Shanye Hudson - Vice President-Investor Relations John R. Peeler - Chairman & Chief Executive Officer Shubham Maheshwari - Chief Financial Officer & Executive VP-Finance.

Edwin Mok - Needham & Co. LLC Patrick Ho - Stifel, Nicolaus & Co., Inc. Krish Sankar - Bank of America Merrill Lynch Stephen Chin - UBS Securities LLC Brian K. Lee - Goldman Sachs & Co. Paul Coster - JPMorgan Securities LLC David Duley - Steelhead Securities LLC Vishal Shah - Deutsche Bank Mark Miller - The Benchmark Co. LLC.

Good day and welcome to the Veeco Instruments First Quarter 2016 Earnings Call. Today's conference is being recorded. At this time, I'd like to turn the conference over to Ms. Shanye Hudson. Please go ahead, ma'am..

Thank you, operator. And good afternoon, everyone. Joining me on the call today are John Peeler, Veeco's Chairman and CEO, and Sam Maheshwari, our CFO. Today's earnings release is available on the Veeco website. Please note that we've prepared a slide presentation to accompany today's webcast.

We encourage you to follow along with the slides on veeco.com. This call is being recorded by Veeco Instruments and is copyrighted material. It cannot be recorded or rebroadcast without Veeco's 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 being 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. With that, I'll turn the call over to you, John, for opening remarks..

Thanks, Shanye. The first quarter marked another period of solid execution for Veeco. We delivered revenue of $78 million, which was at the high end of our guidance range, we achieved gross margin performance of nearly 42%, well above our target of 40%, and we lowered our EBITDA loss to approximately $2 million.

However, business conditions remain challenging and our first quarter bookings declined to $62 million, reflecting the ongoing impacts of global economic uncertainty, a slowdown in consumer spending and a weak LED industry environment.

We continued to repurchase stock during the quarter, buying back approximately 730,000 shares and returning $13 million in cash to our shareholders. Our ending cash balance was $349 million. Overall, we're performing well against our commitments and within the bounds of our control.

Looking ahead, we foresee a continuation of this tough business climate and we plan to take proactive steps to align our cost structure to our current outlook and we're in the process of assessing those measures. With that, I'll turn the call over to Sam to discuss our first quarter financial performance in more detail..

Thanks, John. And good afternoon, everyone. Today I will be discussing our non-GAAP financial performance. You can find a detailed reconciliation between GAAP and non-GAAP results in the press release and on our website. We continued to execute well across the key financial metrics and drive operational leverage in our model.

We delivered first quarter revenue at the upper end of our guidance range while exceeding expectations for gross margin, adjusted EBITDA and earnings per share. However, the global economic landscape and added challenges to our markets impacted our Q1 orders. Turning to the specifics.

First quarter revenue was $78 million and at the high end of our guidance range. PSP products contributed nicely to Q1 revenue, with sequential growth from both the RF and Advanced Packaging markets.

Compared to the prior quarter, Q1 revenue was down by 27%, driven largely by the decline from Lighting & Display markets, where LED chip manufacturers continued to work through industry oversupply conditions.

We delivered ahead of our target gross margin in Q1, achieving 41.7%, an increase of nearly 500 basis points over the prior quarter and above the high end of our guidance. We benefited from a favorable product mix while also seeing margin expansion in MOCVD and PSP products.

Operating expenses were flat quarter-over-quarter at $38 million, which was on the low end of our guidance. We are maintaining tight controls over expenses while continuing to make strategic R&D investments.

We are prioritizing investments in areas that offer meaningful growth opportunities for Veeco, notably in the areas of GaN Power Electronics, Advanced Packaging and FAST-ALD for front-end semiconductor applications. We recorded a narrower than expected non-GAAP loss of $0.15 per share based on a share count of 39 million diluted shares.

Due to strong gross margin performance, our adjusted EBITDA loss was lower than expected, at $2.1 million. Now turning to the market data. We recorded $62 million in bookings for the first quarter.

Lighting, Display & Power Electronics represented 39% of Q1 orders, while EPIK makes up the bulk of our MOCVD orders, we are beginning to generate customer interest for our recently launched K475i tool for red, orange and yellow, or R/O/Y, LEDs where we booked orders with a second customer in Q1.

Advanced Packaging, MEMS and RF made up 11% of Q1 orders. Following record performance in Q4, orders declined sharply in the first quarter in these markets. We are working with device manufacturers and OSAT customers to expand our PSP position and remain encouraged by the progress we are making in Advanced Packaging.

