Veeco Instruments Inc.
Q4 2020 Earnings Call Transcript

Published: 11 Feb 2021

[Operator:]

Please stand by. We are about to begin. Good day. And welcome to the Veeco Instruments Q4 and Fiscal Year 2020 Earnings Call. At this time, I would like to turn the conference over to Head of Investor Relations, Anthony Bencivenga. Please go ahead, sir.

[Anthony Bencivenga:]

Thank you, and good afternoon, everyone. Joining me on the call today are Bill Miller, Veeco’s 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.com. This call is being recorded by Veeco Instruments and is copyrighted material. It cannot be recorded or rebroadcast without Veeco’s expressed permission. Your participation implies consent to our recording.

[Bill Miller:]

Thank you, Anthony. Good afternoon, everyone, and thank you for joining the call. I hope you and your families are well. I am excited to talk to you today about the strong progress we have made on our transformation. Our team executed through the quarter, operating remarkably well through this global pandemic. To begin, I will take you through our highlights, John will provide a financial update and guidance and then I will discuss our markets and technologies before taking your questions. Reflecting on 2020, I am proud of what our Veeco united team has accomplished. We completed our organizational restructuring and began to reshape our product portfolio. We improved gross margins, reduced operating expenses and improved profitability. We restructured our debt and strengthened our balance sheet. We also enhanced our governance, appointing an independent chair to the Board of Directors and assigning our second recently appointed female Board member to the audit committee. We improved our focus on ESG and published our first sustainability report. And importantly, we continue to focus on our employees and internal culture. Together, these actions, along with investments in R&D and service to support multiple evaluation systems are positioning Veeco for our next phase of growth and value creation in Semiconductor and Compound Semiconductor markets.

[John Kiernan:]

[Bill Miller:]

Turning to the markets we serve and our technologies. With the first phase of our transformation behind us, we will continue to focus on the second phase of our transformation, growing the company organically in the Semiconductor and Compound Semiconductor markets. We think of this growth in two phases, near-term 2021 growth and longer term 2022 and beyond. Our near-term growth outlook is supported by recent semiconductor orders from our advanced-node logic customers, demand for 5G RF-related capacity, and market demand and backlog in Data Storage. Looking beyond 2021, we have been investing in our core technologies, which will drive the next phase of Veeco’s growth that enable game changing applications like artificial intelligence, virtual and augmented reality and electric vehicles. We are well-positioned to continue playing a meaningful role with our customers that are making the necessary investments in R&D, service and evaluation systems to deliver and support products they need. In fact, evaluation agreements are already in place for our laser annealing systems for logic and memory applications, and our MOCVD systems for early-stage micro LED development. Now looking more specifically at each of our four markets. In our Semiconductor market, we won an additional laser annealing step at one of our existing customer’s advanced nodes. In addition to that, we see multiple growth vectors we believe will drive growth in laser annealing. We continue to make progress with our customers on their next nodes. In fact, we expect to ship evaluation systems to multiple customers in the coming quarters. We are making progress with a third logic customer at an advanced node. And lastly, while our LSA product line has historically been applied to logic applications, a top-tier memory customer is currently evaluating Veeco’s laser annealing solutions. This is a one-year evaluation and could result in a significant new market opportunity, which could produce revenue growth in 2022 and beyond. In summary, our laser annealing technology with its unique process capabilities and advanced nodes is providing near-term strength and it’s also an important component of our longer term growth strategy. In the EUV mask blank market, we ship the system in the quarter and we continue to work closely with our customers on future plans for capacity expansion as the industry progresses. ASML recently announced they ship 31 EUV lithography systems in 2020, up from 26 in 2019 and they enter 2021 with 42 systems in backlog. With roughly one of our mask blank systems required for every 10 to 15 ASML systems in the field. We continue to see our market opportunity as two to four systems per year on average. In advanced packaging, we saw a positive order activity during the quarter for our lithography and wet processing systems. For applications such as flip chip and fan out wafer level packaging, and we continue to engage with our customers to solve their next-generation advanced packaging challenges. Moving to Compound Semiconductor, we serve this market primarily with our wet processing and MOCVD equipment. Our wet processing equipment offers excellent process control and flexibility for many Compound Semiconductor applications. We shipped multiple systems during the quarter and we are seeing further demand for RF customers as they add filter and power amplifier production capacity. Looking at our MOCVD business, we have pivoted away from the commodity LED market and towards providing high value solutions for our customers. We have strengthened our product portfolio, which we believe is now well-positioned to compete in exciting high growth markets. These include applications in photonics such as indium phosphide lasers and VCSEL, as well as microLED with our Lumina MOCVD arsenide phosphide platform and our propelled gallium nitride MOCVD system use for power electronics, RF devices and microLED applications. Now looking at our Data Storage market, we have been experiencing consistent growth for multiple years driven by cloud and data center demand. Our ion beam technology enables our customers to increase the areal density of their read, write heads. This improved performance in their high capacity drives using cloud and data center applications. Additionally, the absolute number of head shift has been increasing and is forecasted to continue to increase for several years. Based on our visibility in this market, we expect strong performance to continue through 2021. And finally, our Scientific & Other market is largely driven by sales to governments, universities and research institutes. We experience lower sales in this market in 2020, compared to 2019, which we believe was due to COVID-19 impacts. Now turning to our 2021 priorities, with the actions we have taken to execute our transformation and position Veeco for success, as John said, we expect significant revenue growth in 2021. As we move toward that near-term goal, we are keeping our four main priorities in mind. First, we will maintain resiliency and flexibility across all aspects of our operations. Second, we will continue to focus on products and services that align with market trends and generate the strongest results for our customers and shareholders. Third, we will execute relentlessly on our near-term transformation objectives. And fourth, we will continue our efforts to position Veeco for longer term growth in 2022 and beyond. With these four priorities in mind, we are committed to making a material difference and building a stronger Veeco that serves all our stakeholders. And with that, John and I will be happy to take your questions. Operator, please open the line.

