes.

Well here first from Gus Richard supposed to Northland.

Yes, thanks for taking the question graduation from good quarter on could you give a little more color on the second alumina order is that's for Vixel application or.

You know.

And committing lasers.

Yeah, you know I, thanks to the questioned us.

You know we have placed a beta.

In that field that back in 2019, we're getting excellent results.

For not only vixel stacks, but also other photonics applications and getting very good feedback from that customer.

Also we're sharing our vixel and micro SD data with several of the important to end customers and their they've been impressed with their results as well and to your question, Yes, we did receive.

Straight up purchase order from a second customer and.

Our understanding is that is for of axle application.

So that's a that's very positive.

So although many 19 was.

Let's start it.

I'm, sorry, and then on the you'd be side it looks like you're shipping.

Roughly one quarter is is that the kind of run rate.

Going forward before given the flipped version of the shoot to that grow a little faster.

The shipment profile is going to be a bit lumpy.

We ended up shipping for tools in 2019.

In any given quarter, we could be shipping zero, one or two.

I think our backlog going into 2020 here as we have three tools and backlog for the year.

Got it.

And then on.

Let's say.

Can you tell us without for us.

What how much you leading edge or let's say.

Five nanometers, southern and news and below and and how much is.

28 nanometer and more.

Customer related.

Yeah, I don't have that exact number right at the tip of my fingers here, but I would say.

Just looking back through 2019, I would say.

About 80% is that's a leading edge nodes and maybe.

20% is that Ti.

The 28 nanometer nodes approximately 80 20.

Got it and then I guess the the last one from me obviously, the krona viruses a wildcard.

Can you give us a little bit of us senses to what this lift is in revenue what what are you selling into to China is that.

I will say systems is it.

Advanced packaging and how many of your customers in the.

In the near one or that that problems.

Yeah, our under we've been talking to our customers.

Our understanding is that all of our our customers facilities actually our open.

Today.

If you look back over 2019, our China exposure was 10% to 20% of revenue.

Specifically here in the first quarter, it's about it's about 10% of revenue.

We are selling a mix of products.

Some MOCVD equipment.

As well as somewhat clean and edge product.

Here, that's our mix in the in the first quarter.

Got it that's it for me. Thank you so much.

Thanks, guys.

Well hear next from David do leave Us Steelhead Securities.

Yeah. Thanks for taking my questions I had a couple I guess first on.

You mentioned that you had some slow moving or over inventory that we were selling that could provide some potential headwinds could you just get through a bit more detail how much inventory dollar wise do you have to.

So moving or however, you might classify that.

Roughly the impact that you saw.

The December quarter or in the March quarter from selling older inventory.

Sure sure.

We had mentioned in prior calls that we had about $25 million or what was categorized says it's slow moving inventory.

We began to make good progress and read the better than an ongoing focus for for us.

And we did make progress in Q4 2019, we did sell off about $5 million of both inventory.

We've made progress in terms of also in order activity recently and due to our current expectation into to monetize this inventory throughout 2020.

On the left to impact.

On gross margins.

Yes.

So the yes, we did mention that are selling off this slow inventory provided some headwinds to gross margin, we see them, though the one to two percentage point rainy.

Great.

Oh, it's hard for advanced packaging business.

I was little confusing you mentioned that you were one a piece of business. We'll then open thought for for lithography on a fan outlined is that could you just repeat what you said there.

Yes, you have that correct, Dave We said we were a co P.T. O R.

I didn't know side for fan out wafer level packaging application.

Okay well.

Who who grew or other viable competitor, though.

I believe it would be canon.

Okay.

Well as far as you are the big and look for customer that was the guy who kind of or does it have gone out package certainly on their conference call for talking about a big increase in Capex for backend applications I'm not sure. How much is directed at fan out or lithography, but would you expect to see.

And order from that did come for sometime this year or or has there been any indication if things improve Google for your types of pieces of equipment.

Yeah, we are in very close contact with with that customer as you might expect.

Our visibility and lead time it is not very long for this equipment. So we wouldn't actually has a.

Have visibility that far out but.

We we certainly here in C expectations of lithography market picking up in the second half of the year.

We just don't have visibility to that given given our short lead times.

Okay.

Oh thought when.

Eastern a low to quantify how significant this is for you will you be shipping multiple kugel on a quarterly basis or is it just a couple of tools initially or any sort of float we could give us a robot or be much appreciated.

