Veeco Instruments - Earnings Call - Q1 2019
May 6, 2019
Transcript
Speaker 0
Good day, everyone, and welcome to the Veco Instruments Incorporated, Corporate Hosted Q1 twenty nineteen Earnings Conference Call. Today's conference is being recorded. At this time, I'd like to turn the conference over to Anthony Vincigen. Please go ahead, sir.
Speaker 1
Thank you, and good afternoon, everyone. Joining me on the call today are Bill Miller, Veeco's Chief Executive Officer and Sam Maheshwari, 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 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 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 factors are discussed in the Business Description and Management's Discussion and Analysis sections of the company's report on Form 10 ks and annual report to shareholders and in our subsequent quarterly reports on Form 10 Q, current reports on Form eight ks and press releases.
Vico 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. With that, I will turn the
Speaker 2
call over to Bill for
Speaker 1
his opening remarks. Thank you, Anthony. Good afternoon, everyone, and thank you for joining the call. Vico executed well in Q1, and our results were above the midpoint of our guided range. Q1 bookings were $107,000,000 with our data storage and EUV products, and our backlog has grown to $295,000,000 With the commodity LED business largely behind us, our revenues for the quarter have stabilized at $99,000,000 Data storage revenue was a large portion of our overall revenue.
We also shipped multiple systems to both advanced packaging lithography and laser annulant customers. Our non GAAP gross margin was 35.5%. Non GAAP operating income was a loss of $4,800,000 and our non GAAP EPS came in at a loss of $0.14 We ended the quarter with $237,000,000 in cash and short term investments. We are focused on restoring top line growth and returning to profitability by improving our gross margins and carefully managing our expenses. At this time, I'll provide an update on our markets and growth opportunities, and then Sam will provide more details on the financials.
When we look at the macro environment influencing capital equipment, there are cyclical downturns across a few markets. Smartphone sales growth has slowed, memory prices have declined, and automotive softness is also impacting the tech sector. In fact, wafer fab equipment spending is forecasted down this year anywhere between the mid teens to 25%. It is our belief that while these cyclical slowdowns have a temporary effect on capital equipment sales, in the longer run, megatrends such as cloud computing, improvements in GPUs and the refresh cycle brought about by five gs provide tailwinds to the industry. We have aligned our technology investments to these megatrends.
We have engaged with our customers to solve the tough materials challenges and expect to benefit in the next industry upturn. You will recall our four focus areas for growth are EUV mask blanks using ion beam deposition, advanced front end semiconductor with laser anneal, VCSEL manufacturing using MOCVD and advanced packaging lithography. Looking at the EUV mask blank opportunity, trends such as artificial intelligence, high performance computing and cloud computing are all drivers of Moore's Law, which in turn is a driver of EUV. The proof points for EUV are happening now. TSMC has announced risk production of their five nanometer process, which utilizes EUV lithography.
And they have released their design infrastructure, which enables five nanometer system on chips designs for next generation, high performance computing applications. Likewise, Samsung has also announced they have completed five nanometer EUV development and are ready for customer samples. Accordingly, ASML has recently indicated they're on track to ship 30 EUV lithography systems in 2019 and another 33 in 2020. And in addition to their existing EUV logic customers, they are seeing DRAM customers express interest in EUV as well. We mentioned on prior earnings calls that we have been building backlog in EUV mask blank systems.
These are extremely low defect ion beam deposition systems, which are required to manufacture mask planks for EUV lithography. During Q1, we received our fifth order for production capacity, and I'm happy to announce that we shipped the first of these systems in April as planned. We believe the market opportunity is between 20,000,000 and $50,000,000 per year. We are working very closely with our customers and conducting road map discussions as this technology continues to evolve. In laser annealing, we continue to make good progress with our customers.
