Q1 2023 Veeco Instruments Inc Earnings Call
Greetings.
One 2023 earnings call.
At this time all participants are in a listen only mode.
And answer session will follow the formal presentation.
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Now I'll turn the conference over to Jos Anthony Bone head of Investor Relations you may begin.
Thank you and good afternoon, everyone. Joining me on the call today are Bill Miller, <unk>, Chief Executive Officer, and John Kiernan, Our 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 dotcom.
This call is being recorded by Veeco instruments and is copyrighted material it cannot be recorded or rebroadcast without <unk> 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 are subject to a number of risks and uncertainties that could cause actual results to differ materially.
From the statements made 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 in our subsequent quarterly reports on Form 10-Q current reports on form 8-K and press releases.
<unk> 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 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 with that I will turn the call over to our CEO Bill Miller.
Thank you Anthony.
Good afternoon, everyone and thank you for joining our call today.
Veeco executed well in Q1 with solid top and bottom line results.
Our team continues to perform well and remains focused on executing our growth strategy to create value for our customers and shareholders.
Today I'll take you through our first 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.
Revenue in Q1 came in at $154 million non-GAAP operating income totaled $20 million and non-GAAP diluted EPS came in at 30 cents.
All above the top end of our guided range. This quarter's results reflect solid execution revenue first semiconductor products remained elevated increasing by 20% year over year led by laser annealing.
Our team did an excellent job of managing supply chain during the quarter, while material lead times remain elevated our suppliers on time deliveries have improved we're.
We're starting to see some signs that material lead times could improve in the second half of the year.
As we look ahead in 2023, we remain committed to investing in the semiconductor and compound semiconductor markets with differentiated solutions positioning veeco for long term growth.
Now switching gears to our markets and technologies.
As we've discussed in the past there are four key megatrends driving growth in our three primary markets of semiconductor compound semiconductor and data storage.
These trends are high performance computing, and AI mobility, and the immersive user experience the transformation of the automobile industry and the cloud.
Turning first to the semiconductor market our strategy is to expand our served available market by delivering differentiated solutions at the leading edge. We accomplished this with three key technologies.
First our laser annealing product line, which reduces thermal budgets at advanced nodes is gaining momentum.
This is demonstrated by recent orders for additional annealing steps at leading logic customers. We're also seeing traction within the memory market for advanced nodes, which represents a significant long term growth opportunity for the company.
Second our ion beam deposition system for EV is another differentiated technology that new and existing customers continue to adopt.
These systems are used to manufacture nearly defect free UV mass blanks and having the system of choice for many years.
We expect continued demand for our ion beam deposition systems as customers add capacity to support increased adoption of UV lithography.
S. M. L recently reiterated their plans to ship around 60, UV lithography systems in 2023 with approximately one of our systems required for every 10 to 15 E V lithography systems, we size the market at three to five systems per year.
And third we provide advanced packaging lithography and wet processing solutions to idms foundries and <unk>.
Our lithography systems serve applications, such as copper pillar bumping redistribution layers and wafer level packaging.
Our wet processing systems are primarily used for photoresist strip and solvent cleans.
As widely reported the prevailing consensus for wafer fab equipment spend to decline this year by somewhere in the range of 15% to 25%.
The forecasted decline is weighted more heavily towards memory and logic.
As our semiconductor business is currently more exposed to logic, we remain confident that our semiconductor market sales will outperform W. F E spend in 2023.
A few key highlights from Q1 that further support our positive outlook include.
Multiple LSA orders for DRAM devices from a world leading memory device manufacturer despite industry wide capex reductions.
Additional production orders from our most recent advanced logic customer.
Shipment of an advanced node logic LSA evaluation system for a second application.
Further advancement toward an evaluation system over the next quarter for our next generation annealing solution.
And.
We're making progress towards shipping and ion beam deposition evaluation system for low resistivity metals.