[Operator:]

Thank you. We will take your first question from Patrick Ho with Stifel.

[Patrick Ho:]

Thank you very much and congratulations on a nice end to the year and the outlook for 2021. Bill, maybe first off in terms of the laser spike anneal business. It’s great to hear that you are getting a second application entry with a customer. As the industry continues to migrate especially in the logic and down every shrinking nodes and with the future of gate all around. Do you see the potential applications continuing to increase or have you kind of reached a saturation point, let’s say two applications?

[Bill Miller:]

Yeah. Thanks, Patrick. We really love that question and here’s why. In the short-term, laser annealing is really driving our business in ‘21. You just mentioned the second application when one of our existing customers, that’s certainly driving us in ‘21. But longer term, we see opportunities. We are working with our existing customers at their next nodes replacing evaluation systems there. We are actually closely engaging a third logic customer with an eval with their most advanced nodes. And we recently placed two tools at DRAM memory customer, which is really the first penetration we have had into memory and it makes a lot of sense because memory lags behind logic a bit. And what we are seeing is as the nodes advance and the technologies change from, say, FinFET to Gate-All-Around, the one thing that remains is the need to continuously reduce the thermal budgets, heat to a high temperature for a shorter duration of time. And our laser annealing product is uniquely positioned to take advantage of that. So we see very, very bright horizons not only this year, but probably continuing on as we open up memory markets and fill more slots, if you will, of the annealing steps with our existing and hopefully new customers.

[Patrick Ho:]

Great. That’s really helpful. And maybe as my follow-up question for John, given that you saw a pickup in several of your businesses in the December quarter, the demand on the Semiconductor side remains healthy going into the New Year. Your working capital management was very strong this -- in spite of the increase in demand. You -- DSOs are very attractive levels and even as inventory is building. Can you give me the puts and takes of that working capital management? And secondly, how the supply chain looks for you right now, given that at various parts of the ecosystem, there are some supply shortages?

[John Kiernan:]

Sure. Sure, Patrick. So on the working capital side, we did see a slight increase in the inventory, but that did decrease the day’s outstanding giving the increase in volume. As Bill mentioned, we do see investments coming in 2021, both on our increase in revenue, as well as increasing the amount of evaluation tools that are being placed into the field, expected to be put in place in the field in 2021. So we will continue to try to manage that working capital requirement as efficiently as possible. On the second part of your question, regarding supply chain and there, we have been effectively able to manage the increase in demand there. We have not seen any significant impacts to our supply chain at this point and at this point it looks pretty solid.

