VECO - NASDAQ

Greetings, and welcome to the Veeco Q2 2024 Earnings Call. At this time, all participants are in a listen-only mode. A brief question-and-answer session will follow the formal presentation [Operator Instructions] As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Anthony Pappone. Thank you. You may begin.

Thank you and good afternoon, everyone. Joining me on the call today are Bill Miller, Veeco's Chief Executive Officer; and John Kiernan, our Chief Financial Officer. Today's earnings release and slide presentation to accompany today's webcast is available on the Veeco website. To the extent that this call discusses expectations for future revenues, future earnings, market conditions, or otherwise make statements about the future, these forward-looking statements are based on management's current expectations and are subject to the risks and uncertainties that could cause actual results to differ materially from the statements made. These risks are discussed in detail in our Form 10-K Annual Report and other SEC filings. 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. Unless otherwise noted, management will address non-GAAP financial results. We encourage you to refer to our reconciliation between GAAP and non-GAAP results, which you can find in our press release and at the end of the earnings presentation. With that, I will turn the call over to our CEO, Bill Miller.

Thank you, Anthony. Veeco delivered second-quarter top and bottom line results in line with our guidance. Revenue totaled $176 million, non-GAAP operating income $28 million and non-GAAP EPS of $0.42. Our semiconductor business remains strong highlighted by record laser annealing revenue and new LSA orders in advanced logic and memory. In logic, we received follow on orders for a leading customers gate all around architecture. And in DRAM, we continue to receive follow-on business to support our customer's planned expansion. I'll now provide an overview of the technologies driving business today. Our served available market expansion opportunities and our investment strategy. New device architectures and shrinking geometries are creating scaling challenges for our customers. As a result, new annealing capabilities are required to manufacture the highest-performing chips and our LSA systems are qualified at all leading logic customers for their gate-all-around architecture. In ion beam deposition for EUV mask blanks, Veeco is the market leader for defect-free films. Our ion beam deposition technology is a key enabler of our customer's roadmaps, and we're in a strong position to support growing demand for EUV lithography. Moving forward, we're focused on expanding our business to new mask blank applications. In Advanced Packaging, growth in high bandwidth memory is driving demand for our wet processing systems, and our customers are expanding capacity. Our investments in advanced logic and memory have enabled our semiconductor business to outperform WFE growth over the past three years. Looking ahead, we're investing in core technologies to expand our served available market. Beginning with laser annealing, we have a substantial opportunity to grow our SAM from $600 million today to over a billion dollars, driven by adoption of laser spike annealing in memory and the introduction of nanosecond annealing. Our laser spike annealing system is qualified at one tier-one DRAM customer, and we're making progress with the other leaders in nanosecond annealing. We're equally as excited to expand to new advanced applications. We also have a significant opportunity in ion beam deposition to grow our SAM to $350 million for front-end semi-applications where a deposition of low-resistance metals is most critical. And in the compound semi-market, we're focused on long-term opportunities within power electronics and photonics. We continue to increase investments in our evaluation program for core technologies focused on solving Tier 1 customers' high-value problems. This is a key element in supporting our long-term growth strategy. In the semiconductor market, our nanosecond annealing and ion beam deposition evaluation systems at customer sites are progressing well and we're targeting additional evaluation system shipments in early 2025. We're also making progress towards an LSA evaluation shipment to a second leading DRAM customer in early 2025, and we recently shipped a 300-millimeter GaNon silicon evaluation system to a Tier 1 power device customer in the compound semi-market. I'd now like to take a deeper dive into two of our largest opportunities in the semiconductor market. Scaling challenges are driving the need for new annealing capabilities, and our nanosecond annealing technology offers a substantial opportunity to broaden laser annealing adoption to new applications. Due to our system's laser and architecture, we can achieve a lower thermal budget and shorter dwell time versus today's most advanced annealing solutions. This enables a shallow anneal with the precision to modify only the surface level of the wafer, potentially ideal for new applications such as backside power delivery and 3D devices. Our NSA system can also improve performance by changing the structure and properties of the device, opening the door to new material modification steps. As we look ahead, we see potential for initial high-volume manufacturing orders from logic customers in 2025. Turning now to ion beam deposition for 300-millimeter front-end semiconductor applications. Veeco is the industry leader in ion beam deposition technology, which is a key enabler in driving aerial density growth in the hard disk drive industry over decades. This core technology also enables EUV mask blank production and has direct applicability for advanced semiconductor wafer-level manufacturing. Lower resistance metals are increasingly critical to maintaining device performance, and as device geometries continue to shrink, traditional deposition technologies are struggling to lower resistivity. Our ion beam deposition technology differentiates itself through its ability to achieve superior thin film properties, making it ideal for advanced applications where low-resistance films are critical. Based on Tier 1 customer data, our ion beam-deposited tungsten and ruthenium films are demonstrating lower resistance compared to traditional deposition technology. In DRAM, this enables tungsten bit line scaling while maintaining electrical performance of the device. For logic, ruthenium metallization can enable new integration schemes at future nodes. I'd now like to touch upon artificial intelligence and the role Veeco plays in the AI chip manufacturing process. Growth of AI is requiring the most advanced technologies to manufacture higher-performance chips. As we look ahead, we expect several Veeco technologies to benefit from growth in AI. Our LSA systems for transistor formation are used for GPU and CPU production at all leading logic customers most advanced nodes. For HBM DRAM, our first customer has adopted our LSA system for both the logic die and the peripheral logic on each HBM DRAM die. In ion beam deposition, our IBD system enables mask blank production for both GPUs and HBM DRAM. Equally as important, we see future opportunities for our nanosecond annealing and ion beam deposition solutions for each in wet processing. Our systems support advanced packaging for AI by enabling flux clean of micro bumps at leading foundry and memory customers as well as OSATS with similar packaging processes. Looking ahead, we're excited to continue supporting our customer's planned expansions. With that, I'll turn it over to John for a financial update.

