Veeco Instruments - Earnings Call - Q4 2020
February 11, 2021
Transcript
Speaker 0
Good day, and welcome to the Veco Instruments Q4 and Fiscal Year twenty twenty Earnings Call. At this time, I would like to turn the conference over to Head of Investor Relations, Anthony Bensavanga. Please go ahead, sir.
Speaker 1
Thank you, and good afternoon, everyone. Joining me on the call today are Bill Miller, Chief Executive Officer and John Kiernan, our Chief Financial Officer. Today's earnings release is available on the 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 Veco Instruments and is copyrighted material. It cannot be recorded or rebroadcast without Veco'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, including as a result of the COVID-nineteen pandemic. These factors are discussed in the business description, management's discussion and analysis and risk factors 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 call over to Bill for his opening remarks.
Speaker 2
Thank you, Anthony. Good afternoon, everyone, and thank you for joining the call. I hope you and your families are well. I'm excited to talk to you today about the strong progress we've 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'm proud of what our Vika 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 and D and service to support multiple evaluation systems, are positioning BCO for our next phase of growth and value creation in semiconductor and compound semiconductor markets. Looking at our full year highlights. 2020 was a remarkable year of improvement for Vico. Revenue for the full year was $454,000,000 compared to $419,000,000 in 2019. Our gross margin improved by nearly five percentage points to 43% in 2020.
As a result of our reorganization and expense management, we reduced operating expenses to $144,000,000 in 2020 from $156,000,000 in 2019. From an overall profitability perspective, we achieved $52,000,000 in non GAAP operating income and reversed our diluted non GAAP EPS from a loss of $03 in 2019 to a profit of zero eight six dollars in 2020. These results drove $43,000,000 in cash flow from operations. Once again, the BQ United team did an amazing job focusing on success and executing in a challenging environment. Now for a look at our Q4 twenty twenty highlights.
Q4 marked another solid quarter of execution, driven by strength semiconductor and compound semiconductor markets. Revenue came in at $130,000,000 which was above the high end of our guidance and diluted non GAAP EPS came in at $0.30 which was at the midpoint of our guidance. Our gross margin came in at 41% and we achieved non GAAP operating income of $18,000,000 In addition, we generated $15,000,000 in cash flow from operations and increased our cash and short term investments by $10,000,000 John will provide more details on the financials in just a few minutes. We are optimistic about our growth opportunities in 2021. Market drivers such as semiconductor, five gs and data center demand are all trending positively and are aligned with Vico's near term growth objectives in laser annealing, five gs RF and data storage applications.
And our outlook for 2021 is supported by our backlog. As we look out beyond 2021, semiconductor demand is growing. And as such, we evaluated options to increase production capacity for our laser annealing systems. After considering a range of alternatives, we decided investing in new facility offers the best solution. We are excited about the growth opportunity for our laser annealing product and we'll be sharing more details on this in the near future.
On a related note, we are also proud to announce that we received a multisystem order for our laser annealing product from a leading semiconductor customer for a second application at an advanced logic node. This further validates the capability of our laser annealing technology and provides momentum as we enter 2021. And with that, I'll turn the call over to John for a review of the financials. Thanks, Bill, and good
Speaker 3
afternoon, everyone. Today, I will be discussing non GAAP financial data. I 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. Before turning to our revenue by market geography, I would like to remind everyone that we modified the way we report revenue by end market to align with the company's evolving strategy. Today, we are providing revenue in our new end markets.
In the Backup section of the earnings presentation, you can find historical data reclassified to the new end markets for comparative purposes. As shown on the slide, our new end markets are semiconductor, which includes front end and back end semiconductor as well as EUV mask blank systems. Our second market is compound semiconductor, which includes RF filter and device applications, power electronics and photonics applications such as VCSELs, laser diodes and micro LED display. Our third market is data storage, which includes equipment supporting thin film magnetic head manufacturing. And our fourth market is scientific and other, which includes research institutions and other applications.
Looking at full year revenue. Our semiconductor revenue was $166,000,000 which represented 36% of the total and a decline of about 6% from the prior year. We expect this market to grow in 2021 on strength in laser annealing systems. Compound semiconductor revenue was $108,000,000 a 26% increase from 2019 and made up 24% of the total, driven by photonics and RF applications. Data storage revenue was $123,000,000 a 47% increase over the prior year and made up 27% of our total revenue as hard disk drive customers added capacity for thin film magnetic head manufacturing.