During the quarter, we shipped additional systems to a leading foundry for a process step at a very advanced node. The LSA or laser spike anneal demand we are experiencing is consistent with industry trends. The same trends that are driving EUV lithography are driving laser annealing. PECO's LSA leverages our unique dual laser architecture to offer exceptional temperature control and low thermal stress. These process advantages are becoming increasingly important at today's advanced nodes.
We believe this market potential is about $100,000,000 We continue to work with our customers for current production requirements as well as potential future applications. And now an update on our MOCVD technology applied to the VCSEL market. As you know, we have been enhancing our Turbotis platform to produce high performance epitaxial VCSEL stacks. We believe our new product has an advantage over our competition. In our environment, we have validated our product's superior performance, and we are currently working with multiple customers to place a beta tool in their facilities.
This market today is absorbing the capacity that was recently added for the smart smartphone facial recognition application. However, we believe that additional three d sensing applications such as world facing sensors and automotive LIDAR will generate the need for some time. This is a potential market opportunity of 100,000,000 to $150,000,000 per year. Another source of growth for V Go is advanced packaging. As consumer demand higher performance, device manufacturers are responding by utilizing advanced packaging techniques to integrate components in very close proximity.
This wafer level integration improves performance and power consumption. An example of advanced packaging is the well publicized application processor that Apple has been using for years in their mobile devices. In this approach, logic and memory are assembled together in one system in package device. Our advanced packaging lithography systems play an important role in many advanced packaging applications, such as fan out wafer level packaging, fan in wafer level packaging and copper pillar interconnects in flip chip packages. We have had recent traction with our lithography system at OSATs for a variety of applications, including GPU manufacturing.
We also had recent order and shipment activity for a copper pillar application in high bandwidth memory with a new memory manufacturer. These repeat technology investments have come at a time when memory capacity is being carefully scrutinized. This market has the potential to be somewhere between 75,000,000 and $100,000,000 annually. In summary, we continue to remain focused on three priorities throughout 2019. The first is innovation.
We continue to invest in new products and applications to help our customers solve their toughest materials engineering challenges. The second is to continue to work penetrating new markets and accelerating our growth in EUV mask blanks, front end semiconductor with laser and needle, VCSEL manufacturing and advanced packaging lithography. And lastly, we are focused on returning to profitability. We are doing this by improving our gross margins and managing our expenses. With that, I'll turn it over to Sam for further details on the financials.
Speaker 2
Thanks, Bill, and good afternoon, everyone. I will be discussing our non GAAP financial performance. You can find the detailed reconciliation between GAAP and non GAAP results in the press release and on our website. I'll start with an administrative update and then move to the financials. In line with broader semiconductor equipment industry practice, beginning in 2020, we will also discontinue providing our quarterly bookings results.
We have found over the years that bookings can be well tied and may not serve as the most reliable indicator of near term business performance. We will, however, continue to provide quarterly bookings information for the rest of 2019. With that said, Q1 bookings were $107,000,000 and backlog at the end of the quarter was $295,000,000 We saw strength in scientific and industrial orders driven by our data storage customers. We also received multiple advanced packaging photography system orders and another newly mass blend system order as Bill mentioned. And now turning to revenue details.
Revenue for the quarter was $99,400,000 This was above our guidance midpoint driven by strength in our services business. Scientific and industrial market made up 30% of the total revenue driven by shipments to our data storage customers as well as several iron beam sputtering systems shipped to our optical customers. Advanced packaging, MEMS and RF filter market made up 23% of overall revenue driven by multiple AP lithography systems sold for high bandwidth memory as well as GPUs and other applications. Front end semi market plus 23% of revenue driven by multiple LSA systems sold to a leading foundry for an advanced node. LED lighting, display and compound chimney was 14% of overall revenue with almost no contribution from commodity LED equipment sales as expected.
By region, The U. S. Was 33% of overall revenue, EMEA was 18% and China was 10%. Rest of the world, which includes Japan, Taiwan and Korea for us was 39% of overall revenue. As we have highlighted before, we expect China to remain a small portion of our overall revenue going forward.