In RF and MEMS markets, we have seen a slowdown in the pace of new capacity orders which coincides with weaker-than-expected demand for high-end smartphones. Scientific & Industrial accounted for 36% of orders, supported by a strong demand for MBE products.

We continue to win the lion's share of MBE opportunities for advanced materials research and recently booked our 20th GENxplor Advanced Research System. Roughly half of our MBE orders were for production applications where Veeco's technology is enabling high-power fiber lasers and high-end RF devices for mobile applications.

We are pleased with our performance and have a healthy pipeline of opportunities for MBE and optical tools. Data Storage market made up 14% of Q1 orders. Our business there is impacted by declining PC demand and ongoing transition towards Flash drives. As a result, customers are limiting investments to critical technology buys.

We have focused our efforts on expanding service opportunities in this market and have had ongoing success by helping customers maximize the performance and cost efficiency of their installed base. Now briefly covering our revenue breakdown. Lighting, Display & Power Electronics contributed 29%, with a majority of sales derived from the EMEA region.

Advanced Packaging, MEMS & RF increased to 30% of Q1 revenues, driven by strong growth in shipments to the RF markets and capacity ramps for fan-out wafer-level packaging. Scientific & Industrial markets made up 19% and Data Storage accounted for 22% of total Q1 revenues. On a geographic basis, U.S. and EMEA each represented 35% of Q1 revenue.

China decreased to 11%, with the Rest of the World making up the remaining 19%. We ended the quarter with $169 million in backlog, down approximately $17 million from Q4. Now moving to the balance sheet metrics. Cash flow used by operations was $19 million for the quarter.

Accounts receivable increased sequentially by $7 million and shipments were biased towards the second half of the quarter, leaving less time for collections. Inventory remained flat from Q4 to Q1. However, deposits made to contract manufacturers increased by $7 million.

These deposits supported our efforts to insource some of the manufacturing activities for our iMB products as well as to secure certain materials for future manufacturing capability. Capital expenditures increased slightly to $4 million.

We remain committed to investing in next-generation engineering programs and these investments are made to enhance our ability to develop products for Power Electronics and Advanced Packaging markets. We used $13 million in Q1 to repurchase common stock at an average price of $17.86 per share.

Our resulting cash and short-term investments were $349 million at the end of Q1, including $106 million held offshore, which may be subject to taxes in order to repatriate. Now turning to guidance for the second quarter.

Under current business conditions, we expect revenues to remain relatively flat in the second quarter, within a range of $70 million to $83 million. Non-GAAP gross margin is expected to be between 39% and 41%. The slight margin decline from the first quarter is due to product mix.

However, it is important to note that we are performing ahead of our previous gross margin target at these low business volumes. Q2 non-GAAP operating expenses are forecast to be in the range of $37 million to $39 million.

GAAP loss is expected in the range of $0.59 to $0.44 per diluted share and non-GAAP loss is expected in the range of $0.29 to $0.14 per share. Q2 adjusted EBITDA is expected to be in the range of negative $6 million and breakeven.

Also, based on our current visibility, third quarter revenues are trending to be in the same range as I just provided for Q2. And we are planning expense reduction initiatives in the near future which target lowering our EBITDA breakeven by year-end to quarterly revenue levels of $75 million to $80 million.

With that, I'll turn the call back to John for a further business update..

Thanks, Sam. Let me start by sharing our perspectives on the current business environment. At a high level, macroeconomic conditions remain uncertain. Many countries outside of the U.S. are experiencing slow growth impacted by weak currencies, high unemployment rates and geopolitical tensions.

These factors continue to weigh on consumer spending and, in turn, the end markets in which we participate. For the past of couple quarters, we pointed towards sluggish TV demand as a key factor behind weak LED industry conditions. Potential TV growth drivers, including the Chinese New Year and Summer Olympics, have failed to spur TV demand.

Research firm IHS now forecasts a decline in Q1 2016 TV shipments, marking the first time since 2008 that first quarter shipments have declined year-over-year. Despite ongoing demand for general lighting, it will take the industry a bit longer to consume the excess LED supply created by weak display demand.

For LED chip manufacturers, overcapacity conditions combined with intense price pressures continue to weigh on their profitability. Customers have started consolidating facilities and/or transitioning manufacturing to more profitable markets in order to improve their bottom line performance.