And Scientific and Other revenue was $57,000,000 a decline of 23% from 2019 and made up 13% of the total revenue. And looking at our full year revenue by region, please take note that we have modified our region naming convention. Our Asia Pacific region, excluding China, made up 39% of total revenue. The United States was 32%. EMEA was 16%.
China made up 13. And finally, rest of the world made up less than 1% of our revenue for the year. Turning to Q4 revenue by market and geography. Revenue totaled $139,000,000 for the quarter, which was a sequential increase of 24% and a year on year increase of 23%. We had strong performance in our semiconductor market, which made up 41% of our revenue, driven by multiple laser annealing systems and an EUV ion beam system shipment.
The compound semiconductor market contributed 33% of our revenue and was driven by multiple system shipments for five gs RF applications and shipments to photonic customers. Our revenue in this market also included the sale of commodity LED systems, which enabled us to monetize slow moving inventory. Our data storage market came in at 14% of total revenue. We expect growth in 2021 in our data storage market based upon our order backlog going into the year. And finally, the scientific and other market made up 12% of our revenue with systems shipped for a variety of research applications.
And looking at our quarterly revenue by region, our Asia Pacific region, excluding China, made up 48% of total revenue. The United States was 26%. China made up 14%. EMEA was 12%. And finally, rest of world made up less than 1% of our revenue for the quarter.
And now turning to non GAAP operating results. On a full year 2020 basis, as Bill mentioned, we achieved gross margin of 43% and reduced our annual operating expenses to $144,000,000 These improvements reflect the impact of our transformation effort. Our non GAAP operating income increased significantly from $5,000,000 in 2019 to $52,000,000 in 2020. This drove diluted EPS of $0.86 for the year. And now I'll provide a few additional full year figures.
For fiscal twenty twenty, non GAAP depreciation was 15,100,000 amortization was $15,300,000 and our equity comp expense was $12,700,000 Cash interest on our debt was $10,800,000 and cash taxes were $300,000 At year end, we had federal NOLs of two nineteen million dollars which are fully reserved. While we no longer provide bookings on a quarterly basis, we do provide backlog in our 10 ks. When we file, you will see that as a result of a strong year of order intake, we ended 2020 with March in backlog. The biggest contributor by market is data storage, followed by semiconductor, compound semiconductor and scientific and other in that order. A significant portion of the increased data storage backlog is anticipated to be delivered in the 2021.
We are proud of the progress we made on our transformation execution, and our 2020 financial results reflection of that hard work. We are now focused on investing to drive growth in 2021 and beyond. Now turning to our quarterly results. Gross margin came in at 41%, which was lower than guidance. This was due to monetizing slow moving LED inventory as well as service costs related to both five gs installations and future semiconductor growth.
Gross margins are influenced by a number of factors, and we expect quarter to quarter variations. Operating expenses for the quarter were $40,000,000 and as a percentage of revenue declined sequentially from 32% in Q3 twenty twenty to 29% in Q4 twenty twenty. We incurred higher variable expenses associated with the increase in revenue and order intake. Additionally, we strategically increased R and D expenses as planned in support of our growth initiatives. On a non GAAP basis, tax expense for the quarter was a benefit of approximately $300,000 with net income coming in at $15,000,000 And EPS was $0.30 on a diluted share count of 50,000,000 shares.
It's worth noting that our Q4 GAAP net loss of $100,000 includes a noncash charge of $4,800,000 resulting from our convertible debt exchange completed in the quarter. Now moving to the balance sheet and cash flow highlights. We ended the quarter with cash and short term investments of $320,000,000 a sequential increase of $10,000,000 From a working capital perspective, our accounts receivable remained flat at $80,000,000 on increased revenue. DSOs for the quarter came in at fifty two days, an improvement from the prior quarter. Accounts payable also remained flat at $34,000,000 Inventory increased approximately $3,000,000 to 140 investments we are making to ship evaluation systems in support of our growth strategy in semiconductor and compound semiconductor market.