We expect growth in our LSA and EV mask blank product lines to more than offset softness in our advanced packaging lithography and wet processing business due to a weak consumer electronic demand.
As such we expect our semiconductor revenue to be slightly up in 2023.
Now onto the compound semiconductor market.
We primarily serve this market with our wet processing equipment for RF filter and power amplifier devices.
Along with our epitaxy equipment for power electronics and photonics applications.
Our wet processing business has been weak over the last six to nine months due to the softness in the smartphone market.
Timing of the market recovery is not yet clear.
However, the power electronics, and photonics markets offer promising opportunities for growth.
In power electronics, we're focused on again with our legacy most CBD technology.
And with CVD Silicon carbide, which we recently acquired.
Integration of the acquired CVD technology is progressing well.
With our system expected to be demo ready in the second half of 2023.
Our system represents a significant opportunity for a differentiated solution to address growing power electronics demand in the electric vehicle market.
Our epitaxy equipment to address micro OLED applications continues to display promising long term growth potential we're.
We're making ongoing investments in this area, including R&D supporting customer demos and evaluations to penetrate these market opportunities.
Now looking at our data storage market.
Because ion beam equipment is used to manufacture our customers magnetic heads. Despite the industry's widely reported challenges such as excess capacity and inventory. We continue to expect revenue growth in 2023 based on ship dates of orders in our backlog.
Taking a step back the long term trends in the HDD industry continued to remain promising.
According to Gartner and our internal estimates near line hard disk drive exabyte shipments are expected to grow at an approximate 25% CAGR over the next five years.
In addition, she get recently stated they have not let up on executing their heat assisted magnetic recording or hammer based product roadmap and are tracking well to their plan to recognized initial revenue in the second quarter of the year.
Larger drives us more magnetic heads and newer recording technologies like hammer use more complex heads.
Adoption of this technology offers an opportunity for increased deposition and etch equipment.
As such we remain positive on the long term opportunity as the industry recovers from its current challenges.
Moving on to our 2023 priorities.
As always our first objective is to keep our employees safe and healthy and to promote a culture that prioritizes teamwork and execution.
During the quarter, we maintained our commitment to improving our corporate culture by launching our biannual employee survey to assess our progress on key initiatives.
We also reiterated our commitment to further improve transparency diversity inclusion and our environmental responsibility by issuing our fourth sustainability report.
In regard to execution focusing on our supply chain is one of our top priorities as on time delivery and quality metrics are essential to maintaining and improving customer satisfaction.
Our investments in future innovation and product development are critical to our future success and growth strategy.
We will continue to engage our customers through evaluation system shipments and remained focused on penetrating the rapidly growing silicon carbide market.
Lastly, we're focused on outperforming Wi Fi growth expectations, with our semiconductor products, which should support us in maintaining profitability levels with.
With these priorities in mind, we're committed to making a material difference in building a stronger veeco that serves all stakeholders with that I'll turn it over to John .
Thanks, Bill and good afternoon, everyone.
Today I'll be discussing 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 and at the end of the quarterly earnings presentation.
Turning to Q1 revenue by market and geography.
Revenue totaled $154 million for the quarter.
While flat to the prior quarter coming in above the high end of our guidance.
This was driven by sales to our semiconductor customers, which increased 20% year over year.
Our semiconductor business comprised 60% of total revenue in line with the prior quarter with significant contribution coming from our laser annealing product line.
The compound semi conductor market contributed to 14% of our revenue versus 16% of revenue in the prior quarter.
System shipments for Photonics applications were the primary contributor of revenue for the quarter.
Moving along our data storage business totaled 14% of revenue versus 11% of revenue in the prior quarter.
In scientific and other made up 12% of our revenue similar to last quarter.
Now looking at quarterly revenue by region as expected revenue from China was higher in Q1 as compared to prior quarters totaling 40% of revenue.
This increase was primarily driven by LSA systems to trailing edge customers.
