Veeco Instruments Inc.
Q2 2018 Earnings Call Transcript

Published: 2 Aug 2018

[Operator:]

Good day, and welcome to the Veeco Instruments Second Quarter 2018 Earnings Call. Today's conference is being recorded. At this time, I would like to turn the conference over to Mr. Anthony Bencivenga, Head of Investor Relations. Please go ahead, sir.

[Anthony Bencivenga:]

Thank you and good morning everyone. Joining me on the call today are John Peeler, Veeco's Chairman and CEO; and Sam Maheshwari, our CFO. 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. 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 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 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 reconciliation to GAAP measures of performance is available on our website. And with that, I will turn the call over to John Peeler for his opening remarks.

[John R. Peeler:]

Thank you, Anthony. We had good operational performance in Q2. Our revenue came in at a $158 million. Non-GAAP operating income of $11 million and EPS of $0.15 were towards the high end of our guidance. We also exceeded gross margin guidance in the quarter and closed out the first half at 36%, which was above our previously communicated first half expectations. Our book-to-bill ratio was 0.8 with bookings coming in at a $132 million. Order softness was caused by the LED market, where we're beginning to see LED manufacturers delay orders as they absorb recently added capacity. Between 2017 and the first half of 2018, several hundred MOCVD reactors for Blue LEDs were shipped into the market and we expect an absorption period. Also, due to a revision in projections for our Ultratech business, we were required to record a non-cash intangible asset impairment charge of $252 million, which Sam will explain in more detail. Even so, let me reiterate that we remain confident in the strategic fit between Veeco and Ultratech and the long-term growth prospects of the combined company. Additionally, we continue to make progress towards generating synergies as we integrate Ultratech. We recently initiated steps to rationalize our manufacturing capacity and closed Singapore-based manufacturing activities for Ultratech products. We expect to complete this initiative by the end of Q1 2019 and anticipate $2 million in annual savings. We had several announcements throughout the quarter that highlighted the traction we are receiving as a result of our innovation. They highlighted customer wins in our exciting growth markets of Photonics, Display, Advanced Packaging for Memory and Power Electronics. I'll get into some of these growth opportunities in a few minutes, but for now let me turn the call over to Sam for a financial update.

[Shubham Maheshwari:]

Thanks, John, and good morning everyone. Today, I will be discussing our non-GAAP financial performance. You can find a detailed reconciliation between GAAP and non-GAAP results in the press release and on our website. First, I would like to address the asset impairment charge and then I'll provide some color on bookings followed by the revenue details. During Q2, our revised projections from Ultratech products were lower than those made at the time of the acquisition. The reduced projections were caused by lower than expected unit volume of certain vendors' smartphones which incorporate Fan-out Wafer Level Packaging as well as a delay in the adoption of Fan-out Wafer Level Packaging by other electronics manufacturers. In addition, there has been a delay in the build-out of 28 nanometer fabs in China who were expected to buy our LSA systems. Taken together, these projections required the company to assess the carrying value of intangible assets on the books. As a result of this analysis, we recorded a charge of $252 million for the GAAP financial. Since this charge is non-cash in nature and does not impact the day-to-day operations or liquidity of the company, it is excluded from the non-GAAP financial. Again, this is an outcome of comparing current projection to the projections made at the time of the acquisition. Relative to the current run rates, we are confident about the growth of this business in future in both the Front-End Semi as well as Advanced Packaging markets. Now turning to booking. Bookings for the second quarter were $132 million. In Advanced Packaging, MEMS & RF Filter markets we booked multiple, we booked multiple lithography tools for a DRAM copper pillar application and multiple wafer (00

[John R. Peeler:]

