Debra Wasser - Senior Vice President of Investor Relations & Corporate Communications John R. Peeler - Chairman, Chief Executive Officer and Member of Strategic Planning Committee Shubham Maheshwari - Chief Financial Officer and Executive Vice President of Finance.

Mehdi Hosseini - Susquehanna Financial Group, LLLP, Research Division Krish Sankar - BofA Merrill Lynch, Research Division Y. Edwin Mok - Needham & Company, LLC, Research Division Vishal Shah - Deutsche Bank AG, Research Division Michael A.

Klein - Piper Jaffray Companies, Research Division Paul Coster - JP Morgan Chase & Co, Research Division David Duley Patrick J. Ho - Stifel, Nicolaus & Company, Incorporated, Research Division Brian K. Lee - Goldman Sachs Group Inc., Research Division Srinivasan Sundararajan - Summit Research Partners, LLC.

Good day, and welcome to the Veeco Instruments Q3 2014 Earnings Call. Today's conference is being recorded. At this time, I'd like to turn the conference over to Senior Vice President of Corporate Communications and Investor Relations, Ms. Debra Wasser. Please go ahead, ma'am..

Thank you, operator, and thank you all for joining today's call. With me today are CEO, John Peeler; and our CFO, Sam Maheshwari. Today's earnings call 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 www.veeco.com.

This call is being recorded by Veeco Instruments and is copyrighted material. It cannot be recorded or rebroadcast without Veeco's express permission. Your participation implies consent to our taping.

To the extent that this call discusses expectations about market conditions, market acceptance and future sales of the company's products, future disclosures, future earnings expectations or otherwise makes statements about the future, such statements are forward-looking and are subject to a number of risks and uncertainties that could cause actual results to differ materially from the statements made.

These factors are discussed in the Business Description and Management's Discussion and Analysis sections of the company's report on Form 10-K, and annual report to shareholders, and in our subsequent quarterly reports on Form 10-Q, current reports on Form 8-K and press releases.

Veeco does not undertake any obligation to update any forward-looking statements, including those made on this call, to reflect future events or circumstances after the date of such statements. During this call, management may address non-GAAP financial measures.

Information regarding such non-GAAP financial measures, including reconciliation to GAAP measures of performance, is available on our website. I'll now turn the call over to John for opening remarks..

Thanks, Deb. Veeco's results were on track with our expectations, and we are steadily improving our performance. Third quarter orders were $107 million. It was the third consecutive quarter of increased bookings and the fourth consecutive quarter with the book-to-bill ratio over 1.

Revenue was $93 million, down slightly from the last quarter, as growth in MOCVD was offset by weakness in MBE and Data Storage. We generated $2 million in cash, and our cash balance remains quite strong at $487 million. I'm pleased that we're executing effectively and delivering better results.

I'll turn the call over to Sam for the details of our performance..

First and foremost, we want to fund all the growth needs of the existing business, including fully funding the R&D investments, working capital needs and any other capital investments. That said, I recognize that our business is not a CapEx-intensive business.

Secondly, we are continuously evaluating inorganic growth opportunities where the future market growth and the technology fit with Veeco would make it compelling for us to accretively add that business to our portfolio. At this time, we believe we need to maintain about $150 million for operating needs.

Also, about $136 million in cash is held offshore. Outside of these 2 factors, we are continuously evaluating our alternative for capital deployment, either to fund inorganic growth or to create value by returning capital to the shareholders as we have done in the past. Another cash related update on the tax side.

We recently completed our 2013 calendar year tax filing, through which we have requested a cash tax refund from the IRS of $20 million. The timing of the receipt of this cash refund is somewhat uncertain. It could be anywhere between now and a year from now, but it is a material amount of cash refund that we expect to receive from the government.

Now turning to guidance for Q4. We expect orders to increase sequentially from Q3, enabling us to achieve the goal of second-half orders being higher than the first half. Order growth is expected to be driven primarily by MOCVD business. Q4 revenue is expected to be higher than Q3 and in the range of $100 million to $115 million.

