Veeco Instruments - Earnings Call - Q4 2019

Transcript

Speaker 0

Good day, everyone, and welcome to the Vika Instruments Inc. Conference Call hosted Q4 and Fiscal Year twenty nineteen Earnings Call. Today's conference is being recorded. At this time, I'd like to turn the conference over to Anthony Vincidenga, Head of Investor Relations. 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 John Kieran, 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 vito.com.

This call is being recorded by Vito Instruments and your copyrighted material. It cannot be recorded or rebroadcast without Vivo'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 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.

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. 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. I'll be talking you through our financial results and discussing our markets. But first, I'd like to provide an update on our previous Xeon's company transformation. We characterized our transformation in two phases. The first phase, returning the company to profitability, is well underway and includes reducing costs and delayering the company.

As part of the delayering process, we eliminated the COO role when Sam Maheshwari announced his resignation from the company last December. I'm excited to announce that I promoted John Kiernan to the position of senior vice president, chief financial officer as of the beginning of the year. John has been at BPO for twenty five years, leading just about every finance function, and we worked together for the last fifteen years. I'm happy to be partnering with John as we continue through our transformation and prepare the company for growth. Now, I'll take you through our 2019 progress and high level financials, then I'll turn the call over to John for more detailed financial review.

For 2019, our priorities were to innovate, penetrate markets, and improve profitability. Regarding our innovation objective, we executed very well. We shipped multiple I and D deposition systems for EUV mask blank production. We optimized our MOCVD platform for electronics applications and shipped our first data system to a premier compound semi customer. We developed a 300 millimeter single wafer fully automated MOCVD cluster tool and shipped with acceptance to a major front end semiconductor fab.

We updated our advanced packaging lithography product to improve its performance, and we made major enhancements to our laser annealing product to improve our competitiveness at the next dose. Regarding our market penetration objective, we had mixed results. We enjoyed great success in the EUV mask blank market with our Ion Beam Deposition systems. We have promising traction at very advanced nodes with our laser annealing product two semiconductor industry leaders. In advanced packaging, we are still experiencing soft market conditions for lithography products.

And in the photonics market, we are disappointed with weak market condition for VCSELs. And lastly, regarding our objective of returning to profitability. Throughout 2019, we improved our non GAAP gross margin. Our q four twenty eighteen gross margin was 36%, and we exited 2019 at 40.2%. Our non GAAP operating expenses have been declining.

During 2019, we're at $43,000,000 in quarterly OpEx and are now at $38,000,000 at the end of the fourth quarter. We also returned to non GAAP profitability by posting two consecutive quarters of positive EPS in Q3 and 2019. On our balance sheet, our inventory improved throughout the year as well. We opened 2019 with $156,000,000 in inventory and reduced that figure to $153,000,000 by the end of 2019. And now for Q4 results.

We capped off 2019 with solid execution in the fourth quarter. Revenue was $113,000,000 which is above the midpoint of our guidance. We achieved strong revenue in our front end semiconductor market driven by shipments of our EUV mask lines and laser annealing systems. Additionally, sales of our ion beam products in the data storage market remained solid. Non GAAP gross margin was 40.2%, which was in line with guidance.

We are happy to report non GAAP operating income of $7,400,000 resulting in earnings per share of $0.11 Importantly, we generated $14,000,000 in cash and we entered 2020 with positive momentum. Looking at the full year 2019 non GAAP results, our revenue was $419,000,000. During this transformational year, where we lost over $100,000,000 of commodity LED revenue, we were able to generate $5,000,000 in operating income. Our thirteen percent second half revenue growth over first half exceeded our 10% outlook. And as forecasted, we exited the year with 40% gross margin and returned to profitability with positive non GAAP EPS in q three and q four.

Throughout the year, as part of our delayering, we eliminated over 30% of vice president level and above positions, while trimming approximately 7% of our individual contributor positions. This was an intentional approach to our infrastructure reduction and preserves our ability to execute. We also reorganized along product lines with a central r and d organization, which enables us to better allocate our r and d spend to our highest priority projects across the company. This allows us to improve our customer focus and operational efficiency. In addition to prioritizing r and d spend on projects with the highest financial and strategic importance to the company, we are evaluating our existing product line to a similar set of criteria.

