Q3 2022 Veeco Instruments Inc Earnings Call
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Good day and welcome to today's vehicle quality 2022 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.
Okay.
Thank you and good afternoon, everyone. Joining me on the call today are Bill Miller, because chief Executive Officer, and John Kiernan, Our Chief Financial Officer. Today's earnings release is available on the Veeco website.
Note that we have prepared a slide presentation to accompany today's webcast. We encourage you to follow along with the slides on Veeco Dot com.
This call is being recorded by Veeco instruments and is copyrighted material it cannot be recorded or rebroadcast without because express permission.
Your participation implies consent to our recording.
To the extent that this call discusses expectations about market conditions market acceptance and future sales of the company's products future disclosures future earnings expectations or otherwise make statements about the future such statements are forward looking and subject to a number of risks and uncertainties that could cause actual results to differ materially from the state.
<unk> made including as a result of the COVID-19 pandemic. These.
These factors are discussed in the business description management's discussion and analysis and risk factors sections of the company's report on Form 10-K, and annual report to shareholders and in our subsequent quarterly reports on Form 10-Q current reports on form 8-K and press releases Veeco does not.
Take 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 will address non-GAAP financial measures information regarding such non-GAAP financial measures, including reconciliation to GAAP measures of performance is available on our website and with that I will turn the call over to our CEO Bill Miller.
Thank you Anthony and good afternoon, everyone and thank you for joining us today.
<unk> delivered another solid quarter with robust year on year revenue growth driven by semiconductor sales the veeco United team is performing well continually innovating across our differentiated portfolio of technologies and executing on our supply chain to meet customer commitments today I'll take you through our third quarter highlights and discuss our markets.
And technologies, John will provide a financial update and guidance and then we'll be happy to take questions.
Our revenue of $172 million was above the midpoint of our guide and driven by another record quarter in semiconductor.
The significant contributions from laser annealing as well as systems for advanced packaging and <unk> mask blank production.
Our solid execution led to non-GAAP operating income of $28 million and non-GAAP EPS of 45, which were both near the top end of our guided range and we ended the quarter with $272 million in cash and short term investments an increase of $40 million.
If we look across our order book for the quarter, we see pockets of strength in an otherwise mixed demand environment. For example, we had multiple multi system orders for our laser annealing systems for logic applications. We also had increased order activity in our data storage market for ion beam systems over the last two quarters.
At the same time, the weakness in consumer and mobile device markets is impacting our wet processing and lithography product lines for five G RF filters and power amplifiers and advanced advanced packaging applications.
As such we've seen corresponding push outs of shipments by one or two quarters and reduction in orders, which are impacting near term revenue for these product lines.
Consequently, we're carefully balancing the risk associated with this mixed demand environment and the investments, we're making to execute our growth strategy.
And from a supply chain perspective, our team has been executing well and I would say theres a sense that the situation is improving.
We're focused on flexibility in our supply chain and working with our partners to overcome issues as they arise.
I'll switch gears to our specific markets and technologies, starting with the semiconductor market. There's a prevailing consensus among third parties that wafer fab equipment spending will decline in 2023 by over 20%.
This forecasted decline is more heavily weighted to memory and stems from weakness in consumer PC and smartphone markets currently because semiconductor business is weighted heavily towards logic with our laser annealing advanced packaging and easy mask blank products.
So while we're monitoring W. A few carefully at this time, we continue to invest in executing our growth strategy are well positioned with attractive technologies and we're optimistic about expanding our served available market.
Despite current headwinds stemming from the consumer markets I just mentioned over the long term the semiconductor market is driven by secular growth drivers include putting mega trends, such as AI and high performance computing the transformation of the auto industry and ongoing data center and cloud adoption.
Veeco is well positioned with exciting products in this market, which has grown from approximately 25% of our total revenue in 2018 to more than half of our total revenue in 2022. This reflects the execution of our vision and strategy over the last few years to grow in the semiconductor market.
To start our laser annealing systems have applicability in both leading and trailing logic nodes, helping our customers with AI and high performance computing as well as mature automotive and consumer applications. This is <unk> largest product line driving our growth in the semiconductor market.
Commenting on our third quarter laser annealing order activity. The majority of orders came from China for trailing node logic applications.