As John will discuss in a moment, we are seeing good initial traction for EPIK, and we are expecting to ship multiple systems this quarter. As with any new product introduction, we do not recognize revenue on initial shipment, and you may see an increase in deferred revenue on our balance sheet at the end of Q4.

Gross margin is expected to be in the range of 34% to 36%. We are guiding operating expenses to decline, again, to about $41 million. As we have stated in the past, by Q1 2015, our OpEx should be below $40 million on a quarterly basis. GAAP EPS is expected to be in the range of $0.25 loss to a $0.13 loss per share.

Non-GAAP EPS is expected to be in the range of a loss of $0.03 per share to a gain of $0.09 per share. On adjusted EBITDA, we expect to be break even or better on a quarterly basis going forward. Q4 adjusted EBITDA guidance is between $1.7 million and $6.7 million. With that, I'll turn the call back to John for our business update..

Thanks, Sam. Positive market trends continue as indicated by the pickup in orders and customer pull for shipments. Healthy backlighting demand continues with new UHDTVs and iPhones, featuring bigger screens and more LEDs.

We estimate that the launch of the iPhone 6 will add about 25 MOCVD systems to next year's market requirement and that the number of reactors required to satisfy UHDTV requirements will exceed 100 over the next 5 years.

So despite the normal seasonality, because customers are benefiting from backlighting market growth, a trend that we expect to continue. It occurred to me a few weeks ago when the inventors of the blue LED received a Nobel Prize that they had probably not imagined all the ways that LEDs would be impacting our daily lives.

General lighting demand for LEDs is also growing rapidly, driven by falling LED light bulb prices and more promotion from global lighting suppliers. Much of the growth is in the mid-power LED category and that's due to their attractive price versus performance, particularly for residential replacement bulbs.

LEDinside forecasts that mid-power products will be 50% of the market by 2018. We are seeing global lighting leaders, who previously made all their own LEDs, source their mid-power LEDs from Asian manufacturers.

And success by our Asian customers has had a direct impact on Veeco's MOCVD order trends, with orders up about 50% for the first 9 months of 2014 compared to last year. As you probably know, we officially launched our new EPIK700 in September. EPIK features the industry's largest reactor with more than twice our previous capacity.

Its innovative features provide best-in-class uniformity and greater yield. It allows our customers to easily transfer their recipes to the new system. And EPIK is the LED industry's higher productivity and lowest cost of ownership system. EPIK's a big needle mover, with performance that is ahead of our competition.

And so far, the feedback from customers has been great. M.J. Jou, President of Epistar, said EPIK's performance, reliability and production readiness fully met our manufacturing standards and will enable us to lower our costs per wafer.

Another beta customer said our testing of the EPIK700 demonstrated that it is a production worthy platform with stable process, reproducible results and a good user interface. Our beta testing went extremely well, and word of the strong endorsements for EPIK is spreading throughout the LED market.

As a result, excitement's building, and our lab team is very busy running customer demos. We've received EPIK700 production orders from 1 beta customer and 1 nonbeta customer, and we're in commercial discussions for EPIK orders with many customers. We're making steady progress on our FAST-ALD technology as a driver for growth in 2015 and beyond.

Our 6G HAV FAST-ALD system has the potential to optimize encapsulation process steps and improve our customers' device performance. If we're successful, we'll have an exciting 2015 bookings ramp.

While the timing for OLED opportunity has been pushed out, we still believe it represents a multi-hundred-million dollar opportunity because FAST-ALD has the potential to increase adoption for truly foldable mobile phones due to the unique bending radius for displays enabled by our technology.

We're also starting to engage with OLED panel makers in Taiwan and China with our 3.5G system, and we'll be ready to run demos in our lab in the first quarter of 2015. As I look back over the market conditions of the last couple of years, it's been a really tough downcycle. But things do look better.

The MOCVD market is picking up, I'm confident our EPIK700 will do extremely well. Our FAST-ALD technology has great promise. We've got more new great products on the way. And we've adjusted our expense structure and are making good progress on our gross margins. It feels really good to have turned the corner.

We're forecasting a return to EBITDA profitability this quarter. And we expect to be able to deliver consistent profitability and solid growth next year. With that, operator, please start the Q&A session..

