Q2 2019 Earnings Call

Good day, everyone and welcome to the Veeco instruments <unk> corporate hosts the Q2 2015 earnings Conference call. Today's conference is being recorded at this time I'd like to turn the conference over to Anthony been serving gas Investor Relations. Please go ahead Sir.

Thank you and good afternoon, everyone. Joining me on the call today are Bill Miller, because chief Executive Officer, and Sam Schwartz, Our Chief operating Officer, and Chief Financial Officer.

Today's earnings release is available on the Veeco website.

Please note that we have prepared a slide presentation to accompany today's webcast. We encourage you to follow along with the slides on Pico Dot com.

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

Your participation implies consent to our recording to the extent that this call discusses expectations about market conditions market acceptance and future sales of the company's products future disclosures future earnings expectations or otherwise makes statements about the future such statements are forward looking and are subject to a number of risks and uncertainties that could cause actual results to differ materially from the statements made.

These factors are discussed in the business description and management's discussion and analysis sections of the company's report on Form 10-K annual report to shareholders and in our subsequent quarterly reports on Form 10-Q current reports on form 8-K and press releases.

Veeco does not undertake any obligation to update any forward looking statements, including those made on this call to reflect future events or circumstances. After the date of such statements.

During this call management May address non-GAAP financial measures information regarding such non-GAAP financial measures, including reconciliations to GAAP measures of performance is available on our website and with that I will turn the call over to bill for his opening remarks. Thank you Anthony good afternoon, everyone and thank you for joining the call.

Eagle executed well in the second quarter, our revenue was near the midpoint of guidance at $97.8 million and non-GAAP gross margin improved two percentage points to 37.8%. Our non-GAAP bottom line results were also within guidance with an operating loss of $1.6 million, an EPS loss of six cents per share.

We continue to see strength in our technology driven purchases look capacity related orders were soft resulting in bookings for the quarter of $78.2 million. This was expected given the soft macro environment.

But we remain optimistic about our long term growth prospects.

We are still working toward our goal of returning to profitability and we will be reducing infrastructure in the coming quarters to further improve the cost structure of the company.

I will provide an update on our markets and growth opportunities and then Sam will provide more details on the financials.

The semiconductor capital equipment industry is experiencing headwinds for multiple end markets.

Automotive sales growth has slowed.

The memory market is in a cyclical downturn with high inventory levels.

In the smartphone supply chain is in a state of overcapacity as smartphone unit volume growth has slowed.

As a result of these headwinds wafer fab equipment spending is expected to be down in 2019 and estimates vary regarding the timing of recovery.

Veeco is impacted by the industry slowdown, but we benefit from technology inflections spending.

Veeco is proud to leverage a long history of enabling our customers technology and facilitating their high volume production.

And while we see softness in the short term long term trends driving the semi industry are intact.

We're making progress with exciting new products and remain focused on winning our customers business.

I will now give you an update on our growth initiatives supporting easy adoption.

Brian in semi with laser annealing.

MOCVD for the photonics market and advanced packaging.

Looking at are you the mask blank opportunities our customers use our tools to deposit many central layers of their mask blank.

All masks in lithography process, beginning with a mask blank and is critically important that they are defect free.

This is why customers choose the goes low defect density buying beam deposition technology.

Customer demand for our ion beam deposition system is very strong and aligned with easy adoption.

There were several proof points supporting this in addition to TSMC and Samsung announcing their UBI readiness months ago, Intel more recently announced that they are also ready for you the introduction.

And according to a Berenberg report Samsung and SK Hynix are committed to using easy for their 16 nanometer in 12 nanometer DRAM manufacturing processes.

This is consistent with agents to mill, indicating they are seeing interest from DRAM customers for you. The in addition to the logic customers.

Underpinning all these proof points on their most recent earnings call SMS indicated they are on track to ship their ERP systems in 2019 in more than 30 systems in 2020.