Thank you, Bill. Turning first to our revenue for the quarter. Revenue came in at $176 million in line with our guidance, up 9% from the prior year and 1% sequentially. Our semiconductor business performed well during the quarter, comprising 63% of revenue led by record laser annealing. Semiconductor revenue declined 9% from a record in Q1. However, in the first half increased 16% year-over-year. In the compound semiconductor market, revenue declined from the prior quarter to $18 million, totaling 10% of revenue. In line with expectations, data storage revenue increased to $34 million, comprising 19% and lastly, scientific and other made up 8%. Now, turning to quarterly revenue by region. The percentage of revenue from China totaled 37% during the quarter in line with the prior quarter, led by sales to semiconductor customers. Revenue from Asia Pacific region excluding China was 25%, the United States 24% and EMEA at 14%. Switching gears to our non-GAAP quarterly results, gross margin totaled approximately 44% toward the high end of guidance. Operating expenses totaled $49 million in Q2 above our guidance, primarily due to the timing of R&D investments. Tax expense for the quarter was approximately $4 million, resulting in an effective tax rate of 12%. Lastly, net income came in at approximately $25 million, and diluted EPS was $0.42 on 62 million shares. Our diluted share count increased by approximately two million shares in Q2 from Q1. This was primarily driven by a higher Veeco share price, which increased the diluted share count associated with our 2029 convertible notes. Now moving to the balance sheet and cash flow highlights. We ended the quarter with cash and short-term investments of $305 million, a sequential increase of $8 million. From a working capital perspective, our accounts receivable declined by $14 million to $92 million. Inventory increased slightly by $2 million to $245 million, and accounts payable declined by $7 million to $47 million. Customer deposits included within contract liabilities on the balance sheet declined by $13 million to $59 million. Cash flow from operations came in at $8 million and CapEx $3 million. Now turning to Q3 non-GAAP guidance. Q3 revenue is expected between $170 million and $190 million. By market, we expect growth sequentially in semiconductor and similar levels of revenue for the remaining markets. We expect gross margin between 43% and 44%, OpEx between $48 million and $50 million, net income between $24 million and $31 million, and diluted EPS between $0.39 and $0.49 on 63 million shares. And now for some additional color beyond Q3 as we're halfway through the year. We're tightening our 2024 revenue guidance to $690 to $730 million from our prior range of $680 to $740 million and correspondingly, we now expect diluted non-GAAP EPS for the full year between $1.65 and $1.85 per share from our prior range $1.60 to $1.90 per share. With that, I'll now turn the call over to the operator to open up Q&A.

[Operator Instructions] The first question we have is from Rick Schafer of Oppenheimer & Company. Please go ahead.

Thanks guys. Nice quarter. I had a couple of questions. The first Bill is kind of a high-level one, I believe, correct me if I'm wrong please, but I believe your EV hit rate is ALs 100% in terms of converting to design, win, and ultimate new. And I know a few years ago you decided to support roughly 10 EVALs a year, up from, I think, three to four previously. And I mean, I realize bandwidth is finite, but I'm just curious how you're thinking about that. How do you weigh growth, the growth opportunities that you see out there against the costs, given the high success rate that you've had and I'm basically asking if you've ever thought about an increase that you're supporting annually.