Yeah. Thanks, Thanks, Dave.

I would say, it's probably what we can see it it's probably just a smaller a handful of tools throughout the year, obviously seeing issue with the given our lead times, we've done we're not given a lot of visibility.

Into their there longer term demand cycles.

Okay, and then final thing for me is.

What.

If you could help me understand how important the fiveg ramp is for you guys I know it touches multiple product lines, but as far as well you think will make the most [laughter] fix or.

Little bit deal, which which areas would that be.

Yeah, we're actually seeing a pretty broad demand from fiveg.

First implementations of Fiveg, we're seeing are really less than six gigahertz, where the equipment sets are fairly similar to to fourg.

We're also seeing some interest in millimeter wave kind of the greater than 20 gigahertz opportunities and for those opportunities that would really be MOCVD opportunities for us and we are starting to see some early positive signs there.

But I would say we are seeing broad demand for many of our products from many customers really driven by Fiveg I mentioned power amplifiers, we have a Nemo CBD player. There were also selling having order activity in discussions on what processing equipment I envy match.

And lithography tools and any RF filter space.

We're seeing opportunities in what processing and our LT equipment, so I'd say that ever.

They look to the future yeah. This could be driving the business longer term, but I would say, it's really very early.

Thank you.

Michael.

Thanks, Dave.

Again for questions, let us start when I first time well go next to the benchmark company is Mark Miller.

Oh, you indicated that the.

Each bucket data storage business to have remained strong throughout 2020 is that predicated on a pick up in terms of orders from memory customers NEM customers lunar new year.

Hi, Mark good good question.

It's actually not predicated on that we have a very good opening backlog position in our data storage business.

And we are so we are pretty confident.

In our in our view from data storage in 2020.

Is this still kind of remain strong from an order standpoint bubble as the year unfolds, we'll see a see if the the order activity kind of remain strong as is now.

Some are people were talking about Fiveg, we are talking about acceleration in terms of their equipment orders later this year.

Do you expect to similar acceleration as we go towards 2021 for Oh Gee opportunities.

Yeah, right and they just just to answer that a similar question. We are we are seeing broad opportunity in a lot of our equipment. That's up from a number of customers and they're really just starting to be some early discussions some demo work.

Some quotations going out but the activity.

Certainly increasing and I wouldn't be surprised.

If it does pick up but I'm really not quite ready to to call a big pickup in fiveg in the second half of the year yet.

Thank you.

Thank you Mark.

Well go now to Patrick how what's the health.

Thank you very much bill maybe just a follow up on the advanced packaging soccer fee side, you mentioned, the some new wins there right now as that marketplace remains in a low this is actually a great time for you should do evaluations, but how do you see the I guess the buying when.

The business picks up again, it would what I mean by database typically when these guys stopped buying those are spot capacity and then go back to things that they were there used to do you see when this marketers I guess more volume buys for your new system versus the old systems.

Yeah, Yeah. They said we did win.

In advanced packaging, let's sell application or no sat and we also.

Made some significant investments in 2019.

In a new lithography platform with better resolution.

Better field size.

And the like and so.

As well as debt to focus and we are working with the leaders in the industry.

To place.

E mail tools.

We're here in the coming months in quarters.

I think.

We should be well positioned when this market does come back with a market leading product to to hold our.

Leading market share.

Okay, maybe as my follow up question in terms of let's say, obviously, you're in the very leading edge, which some of your top tier customers on that front are there also now starting to do a valuation and design work for their next generation nodes [noise].

How do you see the application increases you know as you go from Oh, no to note in terms of let's say and basically what I'm kind of getting the capital intensity for let's say as you migrate down there notes.

Well, we're working with the leaders in the industry on there on their next nodes and we actually are very excited to see.

As to the the notes become finer the didn't need for our laser spike at Neal.

Technology increases we think we have an opportunity to go from one step today, two two and maybe even three steps at the next no. So we're working very very closely with those customers.

On those are on those Eagles right now.

Great. Thank you very much.

Thank you Patrick.

Again for any other questions at this time that a star one.

[noise] [noise] and with no other questions at this time I'll turn things back to you all for closing remarks.

Thank you operator, and thank you all for joining the call today.

We are excited to be entering 2020 with positive momentum and the more focused and streamlined company positioned for success have a good evening.

Again that does conclude today's conference. Thank you all for joining us.

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