You will notice in our financials an asset held for sale, which is an indication of our intent to divest a certain non cloud product line. At this time, I would like to address the recent coronavirus outbreak. Our priority is the health and well-being of all our employees and stakeholders, and we hope the situation is resolved quickly. In the interim, we are monitoring the situation carefully and have implemented appropriate travel restrictions. With that, I will turn the call over to John to review the financials, then I will provide a market update.

Thanks, Bill, and good afternoon, everyone. Today, I will summarize our revenue by market and geography, cover our P and L, balance sheet and cash flow, and then take you through our outlook for Q1. I will discuss non GAAP financial data and would encourage you to refer to our reconciliation between GAAP and non GAAP results, which you can find in our press release or at the end of the quarterly earnings presentation. Revenue for the quarter was $113,000,000 The front end semiconductor market was 35% of our revenue due to multiple EUV, mask blank and laser annealing systems. The scientific and industrial market made up 28% of our revenue and was led by I n t system shipments to our data storage customers.

LED, lighting, display, and compound semi was 23% of revenue. We had multiple wet etch and clean system shipments to RF device customers for five g related power amplifiers. Revenue in this market also included the sale of slow moving LED related inventory. Advanced packaging, MEMS and RF filter market made up 14% of our overall revenue, reflecting the continued softness we are experiencing in this market. By region, rest of world, which includes Japan, Taiwan, Korea, and Southeast Asia, was 48% of overall revenue, driven by our EUV mask blank and LSA systems.

US was 23%, which included sales to the data storage market. China was 22% of overall sales, mainly from multiple wet etch and clean systems. And finally, EMEA was 7% of overall revenue. Now turning to non GAAP operating results. Fourth quarter gross margin of 40.2% was flat from Q3.

We are happy that we are exiting the year at 40% as forecasted, but please note that in selling off a portion of our slow moving inventory, there was a slightly negative impact to gross margin. We do expect to continue to sell off the slow moving inventory in 2020, which may provide gross margin headwinds. However, we are still targeting 40% gross margin or better going forward. OpEx for the quarter was $38,000,000 and favorable to our forecast. We are beginning to see the impact of the infrastructure cost reductions ahead of our target plan.

Tax expense for the quarter was approximately $600,000 Net income came in at $5,400,000 with EPS of 11¢ on a diluted share count of 48,000,000 shares. Our GAAP net loss widened in Q4 principally because it included a $21,000,000 non cash charge associated with our investment in VASCEPA. As of 12/31/2019, we determined there were certain impairment indicators which led us to conclude that our investment was fully impaired. And now, I'll provide a few full year financial numbers. For fiscal twenty nineteen, depreciation was $17,300,000 amortization was $17,100,000 and our equity comp expense was $15,300,000 Capital expenditures for the year were $10,900,000 Dilution rate from employee equity was approximately 1% of outstanding shares.

Cash interest expense on our debt was $9,300,000 and cash taxes were $2,900,000. At the end of the year, we had federal NOLs of $271,000,000, which are fully reserved. We ended the year with Q4 bookings of $110,000,000 and backlog of $268,000,000 As we've communicated throughout the year, starting next quarter, we will no longer be providing quarterly backlog and booking results. Now, moving to the balance sheet and cash flow highlights. We ended the quarter with cash and short term investments of $245,000,000 Cash flow from operations was $16,000,000 due to earnings in the quarter and $7,000,000 reduction in working capital.

Accounts receivable decreased due to the timing of customer payments resulting in thirty six days of sales outstanding, which is lower than our historical average. While we lowered our accounts payable resulting in twenty eight days of payables outstanding. Inventory declined $2,000,000. We made progress selling slow moving inventory in q four, which has been a focus of ours for some time. And given the order activity in this area, we expect to continue to monetize this inventory throughout 2020.

Long term debt on the balance sheet was recorded at $300,000,000 representing the carrying value of about $345,000,000 in convertible notes. And lastly, our CapEx during the quarter was $2,700,000 Now turning to Q1 guidance. There is still a significant level of uncertainty from coronavirus related travel restriction and factory shutdowns in China. Accordingly, we have widened the low end of our guidance range to accommodate this uncertainty. Q1 revenue is expected to be between 95,000,000 and $120,000,000 with non GAAP gross margin between 3941%.