We believe these actions bode well for MOCVD demand over the long term, however we expect investments will likely remain soft throughout 2016. Turning to the mobile markets. High-end mobile devices have been a key demand driver for the MEMS and RF markets.

Global economic conditions have also weighed on smartphone demand, particularly for high-end models. Weaker currencies have led to higher pricing and affordability issues. Users have been more apt to purchase lower-cost entry-level smartphones or to delay their phone purchases all together.

In this environment, RF device manufacturers are maintaining discipline and focusing their investment towards technology buys necessary to support next-generation smartphone devices. We continue to see incremental business in the RF and MEMS market, where we already have established positions with our PSP and iMB matched products.

In Advanced Packaging, outside of the large capacity ramp that is underway by a leading Asian foundry for fan-out wafer level packaging, investments have been primarily focused on technology transitions. OSATs are moving to smaller geometries and next-generation packaging technologies, which offer both cost and performance advantages.

We believe these next-generation devices will provide opportunities for our PSP products, with a need for more precise process control, as required, and we continue to make positive progress with our customer engagements.

As we navigate through the current market uncertainties, we remain highly focused on execution and managing the business for the long term.

In line with our strategic priorities, we're focused on leveraging our technologies to capture opportunities in our existing markets, expanding into adjacent markets to diversify our revenue and provide stability through industry cycles, investing in highly differentiated solutions that offer substantial growth and maintaining strong operational focus to deliver solid financial performance.

Over the past couple of years, the LED Lighting & Display markets have formed the foundation for our business and we've emerged as the recognized leader in MOCVD. According to IHS, Veeco's share topped 80% in 2015 for gallium nitride, or GaN-based, LED applications. As LED technology has evolved, the quality and performance of devices have improved.

Today, manufacturers can control the spectrum of light being emitted by LEDs to engineer the desired color or set of colors. Tunable LEDs are being used in offices and classrooms, where certain hues have being found to improve concentration and productivity. And red and blue LEDs are used for horticulture to optimize plant production and flavor.

MOCVD technology is enabling these and many other applications, including highly efficient GaN-based power electronics, laser diodes and infrared sensors. We've strengthened our MOCVD portfolio to offer the right set of products to address these opportunities. We're well positioned for GaN LED applications with our flagship EPIK product.

Our recently launched K475i tool is enabling us to more effectively compete for arsenic phosphide applications. We're already making inroads for red, orange and yellow LED production. And lastly, we're seeing acceleration in customer interest for our Propel single-wafer MOCVD technology.

Our R&D platform continues to gather praise from customers in support of their next-generation power device development. We believe that the technology is well suited for emerging applications which will benefit from the tool's unrivaled film uniformity.

Collectively, these emerging applications translate into additional opportunities for Veeco which will build over time. We're equally excited by growth prospects in the Advanced Packaging markets with our PSP products.

We've been focused on leveraging our flexible product design and in-depth process knowledge to develop cost-effective solutions which also meet our customers increasingly complex requirements. For the through-silicon via, or TSV, Reveal application, our PSP approach accomplishes both of these objectives.

TSV technology offers distinct performance and form factor benefits by vertically stacking chips versus placing them side-by-side. However, steep manufacturing costs have been a barrier for wide-scale adoption. The TSV creation process, including the Reveal step, represents more than 50% of the overall process cost.

Based on a third-party analysis, Veeco's PSP process approach for TSV Reveal offers a 60% cost advantage when compared with the incumbent plasma-based process approach by reducing the total number of required steps. This translates into meaningful cost savings and customers are taking notice.

We're continuing our development efforts and have formalized our customer engagements for the TSV Reveal. We're also demonstrating our cost-effective approach to the TSV clean step. These applications could translate into revenue opportunities starting in the mid-2017 timeframe, which we estimate to be between $15 million and $20 million in 2017.

While we continue to operate in a tough business climate, I'm pleased with our ability to execute and deliver against our financial commitments. We've achieved gross margin performance above our 40% target and are maintaining tight control of our costs to drive operational leverage in the business.

We are targeting to lower our cost structure and are assessing appropriate steps necessary to achieve EBITDA breakeven by year end at quarterly revenue levels of $75 million to $80 million. At the same time, we remain focused on our strategic objectives to position the company for growth.