While China revenue in Q2 is forecasted to remain elevated we expect a sequential decline from Q1 and a further decline in the second half of the year.
Revenue from our Asia Pacific region, excluding China totaled 25% of total revenue.
Led by semiconductor system sales.
United States came in at 20% and finally, EMEA was 15% of total revenue for the quarter.
Looking forward to the second half of the year, we expect revenue growth to be led by tier one advanced semiconductor.
And data storage customers.
Switching gears to our non-GAAP quarterly results gross margin came in at 41, 5%.
Declined sequentially from 42, 3%, but above the high end of our guidance range.
Higher revenue favorable product mix and operational spending were contributing factors to gross margin for the quarter exceeding our guidance.
Operating expenses for the quarter were $43 million in line with guidance.
We continue to be cautious in adding expenses in the current macroeconomic environment, while funding our growth initiatives to expand our served available market.
Tax expense for the quarter was approximately $3 million, an increase of approximately $2 million from Q4.
Post reversal of the valuation allowance our effective tax rate was 15% in Q1.
Net income came in at $17 million.
And EPS was <unk> 30 on a diluted share count of 63 million shares.
Now moving to the balance sheet and cash flow highlights we ended the quarter with cash and short term investments of $253 million a sequential decline of $50 million. This reduction was the result of using $30 million of cash for the after you move back acquisition and paying $20 million for extinguishing the remaining two.
<unk> 23 notes.
Cash flow from operations came in at $14 million and Capex was $7 million.
From a working capital perspective, our accounts receivable declined by $4 million to $120 million with Dsos for the quarter declining to 70 days.
Accounts payable increased sequentially by $10 million to $62 million with a corresponding increase in days payable to 62 days.
Inventory increased by $19 million from the prior quarter to $226 million with days of inventory also increasing to 213 days.
This was driven by an increase in inbound materials to support higher expected revenue in the second half of the year and to build a level of safety stock that was completed as a result of the supply chain challenges.
That was recorded at $255 million on the balance sheet and represents the carrying value of our $258 million in convertible notes.
Yes.
Now turning to Q2 non-GAAP guidance.
Q2 revenue is expected to be between $145 million and $165 million with gross margin of approximately 42%, we expect opex between $44 million and $46 million net income between 14 and $20 million and EPS between <unk>.
Six cents in 34 cents per diluted share.
Now for some additional color beyond Q2.
Based on our current backlog and visibility we reiterate our 2023 revenue outlook of between 630 and $670 million with growth in the second half of the year.
We also continue to target diluted non-GAAP EPS for the full year to be between $1 15, and $1 35 per diluted share.
And with that Bill and I will be happy to take your questions operator.
Please open the line.
Thank you and at this time, we will be conducting a question and answer session.
If you would like to ask a question. Please press star one on your telephone keypad, a confirmation tone will indicate your line is in the question queue.
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Our first question comes from the line of Tom <unk>.
Mali with Barclays.
Proceed with your question.
Hey, guys. Good afternoon, and thanks for taking my question and congrats on the good results I just wanted to walk through obviously your products have longer lead times, but there are certain areas, where you could take advantage of some quick turnarounds, obviously with a much better numbers, you've seen an improvement a little quicker than you. Originally expected could you just point to the specific areas.
Where you are seeing that improvement and do you think that's more of a cohort of demand where people are looking to capitalize in the short term or do you see a sustained recovery here, where you've already kind of seen the bottom.
This short term downturn. Thank you.
Thanks for the questions Tom.
As we look at Q1 as compared to our initial guide there were really two things that drove the higher revenue.
In additional semiconductor system LSA system, and then additional data storage system, and and I would say that you know.
Those were on the fence of either happening at the end of Q1 or the beginning of Q2 and we included them in our guide you know more or less in Oh happening in Q2. So we don't see anything structurally changing there or particularly you know in some of the areas, where we have you know less less visibility.
<unk>.