Based on our analysis of the new export regulations, which John will explain in a few minutes. We do not expect these orders to be export restricted.
During the quarter, we achieved a significant milestone by shipping our laser annealing system with shorter dwell times to an important leading edge logic customer and supported their technology roadmap. These advancements in dwell times, along with other advancements in optics demonstrate our commitment to help our customers with their most difficult materials.
Challenges.
Because laser annealing platform is the production tool of record at the world's leading logic players for select the annealing steps. In addition to logic, we've introduced laser in the linked to the memory market. In fact after a recent DRAM evaluation sign off we anticipate volume purchase orders in the 'twenty to 'twenty three to 'twenty 'twenty four times.
Frame overall, our laser annealing business is growing as we wind process steps and new customers.
Now looking at our advanced packaging lithography product life.
We continue to see good potential in applications, such as fan out wafer level packaging copper pillar bumping driven by G. P. Your production and high performance computing.
And we expect our advanced packaging lithography products to continue to be a contributor to our semiconductor market as manufacturers seek to increase I O densities and integrate diverse chips and packages to improve performance.
Switching gears to the E V mask blank product line, our ion beam deposition technology has been identified as the technology of choice to deposit defect free films to create easy math blacks we.
We expect this product line to remain in demand as customers plan their capacity additions to keep up with the adoption of E V lithography.
ASML recently reiterated their plans to ship over 60, UV lithography systems in 2023.
And they're working on capacity expansion plans to ship 90 systems annually by 2025.
With approximately one of our systems required for every 10 to 15 easy lithography systems. We currently size of this market at three to five ion beam systems per year.
Our semiconductor business is performing well today and driving because performance in 2022 and beyond.
Now looking at our compound semiconductor markets, we're working to penetrate this market with our M O CVD solutions by targeting power electronics applications, and photonics applications, including micro OLED.
Our gallium nitride MLC Muni system is in the field under evaluation with a leading customer for an eight inch power application.
We believe there are opportunities in the consumer automotive and data center power markets to enabled.
True cost of ownership with an eight inch Gan solutions, while delivering best in class film properties.
During the quarter, we shipped multiple deposition systems to support photonics applications, and we received evaluation acceptance for our Lumina arsenide phosphide M. O CVD system. This system was being evaluated for a red micro OLED application and we're now working with this customer to further optimize their manufacturing.
Yes, we continue to believe both power electronics and micro Leds are attractive markets and a good long term opportunity for the company.
As such we're focusing R&D investments in these areas.
Our third major end market as data storage.
And the data storage market the mix of hard disk drive shipments for Pcs servers, and cloud data centers has been transitioning for some time.
Overall number of drives shipping has been declining in the consumer markets.
But in the growing enterprise markets the capacity and number of magnetic heads per hard drive have been increasing in response to a 30% growth rate in data stored each year in cloud and data center applications. In fact, the absolute number of heads shipped has been steadily increasing for years and is forecast to continue.
To increase.
In addition, the complexity of heads has been increasing and is expected to continue to increase a disk drive makers advance their technology roadmaps.
Because I am beam equipment is used to manufacture our customers magnetic heads and based on these industry dynamics I. Just described we believe the data storage market will provide growth over the long term.
After a multiyear period of growth and based on reduced order activity in 2021 data storage performance in 'twenty two is paying out as we expected as customers slowed the pace of capacity additions.
As we look forward. However, based on current order activity, we expect twenty-three data storage revenue to grow over 2022.
Now, let's review our 2022 priorities.
The veeco team is performing well in a challenging macroeconomic environment.
Employee health is a top priority we've looked at most safety protocols in our facilities, but we're monitoring and staying flexible.
Customer evaluation program continues to be successful.
During the quarter, we received another customer acceptance for one of our systems, we are developing exciting products and annealing and iron beam that solve customers' high value problems and we're planning to ship systems for customers to evaluate in the coming year.
Another key focus focus for us in 2022 has been managing our supply chain to deal with global shortages of certain components and commodities.
We've been doing just that and I remain committed to remain within our full year 2022 revenue guidance in fact, I'm confident our technologies are well aligned with growth markets driven by global Megatrends I highlighted earlier.