We're leveraging our strong MOCVD technology to further strengthen our GaN-based LED positions and capture emerging opportunities that extend beyond LED, expanding our footprint in Advanced Packaging and working with customers to qualify our cost-effective processes using our PSP platform.

We're investing in areas that offer meaningful growth, such as FAST Atomic Layer Deposition technology, where we've made rapid progress demonstrating our ultra-low temperature ALD capabilities and have seen acceleration in customer pull based on our results. We already demonstrated the ability to deposit nitride films with exceptional film quality.

And since our February call, we've also shown that our process does minimal damage to the underlying film layer. Based on the feedback we received, these results have not been achieved by other ALD systems and address a critical challenge for next-generation memory devices.

We're working with customers and target shipping one or more beta units by year end to meet their production timelines. With that, we'll start the Q&A session..

Thank you. We'll take the first question from Edwin Mok with Needham & Company..

Hey, guys. Thanks for taking my questions. First question just on the MOCVD space. I think your competitors talk about their order improving a little bit this quarter, which kind of contrasts against yours, although they probably started at a lower level. Just wanted to triangulate those commentary. And I have two follow-ups, if possible. Thank you..

Yeah, so thanks, Edwin. The MOCVD order rate for us has predominantly been in lighting and backlighting and with some power electronics, whereas AIXTRON plays into some different segments that we're not currently in. So I think that's the difference, that plus just general lumpiness of the business is the real difference there..

I see. So that's actually a good tie-in to my follow-up. So I think you mentioned the arsenic phosphide effort you guys put in there to go after the auto lighting space. I think historically, AIXTRON is [well-penetrated] into making auto lighting.

Is that an area that you felt you can gain share as you move forward? And maybe you can make some comment about the efforts there?.

Sure. So last quarter we introduced the K475i arsenic phosphide system. It's really for red, orange and yellow LEDs plus solar. And it's an area where we've probably had a little less than 50% of the market share in recent times and we think there is an opportunity to grow our share in this area.

If you remember back to a few years ago when we launched the K465i, the improved characteristics of that device or that reactor really enabled us to gain a lot of share because of the characteristics, the ease of use and cost of ownership benefit. So we think this is an opportunity to grow our share and move into that area in a bigger way..

Okay, great. That's helpful. A question on the financial model. I think you guys talk about looking at your cost structure and maybe take some more steps to bring the adjusted EBITDA breakeven down to $75 million to $80 million.

I was wondering, how do you think about gross margin in that context? I think, firstly, you guys talk about reaching 40% gross margin at $100 million revenue level. Obviously you guys are already there. Is it time to adjust those expectations? Is your gross margin performing better than you expected? Maybe give some color on that..

Sure. Thanks, Edwin. This is Sam. Yes, so we are very pleased with our gross margin performance. And right now, we are performing well ahead of our previously-established target. You said $100 million, 40% was the goal, but we have moved that whole platform up.

Our efforts on cost reductions are now fully flowing through the P&L, then prices are also stable. The only thing that's not working in our favor is really the overall volume. But even at these low volumes, we are able to produce better than 40% gross margin.

And I think I feel good about gross margin at this time that, even at $75 million to $80 million revenue range, I feel good about producing more than 40% in gross margin.

And as we do some of the cost reduction activities that we have now talked to you about and we are in the middle of that process, there is a further upside through that to gross margin that is not baked into our numbers yet. So when we come and talk to you in July, we will share our cost reduction activities in a little bit more detail.

And so, overall, I feel pretty good about our 40% gross margin or higher at these low revenue levels..

Okay, great. That's helpful. Last question I have. On the Advanced Packaging, MEMS & RF space, I know this order is down a lot, as you suggested in your prepared remarks. My understanding is you're selling those products even for the fan-out wafer-level packaging applications as well as some of these MEMS & RF.

I think you cited various market dynamics that drove weaker orders here.

Do you think that you have to wait for the TSV to really kick in for that to start to recover, or do you see a path for recovery for this year? If you can give some comment on that?.

Sure. So keep in mind, we had an enormous quarter in Q4. So I think maybe we pulled a little bit into Q4, but we had a very large quarter in Q4. We have a great order pipeline in front of us. We're expecting to deliver better than 10% growth again this year and we certainly don't have to wait for TSV Reveal.

Our products are very well-suited to the fan-out wafer level packaging area. We got an order last quarter for that. We are qualifying different products for different steps in that process, which will give us some good growth opportunities. And we have been consistently pretty strong in the MEMS area and RF area.