[Bill Miller:]

I guess, I will just add one other comment there, John. We have resourced a few hundred parts from regions that have been more COVID hit and we have successfully been able to do that. And our supply chain and operations organization has done a pretty amazing job there.

[Patrick Ho:]

Great. Thank you very much.

[Bill Miller:]

Thank you, Patrick.

[Operator:]

And we will take our next question from Brian Lee with Goldman Sachs.

[Brian Lee:]

Hey, guys. Good afternoon. Thanks for taking the questions. Maybe just quick housekeeping one, I know the revenue in Q4, you said you had some sort of legacy MOCVD for LED that was in there. Can you quantify? Just trying to back out what that would have been and then also what the margin impact was for the quarter.

[John Kiernan:]

Yeah. Yeah. Brian, it’s about $10 million for the quarter at very low gross margin.

[Brian Lee:]

At very low gross. Okay. Great. That’s helpful. And then in terms of Q1 or the 2021 updated outlook for revenue, are you embedding anything in those numbers for the legacy MOCVD? I guess, one of the reasons I ask is the 40% to 42% gross margin for Q1, I know there’s a bit of mix you mentioned in there. But how should we think about just generally the gross margin cadence moving through the year, because it seems like you guys were 42% to 44% pretty consistently for a couple of quarters before the mix issue in Q4?

[John Kiernan:]

Sure. Sure. Brian, so we are currently viewing Q1 gross margins in the 40% to 42% range and that reflects the existing product -- expected product mix. And including ramping up sales slow moving inventory, we have got about $5 million and that we would pretty much include the program there. So, a little bit of a lesser extent of the gross margin impact in that 40% to 42% range in Q1 2021. Q1 gross margins are also impacted by the cost to support our semi evaluation growth initiatives. As Bill mentioned and we have mentioned in the past with these evaluation tools, we are making investments in advance of revenue. So while -- we aren’t providing specific 2021 gross margin guidance, Brian, we did give an updated revenue guidance for the year of $520 million to $540 million, which is 17% growth at the midpoint and an EPS for the year of $1 to $1.20 on a non-GAAP basis, which is 29% growth at the midpoint. But let me give you a little bit more color on the gross margins. As we have indicated that this increased volume would generally give us gross margin benefits, but we are going to consume those benefits that we would normally see with increased volume with the investments in the service capability to support the number of evals. And now that we have more clarity, we see a tremendous pull for our technology and our planning for success. So typically, we would have one to two evals in the field at a time. In 2021, we expect the evals to reach about 10 in the field and many of these evals would have a period lasting more than one year or so. So as a result, there will be limited amount of benefits that we get to ‘21 -- 2021 revenue from these increased evals. So we are supporting these evals ahead of revenue and we are planning for growth in 2022 and beyond. So these investments are providing some headwinds to gross margin in 2021. And while we expect quarter-to-quarter variations in gross margins, we currently view the Q1 gross margins in the 40% to 42% range as the low point for 2021 and view quarterly gross margins in the range of 40% to 44% in the quarters as we move forward.

[Brian Lee:]

Okay. So it’s a low point for the year. That’s super helpful. And then maybe just last one for me, nice boost to the revenue outlook here. I am just wondering, can you give us a bit of quantification, I know you mentioned some figures around backlog and things ended the year on a strong note? But where are you seeing some of the pockets of strength here with respect to the new segments that gave you the confidence to raise the revenue outlook? And then maybe just related to that, you had a fairly sort of flattish growth to revenue in 2020, and then in the back half, you kind of picked it up. Similar cadence, we should expect in ‘21, it seems like you are starting out ‘21 with a pretty good range here, so it almost implies maybe a flatter revenue trajectory, you can get to the $520 million or $530 million, if we are thinking about the outlook here?