[Operator Instructions] And we'll go first to Mehdi Hosseini with SIG..

John, what is your view on the backlog in December? Do you expect backlog to continue to grow consistent with what you have seen in the past couple of quarters? And I have a follow-up question for Sam..

Yes. We expect backlog to grow again in the quarter. And I think we are shipping both older products, like MaxBright as well as the new EPIK products. And I think we'll have a solid backlog leaving the quarter..

I guess -- let me rephrase the question. Over the past 4 quarters, backlog has increased by mid- to high-single digits on a Q-over-Q basis.

Do you think that trend will sustain into Q4?.

I don't think we want to try to pin it down to specific numbers. We are substantially increasing our revenue this quarter. And -- but I do expect it to grow..

Got it. And then Sam, I kind of missed your prepared remarks. How should I think about the OpEx into the calendar '15? In the slides, it says it should be less than $40 million.

But should we assume that the OpEx is going to go flat from Q1 level? Or should it continue to decline throughout the year?.

Yes. So on OpEx, we're guiding below $40 million going forward on a quarterly basis into 2015. And previous quarters, when we rolled out our initiatives for expense and cost reduction, we had talked about 10% reduction. Most of our activities are going very well in terms of cost reductions here.

And as we complete those activities, we'll give you a more update again at the end of next quarter. But so far, we are very happy with the progress we are making, and we expect to be lower than $40 million on a quarterly basis into 2015..

And we'll go now to Krish Sankar with BofA Merrill Lynch..

Congrats on the good execution. Kind of following up on the cost reduction. I understand that next year is going to be like the real purchases for the EPIK system and definitely going to recognize revenue. And in the past, you mentioned that, that should actually improve your gross margin profile.

I'm kind of curious, when you look into 2015, your customers have a mix of EPIK, MaxBright, K465i. I mean, how does the cost structure work when you are trying to support 3 different platforms? Are you trying to actively move customers away from one of the older platforms? And I had a follow-up..

Okay. Let me start off on that. I think we have been selling 465s and MaxBrights for a long time. We've been successful at continuing to drive down the cost of those. We're introducing the EPIK. We have designed it to ultimately provide a better gross margin.

But I think we'll continue to sell a mix of products and that as we sell more EPIKs, I think over the longer term, that's going to help our gross margin. But there'll be some transition quarters along the way, especially as we move from other initial revenue recognition approach to a bifurcation approach later in the year..

And I'll add to that -- and I'll to what John just said that our expense and cost reduction activities are in Data Storage business as we rolled them out last quarter, and they're going to help us at the overall company level.

And along with the new product, EPIK, that we just launched, that will also help us in improving our gross margin as we grow go forward here post all this revenue recognition related matters behind us..

Got it. That's helpful, Sam. And just as a follow-up, you mentioned that some of the orders trends in Q3 was China and Korea. I'm kind of curious, I mean, I think everyone understands how strong China is.

Do you think the strength in Korea is a one-quarter phenomenon? Or do you expect it to continue next year? And how do you look at the other regions like Taiwan and Japan?.

Well, we have seen some positive orders out of Korea throughout the last year. So this is not a 1-quarter phenomenon, already. I think it's going to be bumpy and up-and-down. But we do expect more growth out of Korea over the coming year.

I think Taiwan's hard to separate from China at this point because many of the largest Taiwanese customers are investing in China with joint ventures and their own fabs there. So I think a lot of the Taiwan countries growth may show up in China. I think there's also growth opportunities for us in Japan and -- also.

So I think we'll see some business there..

And we'll go now to Edwin Mok with Needham & Company..

So first question on EPIK. You guys made an announcement about qualification in EPISTAR. I was just wondering if the 4Q shipment is just this 1 customer? Or is that you start to ship to other customer within the fourth quarter.

And in terms of qualification of other customers, any update on where we are in the progress, any targets you can provide for us?.

Well, a couple of things. We've had sign-off from 2 of our beta customers, and we expect the third one to come shortly. We've had orders from both beta customers and nonbeta customers at this point, and I certainly expect a lot more of that. So we're already seeing a mix. The product's done really well.

The customers who have evaluated it have given us really great feedback on it. And I think that -- we're in the building product and shipping it phase at this point..