So I think we're looking for a good year here and think there's a lot of opportunity in front of us..

Thanks, Edwin..

We'll go to the next question. It comes from Patrick Ho with Stifel, Nicolaus..

Thank you very much. John, maybe as a follow-up to the last question regarding Advanced Packaging, you mentioned at least briefly about fan-out applications.

Can you give a little bit of color on both the steps on fan-out as well as opportunities in copper pillar, given that those are probably the two biggest processes on the Advanced Packaging side that are gaining volume traction today?.

Sure. We do steps for UBM and RDL Etch for flux clean, for photoresist strip. We also handle wafer thinning, metal lift-off, really a lot of different steps. We have a very flexible product line that is adept at cleaning, etching and really processing in single-wafer applications.

And what we're seeing is that as our customers move to finer geometries, tighter devices and more advanced devices, the move from a batch-type processing approach to a single-wafer processing approach really improves their yield and their economics. So as the customers continue to develop their devices, we get more and more opportunities to play.

And that's what's giving us some good growth and good future opportunities..

Great, that's helpful. And maybe my follow-up question on the MOCVD side of things. In the current environment, there's no surprise there's not a lot of activity going on.

However, given the issues your competition has experienced over the past year, can you just discuss maybe how evaluations and qualifications with customers are going, so when volume buys do return, how do you feel about your position, especially with qualifications and evals going on today?.

Sure, sure. Well, first of all, in the mainstream lighting market, we've achieved a clear leadership position. There's no more evaluations going on. I think the market knows what product to buy. In the arsenic phosphide tool we launched, the K475i, we've had a product in that area for quite a while, but this product really ups the bar on performance.

So that's going on and being evaluated now. And then in Power Electronics, we've sold various reactors to the Power Electronics market for quite a few years, as customers were in the R&D phase.

And the feedback we got was basically they didn't feel that anybody's products on the marketplace delivered good enough uniformity and the film characteristics that they were looking for.

So we've developed a single-wafer reactor version targeted at the Power Electronics market that is being used, being evaluated and used at a number of customers really in R&D applications to prove the film quality and the performance of it. So that's ongoing now. We have a high-volume manufacturing tool in development that will go into beta soon.

And that device basically clusters a number of single-wafer reactors together to hit the future high-volume manufacturing requirements that people will have a year or year-and-half or two years from now. So we think that approach is the best approach for the market and will ultimately win out over any other technology..

Great. Thank you very much..

Thanks, Patrick..

We'll take the next question from Krish Sankar with Bank of America..

Yeah, hi. Thanks for taking my questions. I had a couple of them. First one, either John or Sam, one of your big customers, San'an, seems to be having very high utilization rates, yet they're not placing orders.

So why do you think that is the case? And also, do you think that your competition lost some business there, but is the customer trying to quantify any local Asian MOCVD supplier? Then I've got a follow-up..

Okay. So, look, the overall industry is still in a excess capacity situation. So although utilizations have gone up, some major customers in China over the last year have really had added quite a bit of capacity. So I think that's the capacity situation. At this point, there's not a screaming demand to add more right now.

Clearly there are some Chinese competitors in this market that are trying to get qualified and working on developing tools.

We believe we are quite far ahead of them and we'll be able to sustain our lead in terms of cost of ownership and just a fundamentally better product based on many years of experience and hundreds of million of dollars of development..

Got it, got it. That's very helpful.

Then a follow-up question I had is the orders that you have for the integrated fan-out for thin applications, are these orders front-half loaded or do you expect more orders to come in the back half, too?.

I can't speak of future orders, but the orders that we have ship pretty quickly. We generally have lead times in our PSP business of three months or four months or that type of thing. So we're able to turn the product quickly and that's a real advantage for us versus some of the competition.

So we do expect lots more orders and see lots of opportunities, both in similar steps as the past, which, in this case, was a flux clean step, as well as other steps. So we see a good future there..

Thank you..

We'll take the next question from Stephen Chin with UBS..

Thanks. Hi, John and Sam. Just a follow-up question on the MOCVD sales to China. It does look like we're at a bottom with these sales to China coming in under $9 million.

So, is it still your view, John, that there can still be another China MOCVD upcycle? And, if so, what are some of the leading indicators that you're hoping to see from China to get more upbeat on their market? Is it typically higher light demand? Thanks..