There are many variables, which will drive the demand for our U.S the mask blank tools, such as the number of layers produce with the number of exposures before amassed must be replaced.

Scanner throughput.

Mask blank yield pellicle adoption and number of tape outs.

Regardless of how these variables of all we are well positioned to play a critical role in the adoption of UBI lithography with our ion beam deposition system.

Moving to our laser spike in your product we are excited by both the existing customer traction and the opportunity in front of us.

As previously announced we have achieved production tool of record status for one and healing application and a major customers advanced node.

We are working on additional applications with this customer for their next node.

We're also excited to be working with another leading customer on multiple applications in their next node as well.

In addition to this leading edge activity. We're also seeing order activity from customers in China for let's say products.

As you know we have been enhancing our turbodisc MOCVD platform for the photonics market.

This market includes vertical cavity surface emitting lasers for vyxeos edge emitting lasers in red Orange yellow specialty ltds.

Initial feedback suggest certain new product has advantages over our competition in key customer requirements as particle defectivity growth rates uniformity and run to run consistency.

We are pleased to announce that we have now shipped the first of these data and MOCVD systems to our customer and we're receiving excellent feedback.

We look forward to continued success with them and we continue to work with other customers to place additional systems.

Future growth drivers for this market will be machine vision, and industrial applications world facing sensors and automotive light or.

And we're working with customers to help them build capacity for when the market returns.

Another source of growth for Veeco is advanced packaging, which is an exciting segment of the semiconductor industry.

We are confident manufactures will continue to adopt advanced packaging techniques to improve performance of electronic devices.

One of the big drivers of advanced packaging is artificial intelligence.

Advanced packaging scheme shorten the distance between logic and memory, resulting in higher performance lower latency and reduced power consumption, which are characteristics AI devices require.

We are investing in a new with Dougherty product for the advanced packaging market that delivers improved resolution overlay depth of focus in field size to meet next generation requirements.

We successfully completed several demos in our facility and expect to ship, our first beta in the coming quarters.

I would like to spend a minute on how the data storage market is providing foundational support to the company.

Sales of our ion beam systems, the hard disk drive manufacturers have been strong for several quarters and we expect this to continue through the growth in cloud computing.

As cloud computing becomes pervasive and continued growth in software as a service in this real time data access continues to grow in importance the amount of storage from car is forecasted to grow exponentially.

This is still a significant cost advantage favoring hard disk drives over solid state memory.

It's obviously memory costs decline, our disk drive manufacturers must reduce their cost as well.

Veeco has a long history of annealing this trend by helping our customers to improve their aerial density.

Driving down the cost per gigabyte.

Moreover, since the mix of hard disk drives is shifting from personal computer devices to high capacity drives that enable to cloud. The total number of heads shift is forecasted to increase.

This is another tailwind for veeco.

Now that we're halfway through 2019.

Let's look at our progress to date.

We're making good progress with new products.

At this time, we have completed most of the development activity on our MOCVD system designed for photonics applications.

Our next generation advanced packaging lithography system, and our laser annealing system for the sub seven nanometer market.

And as we previously mentioned we shipped our first production system for you the mask blank manufacturing.

And lastly, we remain focused on profitability.

Our gross margins are improving and as we further optimize our cost structure, we expect to see improved performance.

With that I'll turn it over to Sam for further details on the financials.

Thanks, Bill and good afternoon, everyone I will be discussing non-GAAP financial performance you can find a detailed reconciliation between GAAP and non-GAAP results in the press release and on our website.

Q2 bookings were $78 million and ending backlog was $274 million.

As a reminder, beginning and 2020 , we will discontinue providing bookings and backlogs are done.

Revenue for the quarter was $98 million. This was slightly below the midpoint okla guidance due to the recent trading restrictions with wallaby, which impacted revenue by approximately $2 million or.

Scientific and industrial market made up 48% of total revenue driven by ion beam system shipments to a data storage and optical customers.