Okay. Great. That's helpful. And then second question I have is in terms of count [ph]. How do you guys think about pricing or value of this new product as more customer adopt this product over K465i or MaxBright. So if -- as customers buy this product, I always imagined, they get some value out of it.

Does it mean incrementally because of the improvement of the product and that the pricing is not priced at the amount of throughput increase, that incrementally, it actually reduce the size of the market? Or how do you guys think about that? And in terms of your competitor also having a product in your marketplace.

How do you see them being aggressive in pricing? And any color on pricing would be helpful..

Okay. Well, when we develop and launch a new product, we always bring some value to the customers in terms of improvements in throughput, uniformity, cost of ownership, footprint, all of these variables. And the customer has to get some benefit or they wouldn't actually adopt the new product.

So -- but we also expect to share some of that benefit and get some improvement in our profitability and gross margin from the product. So that's generally how we target it. I would say, it continues to be an aggressive pricing market from our competitor.

But I think our product is well positioned, performs well and will help us to do very well over the longer term..

And we go now to Vishal Shah with Deutsche Bank..

I'm just clarifying your comments on the bookings and backlog for Q4.

Can you maybe talk about what the pushout was? And how -- was it a single-digit million, small number and that was in -- back in Q3 bookings? And also, would you say that your bookings are going to be up sequentially in all segments, including Data Storage in Q4?.

Vishal, this is Sam. So when we talk about pushout, it was on the revenue side. It was not -- my comment was not related on to the bookings side. It was simply a tool that we are planning to ship in Q3. It got pushed out into Q4. So that was only a revenue impact not a bookings impact.

And can you remind me your next question, sorry, Vishal?.

Was -- I'm curious if the Data Storage segment is going to be -- bookings in the Data Storage segment will also be up sequentially. You mentioned that your backlog is going to grow in the fourth quarter.

Is that going to be across the board? Or is it just going to be skewed towards one particular product category?.

In Data Storage, our bookings, Vishal, Q3 were on the lower side. As I said in my prepared remarks that this segment has been booking around $18 million, $19 million, say $20 million on a quarterly basis.

So based on the pattern that we have seen in the near -- in the recent past, I think that would seem to indicate that our bookings would be higher in Q4 in Data Storage as compared to Q3..

Okay. I appreciate that. And John, I guess, you had stated this [ph] market size question. You guys have provided some high estimates in the past.

Now with the introduction of this new tool, can you maybe talk about what do you think the market size is going to look like?.

Well, we're expecting the market to grow next year and going forward for a number of years after that. I think that's pretty consistent with what we see from the industry analysts also. And the market is going to need well over -- somewhere between 1,000 and 2,000 chambers going forward.

I would say those chambers, though, are -- the measure we use as the 465i chambers. So with the new tool at a bigger reactor, you have to scale that. But the market has a lot of need for a lot more capacity to ultimately fulfill lighting. And I think we're confident that's going to happen..

And we'll go now to Michael Klein with Piper Jaffray..

How much of your R&D is focused towards OLED relative to the total R&D spend? And does the market opportunity and competitive dynamics make it such that we should expect the R&D here to ramp in coming quarters?.

We are spending in the order of $5 million a quarter on OLED-related R&D. We think that's the right amount. There's -- we see a huge opportunity here, hundreds of millions of dollars of business in multiple segments. And so there are some closed-in opportunities. And there are some opportunities that might take another year or more to hit.

But obviously, we're investing heavily. And we think we'll get at great payoff from that..

Okay.

And just from an industry perspective, what's your sense of utilization rates and your take on end market demands? Do you notice customers are now more willing to purchase new tools? Or are they still hesitant to make major capital purchases?.

So you [ph] -- and I believe you're talking about the MOCVD market. The utilization rates their have come down a little bit since the last quarter, in general, we would see, and these are always kind of rough figures, but China, Taiwan, Korea, coming down 5 percentage points, all in the 85% range. So they have dropped off.

We believe that's normal seasonality. And -- but these are high rates. And these are rates that I think will cause people to buy more tools. And I believe there is some degree of pent-up demand based on customers waiting for new tools. So I think we don't read too much into a dip in utilization that, frankly, we usually see this time of year..