Okay, yeah. So, look, I think we do expect another upcycle and the shipments are very low in terms of number of systems going into China. So we do believe that will bounce back. It's a matter of using up the capacity that's there. I think that does not require an improvement in the TV or display market.

Clearly, if the TV or display market improves, this will get better faster. But even if it doesn't, the general lighting adoption will use up the excess capacity and ultimately cause people to order more product.

I think both in China and in other regions, we're talking to customers about substantial expansion and purchases in the future, so we're confident they're there. What we don't know is what the timing is and is this one or two quarters away, or is it three quarters or whatever away.

So we certainly expect to pick-up and it's happening as lighting adoption continues, or will happen..

Okay. Thanks for sharing that. And my follow-up question is on the atomic layer deposition product that you just reported is in these beta trials, which looks exciting. If you could share some of the items that give you confidence that Veeco could do well in this market longer term.

You're competing against some of the bigger semi cap suppliers and maybe even some local competitors.

Any color you can share on what gives you confidence in this ALD product?.

Sure. So a couple of points. First of all on the ALD product itself, we have a very unique approach to ALD that is able to rapidly deposit film at very low temperatures and not create plasma damage.

So that's pretty fundamentally unique and we think it's compelling and our customers are telling us it will enable them to do some things they couldn't otherwise do. So if we didn't have a differentiated compelling technology, we wouldn't be doing this. Secondly, we've got good customer feedback and a lot of pull and a lot of interest.

So those are one thing. But maybe taking another step back, we spent many years perfecting Ion Beam Etch and Ion Beam Deposition technology for magnetics in the Data Storage market.

And over the past couple of years, year-and-a-half, we have developed an Ion Beam Etch tool for the magnetic memory market in cooperation with another leading capital equipment semiconductor company. We've made our tool attach to theirs.

That tool is in beta trials now in the front-end semi market, is getting very good feedback and a high degree of customer interest. So we've gone beyond the stage where we are in ALD now with this other technology, Ion Beam Etch.

And then third, we have made an Ion Beam Deposition tool to make EUV mask blanks and we've been selling that for a couple of years. And clearly the market's not at a high-volume manufacturing point at this time, so we're not selling those right now or not selling a lot of those.

But it's just another case where we've taken a unique and compelling technology and applied it to a new market and been successful. So I think we're starting to build a track record here..

Okay. Thanks, John..

Thanks, Stephen..

We'll go to the next question. It comes from Brian Lee with Goldman Sachs..

Hey, guys. Thanks for taking the questions. Had two of them real quick on MOCVD. First, John, there's been lot of talk about the cycle and you're clearly seeing some weakness here and not quite sure when the expansion opportunities will materialize. But seems like we have heard of and seen some examples of upgrades across different capacity footprints.

So just wondering if you can comment a little bit about the replacement cycle to the extent that you're seeing any traction there and what you might be expecting going forward?.

Sure. So what we have seen is customers begin to take older generation reactors out of service, products that were shipped, let's say, before 2009 or maybe before 2010 and really just can't economically compete with the newer products that have shipped in recent times and that are shipping now. So, we're starting to see the beginning of that.

First of all, I don't think these tools will ever will come back online. And I think as the market picks up a little bit, they will be looking to replace those with new generation equipment. So we're starting to see the trend. It's not having a big impact on our results yet, but I expect that it will help over time..

Okay, great. That's helpful. And then just maybe a follow-up question to an earlier one around San'an.

Just at a high level, can you comment as to the status of the deliveries, just if you have any knowledge of any of those systems that your shipped last year and at the beginning of this year, if any of those are idle or if they're all connected at this point? And then what sense of utilization trends you're seeing there, given the bigger capacity footprint at this point for that customer? Thank you..

Look, I need to stay away from talking about specific customers. But the products we've shipped are being used and running and working and all of that. So I think our EPIK product has been a very successful product and is doing well at quite a few different customers. Thanks, Brian..

We'll take our next question from Paul Coster with JPMorgan..

Yeah, thanks for taking the questions. A couple of quick ones. You've been doing such a good job on expense containment and managing the margins north. It's a little bit surprising to see R&D up year-on-year and sequentially.

Can you just talk a little bit about what that's all about and when we would expect that to reverse with or without the anticipated additional restructuring effort?.

Sure. Thanks, Paul. We are funding a number of R&D programs. John talked about Ion Beam Etch, ALD and new products that we have launched in the last year. And right now a number of programs are, I would say, beyond the mid-stage of development cycle. So there is a strong focus on R&D and we are committed to fully funding them.