Rick, thoughtful question, and I hate to say 100%, but I think you're right. Actually, knock on wood that we had a lot of success with the last round of evaluations we put into the field. Clearly, that gives us confidence as we place EVALls in the field. We did just place in the fourth quarter to ion beam deposition systems for memory and to nanosecond annealing systems in logic. We have a laser annealing system out in the field for a second memory customer. So we have a lot of irons in the fire and we're planning more at the end of the year and widening our breadth of evaluations in 2025. I think for us, it does give us some confidence that we know how to support these in the field, how to support the tools in the factory and be responsive to our customers. That, as you said, gives us some confidence. I think the one thing that John and I need to kind of manage is not get out too many at a time. That if there is some type of a problem that we need to attack it aggressively. We're resource-limited. That's probably the governor on the EVALs, which is effectively a governor a bit on our growth. I think we do a good job of managing, being aggressive, and working with the leaders in the industry and working closely with them, but not getting ourselves into a situation where we're overextended. That's the calculus.

Got it. That makes sense. And then if I could just on a quick follow up. I appreciate, John, you tightened in the range again around the midpoint, which you've been tracking to all year. I guess I'm curious with now you've given the guide for 3Q, w don't really know about 4Q yet, but we can. I guess I'm really curious, what are the puts that you see in terms of hitting or exceeding, let's say, the high end versus the lower end of the new range?

Yes. So, thanks for the additional question, Rick. So, in our view, we've narrowed the range because we're sort of halfway through the year. I would say compared to our initial expectations here, the expectations haven't changed significantly by the various markets. I would say that semi is slightly stronger and so we're now thinking for the full year in semi, when we compare it to last year, to be up high single digits, low double digits. And I'd say that on the flip side, we see slightly lower contribution from compound semi-space where we're now saying, flat to slightly down. We were flat to slightly up there.

Great. Thanks for the extra color.

Thank you, Rick.

The next question we have is from Charles Shi of Needham & Company. Please go ahead.

Hi. I want to -- my first question is about the follow-on business you received from the tier one DRAM customer, I assume that's LSA. But I do want to ask, it sounds like you received the order, but when will the order turn into revenue? What's the expectation? How big is the order? Is there any way you can kind of characterize that for us because the HBM ramp is something that people really are bullish about but since you only, you probably have -- are qualified of only one customer want to have some color on the timing and the size of the ramp next. Thanks.

I think you're talking about the Q2 order we announced in our press release. That was for a two-system order for a gate-all-around two-nanometer pilot line and I believe those two are scheduled to either ship in Q4, Q1, John?

Yes. So I think Charles may be asking about in our scripted remarks that we just presented that we receive follow-on business from our DRAM customer and yes, in LSA we have one leading DRAM customer for HBM where we've been shipping laser spike annealing tools for their HBM product. We've had ongoing orders from that customer, they're bringing up their production there and we continue to receive follow-on orders, and we see that continuing into the future here. What we've said is that typically when we win an application at a customer for laser annealing and we win one application for a customer, that it typically comes in sort of a chunk of $25 million to $35 million of business, a handful of tools. These tools are in the $6 million to $7 million range. So we're at the early stages of the laser annealing adoption. But that level of intensity that we've seen typically in the adoption of logic, at least at this point, and foundry logic is progressing at a similar intensity in DRAM.

I guess I'll just add one comment, John. We started with that customer originally winning just the base logic die, and now we've expanded to the peripheral logic on each of the multi-level stack of the HBM DRAM device, which obviously drives more wafer starts.

So is the timing, is there some revenue of the repeat orders in second half, or is it more like 2025 events?

No, we've been having revenue. They started actually shipping tools towards the back half of last year. We've been shipping tools this year and we've been taking a new order as well. So it's sort of ongoing. So typically, Charles, when we're getting these $25 million to $35 million chunks of business, it's over a 12 to 18-month period of time and I think what we're highlighting here is that we're seeing that type of level activity as they're ramping their production using laser annealing for that one particular customer.

Okay. Maybe the second question. The data storage business does appear to have a very good Q2. Is that just some quarterly lumpiness or should we expect the revenue, how should I think about the revenue of data storage going into second half and for the full-year year-on-year growth? How to think about that?