We expect non GAAP OpEx to be around $37,000,000 GAAP EPS is expected to be between a loss of 24¢ and a loss of 1¢ per diluted share. Non GAAP EPS is expected to be between breakeven and 22¢ income per diluted share. And now for some additional color beyond Q one. At this time, based on our current visibility, we see Q2 revenue trending similar to or slightly higher than Q1. Please note that this Q2 outlook does not incorporate any potential coronavirus impact, which is unknown at this time.

Additionally, we are ahead of plan with OpEx reduction and reiterate that at current revenue levels, we expect non GAAP OpEx to decline toward our target of $36,000,000 per quarter by q three. And with that, I'll turn it back over to Bill. Thanks, John. And now for a business update. We are seeing positive indicators in semiconductor markets.

Wafer fab equipment spending is forecasted to increase in 2020 to somewhere around $50,000,000,000 This capacity increase is driven by leading node semiconductor fabrication and advanced packaging in areas such as artificial intelligence and high performance computing, five g wireless infrastructure deployment, cloud computing and big data, and autonomous driving. Generally speaking, these market trends and the capacity our customers require bode well for our technologies like ion beam, laser annealing, lithography, and MOCVD. Most specifically, in our front end semi market, we are experiencing strong demand for ion beam deposition systems from our EUV mask line customers. This is consistent with recent messaging from ASML, which reflected 26 EUV lithography scanners shipped in 2019, plans to ship 35 systems in 2020, and capacity improvements underway to ship between forty five and fifty systems in 2021. We also continue to do well with our laser annealing products in the front end semiconductor market.

In the fourth quarter, we recognized revenue on multiple laser annealing systems at leading edge nodes. As these customers continue to ramp these leading edge nodes and begin to invest for their next nodes, we hope to gain share given our laser annealing advantages and ability to meet our customers' advanced requirements. In our advanced packaging, MEMS, and RF filter market, we achieved pro production tool of record status at a major OSAT for a fan out wafer level packaging application with our lithography products. We are encouraged by this accomplishment as it validates our lithography technology and ability to compete in this market. The lithography portion of the advanced packaging market has been soft for well over a year.

However, we believe the softness is a result of overcapacity and the drivers such as AI and high performance computing will persist and in time this market will resume growth. We are largely complete with our new lithography system targeted at advanced customers and packaging. We improved the product's field size, uniformity and depth of focus, and we expect to ship evaluation systems to leading semiconductor manufacturers in the coming quarters. In the compound semiconductor market, VCO has a long history of technology leadership in MCVD and offers a breadth of products to address many applications. We have an automated gallium nitride single wafer cluster tool, which can accommodate wafer sizes up to 300 millimeter.

This will be used for power and RF device manufacturing. And we recently announced Lumina, our arsenide phosphide platform, which is ideally suited for photonics applications. The Lumina system is currently being evaluated by a leader in photonics, and we are achieving excellent feedback. Additionally, during the quarter, we received an order from another customer for the Lumina system. We are confident in the performance of our entire MOCVD portfolio, and we are ready with best in class technology solutions to address the needs of the photonics, I g r f, power, and micro LED display markets.

And finally, in the scientific industrial market, the data storage dynamics driven by cloud computing and big data continue to be positive for Vivo. Sales to our data storage customers were again strong in the fourth quarter, and we expect sales to remain strong at least through the 2020. Looking ahead to our priorities in 2020, we are focused on prioritizing r and d spend on the projects that are strategically and financially most impactful to the company and strengthening our foundational businesses. We also seek to extend our core technologies into the front end semiconductor and photonics and RF markets. And we are starting to see the operating leverage benefits of actions taken to improve gross margins and reduce our operating expenses.

We expect to continue to reduce operating expenses to deliver strong gross margins throughout 2020. And with that, John and I will be happy to take your questions. Operator, please open.

Speaker 0

Thank you. At this time, if you do have a question, please email us by pressing 1 on your touch tone phone. Again, that will be star 1 for questions. We'll pause for just a moment. We'll hear first from Gus Richard with Northland.

Speaker 1

Yes. Thanks for taking the question. Congratulations on this quarter. Could you give a little more color on the second Illumina order? Is that for the full application or, you know, know, edge emitting lasers?

Yeah. You know thanks for

Speaker 2

the question, Gus. You you know we have placed

Speaker 1

the beta in the field back in 2019. We're getting excellent results for not only VCSEL Slacks, but also other photonics applications. We've been very good feedback from that customer. Also, we're sharing our VCSEL and micro L. E.