Days of inventory came in at 159, an improvement from two hundred days in the prior quarter. Long term debt on the balance sheet was recorded at $321,000,000 representing the carrying value of $389,000,000 in convertible notes. Our CapEx during the quarter was 3,500,000 bringing CapEx total for the year to $6,800,000 Now turning to our convertible notes. As outlined on the slide, with the actions we took over the course of 2020, we went from a single $345,000,000 tranche of debt due in January 2023 to a more manageable debt structure with three maturities roughly evenly staggered over the next six years. Our annual cash interest expense is expected to be approximately $13,000,000 on a go forward basis.
With this debt structure and strong balance sheet, we have the flexibility and capital to focus on driving long term organic growth across our business. Now turning to Q1 guidance. Q1 revenue is expected to be between $115,000,000 and $135,000,000 with non GAAP gross margin between 4042%. Our gross margin estimate reflects our anticipated product mix as well as service costs related to both evaluation systems and customers' RF five gs RFRAM. We expect non GAAP OpEx to be between 37,000,000 and $39,000,000 a reduction from Q4 principally in SG and A expenses.
GAAP EPS is expected between a loss of $09 and earnings of $09 per diluted share. Non GAAP EPS is expected between $0.12 and $0.30 per diluted share. Diluted non GAAP EPS is based upon a 50,000,000 share count at stock prices of about $20 per share. Bear in mind, taking our convertible notes into account, the share count for the diluted EPS calculation will increase by about 300,000 shares on average for every dollar increase in the average stock price over the course of the quarter. We have included a table in the back up section of the earnings presentation to provide detail on the effect of the convertible notes on the diluted share count.
And now for some additional color beyond Q1. Based on our current visibility and backlog, we are increasing our revenue outlook for 2021 and now expect revenue for the full year to be in the $520,000,000 to $540,000,000 range. And we are targeting non GAAP EPS for the full year to be between $1 and $1.2 I'd like to provide a little bit more information on the capacity expansion plans that Bill mentioned earlier. We are currently in the final stages of lease negotiations for San Jose property of approximately the same size as our current facility, but with a better footprint allowing us to increase the size and efficiency of our production space. Capital expenditures associated with this project are expected to be between 30,000,000 and $40,000,000 over the next two years.
Additionally, there will be a period of duplicate expenses until the transition to the new facility is completed. And with that, I'll turn it back over to Bill for market update. Turning to the markets we serve
Speaker 2
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 five gs RF related capacity and market demand and backlog in data storage. Looking beyond 2021, we've 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 and are making the necessary investments in R and D, service and evaluation systems to deliver and support products they need. In fact, evaluation agreements are already in place systems for logic and memory applications and our MOCVD systems for early stage microLED 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 customers' 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 Vico'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 is also an important component of our longer term growth strategy. In the EUV mask blank market, we shipped this 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 shipped 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 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 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 VCSELs as well as MicroLED with our Lumina MOCV arsenide phosphide platform and our PROPEL gallium nitride MOCVD system used for power electronics, RF devices, and MicroLED applications. Now looking at our data storage market, we've been experiencing consistent growth for multiple years driven by cloud and data center demand.
Our Ion Beam technology enables our customers to increase the error density of their readwrite heads. This improves performance in their high capacity drives using cloud and data center applications. Additionally, the absolute number of heads shipped 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 and Other market is largely driven by sales to governments, universities and research institutes.
We experienced lower sales in this market in 2020 compared to 2019, which we believe was due to COVID-nineteen impacts. Now turning to our 2021 priorities. With the actions we've taken to execute our transformation and positioning 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 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 VCO that serves all our stakeholders. And with that, John and I will be happy to take your questions.
Operator, please open the line.
Speaker 0
Thank We'll take our first question from Patrick Ho with Stifel.
Speaker 4
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 in new business, it's great to hear that you're getting a second application entry with a customer. As the industry continues to migrate, especially on 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 the saturation point, say, two applications?
Speaker 2
Yes. Thanks, Patrick. We really love that question, and here's why. In the short term, laser annealing is really driving our business in 2021. You just mentioned the second application win at one of our existing customers.
That's certainly driving us in 2021. But longer term, we see opportunities. We're working with our existing customers at their next nodes, so we're placing evaluation systems there. We're actually closely engaging a third logic customer with an eval at their most advanced nodes. And we recently placed two tools at a DRAM memory customer, which is really the first penetration we've had into memory.