Yes, sure, Charles. So I do think, we typically see with high ASPs for our data storage tools, lumpiness from quarter to quarter. The revenue that we achieved in the second quarter was anticipated. Revenue was lower in the first quarter. And I think as we look at the second half of the year, we're expecting sort of an equal quarter in Q3 to Q2, and then, a fall-off in Q4 there, just based upon the scheduled timing of the shipment. So our view for the full year, this year, is that the systems revenue is coming in exactly, scheduled releases of the backlog as planned there. So what we're saying then is for the full year, this year, our expectation is data storage revenue to be up about 5% to 10% if you compare it to last year's volumes.

Thank you.

Thanks, Charles.

Thanks, Charles.

The next question we have is from Dave Duley of Steelhead Securities. Please go ahead.

Hi, thanks for taking my questions. I guess I have a couple of questions. Just take a step back. We've seen really big increases in CapEx from a couple of DRAM guys. I'm sure the third guy is going to join the party. Could you just kind of, in summary, touch upon how that will really help Veeco, or how are you exposed to increases in CapEx from the DRAM guys?

Dave, as we've talked a few times, our exposure in DRAM has gone from practically zero a few years ago, and we've now won one customer in LSA for high bandwidth memory. And as John just said, they're now taking equipment from us. We are planning. We're doing Eva demonstrations, excuse me, with the other two DRAM players and our goal is to have a second customer under an evaluation agreement and shipping early in '25, an evaluation system as our kind of next step of landing on the first customer. Now expanding to a second customer with an evaluation system that would probably drive revenue in the 2026 timeframe. The other area we have exposure in high bandwidth memory is in our wet processing business. We are seeing a pretty significant uptick this year in that business really driven from sales to foundry logic people, DRAM makers, as well as some OSATS type applications for HBM. And that's a second leg that we have on the HBM stool.

I would say, Bill, we would also comment on. We have two evaluation systems in the field right now for our ion beam deposition technology for low-resistance metals. So there hasn't been any previous revenue in that area but that's an area for future growth for us and an important area for us in DRAM in bringing out ion beam technology that has been traditionally used in our data storage and for the EUV mask blanks market, and bringing out ion beam deposition technology to advanced semiconductor manufacturing for low resistance metal and the first application and the first EVALs are in the DRAM space.

As a follow-on are those low-resistive films used in high-bandwidth memory?

They would be beneficial to all memory, but obviously high bandwidth, the lower the resistance, the higher the speed of the device overall. So I would think a first entry wouldn't be unreasonable to think it would be in high bandwidth memory.

Okay, so that's another area that's really kind of driven by this new high.

Yes, and if we're successful. Yes, Dave, and if we're successful here, I would expect we'd have follow-on orders in '25 from those ion beam deposition evaluation systems.

And we have two of the three leading

Memory customers.

Memory customers.

Those guys are in Korea?

C'mon, David.

I had a try. Okay. My final question is a follow-on from Charles earlier is you talked about, hard to stack being up on a year-over-year 5% to 10%. I guess, just thinking going forward at some point or another, would you think that this will start to show some nice uptick from the AI data center consumption and storage? And when would you expect to see incremental orders from an improvement business improvement?

I would say, Dave, on the data storage side, our customers are continuing to invest in new technologies, which is positive for the industry. And they still expect long-term exabyte growth CAGR in the 20% to 25% range but utilization at their fabs are still at historically levels, I mean, we are seeing signs of improvement. Our customers are talking about signs of improvement and bringing up additional capacity but I think customers are also signaling right now that they are being cautious about adding additional capacity until utilization rates are higher. So I think as we're sitting here today and we're sort of halfway through this year, based upon the order activity, what we do have visibility into the first half of next year and it looks like our systems business will be lower in the first half of '25 compared to '24, despite the improved utilization for the customers.

Okay, thank you.

Thanks, Dave. The next question we have is from Thomas O'Malley of Barclays. Please go ahead.

Hi guys, I have a couple here. So the first one is just on China. I think across the semi-cap equipment space you're hearing China hanging in a little stronger for a little longer but when I look at your customer deposits, they've come way down.

Could you just talk to there, we had some background noise? So if you don't mind repeating what you were saying there. It wasn't clear to us.

Sure thing. Yes, so I was saying across semi-cap equipment prints, you've seen China hanging in stronger for longer. But when I look at your customer deposits, they've come down a bit. Could you talk about what your expectations are in the back half of this year for China? And are you seeing any kind of weakening into the back half of the year, is the first one?