That's the reason overall for the uptick in R&D. And as I said, we are committed to those and we will keep funding them, too. On the other hand, as the activity has gone down, we are looking at initiatives to reduce costs and expense structure in the company and bring the company back to EBITDA profitability..

Sam, you also I think mentioned that the gross margins on the MOCVD sales were actually – did you say higher, even though the unit volumes were lower? Is that correct? And, if so, how do you pull that off?.

Yeah, sure. So I think my comment was more related to an overall company level. As you know, we do not disclose gross margins by product line or business unit. Overall, last year, we worked quite a bit on cost reduction efforts, materials-related cost reduction on EPIK product line.

And it takes some time for those cost reductions to work their way through inventory and then through over to the P&L. And at this time, beginning with Q1, consistent with our plan, it is now beginning to show on the P&L. So that is definitely a very big driver for our overperformance or good performance on gross margin.

At the same time, we are definitely enjoying stable prices. Even though the volume is low we are enjoying stable prices on the MOCVD product just because of the differentiation of the product. And our other businesses outside of MOCVD are doing relatively well.

MBE is doing very well, PSP is doing very well, so the businesses which have gone down in volume, we have done a good job in terms of cost reduction and the other businesses we are seeing a good leg up on the overall volume there. So, overall, this whole thing is working out to produce more than 40% in gross margin..

Got it. Okay. My last question for John, if I may. So you mentioned that some Asian suppliers are trying to get qualified in the MOCVD space. I'm not particularly worried about that. But I wonder what architecture are they using.

Are they trying to use the same kind of orbital approach as Veeco or not? And if they are using the same approach, do you think there's patent issues there?.

There are multiple suppliers using multiple different approaches. And they've been working on it for quite a while. It's a tough industry to enter and, if you remember the Applied Materials attempt to enter this market with a lot of funding and lot of experience and a lot of smart people, they ultimately didn't do so well.

So, look, we don't take anything for granted. We continue to work very hard on sustaining our lead and we think we have the lead and can keep that..

Got it. Thank you..

Thanks, Paul..

We'll move to our next question. It comes from Colin Rusch with Opp Co. Sir, please check you mute function. And hearing no response, we'll go to the next caller, David Duley with Steelhead..

Thanks for taking my question. Just a clarification.

Do you expect your Advanced Packaging, RF & MEMS business to recover on the revenue front in the second half of the calendar year?.

First of all, we're off to a good start in revenue with the business and we're looking for a solid revenue growth year this year and we're looking for 10% or better overall year-over-year..

Okay. So you came up, I guess it was December quarter where you had a really big revenue quarter in that business. I was just wondering how the....

We had a very big bookings quarter in the December quarter and a smaller bookings quarter in Q1. But both were quite solid in terms of revenue..

Okay. Okay, thank you. Now, you talked about lowering your breakeven, I suspect given you're seeing growth in this Advanced Packaging area that you're probably not going to see a bounceback in the MOCVD business in the second half of the year given the lead times, at least on the revenue front..

Look, what we are attempting to do here is to look at where all we can reduce cost and expense structure given the lower activity. We have provided you a guidance for the second quarter and I already laid out an expectation for the Q3 quarter at the overall company level.

However, beyond that, I don't think we have sufficient visibility to call it in any direction. Overall, the industry is in an oversupply situation on the MOCVD side. However, at the same time, there are a few customer engagements or customer discussions we are beginning to have where they are talking about substantially large expansion plans.

So it is very hard to call when would those PO activity would happen and then when would those shipments would go through. It's really difficult to call. So, I would say beyond Q3, we do not have sufficient visibility to call it in either direction for you. So it is really open out there at this time for us.

And it would really depend upon the purchase order activity on the MOCVD side. On the PSP side, the business is overall expected to grow. We have already laid out that expectation and we feel good about it in terms of 10% growth year-over-year for them. Our MBE business, we are taking market share away from the competitor.

That business is showing pretty strong growth. And then the last business, Data Storage business, that industry is going through some challenges in terms of continued PC demand decline, et cetera. So our cadence on that is well understood.

But overall I would say the most difficult thing to call here is the pick-up or the recovery or the timing of the recovery of the MOCVD business. Hope I addressed your question, David..