[Bill Miller:]

Yeah. Yeah. Let me take the first piece of that and maybe John could answer the second half. What we have been saying is, we see growth in 2021 from three areas, laser annealing, 5G RF and Data Storage. And the Data Storage piece of our businesses on long lead times and when we put out our 10% up to $500 million range that fully baked in the Data Storage piece. So I look at that incremental step up that’s really driven by planned growth or expected growth in the laser annealing and the 5G RF segments. So I think those are the two pieces that drive that incremental growth in the numbers.

[John Kiernan:]

Yeah. And then, Brian, to answer the second part of your question, given the backlog visibility and when shipments are required, our view is that we would see to your point lesser of a build in the second half of the year for 2021 in our current view compared to 2020.

[Brian Lee:]

All right. Thanks, guys. I will pass it on.

[Bill Miller:]

Thanks, Brian.

[Operator:]

We will hear next from Tom O'Malley with Barclays.

[Tom O'Malley:]

Hey, guys. Thanks for taking my question and congrats on the next topline. I just wanted to dive in to the Data Storage segment. It looks as though it fell off kind of sharply in December, and you mentioned that the backlog was very strong there and called out 2Q and 3Q or calendar ‘21. Can you talk about, just to put some pictures, what happened there, did customer demand fall off or if it was getting pushed to the right, any color there would be really helpful?

[Bill Miller:]

Yeah. Yeah. Sure, Tom. I would say, there’s been no push out of demand or anything. This is now that we are breaking Data Storage out of its own segment. You can see it can be a bit lumpy. These tools have ASPs from $5 million to $10 million. So it doesn’t really take much to move the number around. I would expect that number to increase going forward in Q1. So I think we have a substantial piece of backlog that will ship -- is scheduled to ship in Q2 and Q3, I think we will see that increase in Q2 and Q3. So I wouldn’t read much into that fluctuation in quarter-to-quarter.

[Tom O'Malley:]

Okay. And then just as a follow-up with Data Storage improving into Q1, obviously you are guiding down sequentially about $40 million. Can you give us a little color on what’s weaker in terms of your segments or just any color on the moving parts into Q1, just given that we have the new segments here, it would be helpful to kind of have a foot to start the year?

[Bill Miller:]

John?

[John Kiernan:]

So we did mention we have a little less sell-off of slow moving inventory in the first quarter. That’s a piece of it. And I would say that, there’s nothing else that would be individually large driving down the midpoint of our range in Q1.

[Operator:]

And we will go ahead and take our next question from Rick Schafer with Oppenheimer.

[Rick Schafer:]

Yeah. Thanks and add my congratulations, guys. I guess I had a quick question on backlog. I think obviously with the latest numbers, and as you said, your backlog, I guess, with the new numbers support pretty high-teens type growth this year based on your guide. It sounds like demand signals are up taking pretty broadly. So, I guess, I am curious, how much upside, what is the potential and terms of upside based off your new guide today in terms of what you can support and I know you probably can’t quantify exactly? But I am just sort of wondering, at these levels, are you kind of thinking you are sort of sold out -- obviously, sold out for the year, I know you have made that comment, I believe, Bill, about your Data Storage segment in particular being pretty close to sold out this year. So I am curious sort of where that upside had drew might come from this year, which segments might have some room left this year?

[Bill Miller:]

Yeah. Let me start and let John fill in some of the details. Our Data Storage is pretty close to sold out for the year. So really we are not going to be driving growth in that segment. We did just very recently win a second application in laser annealing. And that could probably drive -- is driving growth as well as 5G for RF filters and RF devices for wet processing equipment. So those are on shorter lead times. So if I were to say, where we would have any upside from here, would really only be able to come from shorter lead time products. John, I don’t know if you want to add to that.

[John Kiernan:]

I think that’s right, Bill. We are, as we mentioned, looking to add capacity going forward for laser annealing with the announced capacity expansion. We are planning on in San Jose in terms of being able to increase the production footprint there and we are running at fairly high capacity in our wet cleaning product line for 5G as well at this point.

[Rick Schafer:]

Can I ask a follow up on that comment, John? How does that new capacity sort of come on line for you guys in terms of obviously raising your ceiling on what your topline looks like? I am thinking of next year even. I mean, does this capacity start to become available to you, say, second half this year or is it more of a ‘22 phenomena? I know you mentioned that it’s probably going to be an overall gross margin drag to investment probably well into next year, but I didn’t know when that capacity would start to kick in? Thanks.