So, I would say, Tom, China is playing out as we sort of expected at this point and we've got good visibility into the second half of the year. We said that China would be about a third of our business this year. That's still our expectation. We said that first half would be a bit stronger than second half. We still see that currently. We continue to see investments in new projects by our customer. Activity with the customer is still pretty strong at this point in time. You also asked the question about customer deposits have come down and I wouldn't necessarily say and directly correlate it to any one region, but I would say that typically, for an example, data storage customers have given deposits. We've shipped the backlog in data storage. As I just mentioned, we've had this year in backlog. We're shipping against that backlog, and those deposits have not been replaced at the same pace at this point.

Helpful. Then the follow-up is just is you kind of tighten the range on Rev and EPS for the full year. And when I look at least the last couple of years, obviously there were some moving pieces in the broader market that shifted things around but it seems like December is normally a seasonal downtick for you guys. When I look at December this year, the midpoint of your guidance, it looks more flattish. Could you just talk to your expectations around Q4? Any moving parts that kind of get you there? Just because we now have the final quarter and you've narrowed the range. So you've been pretty specific there. Anything that would help us narrow on December? Thank you.

Sure. Be happy to. So, Tom. So, yes, we're halfway through the year. We've narrowed the range down. I don't think there's any sort of change in expectation for the year in any material way there. We had initially called first half of the year in this revenue range about $350 million at the midpoint of our guide, and revenue at the midpoint of our guide in the $360 million range for the second half of the year. And as you point out, that's roughly two-quarters of similar type numbers for Q3 and Q4, once you take into consideration our full-year guide and our Q3 guide and year-to-date where we are. So, yes, I would say there's really -- not really much of a change there or anything to highlight. Thanks for the questions.

The next question we have is from Gus Richard of Northland Capital. Please go ahead.

Yes, thanks for taking my questions. Just on the two-nanometer logic line that you've got some LSA, nanosecond LSA going into, can you talk about the number of steps that you're getting with all around gate and backside power and how that compared to three-nanometer?

I would say at both two and three nanometer. Our understanding at the moment is that we have one application step at all the customers and that we are, we did place, did receive some orders this quarter and plan to ship those later this year.

Okay. And then you haven't really touched on compound semi, that was weak again in the quarter and I'm just wondering how, silicon carbide's coming along, have you gotten any other traction in power in GaN other than the one evaluation, an established small set type?

Yes, we, during the quarter we've made a fair amount of progress in silicon carbide. We are getting, I would say hopefully very close to getting our way to meeting all of the market requirements for silicon carbide and our goal is to place two evaluation systems either end of this year or early in '25 there. That's kind of remained about the same. I would say in GaNon silicon, the update on the 300-millimeter evaluation that you just mentioned is the installation is progressing very well and we're in the midst of turning the tool over to the customer for them to start running their qualification wafers. I think that startup is off to a good start.

Got it. Thanks so much.

Thanks, Gus.

The next question we have is from Mark Miller of Benchmark. Please go ahead.

I'd like to go back and talk about data storage. What do you feel in terms of your customers is their current factory utilization, mid-80s to upper 80s?

I'm not sure we should be commenting on their utilization rates, but I will say if you look at what they've said, that their utilization rates were at historically low levels and we definitely saw that in terms of a reduction in our historic service run rate business. We've seen that pick up a bit, but I wouldn't say we're back to historical norms from what we see from a service standpoint.

I asked that question because most recently, Seagate Western Digital reported very strong near-line sales that had come up very significantly. So that's why I was curious. Are there any process changes, new materials in terms of the fabrication of thin film head that could lead to opportunities for upgrades or new equipment for you coming down to play?

The industry has been working on energy-assisted magnetic recording for some time. As that gets adopted more broadly, it will be an opportunity for us on one hand because the heads are much more complex and there are a lot more deposition and edge steps in the fabrication of the head. And it will also be healthy for the industry because as aerial density grows, it actually helps the industry be cost-competitive against flash memory as well. So I think it's overall a good thing in the long run, just here in the short term, it seems a bit soft.

So Seagate is a little ahead of western digital and ramping hammer or even more heads. So you think this plays out in the second half of next year as an opportunity?

It's hard for us to see the visibility of that yet. I think we're going to have to wait a little longer to see how successful the industry is with the broader adoption of these energy assisted recording devices.

Thank you.

Thanks, Mark.

Ladies and gentlemen, we have reached the end of the question and answer session and I would like to turn the call back over to Bill Miller for any closing comments.

I'd like to thank our customers and our shareholders, along with the Veeco United team for their continued support in our journey. Have a great evening.