And it makes a lot of sense because memory lags behind logic a bit. And what we're 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 budget, heat to a high temperature for a shorter duration of time. And our laser annealing product is is uniquely positioned to take advantage of of that. So we see 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.
Speaker 4
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 December, demand on the semiconductor side remains healthy going into the New Year. Your working capital management was very strong in spite of the increase in demand. Kept DSOs at 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?
Speaker 3
Sure. Sure, Patrick. So on on the working capital side, we did see a slight increase in the inventory, but that did decrease the days outstanding, given 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 into the field expected to be. Put place in the field in in 2021.
So we will continue to to try to manage that working capital requirements as efficiently as as as as possible. On the second part of your question regarding supply chain and and there, We we have been, you know, effectively able to to manage the increase, you know, in in demand there. You know, we've not seen any significant, you know, impacts to to our supply chain at this at this point, and at this point, it looks pretty solid.
Speaker 2
I guess I'll just add one other comment there, John. We have resourced a few 100 parts from regions that have been more COVID hit, we've successfully been able to do that. And our supply chain and operations organization has a pretty amazing job there.
Speaker 4
Great. Thank you very much.
Speaker 2
Thank you, Patrick.
Speaker 0
And we'll take our next question from Brian Lee with Goldman Sachs.
Speaker 5
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? I'm just trying to back out what that would been and then also what the margin impact was for the quarter.
Speaker 3
Yes. Brian. It's about $10,000,000 for the quarter.
Speaker 2
At very low gross margin.
Speaker 5
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?
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?
Speaker 3
Sure, Brian. So we're currently viewing Q1 gross margins in the 40% to 42% range, and that reflects the existing product expected product mix. And including wrapping up sales, slow moving inventory, we've got about $5,000,000 And that we would pretty much conclude the program there. So a little bit of a lesser extent of the gross margin impact in that 40% to 42% range in Q1 twenty twenty one. Q1 gross margins are also impacted by the cost to support our semi evaluation growth initiatives.
As Bill mentioned and we've 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 $520,000,000 to $540,000,000 which is 17% growth at the midpoint, and an EPS for the year of $1 to $1.2 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've indicated, that this increased volume would generally give us gross margin benefits. But we're going to consume those benefits that we'd normally see with the increased volume with the investments in the service capability to support the number of evals.
And now that we have more clarity, see a tremendous pull for our technology and our planning for success. So typically, we'd 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 benefit that we get to twenty one twenty twenty one revenue from these increased evals.
So we're supporting these evals ahead of revenue, and we're planning for growth in 2022 and beyond. So these investments are providing some headwinds to gross margin in 2021. And while we expect, you know, 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.
Speaker 5
Okay. So it's a low point for the year. That's super helpful. And then maybe just last one for me. The nice boost to the revenue outlook here.
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 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 fairly sort of flattish to revenue in 2020, and then in the back half, kind of picked it up. Similar cadence we should expect in '21, it seems like you're starting out '21 with a pretty good range here.
So it almost implies maybe a flatter revenue trajectory to get to the $520,000,000 or $530,000,000 if we're thinking about the outlook here?
Speaker 2
Yes. Yes. Let me take the first piece of that. Maybe John can answer the second half. What we've been seeing is we see growth in 2021 from three areas: laser annealing, five gs RF and data storage.
And the data storage piece of our business is on long lead times. And when we put out our 10% up to $500,000,000 range, that fully baked in the data storage piece.
Speaker 3
So when
Speaker 2
I look at the incremental step up, that's really driven by planned growth or expected growth in the laser annealing and the five gs RF segments. So I think those are the two pieces that drive that incremental growth in the numbers.
Speaker 3
Yes. And then, Brian, to answer the second part of your question, given the backlog visibility and when shipments are required, current view is that we would see, to your point, lesser a a in the second, you know, half of the year for for 2021 in our current view compared to 2020.
Speaker 5
Alright. Thanks, guys. I'll pass it on.
Speaker 2
Thanks, Brian.
Speaker 0
We'll hear next from Tom O'Malley with Barclays.
Speaker 6
Hey, guys. Thanks for taking my question and congrats on the nice top line. I 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 2021.
Can you talk about just the puts and takes of what happened there? Customer demand fall off or things getting pushed to the right? Any color there would be really helpful.