Front end semi markets was 25% of revenue and was driven by shipment muscle or first easy math blank system as well as sales of multiple laser annealing systems.

Advanced packaging, Mems and RF into market made up 17% of overall revenue driven by multiple ERP lithography system, So for high bandwidth memory and GPU application.

Led lighting display and compound semi was 10% of overall revenue, reflecting softness in the worldwide LCD market and we are in the early stages of penetrating the photonics markets.

By region. The U.S. was 40% before all revenue driven by the data storage market.

Rest of the World, which includes Japan, Taiwan, and Korea was 27% driven by or would you be mask blanks system sale.

And China was 20% of what all revenue driven by services revenue and let's say product shipment.

Lastly, EMEA almost 13% of all revenue.

Now turning to the non-GAAP operating results.

Gross margin of 37.8% was a two percentage point sequential improvement from Q1 due to the improved product mix as well as cost reduction efforts.

Opex for the quarter was $38.5 million on reduced R&D spending.

We expect Opex to remain at these levels for the remainder of this year and expect to reduce it and 2020 .

Tax expense for the quarter was zero point $3 million net income was a loss of $3 million and EPS was a loss of six cents on a diluted share count of 47 million shares.

Now moving to the balance sheet and cash flow highlights.

We ended the quarter with cash and short term investments of $247 million, which was a sequential increase of $10 million.

Out of the $247 million in cash $43 million what has offshore.

Cash flow from operations was $14 million driven by a decrease in accounts receivable and inventory as well as an increase in customer deposit.

Offset by reduction in accounts payable.

We made good progress reducing inventory by converting evaluation tools in this quarter, however, inventories still high because we had experiencing slow moving inventory in the LCD business due to the ongoing softness there.

Long term debt on the balance sheet was recorded at $294 million, representing the carrying value of $345 million in convertible notes.

And lastly of a capex during the quarter was $4.3 million.

Now turning to Q3 guidance, which is non-GAAP unless gap is specifically mention.

Q3 revenues expected between $95 million and $115 million, but the gross margin between 37 and 39%.

We expect opex to be around $39 million.

GAAP EPS loss is expected between 40 cents and 20 cents per diluted share.

non-GAAP EPS is expected between a loss of 10 cents and an income of 10 cents per diluted share.

And now for some additional color beyond Q3 at this time based on our current visibility we are reiterating second half topline growth of roughly 10% over the first half.

We continue to target gross margin of 40% by the end of this year due to the favorable product mix and cost reductions.

And we expect positive EPS in Q4.

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

Thank you at this time, if you do have a question. Please stop loss by pressing star one again that will be start one for questions well go first today to Patrick Ho with Stifel.

And Patrick you may have us muted, but your line is open.

Sorry about that.

Yes, we can hear you.

Oh, sorry, thank you.

Sorry about that.

Maybe first focusing on the advanced packaging market traditionally a lot of your past that advanced packaging buys on the liberal side have been driven by the smartphone market. You mentioned you saw some memory by.

Do you expect those trends to continue or are you seeing any indications that the smartphone market may turn soon and that pipeline some of your.

You know a new buys over the next few quarters.

Sure Patrick So you know since the Ultratech acquisition, we have seen some headwinds in the smartphone supply chain that is a big portion of the advanced packaging market, but we are seeing the the breadth of applications starting to increase and so we are seeing some DRAM applications for copper pillars in high bandwidth memory applications and were also seeing some most satisfying for a GPU applications in advanced packaging. So we are seeing the the number of applications brought in and that's certainly a very much of a positive thing, but obviously the smartphone market. Today is a is a big driver of the advanced packaging market.

It's certainly a AI is is driving a lot of that as well so.

It will be interesting to see how fast the advanced packaging applications for a I take off here.

Great. Thanks.

Thanks for that and maybe Sam as a follow up you are on target to get to your 40% gross margins by the December quarter.