D. Data with several of the important end customers, and they've been impressed with the results as well. And to your question, yes, we did receive a straight up purchase order from a second customer, and our understanding is that is for a VCSEL application. So that's that's very positive. So although nineteen was got it.

Okay. And then on the E. U. V. Side, it it looks like you're shipping roughly one at the quarter.

Is is that the kind of run rate we should expect going forward or given

Speaker 2

the full function we usually should should

Speaker 1

back up a little bit faster?

Speaker 2

The the shipment profile is going to

Speaker 1

be a bit lumpy. We ended up shipping four tools in 2019. But in any given quarter, we could be shipping zero, one or two. In our backlog going into 2020 here, we have three tools in backlog for the year. Got it.

And then on L. A, can you can you kind of split out for us what how much is leading edge, you know, let's say, nanometers, seven nanometers and below, and how much is, you know, is 28 nanometer and and more front customer related? Yeah. I don't have that exact number right at the tip of my finger here. But I would say, just looking back through 2019, I would say about 80% is is at the leading edge nodes and maybe 20% is at the at the 28 nanometer nodes approximately.

Got it. And then I guess the the last one for me, obviously, the coronavirus is is a wild card.

Speaker 3

Can you give a little bit

Speaker 2

of a sense as to what this

Speaker 1

what is in revenue? What what are you selling in that in China? Is it all of those systems? Is it advanced packaging? And, you know, how many of your customers in that in the, you know, near one or that that province?

Yeah. Our understanding that all of our our customers' facilities actually are open today. If you look back over 2019, our China exposure was 10 to 20% of revenue. Specifically, here in the first quarter, it's about it's about 10% of revenue. We are selling a mix of products, some MOCV equipment, as well as some wet clean and etch products that are mixed in the in the first quarter.

Got it. That's it for me. Thank you so much. Gus.

Speaker 0

We'll hear next from David Dooley with Steelhead Securities.

Speaker 2

Yes. Thanks for taking my questions. I have a couple. Just first one, you mentioned that you had some slow moving or over inventory that you were selling natural headwinds. Could you just give us a little bit more detail on how much inventory dollar wise do you have to slow moving or how are we gonna classify that?

And what is roughly the impact that you saw in the December or in the March from selling over inventory?

Speaker 1

Sure. Sure. We had mentioned in prior calls that we had about $25,000,000 of what was categorized as of slow moving inventory. We began to make progress, and we have been that has been an ongoing focus for for us. And we did make progress in 2019.

We did sell off about $5,000,000 of of inventory. We've made progress in terms of also in order activity recently and our current expectation to monetize this inventory throughout 2020.

Speaker 2

And so that's the impact on gross margins?

Speaker 1

Yeah. So the yes, we did mention that selling off this slow inventory provides some headwinds to gross margin. We see it in the one to two percentage point range.

Speaker 2

Great. As far as your advanced packaging business, did you I was little confused. Did you mention that you were one of the within the flat for for photography on a fan out line? Is that could you just repeat what you said there?

Speaker 1

Yeah. You you have that that correct, Dave. We said we were a pro P. T. O.

R, had had an OSAT for a fan out wafer level packaging application.

Speaker 2

Okay. And who who is the the comparable competitor there?

Speaker 1

I believe it would be Canon. Okay.

Speaker 2

And as far as your big initial customer that was or a guy who kind of embedded the fan out package, certainly on their conference call, they're talking about a big increase in CapEx for basket applications. I'm not sure how much is directed at fan out or lithography. Would expect to see orders from that customer sometime this year, or or has there been any indication that things improving there for your types of pieces of equipment? Yeah.

Speaker 1

We are in very close contact with with that customer, as you might expect. Our visibility in lead time is is not very long for this equipment, so we wouldn't actually have have visibility that far out. But we we certainly hear and see expectations of the lithography market picking up in the second half of the year. We just don't have visibility for that given given our short lead times.

Speaker 2

Okay. And talk to me on the top line. Is there a way to quantify how significant this is for you? Will you be shipping multiple approvals on a quarterly basis or if you just can't help us towards initially or any sort of place that you can give us around that would be much appreciated.