Now turning to non GAAP operating results for Q1. Gross margin of 35.5% was toward the higher than before guidance driven by tighter spending controls. OpEx for the quarter was $14,000,000 Our cost reduction efforts were achieved a quarter earlier than previously communicated. Tax expense for the quarter was $500,000 Net income was a loss of $6,400,000 and EPS was a loss of $0.14 on a diluted share count of 47,000,000 shares. Now moving to the balance sheet and cash flow highlights.
We ended the quarter with $237,000,000 in cash and short term investments, of which $66,000,000 were held offshore. Cash flow from operations was negative $22,000,000 primarily due to working capital investments, biannual debt interest payment and a non GAAP net loss of $6,400,000 Although the cash balance declined during Q1, we expect to generate positive cash in Q2. Accounts receivable increased to $75,000,000 due to stronger shipment profile in the third month of the quarter and accounts payables dropped to $36,000,000 as incoming inventory receipts decelerated. As a result, inventory declined to $138,000,000 Long term debt on the balance sheet was recorded at $290,000,000 representing the carrying value of three forty five million dollars in convertible notes. And lastly, our CapEx during the quarter was $2,200,000 Now turning to Q2 guidance, which is non GAAP unless GAAP is specifically mentioned.
Q2 revenue is expected between $90,000,000 and $110,000,000 Gross margin is expected between 3739%. OpEx is expected around $30,000,000 Operating income is expected between a loss of $7,000,000 and income of $3,000,000 GAAP EPS loss is expected between $0.37 and $0.27 per diluted share. Non GAAP EPS is expected between a loss of $0.18 and income of $02 per diluted share. And now for some additional color beyond Q2. At this time, based on our backlog and current visibility, we see Q3 sales tracking above Q2.
We also see our gross margins further improving due to favorable product mix. For the 2019, we see top line improve over the first half by roughly 10%. We continue to target gross margin of 30% by the end of this year. And with that, Bill and I will be happy to take your questions. Operator, please open the line.
Speaker 3
Thank
Speaker 0
We'll take our first question from Brian Lee with Goldman Sachs.
Speaker 4
Hey guys, thanks for taking the questions. It looks like on the four focus areas, Bill, that you outlined here, the TAM, it totals as much as $400,000,000 Can you talk to how much of that is already in play with tools that you have in the field and the tool of record? And then related to that, I guess, how much is still to come? Maybe an update on evals that you have in the field, how close you are on some of those turning into beta tool agreements and ultimately deals?
Speaker 1
Sure, Brian. Let me kind of start at the top with EUV. You know, we see that to be kind of in the twenty to fifty million dollar market. We are the leader in that space today. And so that we expect to start hitting our financials q two.
So that would be be incremental, and that's in really good position. Laser and needle in the front end, we are a player there, and we are gaining some share today. But we are currently a player in that in that market. Moving to VCSEL, that's kind of a $100,000,000 kind of sized opportunity where we do not play today. And so, as I mentioned, we have a tool that we've developed for this application.
We're getting great results in our lab. We are close to, landing a beta customer here. We're working with multiple of them right now and expect, expect that to be done here in the near term. So, that would be kind of in the incremental, opportunity. And then in advanced packaging lithography, in that opportunity, we do have a leading market share and we are developing a product to maintain that strong position.
So I would characterize it as EUV is incremental and strong, VCSEL would be incremental and LSA and advanced packaging would be existing markets that we compete in today.
Speaker 4
Okay. No, that's helpful. And then
Speaker 5
Brian, would also like to add that beyond the growth opportunities, we are a very strong player in data storage and that market is also very strong and at least here it's growing.
Speaker 4
Okay. No, great. I appreciate that additional color Sam. Maybe just with EUV you're specifying Q2 here. How I mean I guess is there any sort of granularity you can provide on the VCSEL opportunity in terms of timeline and kind of what scale of that TAM you think is actually applicable based on the number of engagements you have across the customer set?