Can you tell us what the biggest I guess variables are influenced for gross margins are if it's going to be product mix or do you get some of the the cost savings initiatives that you put into place they start getting recognized on the gross margin like what's the biggest influence that we should look at.

For the December quarter, as well as going into 20 Twond.

Thanks, Patrick Thats a good question. So for the 2019 Q4 quarter. So to lead product mix is definitely the strongest contributor to improvement in gross margin. The cost reduction is definitely helping us already in Q3 and Q4, but it is a small contributor now as we go into 2020 .

With our guide of second half revenue growth and as we carry that growth into 2020 . The war lose should also begin to played Sparta no word on gross margin expansion. So I would summarize and say that product mix is the largest contributor and for the longer term a warning would be second and then cost reduction is playing out as the third a positive driver for the overall gross margin.

Great. Thanks, a lot guys.

Thanks, Patrick.

Well hear next from Brian Lee with Goldman Sachs.

Hey, guys. Thanks for taking the questions.

I had a couple here maybe just.

I know you know moving into 2020 bookings are no longer going to be reported and.

You're trying not to focus on that metric anymore, but did they seemed.

Relatively soft this quarter versus the revenue guide for Threeq. It sounds like you have good visibility into Threeq and Fourq you, though.

Reiterating the 10% up view second half versus first half. So just wondering is there something unique about the mix near term.

Just more turns business or.

Maybe you could give us some more color there in terms of the bookings relative to the revenue guide.

Sort of gap there.

Sure.

So yeah.

So definitely we do agree bookings were soft in Q2, but actually we've seen good big bookings in July already so some of the business that we were planning to close in June and just got pushed over into the first two weeks in July . So overall, we are looking at improving over bookings in Q3 over Q2, So thats certainly encouraging for US and then in terms of the overall guide for the second half being 10% over the first half a lot of confidence there is coming from the strong backlog that we are carrying so at this time, we have about $275 million in backlog. So that enables us to a ship in the second half and gives us the confidence due to to enable the revenue growth.

And then your other question or other part of your question in terms of the mix. So right now we are shipping quite heavy into the data storage industry. We have a very strong market share position there and we are blessed with very long lead time, there. So thats certainly helpful.

The other place where we are seeing some good activity has been less talked about many times is in that you re business.

A piece of our business, particularly in the advanced packaging markets.

Generally has low visibility for us in the sense. The lead times there generally can be from three to four four months or three to five months say, but that business has been running running soft in the last couple of quarters and it is continuing to be soft. So right now our backlog gives us plenty of visibility to give us the confidence for the revenue growth and hopefully we're also looking for overall bookings growth in Q3.

Okay. No. That's helpful color I appreciate that Sam and then.

On the.

The Vixel MOCVD beta tool congrats there I know you guys have been.

Speaking about that for a couple of quarters running here. So good to see the progress but can you can you give us some more color on.

Whether this customer is new to the Vixel.

Technology market or is this a customer just looking to dual source.

Off the current vendor that they use and then is there sort of a timeline you can provide us in terms of converting the beta are you, including this as part of your.

Second half revenue expectations. Thanks, guys.

Sure Brian Yes. Thanks, Thanks for the shout out on getting the arsenic phosphide tool out there is a a longstanding customer veecos and it's really for photonics applications, including Vixel. So I would characterize them as not being in that space today, but their desire is to enter that.

So to answer the second half of your question.

We're typically a beta would go say six to 12 months. So we're thinking more like early 2020 and so the revenue from this tool is not in the second half guidance.

Okay. Thanks, a lot.

And from Northland, we'll hear from gas for short.

Yes, thanks for taking the question pronouncing my name right on the TV side.

You know you've got a mix of DRAM guys coming in could you give us a little bit of help on how many our ion beam Dev tools you need.

For.

Stepper and does it matter if it's.

Memory or logic.