Yes, you did. Thank you. And just remind us what the lead times are of the MOCVD tools are now..

Generally, MOCVD lead times are around six months. It could be six months plus/minus one month..

Okay. Thank you so much..

Thank you, David..

We'll move next to Vishal Shah with Deutsche Bank..

Yeah, hi. Thanks for taking my question.

Sam, maybe can you talk about how your R&D is split across the different end markets? Is it still assumed that your spending on R&D is comparable to your revenue split? Or you are spending more on one area versus the other?.

So our R&D is really – R&D is fungible across various business lines in the sense we do not really follow a model there. There is a specific percentage as a factor of revenue. We really move it around depending upon the opportunity we have in well-established products in the company.

We look at all the opportunities that are in front of us and then we rank order them and fund the most promising ones. So really the way we run our business is more from a product opportunity and a product potential perspective and not really as a factor of the top line..

Okay. So maybe just a fairly long-term question then.

Assuming the MOCVD still comes back, can you maybe just talk about how you think your revenue split will be across different segments, assuming you're successful in some of the other product strategies across other segments?.

Sure. As the industry comes back, I think there would still be a large contribution from the LED industry in our overall revenue. It is not there right now in this quarter, but that is just an anomaly. Longer term, it should come back. Now, we are also beginning to gain traction in the semiconductor side.

Those revenues are expected more from the ALD side more in the 2018 timeframe from a P&L revenue, although we expect to ship products or have shipment revenue in 2017 from ALD. But that would go through a process of normal growth that happens in semiconductor. PSP, when we had completed the acquisition in 2014, they were running around $60 million.

And we are growing that business, 10% was our expectation, but we grew it 20% in 2015. And we expect to keep growing at this coming year as well.

On the other hand, Data Storage side, that is facing some secular headwinds, as we have talked about in the past, so that business we are monetizing through customer productivity improvements as well as monetizing certain service opportunities there.

So that business is generally flat to a very low percentage in terms of growth and it would see a reasonable amount of volatility across the quarters..

Okay. That's great. Thank you so much. And one last question just on the MOCVD side. Can you then talk about utilization rates at your customer level at the customers across different regions, please? Thank you..

Sure. So utilization rates, the December quarter tends to be a little bit higher utilization just based on the seasonality basis. What we saw is China come down for the Tier 1 customers from, let's say, 83% in December to 80%.

There was a lot of new equipment brought online in the second half of last year, kind of second tier players in China around 60%, probably a little better than the end of the year. Taiwan is about flat, 84%. And Korea came down a little bit to about 72%, probably driven by weak TV demand. But certainly better than it was in the October quarter.

So overall utilization rates, maybe just a tad down..

Okay, great. Thank you..

Thanks, Vishal..

And we have time for one more question and it comes from Mark Miller with Benchmark Company..

Hi. Hello..

Hi, Mark..

Yes, please go ahead, sir..

Okay. I was just wondering there were a lot of people have written off the data storage business and we heard what Seagate was saying. But I listened to another call by a supplier of deposition equipment for the disk and they provided a little bit of hope.

They basically said we think that the PC secular trend will slow down and we'll keep on increasing the number of heads and disks per media. Now, this is not going to happen this quarter or next.

What are your hopes there? Is there any reason to have any hopes that we'll see and significant capacity adds in the long term?.

Well, I hope they're right. And I think there are larger drives being made with more heads and more disks going into the enterprise and cloud-type opportunities. So I think that is one of the positive trends there. I think there's also a continuing need to evolve some of the technology to get performance out of the drives.

And so we see the opportunity for us is helping to move the technology forward as well as provide a quite a few different types of services for the industry that really improve their productivity and improve their profitability. Should we get back to a point where we actually see some capacity growth, that will be great.

But our strategy for this business has been to continue to serve the Data Storage business, but to take the unique technologies we have in that area and leverage them into other markets that do have a lot of growth.

And I think one of the examples I gave of that earlier was taking magnetic Ion Beam Etch capability and taking it into the front-end magnetic memory market. We think that will give us some extra growth over the long term as well as taking it into the MEMS & RF areas, which we've done.

So you know we don't think of our business as a Data Storage business anymore. We think of it as Ion Beam Etch and deposition business that happens to serve the Data Storage market..

Thank you..

Thanks, Mark..

Thanks, Mark. And with that, we will wrap up. Thank you all for joining us tonight..

So that does conclude today's presentation. Thank you for your participation..