Thanks, Sam. On prior earnings calls, we mentioned the importance of Advanced Packaging as an enabler to better performance in applications like Artificial Intelligence and Autonomous Vehicles. Few weeks ago, we attended SEMICON West where this theme resonated quite clearly. A common topic throughout the event was the slowing of Moore's Law and the alternative innovation path the semiconductor industry is currently undertaking. In order to keep up the pace of performance improvement, new structures are being developed, new materials are being qualified and Advanced Packaging techniques are being incorporated in the chip and package designs. Though the market is currently in an overcapacity situation in Advanced Packaging lithography for logic and foundry customers, we believe this market will be a growth opportunity for us in the longer term. According to TechSearch, the increase in demand for wafers incorporating fan-out alone will grow from 1 million wafers per year today to more than 6 million wafers per year in 2021. Veeco is well-positioned with its Lithography and Wet Etch products to help our customers achieve performance requirements by incorporating Fan-Out Wafer Level Packaging and copper pillars into their products. The application has been primarily with Logic customers, but memory customers are now using copper pillars for DRAM interconnects to improve electrical performance and thermal efficiency. We recently received a multi-tool order for our lithography systems from a DRAM customer and are working to build on this momentum with follow on orders in memory and other adjacent markets. Turning to the LED Lighting, Display & Compound Semiconductor market, over many years this market has evolved from a backlighting market where systems were sold to make mobile and TV backlighting LEDs. Veeco did very well in this market, as there are inherent advantages to our MOCVD TurboDisc technology. We enabled our customers to lower their cost of ownership and improve their uniformity. As this market transitioned to more of a general lighting market, Veeco again did very well by developing next generation of MOCVD tools to further reduce cost of ownership. Overall, we've successfully installed over a 1000 reactors at more than a 100 customers. Currently, there are two market dynamics happening at the same time. First, with the addition of Chinese competition for MOCVD, the general lighting and backlighting market is becoming commoditized and pricing has declined. We began to see this towards the end of 2017 with orders at very low gross margins. Second, there is an emergence of new applications such as photonics for 3D sensing, GaN power devices for electronics and electric vehicles, GaN RF devices for 5G RF and Micro LED displays. Our strategy in this market has been to focus on delivering value through differentiated technology and our R&D has been aligned with this strategy for some time, resulting in a broad MOCVD product portfolio to address these emerging applications. In 3D sensing, we were pleased to see additional phone manufacturers adopt pixel-based facial recognition in their devices. We will be shipping systems in the second half of this year to address this demand. We are engaged with several VCSEL manufacturers for their epi (00

[Operator:]

Thank you, sir. We can take our first question from Brian Lee from Goldman Sachs. Please go ahead. Your line is open.

[Brian Lee:]

Hey guys. Thanks for taking the questions. I had several here. I guess just first off, Sam, on the Ultratech write-down, can you give us a little bit more color on whether that's assessed quarterly or if that's an annual assessment? And then with respect to timing, it seems like the business had been tracking below expectations for a little bit of time here and post the deal. So, wondering if anything had downticked even further here to drive the impairment decision at this point?

[Shubham Maheshwari:]

So thanks, Brian. So, at around the anniversary of the acquisition – we had done the acquisition if you would remember in – towards late May, early June of last year and as we assessed the business, particularly for accounting reasons, we – we have to look at the new projections and these projections are lower than what we made at the time of the acquisition. And so, that is what triggered the impairment. However, I want to say that the current projections for out-quarters here is higher than the current run rates that we have experienced so far with Ultratech. You know it is not new news; we have shared with you before that since the time of acquisition, Ultratech business has been soft because of various delays in either the smartphones or the adoption of Fan-Out Wafer Level Packaging. And as we look at the last one year of experience, we are required to kind of take those results into consideration and develop projections based off of that experience. And so these projections are made on an annual basis, and that's what we've done. But more importantly, I want to stress that we are very confident about the strategic fit of the business with Veeco. And also, we are confident about the growth of this business going forward compared to what we have experienced so far. Maybe John, do you want to add something to Brian's question?

[John R. Peeler:]

Well, I'd just reiterate that we are – the business fits well with ours. We sell Ultratech products to Compound Semi customers. We are seeing a lot of sales synergy in the business, and we think over the long-term, it will be a good addition to Veeco. The impairment is really something that the accountants made us do.

[Shubham Maheshwari:]

Yeah. So, I mean the other thing I want to stress, Brian, is that this is completely a non-cash charge. It has no impact on the liquidity or operations of the company in any which way.

[Brian Lee:]

Okay. Now, that's helpful color. I appreciate the context. And your second question – or two questions related to sort of the state of the business and some of the strength you're seeing here. I guess first off, on the bookings. John, you mentioned the strength in Scientific & Industrial Ion Beam and Data Storage related. It sounds like it's one of the bigger quarterly results I think we've seen for that segment in a little bit of time. So can you speak to how sustainable you think that momentum is, or if this is something we should expect to moderate here? I'm not sure where you think we are in terms of the CapEx cycle for some of the Data Storage players.

[John R. Peeler:]

Well, there is – there's tremendous growth in the amount of information to be stored due to the cloud and various enterprise applications. So, our customers in the Data Storage market are working to improve their areal density, they are changing their designs and they need more equipment to make more advanced heads and more advanced disk drives that store more and work better. So, we do think this business will continue and it'll be a healthy business for us both in terms of products and services. It was particularly strong this quarter, but we see more ahead over the next year.

[Shubham Maheshwari:]

Brian, I'll also add that in this business, traditionally we've had a number of technologies residing inside this business. And the same type of Ion Beam technologies, we are finding a lot of solid and very good traction in the EUV market and certain other Optical Coatings market. So this business is generating revenues for us, not just from Data Storage but also from other type of applications. And it's kind of beginning to pan out for us and we are seeing some good strength in these other areas also.