And we're well positioned to capitalize on these mega trends that drive it goes long term growth and profitability and with that I'll turn it over to John .
Thanks, Bill and good afternoon, everyone.
I'll be discussing non-GAAP financial data I wouldn't 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.
Turning to Q3 revenue by market and geography.
Revenue totaled $172 million for the quarter.
And as Bill mentioned was driven by record sales to our semiconductor customers, which increased 3% sequentially from Q2, 2022, and 32% from a year ago.
Our semiconductor business made up 59% of our total revenue.
What was the last quarter with.
With significant contribution coming from our laser annealing products.
The compound semiconductor market contributed 16% of our revenue and while down sequentially revenue in this market increased 21% from Q3 2021.
This was driven by system shipments for photonics and RF applications.
And.
Data storage market came in at 16% of total revenue and in line with our expectations and finally, the scientific market made up 9% of our revenue.
Now looking at third quarter revenue by region, Our Asia Pacific region, Excluding China made up 38% of total revenue driven by.
Semiconductor systems sales in the United States was 31% of our total revenue driven primarily by semiconductor sales as well as systems sold to data storage customers.
China made up 21% of total revenue, primarily driven by sales to semiconductor customers as well as shipments were compound semiconductor applications and finally EMEA made up 10% of total revenue for the quarter.
Switching gears to our non-GAAP third quarter results gross margin came in at 42% in line with guidance.
Operating expenses for the quarter were $44 million below our guide on lower SG&A expenses than originally planned.
It began to slow the pace of hiring focusing on the highest priority positions, while we address the macro economic environment.
Now moving to the balance sheet and cash flow highlights we ended the quarter with cash and short term investments of $272 million.
An increase of $40 million from last quarter.
This brings us close to being cash debt neutral and important milestone we've been working toward.
Cash flow from operations was $47 million. This cash performance benefited from an increase in customer deposits of 88% or $51 million during the quarter, increasing from $58 million to $109 million a portion of the deposits pertains of products scheduled to ship.
In 2024.
Our accounts receivable increased by $16 million due to the timing of shipments and customer payments.
Some of which were delayed and collected in the first week of the fourth quarter as a result, DSO for the quarter increased to 75 days from 70 days in the prior quarter.
Accounts payable increased sequentially by $4 million to $51 million with days payable at 46.
Inventory was $188 million.
A $12 million from the prior quarter due to an increase in incoming material with days of inventory increasing to 161 days.
Capex for the quarter was $6 $4 million. This included limited payments for our San Jose facility expansion, we still have remaining payments of approximately $7 million, which we expect to make in the coming quarters.
We fully transitioned our operations to the new facility during the third quarter as expected.
We're glad we did I think it's fair to say that you expanded capacity enabled us to deliver record semiconductor revenue over the last few quarters.
Long term debt, including the current portion of $20 million was recorded at $274 million on the balance sheet and represents the carrying value of our $278 million in convertible notes.
Before turning to Q4 non-GAAP guidance let.
Let me start with some details on the new China export regulations, which have broadened our requirements under which export licenses will be required.
Presumption that they will be denied.
Generally so.
Semiconductor equipment sold two fabs in China manufacturing logic devices at or below 16 nanometer.
DRAM devices at or below 18 nanometer half pitch ward and Anne devices at or above a 128 layers will require export licenses.
<unk> person supporting these operations will also require licenses.
In addition, U S government created a new export classification code for certain deposition equipment, which will now require licenses and Furthermore, certain China based companies have been added to the department of Commerce on verified listing.
Our recent order activity has led to an increase in backlog in China, particularly in our LSA product line, which may be subject to these regulations, while the export landscape is fluid and evolving we believe at this time a substantial majority of our backlog will not be negatively affected by the new regulations.
Yeah.
Now turning to Q4 non-GAAP guidance.
With these new export regulations, and current supply and demand environment in mind, we expect Q4 revenue to be between 150 and $170 million.
Incorporated in this revenue guide, we are assuming a less than $5 million impact due to the China export restrictions.
With a less favorable mix in Q3, we expect gross margin to be between 39 and 41% we.
We expect opex to be between 43 and $45 million.