Sure. There is a there was a lot of variables that go into that certainly the number of of steps that are going you ve matters a pretty significantly.

The yield of the E V mask blanks, whether pellicles are introduced and just the absolute number of the number of applications or end products that are willing to go TV make a big difference. Another key item is obviously the yield of the mask blanks themselves are fairly low today and.

The wear out mechanism of the masks is a variable as well so there's a lot of variability and I'd like to give you a a rule of thumb for that but given all those caveats I. Just told you it's probably in the neighborhood of a one easy mask blank tool per 10 to 12 15.

Hey, a seminal scanners something like that.

Okay, nice and pretty wide range I apologize, but.

If we're going to see kind of how this market shakes out.

Right and and we don't know how long the mass blank. So last one machine. So okay. That's helpful and then on the.

Arsenide costs for MOCVD tool is the initial customer using that for an edge emitting laser Vic folds or a red orange yellow early days.

So I would say they are a.

A full service photonics player or in the world and they are probably they are planning to use it for all of the above applications.

Okay, and then timing on the you know do you expect to ship another beta before year end or any any color there.

Yeah, we're working very closely with a number of customers to ship. Another tool certainly that's certainly a strong goal of ours.

And you know, we're we're just working through the issues and certainly would like to get one ship certainly here in another one in the second half of the year for sure.

Okay, and then they'll work and.

On the spike in Neely it from my understanding.

We should start to see risk production for five nanometer in the fourth quarter.

I would imagine the customers kind of decided what they're going to be using have you gotten any color indication on on additional layers at five for the Spike anneal.

So oh, we're certain clearly the the tool of record at five for one particular application and we are working with them at their next node or obviously, we're the incumbent on that particular application, but we are actually working with them to qualify two to three other applications at the next node. So our exposure at five as far as I understand it was really only the one application.

You mean seven.

Yeah, if you have one layer and Kevin and you're working on two three more five but no indication on additional layers and fives.

No I mean, it just be clear.

Though the one the application Weve one is actually at five and that we're working with them on their next nodes for multiple multiple steps multiple guidance, though.

Got it got it sorry, my my misunderstanding.

And then and.

And just to fill in a little more color. Similarly, a working with another customer and ER have qualified and ER at Onestep, one application say seven nanometers, or so and we're working with them to qualify a two to three additional applications at their next node.

So okay.

So to customers.

Two two steps and then moving to the next those the more or steps.

Got it and then last one from me you noted the bookings picked up in July can you give a little color on which end market or which end markets were picking up.

Yeah, I would say I'll pass it to Sam for more color, but I would say it was really just timing I mean, we were actually forecasting these orders in Q2 and some just slipped over I think in particular, there's a.

There was a laser anneal and maybe a somewhat clean etch tools order I think those are the two that come to my mind yeah yeah.

Okay, alright, thanks, so much that's all gaming.

Thanks, guys.

And I guess the questions that is star one at this time, we'll hear next from David Duley with steelhead.

Yes, thanks for taking my questions most of them just got answered but.

I was wondering what the the mask blank tool you back like cool.

Is that what's going to drive second half revenue above first half or maybe maybe the question is what's going to drive the second half 10% growth over the first half.

Sure David I'll try to answer your question, Yes, you you re mask blank two definitely plays a part in it.

The other part of it is stronger in the second half is related to our shipments to the data storage industry and there is also a a few other areas of improving business into an MOCVD side.

Okay and on the Lsatwo you much but your stock.

Qualified with a second customer.

Just curious is there some.

Technical needs at five or seven nanometers, whatever these advanced nodes are well they might be switching from a different type of annealing technology.

Or a dead hours or what is driving that.

Yeah, we're clearly seeing.

Oh, a desire for our laser annealing technology, we're particularly particularly strong not only with or the speed with which we can ramp but also the very fine a temperature control and so what these finer nodes.