[Brian Lee:]

Okay, great. Maybe last one from me and I'll pass it on. Just on the Blue LED side, can you update us on what you're seeing in terms of utilization trends across some of your customers and then you know specifically in China, how you are thinking about the supply/demand balance out there given your comments around capacity digestion, just maybe how – how much time you think that might require for us to see a pickup back in China. Thanks.

[John R. Peeler:]

Okay. Well, utilizations have come down slightly, not a lot. I think in the China Tier-1s they are still in the high 80s. Tier-2 has dropped. We've heard of some inventory buildup at certain Tier 1 players. And then outside of China, utilizations have dropped a little bit too. And it's not surprising; in 2017, we believe there were over 400 reactors added to the market or K465i-equivalent reactors. And in 2018, it's going to grow substantially over that. So I think we've put a lot of product into the market. Lighting adoption continues at a very fast pace, but it's just going to take some time to absorb what's out there.

[Brian Lee:]

Just to clarify, John, on your comments; so, you estimate 400 K465i-equivalents were added in 2017 and that in 2018 more than 400 incremental units are going to be added?

[John R. Peeler:]

Yes, yes.

[Brian Lee:]

Okay. All right, thanks a lot guys.

[John R. Peeler:]

Thanks, Brian.

[Operator:]

Thank you. We can now take our next question from Edwin Mok from Needham. Please go ahead.

[Y. Edwin Mok:]

Hey guys. Thanks for taking my question. So first question, John, on some of those new applications that you talked about, so GaN and also Micro LED. One, do you expect those to be growth driver in 2019 and specifically on Micro LED, do you think that the customer base need to buy new tools to replace the Micro LEDs, or can it use existing capacity?

[John R. Peeler:]

I think first of all on Photonics and GaN Power, GaN RF, we do think that 2019 will be a growth year for us. We've announced important deals in Photonics and GaN Power to Lumentum on Semi and Alidia (00

[Y. Edwin Mok:]

Yeah, so John, maybe just a quick follow-up on that. I think you've talked it about before; you guys are developing a new tool for Photonics and then also GaN Power market. Are you also working on new tool for Micro LED, or is it just a improvement of – in that platform on that?

[John R. Peeler:]

Yeah, we've been working with the key players in Micro LEDs around the world and there were quite a few of them and we have a product pipeline that will deliver what the market needs and we'll roll that out as – basically at the right time when Micro LEDs are really ready to go.

[Y. Edwin Mok:]

On the LDD Ion (00

[John R. Peeler:]

Well, we booked one additional unit this quarter. We have a strong interest in more and we expect more bookings in the coming quarter. Those tools will ship in 2019. And so I think they'll give us a good source of growth there in 2019.

[Shubham Maheshwari:]

So, Edwin, these tools have pretty long lead times. These are very complex tools, as you can imagine and pretty much we are the only provider for that blank – mask blank deposition capability in the market. And so, we are quite excited about this. But these tools do have long lead times. And there is, as John just said, pretty strong customer activity in that market for us.

[Y. Edwin Mok:]

That's very, very helpful. And then lastly, Sam, just for you. If I see, your guidance implied (00

[Shubham Maheshwari:]

Yeah, sure. Yes. So you know what's been happening is if you look at the OpEx performance over the last [Technical Difficulty] (00

[Y. Edwin Mok:]

Okay. Great. That's a great trend. That's all I have. Thank you.

[John R. Peeler:]

Thanks Edwin.

[Shubham Maheshwari:]

Thanks Edwin.

[Operator:]

Thank you. We will now take our next question from Mark Miller from the Benchmark Company. Please go ahead.

[Mark Miller:]

(00

[John R. Peeler:]

We haven't seen that impact. So, you know our weakness was more in the Blue LED market. We've performed I think well in the front-end and other markets. Advanced Packaging is an overcapacity situation at a large [Technical Difficulty] (00

[Mark Miller:]

You reported sharp increase in business from Data Storage. Is that for Ion Beam Deposition and Ion Beam Etch and its thin film head related I assume?

[John R. Peeler:]

Yes. Yes. We developed what we think is the best Ion Beam deposition [Technical Difficulty] (00

[Mark Miller:]

So these Ion Beam for thin film heads, it's more for new designs rather (00

[John R. Peeler:]

Yeah. They – it's new designs that basically enable better areal density and enable more capability. Lot of times the customers have to take more passes [Technical Difficulty] (00

[Mark Miller:]

Thank you.

[John R. Peeler:]

Yeah. Thanks, Mark.

[Operator:]

There are no further questions on the phones at this time. So, I would like to hand back to our hosts for any additional or closing remarks.

[John R. Peeler:]

Thank you for joining us today and we look forward to seeing you in the [Technical Difficulty] (00

[Shubham Maheshwari:]

Thank you.

[Operator:]

This concludes our call today ladies and gentlemen. Thank you for your participation. You may now disconnect.