I guess I'll just add John that in the you mentioned kind of a shorter lead time products like lithography or wet processing.
We arent seeing any recovery there, particularly in lithography.
I will say, though that we are starting to have a little more discussions are more encouraging discussions with our customers for projects are either later in the year or in 2024. So that's the first positive thing we've been able to say in litho for you know the last six to nine months.
Helpful. And then I, just kind of wanted to square away.
The data storage guidance versus what we're seeing in the market.
Western Digital's reporting Tonight, and you get out of your reported and are talking about sequential downtick in Hdds Seagate mentioned that they wouldn't be a recovery until Q4 could you talk about what that means in terms of capital spend you've already kind of taken down guidance there, but how are you.
Seeing an additional wave of weakness from those customers or are they still spending on plan versus what you expected entering the year. Thank you.
Yes, Tom I would say clearly, we're seeing the softness that theyre, having excess capacity and burning down inventory I would say that is negatively impacting our spare parts at our service revenue business here in the short term modestly.
Yeah, we'll have to kind of wait and see how that inventory gets gets burned off and when that happens.
Our outlook for the second half increase in it and data storage is really driven by the orders that we actually have in backlog and are building now for the second half of the year and we've recently confirm those shifted so that's that's what gives us.
The ability to how of higher second half.
How helpful and let me just sneak one more in if I may you guys short time pretty helpful about about giving some segment detail into the June quarter could you just talk about sequentially through your business segments, what youre expecting to get to the midpoint of guidance. Thank you.
Yes, Tom So you know, we're expecting a fairly similar quarter overall, but some changes in the AR and the makeup by market. So we we are expecting semi to be up in Q2.
Call it closer to the 500 $105 million range we're.
We're looking at you know compound semi you know in the $25 million range. These are all at the midpoint of our guide.
Data storage as we talked about the first half we see exactly as we initially planned out but as I. Just mentioned earlier, we had one more system shipment in Q1. So we now are expecting Q2 to be more in the in the $15 million range, but the first half being right on on schedule.
And and scientific we see in the $10 million range or so in a in Q2.
Very helpful. Thank you guys.
Youre welcome Thanks, Tom.
Our next question comes from the line of Rick Schafer with Oppenheimer. Please proceed with your question.
Hi, This is the way mark on the line for Alright, Congrats on the quarter and our recent LSE announcements I believe this is your first entry into the DRAM memory space. I was wondering if you can help us size the market and how does it compare to a logic.
Market and when do you expect to ship your first system.
Thoughtful question way I would say, we're really excited about the opportunity in DRAM, which has been a fair amount of work to get these follow on orders we size each customer each application at each step.
Kind of in the $25 million to $35 million range over a 12 to 24 month period of time. So we now have one customer in one application.
We expect to start shipping our.
Tools I think are hitting this quarter right now in the second quarter.
And throughout the rest of this year. So hopefully that gives you a little bit of color on that.
Great. Appreciate it. Thank you so much that's where my follow up it looks like this in the equipment and the design win is gonna be manufactured in our new San Jose facility that you expanded into last year. I was just wondering if you can kind of walk through how much capacity do you have at this facility and do you have enough ample.
Face to support this new order.
Yeah.
Oh, yes, and yes, Oh, so the new space in San Jose is a reminder, gave us the opportunity in this and the same overall square foot building to double our manufacturing or more than double our manufacturing output and you know we have.
Not reach that capacity.
At this point so yes for the for.
So this business that we're planning on for for this year and going into next year, the San Jose facility has adequate.
Capacity.
Great. Thank you so much.
Hum.
Our next question comes from the line of Gus Richard with Northland. Please proceed with your question.
Yes, thanks for taking my question.
Yeah.
Terms of <unk>.
Most CVD in Gan.
I know you've had in the evaluation system out there for a while in Asia, and I think you've been talking to customers about.
CBD for Gan and I was just wondering if you kind of give us an update on what youre seeing in that market and what's the opportunity over the next 12.