[John Kiernan:]

Sure. Some of it will be a mix of internal capacity versus using outsourcing contract manufacturing. So we are starting on the wet processing side to use contract manufacturing and from the laser annealing product line that’s mainly going to come from in-house manufacturing growth.

[Rick Schafer:]

Thank you, guys.

[Bill Miller:]

Thanks, Rick.

[Operator:]

We will go ahead and take our next question from David Duley with Steelhead Security.

[David Duley:]

Yes. Can you hear me?

[Bill Miller:]

Yeah.

[John Kiernan:]

Hi, Dave.

[David Duley:]

Okay. Sorry. I had technical difficulties with call. So thanks for taking my question. I was wondering, could you just take a step back in the LSA business and elaborate as to why customers are perhaps shifting back to laser spiking annealing from the flash technology. What is it at these advanced nodes that is driving that trend, shifting back toward your technology? And as a follow-up to that is, could you help us size the market now for LSA?

[Bill Miller:]

Yeah. Yeah. Let me start with a little background. We acquired this from Ultratech and they actually had success at the 28-nanometer node with laser annealing. And they weren’t able to continue their position at the next node. And so, when we got in there, we have put a pretty concerted effort into understanding why they have lost their position and we listen to the customer. And we put a lot of effort into supporting and servicing the customers. And so, I think, the technology has some real legs in value and what’s happening at the -- as the notes continue to shrink to 5 nanometer and 3 nanometer and 2 nanometer and beyond, the thermal budget, as I mentioned, become a real challenge. And the ability of the wavelength of our laser to have that energy be absorbed uniformly over all kinds of different materials on the surface of a semiconductor device is really important. As well as the ability for us to scan the wafer very quickly and heat it to very temp -- high temperatures, and then cool it very rapidly. With each consecutive node, customers are pushing us from 200 microseconds to 150 microseconds to 100 microseconds. And so, there’s a real road map in terms of thermal budget that we are working very closely with our customers to execute. And I think we are seeing the fact that flash just can’t heat and cool fast enough at these more advanced kneeling steps. Now we are also seeing memory customers have the same set of challenges that the logic guys were facing a number of years ago, if you will.

[David Duley:]

Okay. That’s great. And…

[Bill Miller:]

And the second half of your question.

[David Duley:]

Yeah. As far as, you have mentioned, you have moved your breakouts of your business around. I think it’s the first time in sometime you talked about advanced packaging order, perhaps, give us a little bit more detail what you might be seeing in that particular market?

[Bill Miller:]

Yeah. Yeah. So, we actually -- if you look back, historically, this has been a good base business, healthy business kind of in fan-out wafer level packaging, copper pillar bumping, we have been shipping to OSATs and IBMs. \And I think last call we said our order pipeline was increasing. Clearly, now, we are seeing an uptick in demand going forward. I would say our visibility is improving. We do operate this business at fairly short lead times and so our visibility is certainly improving as we move forward into 2021.

[David Duley:]

And just as a follow on to that particular question, is it just one customer or is it a broad base of customers that you are starting to see greater visibility and plans to increase their CapEx for advanced packaging?

[Bill Miller:]

Yeah. Dave, I would say it’s broad, actually. We are seeing OSATs, IBM foundry, we are seeing some breadth to it that we weren’t seeing the previous year or more.

[David Duley:]

Great. Thank you.

[Bill Miller:]

Thank you.

[Operator:]

And we will take our next question from Mark Miller with Benchmark Company.

[Mark Miller:]

Thank you for your question and congrats on your progress. I just wanted to talk a little bit more about the…

[Bill Miller:]

Thank you.

[Mark Miller:]

…backlog -- you are welcome. A little bit more about the backlog, you said, the Data Storage was going to be strongest in Q2, Q3. Would you characterize the backlog as front-end loaded, back-end loaded or pretty even through the year as it shifts?

[John Kiernan:]

So, Mark, yeah, we reported that the backlog was $366 million at the end of 2020. We would have more backlog at the beginning part of the year than the ending part of the year. Although specifically related to the Data Storage we indicated that customer’s shipment requirements will be a little bit more weighted to Q2 and Q3 going into the year.