<unk> Com is expected between 13 and $23 million.
EPS is expected between 24, and <unk> 40 per diluted share and is based upon a 64 million share count.
Please refer to the schedule in the guidance section of the earnings press release and backup section of the earnings presentation, which illustrates our Q4 EPS is calculated based on the guidance ranges provided.
And now for some additional color beyond Q4, Q1 revenue appears to be flat to slightly down from our Q4 2022 guide as we're experiencing a slowdown in our <unk> RF and advanced packaging markets.
Given the alignment between our differentiated technologies and the Mega trends driving the markets in which we operate were up but.
We're optimistic about the growth of our business. Despite these current market dynamics.
And finally as highlighted in our prior quarterly earnings call. There is a possibility within the next 12 months that a significant portion of our deferred tax asset valuation allowance.
We'll no longer be needed. If this happens from a GAAP perspective, our P&L tax benefit will be realized in the period in which the reversal takes place. Additionally.
Additionally, from both a GAAP and non-GAAP perspective, the effective tax rate would increase from that point forward.
From a cash perspective, the company will continue to use its tax NOL and credit carryforwards to offset U S taxes, limiting the cash impact until such carryforwards have been fully utilized.
And with that Joe.
And I would be happy to take your questions. Operator, Please open the lines.
Thank you Sir.
Mind, you to the participants if you would like to ask a question. Please signal by pressing star one on your telephone keypad, if you're using a speaker phone. Please make sure. Your mute function is turned off to allow your signal to reach our equipment again press star one to ask a question, we'll pause for just a moment to allow everyone the opportunity to signal for questions.
Okay.
We will take the first question from Rick Schafer of Oppenheimer. Your line is open. Please go ahead.
Yes, Thanks Scott.
Couple of questions if I could.
The first one.
Bill or John I'm curious.
On order velocities, obviously, you are slowing for everyone. I mean I'm curious are you guys just seeing orders pushed out or I didn't hear you talk much about cancellations. So curious if you are seeing any canceled and if you are.
If you could just give some color on is it is it more near term backlog.
He cancels or is this or is it more of the long term stuff three four quarters out.
By one to two quarters.
We have not seen any significant cancellations I want to be clear about that.
When you talk about order velocity.
The the macroeconomic environment is a bit challenging it's I kind of characterize it as mixed on one hand smartphone and PC weakness is creating headwinds for.
For certain segments, particularly advanced packaging lithography for application processors in GPU in wet processing.
<unk> is being impacted with slowdown in <unk>, RF filters and power amplifiers.
And those are typically our shorter lead time.
One to two quarter kind of products.
But at the same time from a positive standpoint.
You know the secular growth drivers such as AI and high performance computing transformation of auto industry data center cloud et cetera, our data storage business.
Ben and doing well from an order standpoint, we've been receiving technology and capacity orders from our customers.
Laser annealing, we've been receiving good orders for both advanced and trailing node logic, you know and we even have a customer deposits for orders scheduled into 2024. So it's really you know kind of the the short end of the market in the longer term part of the Mark.
Get that that's kind of makes us feel like it's a mixed environment right now.
So that's really great color, thanks, a lot though.
And maybe a follow up to that just.
It sounds like I don't want put words in your mouth, but <unk>, an advanced package, probably are down in <unk> and down again in <unk> It sounds like.
Is it safe to assume the other I mean do you see growth in some of the other segments as we go into the fourth quarter, maybe just some color on direction anyway.
Or by segment and <unk>.
Yeah. So let me let me take a shot at that.
Rick. So you know we are guiding at the midpoint of about $160 million in revenue for Q4. So that's down from our Q3 actuals of 172 million roughly.
And if I cover that in the four markets, we see semi down just slightly in Q4 compared to Q3, mainly driven by advanced packaging.
And the compound semi side, we do see.
Revenue down in the compound semi market compared to.
Q4, <unk> driven.
By the reduction in <unk> RF power amplifiers filter business there.
We see data storage.
Down a bit in Q4, and we see the scientific which is a smaller piece of our business pick up a bit in Q4.
Thanks for all that and then I'll just sneak a last one if I could.
$5 million impact that you talked about from China.
If we sort of annualize that.