12 to 18.
Yeah, we do have an evaluation system for Gan power electronics, it's for the transition.
<unk> from six inch.
Eight inch of the the product is running and we're in a competitive situation there are.
Our customers asked us to extend that evaluation.
Through this year, which we are going to do and so it's a it's a little slower taking off than we had originally planned and we're still still working at it.
I would say, we probably won't see any meaningful.
Gan on silicon.
Power activity beyond where we are today until.
The 2024 time frame.
That being said, we also have a gan on silicon for micro OLED.
Where were working with a few customers on opportunities there and that continues to develop as well for Gan on silicon.
Got it got it and then.
I think thats it for me thanks, so much.
Thanks Gus.
Yeah.
Our next question comes from the line of Dave Duley Steelhead Securities. Please proceed with your question.
Yeah. Thanks for taking my question. My first is about LSA. You mentioned you had customers I guess plural that you'd won new applications from in the foundry and logic space. I was just wondering if you could elaborate a little bit more about that.
Yeah in our in our press release, we used customers because.
We had follow on volume orders for our third largest customer.
First volume when Theyre in foundry logic, and we also how.
How to win in DRAM with multiple.
Multiple tool order. So those are the two customers that were specifically one from foundry logic and one in memory.
Okay. So it wasn't two new wins in the foundry and logic space.
No there was one new wind in foundry logic and one in memory.
Okay great.
A little bit.
Topics to silver.
Silicon carbide.
You've made this acquisition.
And you talked about if I'm not mistaken having a demo later late this calendar year could you help us understand you know the size the market opportunity that you're chasing in the silicon carbide market place in <unk>.
And who the key competition is for I, just deposition tool I guess that you're talking about.
Yeah. So.
According to your there sizing the silicon carbide device market.
At $2 billion going to about $6 billion in 2027.
And the corresponding.
Epitaxy equipment market.
It's about $250 million. These days are going to about a half a billion dollars by 2027, there are a few participants in that market today.
Namely a semi and then a new flare and extra on our competitors in that space.
Sure.
And.
Yes.
What is it accurate that you will have a demo later this year and then when would you expect to have I guess meaningful revenue from this particular opportunity.
Yeah. Thanks for thanks for reminding of the first half of your question I would say right now we are shipping our demo tool from Sweden.
Our demo lab in Somerset, New Jersey, as we speak we're going to be facilitating it and our plan is to be demo ready in the second half of the year, we've met with a number of the tier one and tier two.
Players in this market, they're all very excited about you know the acquired technology with our worldwide service footprint.
Is very intriguing to them and so.
We're pretty much at the key milestone of having to have the demo tool put down films that can be measured in and send to our customers and then we would expect.
To have eval systems for some tier ones in 2024.
And then also start selling directly to some tier two customers as well. So I think we're planning for some modest revenue in 'twenty four but I wouldn't see why I think we have more meaningful revenue in 2025.
Okay.
Thanks for giving me the competitive layout, who would you say is the leader.
In this space now and you know I would imagine youre going to have to show a fairly significant cost of ownership.
Advantage versus whoever that leader is what would be the key K.
Reason for that you can show a superior cost of ownership.
Well the the market the market actually is varies pretty significantly by.
Region or what tier so we do understand cost of ownership is critical as well as yield and Youll plays a big.
Part in that and so from our discussions with our with our customers.
They do see an opportunity for us to have a cost of ownership.
Advantage over what's available in the market today.
Alright. Thanks.
Thanks, Dave.
And we have reached the end of the question and answer session I'll now turn the call back over to CEO Bill Miller for closing remarks.
Thank you I do want to thank our customers and shareholders along with the Veeco United team for their continued support as we execute our growth strategy.
Have a great evening, everyone and thank you.
And this concludes today's conference and you may disconnect your lines at this time.
You for your participation.
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Uh huh.
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