And then just housekeeping, I'll throw this in there and pass it on. I don't know if I missed it, but any updates on the security breach you guys had talked about last quarter? Any additional thoughts around the cost related to that?
Speaker 1
Okay. I'll I'll jump in on your on your VCSEL question. So, typically, you know, from the time of placing a beta tool, to having those that first tool revenue is probably as fast as six months and maybe as long as twelve months. So maybe somewhere in the middle, that would be about, nine months, to have meaningful revenue or to have revenue on the first tool. And it's probably a similar time frame to have meaningful revenue as well.
Speaker 5
K. And, Brian, I'll take the question on the security breach. So that investigation, we largely completed that. And we had a public filing, an eight k or something like that in in February time frame. So we have largely completed that.
That cost is behind us at this time. And at this time, we are just cooperating with any of the investigative or government authorities that might be interested to investigate it in further. But at this time, the cost is largely behind us.
Speaker 4
Okay. Thanks guys.
Speaker 0
Martin. We'll move next to David Dooley with Steelhead Investments.
Speaker 6
Thanks for taking my question. I had a couple. You mentioned you thought the second half would be up 10% from the first half as far as revenue goes. Just from a macro perspective, could you talk about which areas you expect to contribute to that 10% growth?
Speaker 1
So sure. We're seeing some strength in logic, particularly in these technology transitions. With EUV, we have exposure with our mass blank tool I just spoke about, as well as our laser spike anneal tool at five nanometers. And then as Sam previously mentioned, in the cloud, we do have some exposure in data storage with their technology transitions with with HAMR and and MAMR. And so that seems like it's progressing really well.
So I think those are the big growth areas. And as you know, we don't have a lot of exposure in the memory market as well.
Speaker 6
Okay. And as far as the LSA business, you mentioned that you're shipping tools into advanced nodes. It's been some time, I think, since you've done that at a major foundry or logic customer. Perhaps you could talk about why it is that you've been reinserted there and what the potential opportunity and do you expect other customers beyond the first customer here at AdvanceNotes?
Speaker 1
Sure, David. I think the last win that UltraTech had was, I'd say, 28 nanometers. And we've now been able to penetrate at these advanced nodes at five nanometer and beyond. And what we're seeing is our ability to have very fine temperature control and stability with our dual laser system is really seems to be be well liked by by our customers, and we are engaged with with more than one at this time. And working to since we got our foot in the door, we were working to win more applications at at the current customer as well as new customers as well.
So it's kind of a a beachhead position we have.
Speaker 5
David, I'd also like to add that, you know, we won this major customer of the five nanometer node, and then we are also will be on the development tool of record for the following node as as well. Okay.
Speaker 2
That's good
Speaker 6
to hear. Now as far as advanced packaging goes, you know, it just seems like there's a lot of OSATs and IDMs that are making incremental investments and talking about their product road maps in this area, such as TSMC and Intel and Samsung and others. And I'm just wondering, do you see an acceleration in the size of this overall market? I think you mentioned the market was like roughly €100,000,000 which is what I seem to recollect it's been for some time. So maybe just frame what you expect to happen to this market and help us understand what you're seeing as far as the customer base broadening out.
Speaker 1
Sure. So I I would say, you know, historically, it's really been strongly driven by smartphone demand for the last, period of time. And certainly, we're seeing some headwinds in smartphone demand, which is definitely definitely big big wins at us. But you're right though that we are seeing new applications come on with o sets, with different graphic processor units applications, as well as applications in DRAM with high bandwidth memory. So and then also many of these other customers that you mentioned have their own various integration schemes.
So, you know, we we see the smartphone is is a kind of a big piece of the current demand, but it does seem that there are new applications being developed that would that would continue to show this business growing, certainly for the long term, but even in the current position.
Speaker 6
And the large foundry customer that has purchased multiple tools in the past, Is there an expected rekindling of demand from that customer given that it's seven and five nanometers, you know, there's six or seven customers rather than just one?