Should we think of kind of pulling sort of $20 million out of the 23 model is sort of.
In Europe .
Derisking China's as best we can at this stage.
Yeah, So I think that's a little bit complicated there.
Rick So let me let me go through a little bit of detail and I hopefully that will will help gain an understanding so in China. You know this past year or so it's been about 20% of our business overall spread across multiple technology semi compound semi scientific not really any.
Data storage and in China and of course, these new export regulations are geared towards advanced semi conductor. So that applies to you know a piece of our business in China and based upon the recent you know activity for our LSA products, we actually expect.
You know, our China business to be up a bit in the near term.
So yeah the export regulation is.
Landscape is quite fluid and evolving but as we said in our prepared remarks, we believe that at this time, a substantial majority of our backlog will not be negatively impacted by the new regulations and this is really due to that we've been taking orders for you know trailing nodes and.
Our ex our LSA products.
Arent a class of products that require export licenses.
But if I look further out in the future, it's not as clear at the current.
<unk> will impact our customers' buying patterns and we.
We do recognize there may be future business that we could have you know one that is not currently in our backlog that might not materialize. You know this could be from follow on business from existing customers. If they're looking to operate at more advanced nodes or potential new customers that we would have the ability to penetrate and they're either.
Adding at advanced nodes were just been recently.
Added to the commerce departments restricted list. So you know overall as we look forward its hard to estimate what this potential impact might be but as we said you know in our prepared remarks as of now we expect to be able to ship the substantial portion of our backlog.
No a little bit long winded, but that's our current view.
That's great color. Thanks, a lot guys.
Thanks, Rick.
So we'll take the next question from Mark Miller Debenture, but <unk> company. Your line is open. Please go ahead.
Thank you for the question are there any other tools besides the LSA that might be impacted in China.
I'll I'll throw it in.
Some of our a very small.
<unk> R&D systems might.
Might be impacted but it's a it's not a big number genre or if there's any other things that are.
Yeah, I think that captures it well bill so so mark.
That.
One of the equipments that got added to the export regulations was deposition equipment and for the most part we don't sell a lot of deposition equipment into into China.
Okay.
Can you give me an update on the status on the eval tools you have in the field.
Sure sure.
We've.
Over the last year and a half we've talked about ramping up.
To 10 Eval systems had a high concentration.
In the semi space and of that a big concentration in laser annealing and we're pretty excited that over the course of this year. The majority of this first batch of eval tools have been successful savings accepted successfully excuse me.
And we're working with these customers to turn those acceptances into follow on volume orders, we do expect to ship a.
A couple evolves this quarter and we have an aggressive plan in 2023.
To continue our eval program, primarily across semi and secondarily in the compound semi space, So I think where.
We're continuing the same play playbook that we had laid out previously.
Eval tool specifically with what are they for what applications.
Therefore.
Laser annealing sink.
Thank God.
The next the next in the next N plus two.
On the roadmap for leading logic and we also have a new technology in laser annealing that we are going to be putting out into the field in the coming periods periods here and we also have ion beam deposition system.
I'm for low resistance metals into semi for both memory and logic applications.
That we expect to put into the into the field in 2023.
Thank you.
Thank you Mark.
Okay.
Again, a reminder to everyone. If you have any question. Please press star one.
And we will take the next question from David Duley from Steelhead. Your line is open. Please go ahead.
Yes could you just elaborate a little bit more on the big increase in deposits that you mentioned.
Why is it all of a sudden that youre seeing that.
Sure.
David.
Good question.
We've seen strong activity during the quarter, an area, where we collect customer deposits.
So think in some of the longer lead time pieces of the business.
And we collect deposits on many of our orders, but not on all customers and all.
All technology types.
So the increase in the customer deposits.
<unk> strong data storage orders.
And laser annealing orders from China.
We mentioned in our prepared remarks, as well that we actually have instances, where we received orders with deposits versus items scheduled to ship.
In 2024 as well.
Okay, and just along these lines did you and I didn't see I'm, sorry, I haven't gone through all the slides did you mentioned what the backlog was you mentioned your backlog.
Very strong in.
But I was just curious if you could give us the number.