And we'll now go to Paul Coster with JPMorgan..

John, I sense a different kind of tone with respect to the ALD equipment.

So what happened? Is it that you're suddenly seeing some -- a bit smaller, additional customers sort of taking a look at this technology? Or are you sort of -- are you getting some kind of evidence from your big customers that we're getting closer to real adoption of this technology?.

Well, I think there are actually 3 things happening. We're making good progress that are big customer and that continues. Obviously, it's taken longer than we thought it would take, 9 months ago or so. But we are making good progress there.

Secondly, we're starting to see pull from other customers in other regions and for flexible OLEDs and that type of product. And third, as we've worked on more adjacent market opportunities, we continue to find a real strong desire from the customers to sample this technology and try it out.

They see they have unmet needs that our OLED technology can provide. And we've got lab tools coming up in Q1 that will allow us to engage with the customers and see if we can take it to the next level. So it's a -- there's a lot going on. And that's kind of what's maybe driving things..

All right.

So we might actually see some -- little bit of modest revenues in the first half of '15, it sounds like?.

Well, I hope to have revenue in '15. And I'll say that, I wouldn't be too -- I wouldn't comment on preciseness of when..

Okay. And then Sam, a quick question on the OpEx. The $40 million target that is including stock comp, excluding amortization? I just want to make sure I'm sort of on the right track there..

Yes, that is correct. $40 million includes stock comp, equity compensation. Yes, it does..

And we'll go now to David Duley with Steelhead Securities..

I was just wondering, you had customers giving the major customer endorsement on your new MOCVD tool.

If you could share with us what sort of productivity improvement or cost improvements or any sort of metrics that you're hearing back from the customer in real-life production settings?.

Well, we've stated in our press releases that there's typically a 20% cost of ownership, potentially more. There is a fairly dramatic improvement in footprint efficiency, almost doubling the amount of LEDs you can put out of given space in the fab and a lot of other metrics, capital efficiency and things that are better.

But beyond just the metrics, the product works well. So I think that's really important. It's stable and performs well. Our products are highly automated. They've had a reputation in the market of having very high uptimes and being real work courses and people's fabs.

So it's a type of product that you really want to use when you are going to have a high-volume fab to make lighting applications..

And is that most customers take the beta at first and an evaluation before they start to order? Or do you expect customers just to order kind of without doing a long evaluation?.

Well, we're-- first of all, we're done with beta. So there are no more betas. We've done 3 betas and that's what we do with the early. Beyond that, some of the beta customers are already ordering more for manufacturing. I know one of the beta customers has moved their beta unit into production situation. And many customers will just buy the product.

So I don't think we're going to go through a real long period of evaluations..

And just so I get it right, you shipped the tools that have been shipped into production of these beta customers are moved into production but the amount of time it will take to see revenue from them is how long? What quarter next year do you think it will be here?.

So the beta tools, they were -- as John just mentioned, we have 3 beta tools and we have received acceptances on 2 of them already. And we expect to get the third one accepted soon over here.

But in terms of production tools, as we ship the production tools, we would need to wait until a broader pattern of system acceptance is established in the field, at which time, we can recognize the revenue upon shipment.

So in short, it would take about 2 quarters or so for us to go from a final acceptance based revenue to shipment based revenue on this new product..

The betas are already revenued in Q4..

The betas are revenued, yes..

Okay, great. I guess, I asked 2 questions there. And you answered both. Final thing for me is, you mentioned you saw a seasonal downtick in the utilization rates out there.

What time of year do you typically see the seasonal uptick in the utilization rates? Is that early -- late in the March quarter, early in the June quarter, or typically when is that?.

Probably, we may begin to see that, since China is a large part of our business, right after the Chinese New Year, we begin to see that. So say, mid to late spring and onwards..

We'll go now to Patrick Ho with Stifel, Nicolaus..

John, in terms of the EPIK700, can you characterize the customers that you're getting the initial tractions? I'm going to assume that they're existing customers of Veeco.