Speaker 1
Good question. I don't wanna get into too too specifics here too much specific here, but a lot of their business is driven by or maybe driven by smartphone demand, which is soft at this time. And so so their our business with them is soft as well.
Speaker 6
Thank you.
Speaker 1
Okay. Thank you, David.
Speaker 0
And we'll move next to Gus Richard with Northland.
Speaker 7
Yes, thanks for taking the question. On the MOCVD business, is what remains still mostly gallium nitride or are there other applications?
Speaker 1
Hi, Gus. Yeah. They're both gallium gallium nitride as well as arsenic phosphide opportunities. And so the the tool that we're developing for the photonics market is really an arsenic phosphide tool to compete in that $100,000,000 market. We don't have a strong position today.
So that would include VCSELs, edge emitting lasers, red, orange, yellow, specialty LEDs and the like as well as micro LED. And then really the the GaN opportunity for us would be in power electronics, GaN on silicon power electronics. And down the road, opportunities in RF for kind of greater than 20 gigahertz millimeter wave type RF five g applications. It will be for GaN. Got it.
Speaker 7
Got it. And I've recently heard some other folks talking about micro LED, at least some development going on. Is that still a ways away before seeing revenue opportunity for you all?
Speaker 1
We are because we are engaged with many of the the players in the in the display space, and they are working through technical challenges. Some of those technical challenges are driving new performance requirement in our MOC epitaxial growth, which is good for us. But there are also system level integration challenges, like transferring the LEDs, etcetera. And so I think you're going to see some first adoption of, say, mini LEDs, of larger sized LEDs. But true micro LED displays, I think, are a few years out still.
But there's still still a fair amount of activity ongoing in that area. All right. Thank you.
Speaker 7
And then on MRAM, I'm noticing an increased level of development activity. I don't think anybody's reached production at this point. You didn't mention it in your prepared comments, and
Speaker 1
I was just wondering what sort of
Speaker 7
activity you're seeing, in the MRAM market.
Speaker 1
Yes. So we are, we are working with a partner here, and we have seeded a number of tools at all the players that are working in in MRAM. And, we're kind of in a position to see, how those, orders materialize, once their customers develop the applications.
Speaker 7
Got it. Okay. But still, when when do you think that might, contribute to revenue?
Speaker 1
So in this in MRAM, we're actually the opposed to selling a complete multimillion dollar system, we're supplying a key component or an expensive component, but a key component to the system. So the revenue will not be as as significant as on the entire tool. Just wanna be really clear about that. Oh, but I think that it is a good it's good business, but it's not a top line growth.
Speaker 5
Guess I'd like to add along with what all Bill said is that, you know, along with our partner, a capital equipment partner, we are in a full position on the MRAM side between us and the partner. They provide the full tool and we provide the critical sub assembly like Bill just said. So we our position together is very strong and we we wait for the industry to to pick up over time here as things go into production.
Speaker 2
But that's that's the way we are participating in this market.
Speaker 1
I got it. I understand. Alright. Thanks so
Speaker 2
much for taking the questions.
Speaker 1
Thanks, Gus.
Speaker 0
We'll move next to Mark Miller with The Benchmark Company.
Speaker 8
I just wanted to talk about your guidance. You're indicating you believe you'll be or at least your goal for the fourth quarter is 40% non GAAP gross margins. Is that correct?
Speaker 5
That's true, Mark. Yes.
Speaker 8
Okay. I also want to talk about data excuse me?
Speaker 5
No. Go ahead, Mark.
Speaker 8
Data storage, which was strong last quarter, you said it's growing. I assume because Nidec came out last week and indicated that their spindles their motor sales will be lower. I assume that's desktop and laptop considerably lower. So you're anticipating the cloud or the nearline drives, which have more platters to compensate and actually provide growth. When do you see that picking up?
Speaker 1
Good question, Mark. We've actually seen our business, from an order standpoint picking up for some number of quarters, as we've been saying. And all of our equipment is used to make the very steps of making ahead of the drive. So as drives are decreasing, actually, not only heads per drive are increasing also, and total number of heads is increasing. So our business is doing doing very well there.