Speaker 1

Yeah. Thanks. Thanks, Keith. Hey, I would say it's probably what we can see is it's probably just a a smaller handful of tools throughout the year. Obviously, it's a same issue with given our lead times.

We're we're not giving a lot of visibility into their their longer term demand cycles.

Speaker 2

Okay. And then final thing from me is, what if you could help me understand how important five g ramp is for you guys. I I know it's impacted multiple product lines. But as far as where you will make the most significant movement of the deal, which which areas would that be?

Speaker 1

Yeah. We're actually seeing pretty broad demand from five g. You know, first implementations of five g we're seeing are really less than six gigahertz, where the equipment sets are fairly similar to to four g. We're also seeing some interest in millimeter wave, that's a greater than 20 gigahertz opportunities. And for those opportunities, that would really be MOCG opportunities for us.

And we are still starting to see some early positive signs there. But but I would say, we are seeing broad demand for many of our products from many customers really driven by five g. I mentioned power amplifiers. We have an M. O.

C. V. D. Player there. We're also selling having order activity discussions on web processing equipment, I n d match, and lithography tools.

And, in the RF filter space, we're seeing opportunities in web processing and our A. L. D. So I would say that we're when I look to the future, you know, this could be driving the business longer term, but I would say it's really very early. Thank

Speaker 2

you.

Speaker 0

We'll go next to the Benchmark Company's Mark Miller.

Speaker 1

You indicated that the,

Speaker 3

inspected data storage business do remain strong throughout 2020. Is that predicated on a pickup in terms of orders from memory customers and end customers later in the year?

Speaker 1

Hi, Mark. Good good question. It's actually not frontier on that. We have a very good opening backlog position in our data storage business, and we so we we feel pretty confident in our in our view from data storage in 2020. Is this still kind of remain strong from an order standpoint?

Although, as the year unfolds, we'll see see if the the order activity kinda remains strong as of now.

Speaker 2

Some of our people who

Speaker 3

are talking about five g are talking about acceleration in terms of their equipment orders later this year. Do you expect a similar acceleration as we go towards 2021 for for five g opportunities?

Speaker 1

Yeah. As I as I just just answered a similar question. We are we are seeing broad opportunity in a lot of our equipment sets from a number of customers. And they're really just starting to be some early discussions, some demo work, some quotations going out. The activity is certainly increasing.

I wouldn't be surprised if it does pick up, but I'm really not quite ready to to call a big pickup in five g in the second half of the year yet. Thank you.

Speaker 2

Thank you, Mark. Patrick Ho with Stifel.

Speaker 1

Thank you very much. Bill, maybe just a follow-up on the the advanced packaging lithography side. You mentioned some new wins there. Right now, as that marketplace remains in the low, this is actually a great time for you to do evaluation. But how do you see the, I guess, the buying when the business picks up at the end?

And what I mean by that is, typically, when these guys stop buying, they'll just build capacity and then go back to things that they're used to. Do you see when this market turns, I guess, more value wise for your new system versus the old systems? Yeah. Yeah. They said we did win an advanced packaging with the application at at an OSAT.

And we also made some significant investments in 2019 in a new lithography platform with better resolution, better field size, and the like. And so that's the focus. And we are working with the the leaders in the industry to place eval tools right here in the coming months and quarters. So I think we we should be well positioned when this market does come back with a market leading product to to hold our leading market share. Okay.

And maybe as my follow-up question in terms of LSA, obviously, you're in the very leading edge with some of your top tier customers on that front. They're also now starting to do evaluation and design work for their next generation nodes. How do you see the application increases, you know, as you go from node to node in terms of LSA? And, basically, what I'm I'm getting is the capital intensity for LSA as you migrate down their nodes. Well, we're working with the leaders in the industry on their on their next nodes.

And we actually are very excited to see that as the the nodes become finer, the the the need for our laser cycle meal technology increases. We think we have an opportunity to go from one step today to two and and maybe even three So we're working very very closely with those customers on those those emails right now. Great. Thank you very much.

Thank you, Patrick.

Speaker 0

And with no other questions at this time, I'll turn things back to you all for closing remarks.

Speaker 1

Thank you, operator, and thank you all for joining the call today. We are excited to be entering 2020 with positive momentum and a more focused and streamlined company positioned for success. Have a great evening.

Speaker 0

And that does conclude today's conference.

Speaker 2

Thank you all for joining us.