Yes, so David we only report backlog annually once a year at the end of the year. So you didn't Miss that we we don't provide a quarterly bookings or backlog number we haven't done that for a number of a number of periods now.
Okay, and maybe even though you haven't given us the actual number what percentage of the backlog is shippable in 2023.
So we wouldn't record you know into backlog any.
Any shipments that we don't expect to occur in the next 12 month period. So when we get to the end of the year and we do report our backlog Youll see a statement in there that they would relate to only items that we expect to ship in the in the coming 12 months.
Okay.
Then.
Bill I was wondering if you might take a shot at you know I think you mentioned as many other equipment companies have talked about.
W. F E kind of being down, let's say 20 or 22%.
Was wondering if you might be able to take a guess at what your semi businesses or your overall revenue might be versus that expectation.
Okay.
Yeah, I would say, yes, a lot of the.
The drop that we're seeing forecast is down about 20% kind of number is kind of more concentrated.
On the memory side.
And were much less susceptible to memory, because our our semi business is really focused today.
On logic.
And it seems that logic is is holding up well with particular strength.
In China for trailing node applications.
Alright, so as we mentioned in our prepared remarks.
Advanced packaging is showing signs of weakness.
Across the board from foundries, <unk> Idms and <unk>.
And we think this is really driven by weakness in mobile.
Mobile and consumer applications and the third leg of our semi stool is EV and we see that to be continuing along at what we have said historically three to five systems per year in 2023, So I don't know that that.
That gives you a little more color.
Okay.
Okay. Thank you and I guess final question for me is I'm, assuming as you mentioned a lot of the orders that you're getting are in the hard disk drive business.
Would you guess that your HDD business is up in calendar 2023 or is it really.
The back half of 2023, when do you think the.
Inflection point happens for the disk drive revenue.
Yeah, I would say given our long lead times in and having.
Or is kind of a start in the second quarter and then into the third quarter here.
Our data storage, we believe our data storage business will be up next year over this year.
And it will likely be.
More concentrated in the second half of the year, just given the lead times.
Okay. Thank you.
Thanks, David.
Kudos to the next question from Gus Richard from Northland. Your line is open. Please go ahead.
Yes, thanks for taking the questions.
Just on the advanced packaging is is the litho weakness primarily fan out or is it copper pillar.
Any color you can provide there.
Okay.
It's actually pretty pretty broad in terms of it's very hard for us to tell exactly what's for fan out for mobile versus.
Copper pillar I would say.
Generally our mobile market is weak, which is a lot of fan out.
Packaging.
But we are seeing it.
Continued to be soft I'd say.
Okay.
Fair enough and then just.
You mentioned.
You're working on.
Microalgae Red for application could you remind me.
Which one is has got the most traction.
On silicon or is it <unk>.
<unk> Tonight.
This particular one.
It was on gallium arsenide arsenide phosphide.
Read kind of traditional micro LCD approach.
And it's really tied to the luxury television market in.
Inflection.
And we still continue to make progress with our customer with the innovative approach with.
200, and now 300 millimeter Gan on silicon.
<unk> approach to micro Leds and.
They're getting great performance and Theyre targeting the inflection of the luxury TV market as well.
Okay I understand.
And.
Oh, Okay and then.
I think that that's it for me thanks, so much.
Thanks, a lot guys again power sorry.
Sorry, I forgot one power.
Dan you've been in eval sorry.
You've been an eval for a long time in that eight inch scan for power and I'm. Just wondering are you getting close to conclusion.
Okay.
We are making a lot of progress there on this six inch to eight inch transition.
We're getting good good results from the equipment set.
We are working on some modifications and upgrades if you will and so we expect this eval to continue into 2023.
And if successful I would I would be looking to for volume power electronic Gan on silicon power electronics.
In 2024.
Okay.
Okay. Thanks, Thanks, so much.
Thank you guys.
It appears that there is no further question at this time, Mr. Speaker I would like to turn the conference back to you for any additional or closing remarks.
Yes, Thank you operator and to all joining us on today's call and I understand there may be a bit foggy out here in the near term, but I would like to reiterate that veeco is well positioned to execute our long term growth strategy as market conditions improve so.
Have a great evening. Thank you all.
That concludes today's event. Thank you for your participation you may now disconnect.
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