Speaker 2
Yes. Yes. Sure, Tom. I would say there's been no push out of demand or anything. This is now that we're breaking data storage out as its own segment, you can see it can be a bit lumpy.
These tools have ASPs from 5,000,000 to $10,000,000 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. And so I think we'll see that increase in Q2 and Q3. So I wouldn't read much into that fluctuation quarter to quarter.
Speaker 6
Okay. And then just as a follow-up with data storage improving into Q1. Obviously, you're guiding down sequentially about $14,000,000 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, would be helpful to kind of have a foot to start the year.
Speaker 5
John?
Speaker 3
So we did mention we have a little less sell off of slow moving inventory in in in the first quarter. That's, you know, that's a 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
Speaker 5
Q1.
Speaker 0
And we'll go ahead and take our next question from Rick Schafer with Oppenheimer.
Speaker 6
Yes, thanks. And I'll add my congratulations, guys. I just had a quick question on backlog. Think, obviously, with the raised numbers, I think you said your backlog, I guess, with the new number supports something pretty high teens type growth this year based on your guide. It sounds like demand signals are up ticking pretty broadly.
So I guess I'm curious how much upside what's the potential 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'm just sort of wondering, at these levels, are you kind of thinking you're sort of sold out or sold out for me? I know you've made that comment, believe, Bill, about your Data Storage segment in particular being pretty close to sold out this year. So I'm curious sort of where that upside headroom might come from this year? Which segments might have some room left this year?
Speaker 2
Yes. 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 we really are not going to be driving growth in that segment. We did just very recently win second application in laser annealing, And that could probably drive is driving growth as well as five gs 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 those shorter lead time products. Donald, do want add anything to that?
Speaker 3
I that's right. Bill, we are, as we mentioned, looking to add capacity going forward for laser annealing with the announced capacity expansion we're planning on in San Jose in terms of being able to increase the production footprint there. And we're running at fairly high capacity in our cleaning product line for five gs as well at this point.
Speaker 6
Can I ask a follow-up on that comment, John? How does that new capacity sort of come online for you guys in terms of obviously raising your ceiling on what your top line looks like? I'm thinking of next year even. I mean, does this capacity start to become available to you, say, second half this year? Is it more of a 22 phenomenon?
I know you mentioned that it's probably to be an overall gross margin driving investment probably well into next year, but I didn't know when that capacity would start to kick in.
Speaker 3
George, some of it will be a mix of internal capacity versus using outsourcing contract manufacturing. So we're starting on the the on the web processing side to to use contract manufacturing. And from the the laser annealing product line, that's mainly gonna come from from in house manufacturing. Right.
Speaker 5
Thank you, guys.
Speaker 2
Thanks, Sergey.
Speaker 0
Go ahead and take our next question from David Dewey with Steelhead Security.
Speaker 4
Yes. Can you hear me?
Speaker 2
Yes. Hi, David. Okay.
Speaker 6
Sorry, I had technical difficulties with the call. So thanks for taking my question. I was wondering, could you just take a step back in the LSA business and elaborate as why customers are perhaps shifting back to laser spike and healing from the flash technology. What is it at these advanced nodes that is driving that trend, you know, shifting back towards your technology? And as a follow-up to that is, could you help us size the market now for LSA?
Speaker 2
Yes. Yes. Let me start with a little background. We acquired this from UltraTech. 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 put a pretty concerted effort into understanding why they lost their position. And we listened 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 nodes continue to shrink to five and three and two and beyond, the thermal budgets, as I mentioned, become a 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 high temperatures and then cool it very rapidly. With each consecutive node, customers are pushing us from two hundred microseconds to one hundred and fifty microseconds to one hundred microseconds. And so there's a real road map in terms of thermal budget that we're working very closely with our customers to execute. And I think we're seeing the fact that flash just can't heat and cool fast enough at these more advanced annealing steps. And so now we're also seeing memory customers have the same set of challenges that the logic guys were facing, you know, a number of years ago, if you will.
Okay. That's very helpful. And the second half of your question?
Speaker 6
Yeah. As far as the you mentioned you've moved your breakouts of your business around it. I think it's the first time in some time you talked about advanced packaging or the perhaps give us a little bit more detail what you might be seeing in that particular market.