[Mark Miller:]

And what about the mix in the backlog, is that going to be higher mix than what you have seen recently or is it similar?

[John Kiernan:]

Yeah. So, we would typically, with a longer lead time type of systems, have a greater backlog. So I don’t think proportionately that we see any big shift there in terms of the longer lead items would tend to be a larger percentage of the overall backlog.

[Bill Miller:]

Just do the math.

[John Kiernan:]

Yeah. Just given the lead times. As Bill just mentioned…

[Mark Miller:]

Okay.

[John Kiernan:]

… we have an example in the advanced packing with lithography the lead times would typically be in the three to four month range, and as an example, the Data Storage you could have lead time in a nine month range, as an example.

[Mark Miller:]

And the next one is R&D, you have increase the investment and is that investment going to be stayed at similar levels throughout the year?

[John Kiernan:]

So we expect that as the year progresses that OpEx as a percentage of revenue including R&D would come down as a percentage of revenue as we progressed in the year. But in absolute dollars, we would expect to have an increase in R&D expenses for 2021 over 2020.

[Mark Miller:]

Thank you.

[Bill Miller:]

Thank you, Mark.

[John Kiernan:]

Thank you, Mark.

[Operator:]

We will go ahead and take our last question from Gus Richard with Northland.

[Gus Richard:]

Yes. Thanks for taking my question. Just a housekeeping question real quick, what was the variance in the service in the quarter?

[Bill Miller:]

Okay. Yes.

[Gus Richard:]

In line with the cost, isn’t it?

[Bill Miller:]

Yeah.

[Gus Richard:]

You don’t break it out?

[Bill Miller:]

Go ahead, Gus.

[John Kiernan:]

Yes. We break it out and spares and service to Q4 was about $ 38 million for the quarter.

[Gus Richard:]

Okay. And then is spares and service included in the backlog or no?

[John Kiernan:]

Yeah. That is part of our reported backlog.

[Gus Richard:]

Got it. And then of the turn…

[Bill Miller:]

I would say most of its turn is pretty fast.

[Gus Richard:]

Yeah. Yeah. So you would only have backlog for spares and service in Q1, maybe a little more in Q2.

[Bill Miller:]

Exactly.

[John Kiernan:]

Exactly.

[Gus Richard:]

Got it. And then, in terms of the evals, you were talking about having 10 out this year. Of those, how many have you got out and how many are in LSA? How many are in MOCVD and something else?

[Bill Miller:]

Yeah. I would say, the -- approximately half are in LSA, including some other advanced tools, platforms that won’t be out until the end of ‘21. We have some tools, MOCVD tools for power electronics, as well as micro LED and then we have a wet processing tool going out shortly. So that’s kind of a flavor for what we have, I’d say, it’s probably laser annealing heavy.

[John Kiernan:]

We have got about 30% of them out at this point.

[Bill Miller:]

Yeah.

[Gus Richard:]

Okay. Okay. And then in the -- there’s a sort of a pause in your Data Storage business in Q4, Q1. Is that just lumpiness as you mentioned earlier or is there a little bit of a digestion period, any other reason for that pause?

[Bill Miller:]

Yeah. I wouldn’t describe it as a pause, Gus. I would say, it’s the size of the machines and it is a $6 million or $8 million machine in this quarter versus that quarter can move the numbers around. I wouldn’t say we are picking up any signs of demand change here or backlog change to push out.

[Gus Richard:]

Okay. That’s it for me. Thank you so much.

[Bill Miller:]

Thanks, Gus.

[Operator:]

And that concludes today’s question-and-answer session. I’d like to turn the call back over to Mr. Bencivenga for any additional or closing remarks.

[Bill Miller:]

This is Bill Miller by the way. Thanks. Thanks for joining us today on the call. As you may be able to tell, we are very excited about entering ‘21 with our growth. Certainly, like to thank our customers and our shareholders along with the Veeco United team for their continued support as we execute our growth strategies. So look forward to updating you all at upcoming conferences. Have a great evening.

[Operator:]

Once again that does conclude today’s conference. We do appreciate your participation. You may now disconnect your phone lines.