Our controlling the peak temperature is really important and that the more standard techniques aren't aren't as effective at maintaining that temperature peak as well so.

That does seem to be a positive or tailwind for us.

Okay.

Hmm.

Well hear next from Mark Miller of the benchmark company.

Thank you for the question Intevac, which supplies them deposition equipment for for hard disk.

I indicated they were seen increase utilization of their tools and I'm. Just wondering are you seeing similar things in terms of your your your head manufacturing systems.

Yes, I would say.

We're seeing a variety of technology buys for you know hammered maamouri as we've discussed previously mark, but certainly overall demand certainly on the head side seems to be up we're talking with one customer about potentially or upgrading to a larger wafer size for.

Adding capacity so I think it's a it's a pretty strong environment, a with a mix of technology and capacity buys right now.

You mentioned the.

Well wait pitching for about $2 billion in sales last quarter or has this been a change though with the recent.

Revision by the administration or you're still expecting some headwinds from what Wally restrictions.

Yeah, we have four we're taking all the steps that we need to take to ship a product or two away, but so far we have not been successful at it in terms of obtaining the licenses and what else is needed I just want to remind Marc can you Mark Mark you as well as everybody that our exposure to walk away is quite minimal overall, it's $5 million or less for the entire year, but we do have a very small amount of backlog that we are carrying.

No it it's a little bit more complex than that because not every single entity of why we are.

His restricted say or some entities and it might be okay to ship some entity that might not be okay. So it becomes a lot more of a detailed question, but Ah we are trying to ship it but so far we have not yet.

Do you see any impact on the the possibility of increased tariffs.

I mean by the September will that have any additional impact on your business.

So in terms of tower, therefore, I would break it down in a couple of areas. The first one which is a simpler one to answer is that any supply chain procurement from China for us which might include tablets that impact is going to be minimal. So he can.

Yes, we can ignore that then the second piece is our shipments into China overall, we believe.

On an annual basis, our revenue exposure to China, and the new Eco soda say say around 10%. So we do ship.

Non Ltd.

Related product to China, and we are continuing to ship and so we have to see what happens.

With those products in terms of what are the actions that the Chinese government takes in terms of tariffs or or whatever have you.

And the total impact which is rather unknown to us is the indirect impact of all of these trade tower, they have and it slows down the macro economy or it slows down the revenue level itself over customers and how that may impact us is rather unknown to us.

I must say that we are not immune or insulated from the macro softness or but we really do not have a way to a very accurately.

Quantify that impact or so that's the way I think we are looking at the situation.

And then change were risk in terms of the you know trying to just devalued.

Its currency and any change for US here you see.

So mark really most of our cash has already been brought all onshore so our cash cash balances in China are fairly small and a a lot of them were sales in China are U.S. dollar denominated so as such exchange rate does not have a direct impact on us and the expense side.

ER can help us, but it is again very small impact to us so overall the exchange.

Exchange rate impact on us I would say is minimal the only one place to be and I may not have an answer for you is that since our sales are dollar denominated and UAN tons, it might become a little bit more expensive for our customers over there.

How that shakes out we don't know its just too soon.

On that front.

Thank you.

Thanks Mark.

And at this time I'd like to turn things back to Bill Miller for closing remarks.

Thank you and thank you everyone I just want to close with a thought that we are in the midst of a a transformation of veeco and we're really focusing on working on much more challenging and differentiated end customer applications. We're starting to see some proof points there as we talked about in.

E U V and let's say at leading edge nodes and we do at this point now that we have some traction think it's an appropriate time to start working down our cost structure and our legacy business businesses, where industry challenges are really not as significant. So an example of that would be.

Leidy for general lighting, so by doing this this allows us to invest in solving tough materials challenges and improving our profitability as we continue to transform the company. So I look forward, Sam and I look forward to talking with you.

Next quarter to update our progress and towards meeting our longer term goals. Thank you again.

And that does conclude today's conference again, thank you all for joining us.