And we're also exposed, as I mentioned, to technology transitions with HAMR and MAMR and working closely with our customers to make that a success.
Speaker 8
And specifically, I know your tools are used in the reader for leads hard bias deposition. For the HAMRMAMR, what is the application there for those structures for the writer?
Speaker 1
They're actually similar type types of steps, just different requirements.
Speaker 8
Oh, it's a deposition. It's a deposition rather an edge tool.
Speaker 0
Okay. Is that
Speaker 8
Alright. Well, thank you very much.
Speaker 1
Thank you, Mark.
Speaker 0
We'll move next to Patrick Ho with Stifel.
Speaker 3
Thank you very much. Bill, maybe if you could add a little color on your comments regarding the LFA and additional shipments this past quarter. The industry is pushing more aggressively to five nanometers. Are these additional shipments as part of this aggressive push for the same application? Or have you broadened your reach with this customer to additional applications that drove some of these increased shipments?
Speaker 1
Yeah. That's that's a great question. Yes, we are, shipping, but it's really, as I said, we're still at that beach beachhead one one particular application, unfortunately, at this point. But certainly, we are working very closely with our customers at the next nodes to gain more to broaden our applications, if you will.
Speaker 3
Great. That's helpful. And maybe as a follow-up on to that LSA question, given that you've made this entry back into this key foundry, but the industry itself also continues to push towards seven, five and eventually three nanometers, How do you feel your evaluations are going with other potential foundrylogic customers at these advanced nodes? Is there are there opportunities for additional wins given the wins you had given the win you had on this one customer?
Speaker 1
I think it's a very strong proof point for us, and we are certainly doing demo programs, significant demo programs with other customers. And there is there is generally generally interest for our tool. And we're also working on our next generation product as well. So I think I think we're in a we're in pretty strong position here.
Speaker 5
Yeah. Patrick, I'd also like to add that, you know, for the trailing edge application, for some time, we were expected to see China foundries buying this this tool. And now we are beginning to see that activity pick pick up or beginning to see that, that activity start. So on the leading edge, we are feeling good about this thing. The this this tool in terms of advanced nodes and Bill just said about the next gen tool.
But then at the same time, want to remind investors about the trailing edge, particularly from China, where we are also seeing good bit of activity.
Speaker 3
Great. And final question for me, Sam, maybe specifically for you on the gross margin trends going forward. With the, I guess, the decline of your traditional and conventional MOCVD business out of the way, And I know product mix always has some type of influence. But on a going forward basis, is revenue and absorption the biggest variable as we look at gross margins going forward?
Speaker 5
Yeah. Good question, Patrick. Of course, you know, there are always two or three factors at play here. But going forward, a number of things are coming into play here. First, obviously, with the EUV tool shipping and also data storage, we begin to ship products that for which we have backlog.
So those are all beneficial product mix. So the mix is beneficial going forward. Secondly, you know, the the revenue that declined with the deemphasizing of the commodity LED, all of that created some extra cost. But at this time, we have worked through a lot of that a lot of that cost out. So cost reduction is also playing playing a beneficial impact to the gross margin, although in a smaller way than than the product mix.
And then thirdly, we are looking at growth here. So as revenue growth, overall absorption begins to look better than what it has been doing in the last one or two quarters. So all these three factors are playing and we feel very good about, meeting our gross margin goals as we look forward for the next many quarters here.
Speaker 3
Great. Thank you very much.
Speaker 7
Thanks, Patrick.
Speaker 0
That does conclude our question and answer session at this time. I'll turn the call back over to our speakers for any final or additional comments.
Speaker 1
Okay. Thank you all for attending today. I look forward to giving you an update next quarter as well. Thank you. Thanks.
Speaker 0
This does conclude our conference call for today everyone. We do thank you for your participation. You may now disconnect.