What are some of the opportunities with customers that are not, I guess, either lead Veeco users or even ones that don't use Veecos predominantly? How do you see the opportunity versus transitioning, I guess, existing customers to potentially new ones?.

Well, first of all, we sell to most of the customers in the market. There are not so many customers -- there are not many customers that are doing substantive expansion that don't buy Veeco tools. At this point, we have over a 50% share in every region of the world, except Japan.

And generally, the leaders around the world have been big buyers of all our tools. Some customers are dual-sourcing customers and some are single. If you're asking, can we penetrate some accounts that we're not in yet, at all? Possibly, but there's not a huge group of those customers.

But the customers that have accepted, or purchased the tool at this point, are global leaders. And they're some of them most important guys around..

Yes, maybe I should have clarified a little more just to follow-up on that.

if you're dual sourced with a specific customer that's kind of evenly split, are there opportunities where you can then become "the more lead or dominant supplier" with this tool?.

Sure. Absolutely..

Great. And my final question. In terms of product bake offs that you're seeing, it seems like you are getting the traction that you've talked about.

Can you characterize it in terms of the bake offs that you are now seeing, are you seeing it against a new product, or your competitors' older products?.

Well, I think if we're running our new products, it's against our competitors' older products. But our -- excuse me, against our competitors' newer products. But -- so -- the market's quite aware of both products, and that's really what we're competing with. So I'm not sure if I answered your question..

We'll now go to Brian Lee with Goldman Sachs..

Maybe to follow-up on Patrick's question. Your main competitor did announce a big order with one of your traditional customers in China.

So I'm just wondering, was this a competitive bid process? Or is there any pricing precedent being set here on these next gen tools given that, both you and AIXTRON trying to have new platforms out? It would seem that they are potentially being aggressive in China getting back shares. So I'm curious to hear your thoughts on that..

Well, first of all, Sanan has been a good customer of ours in the past. We expect they will be a big customer of ours in the future also. Clearly, AIXTRON has been aggressive and continues to be aggressive to try to win where they can. I can't comment a whole lot on any specific account, though, as I think you understand..

Yes. Fair enough. Second question I had was on the ALD order. Maybe just to clarify, so it's not -- if I get it right, you had 2 beta tools which got signed off, so those were booked.

Are those -- is it fair to assume that both of those tools are for Samsung? And are they for production? Or are they still R&D? And then last question on that would just be the $3 million that you did book in orders for ALD, is that representative of the tool ASP, as those tools will be configured to ship going forward?.

The ALD order was for -- not for production system, but was for a laboratory system. The price is not representative of the manufacturing pricing. And it was really one tool..

It was a prototype system, Brian..

Okay.

And that prototype system is still in Long Island? Or is that in Korea?.

It's in Korea..

We'll now go to Srini Sundar..

My first question is, what particular applications do you think will give you an edge to gain market share versus AIXTRON in MOCVD? That would be my first question.

Meaning, if you're going to increase your market share next year, what gives you the confidence that you will be able to?.

Okay. Well, the applications are really backlighting and really general illumination. I think those are the markets. The longer-term growth market at this point is general illumination. And I think our tool is extremely well suited for that market.

I think what gives us the confidence is the quality of our new tool, the innovation levels that improve both throughput -- so I think there's a -- the tool has a number of new innovative features that both improved throughput and uniformity and cost of ownership, and basically help our customers be able to make more LEDs for a given price..

Okay. Has a follow-up on OLED -- I'm sorry, on ALD.

What kind of applications that you're looking at, other than the flexible cell phone related applications?.

Really, flexible displays, obviously, OLED lighting, semiconductor applications and a number of other areas..

Okay.

But looking back in retrospect, do you think that you guys underestimated the timing it would take for it to be revenue?.

Well, we certainly would have liked it to revenue earlier. And we thought it had a good chance of revenue in earlier, but we also knew there was a significant probability that it would revenue later. So -- but I think the important part is that it's really great technology with compelling benefits. So that's what we feel good about..

[Operator Instructions].

All right. Well, I think we'll wrap up at this point. So thank you for joining us. And we look forward to speaking to you individually where we can. Thank you..

Thank you..

This concludes our conference. Thank you for your participation..