Speaker 2
Yes. Yes. So we actually you know, if you look back historically, you know, this has been a good base business, healthy business, kind of in fan out wafer level packaging, copper pillar bumping. We've been shipping to OSATs and IDMs. 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.
Speaker 4
And just as follow on
Speaker 6
to that particular question, is it just one customer? Or is it a broad base of customers that you're starting to see greater visibility and plans to increase their CapEx for Advanced Packaging?
Speaker 2
Dave. I would say it's broad, actually. We're seeing OSATs, IDM, Foundry. So we're seeing some breadth to it that we weren't seeing the previous year or more.
Speaker 4
Great. Thank you.
Speaker 5
Thank you.
Speaker 0
And we'll take our next question from Mark Miller with Benchmark Company.
Speaker 7
Thank you for your question and congrats on your progress. Wanted to talk a little bit You're more about the welcome. A little bit more about the backlog. You said data storage was going to be strongest Q2, Q3. Would you characterize the backlog as front end loaded, back end loaded or pretty even through the year as it ships?
Speaker 3
So so, Mark, yes, we reported that the backlog was three sixty six million at the 2020. We would, you know, 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 customers' shipment requirements will be a little bit more weighted to Q2 and Q3 going into the year.
Speaker 7
And what about the mix in the backlog? Is that going be a higher mix than what you've seen recently, or is it similar?
Speaker 3
Yeah. So we would typically, with the 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 just given the lead times. As Bill just mentioned, as an example, in the advanced packing 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 times in the nine month range, as an example.
Speaker 7
And the last one is R and D. You've increased the investment. Is that investment going to stay at similar levels throughout the year?
Speaker 3
So we expect that as the year progresses that OpEx as a percentage of revenue, including R and D, would come down as a percentage of revenue as we progress in the year. But in absolute dollars, we would expect to have increase in R and D expenses for 2021 over 2020.
Speaker 2
Thank you. Thank you, Mark.
Speaker 3
Thank you, Mark.
Speaker 0
And we'll go ahead and take our last question from Gus Richard with Northland.
Speaker 6
Yes. Thanks for taking my question. Just a housekeeping question real quick. What was spares and service in the quarter? Okay.
You don't break it up?
Speaker 2
Go ahead, Gus.
Speaker 3
Yes. We break it out and spares in service for Q4 was about 38,000,000 for the quarter.
Speaker 6
Okay. And then is Spares and Service included in backlog or or no?
Speaker 3
Yes. That is part of our our reported backlog.
Speaker 6
Got it. And then of the 10
Speaker 2
I would think most of it turns pretty fast. Yeah. Yeah. So so you've only had backlog for spares and servicing in q one, maybe a little on q two? Exactly.
Exactly.
Speaker 6
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 and something else?
Speaker 2
You know, I would say, the the most approximately half, are in LSA, including some other advanced advanced tools, platforms that will won't won't be out until the '21. We have some tools, MOCVD tools for power as well as micro LED. And then we have a web processing tool going out shortly. So that's a that's kind of a flavor for what what we have. I'd say it's probably laser annealing heavy.
Speaker 3
Not We've about 30% of them out at this point.
Speaker 2
Yeah. Okay.
Speaker 6
Okay. And then, you know, in the there's a sort of a pause in your data storage business in q four, q one. Is is that just, you know, lumpiness, as you
Speaker 1
mentioned earlier? Or is there a little bit
Speaker 6
of a digestion period? Any other reason for that pause?
Speaker 2
Yes. I describe it as a pause, Gus. I would say it's the size of the machines, and it's a 6,000,000 or $8,000,000 machine in this quarter versus that quarter can move the numbers around. I wouldn't say we're picking up any signs of demand change here
Speaker 3
or
Speaker 2
backlog change, Michelle.
Speaker 6
Okay. That's it for me. Thank you so much. Thanks, Gus.
Speaker 0
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.
Speaker 2
This is Bill Miller, by the way. Thanks. Thanks for joining us today on the call. As you may be able to tell, we're very excited about entering 2021 with our growth. Certainly, I'd like to thank our customers and our shareholders along with the Veeco United team for their continued support as we execute our growth strategy.
And so look forward to updating you all at upcoming conferences. Have a great evening.
Speaker 0
Once again, that does conclude today's conference. We do appreciate your participation. You may now disconnect your phone lines.