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

Brian Lee - Goldman Sachs & Co. Krish Sankar - Bank of America Merrill Lynch Stephen Chin - UBS Securities LLC Colin Rusch - Oppenheimer & Co., Inc. (Broker) Patrick Ho - Stifel, Nicolaus & Co., Inc. Edwin Mok - Needham & Co. LLC Mark Miller - The Benchmark Co. LLC David Duley - Steelhead Securities LLC Vishal B. Shah - Deutsche Bank Securities, Inc..

Good day and welcome to the Veeco Instruments Second Quarter 2016 Earnings Call. Today's conference is being recorded. At this time, I'd like to turn the conference over to Shanye Hudson, Vice President, Investor Relations. Please go ahead..

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 rerecorded 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, John, for opening remarks..

Thanks Shanye. The first half of 2016 played out as expected with weak LED industry conditions weighing on our MOCVD business. Despite these challenges, Veeco once again delivered commendable results for the second quarter.

Revenue was $75 million and near the midpoint of our targeted range; gross margins expanded by 70 basis points, exceeding our guidance range for the second consecutive quarter; bookings improved by approximately 10%, reported by multiple orders in Advanced Packaging for our PSP products.

And while orders for our Lighting & Display markets remained soft in the quarter, we are now seeing increased customer activity and MOCVD demand. Even so, our focus remains on rightsizing the business to improve profitability through the cycles, and we have quickly taken action towards that goal.

We're executing plans to lower the company's quarterly breakeven level to be between $75 million and $80 million by Q4. These efforts are intended to streamline the organization, while maintaining the flexibility and capability to support future growth.

With it, I will turn the call over to Sam to share further details on our restructuring efforts and our second quarter performance..

Thank you John and good afternoon everyone. Before I discuss our second quarter financial performance, I want to spend some time on the restructuring initiative that we are undertaking. As John mentioned, we target achieving EBITDA breakeven at quarterly revenue levels of between $75 million and $80 million.

We are taking several actions aimed at improving efficiency and profitability of the company. Starting with our manufacturing operations, we currently manufacture Ion Beam optical and certain MOCVD products in separate facilities located in the State of New York.

We are consolidating these manufacturing activities into our New Jersey facility by Q1 of next year. The consolidation would help us manage volume variability across product line, while maintaining the ability to scale through our outsourced manufacturing partners.

Second, we are reducing certain head count to create a more efficient field infrastructure and streamline administrative function. And third, in the R&D area, expenses will decline towards the end of this year as certain development programs are completed. However, we will continue to fund R&D programs that position the company for future growth.

The benefit to our P&L from these efforts will be realized in full by Q1 of next year. We are targeting annualized savings of approximately $20 million in fixed costs. Approximately 60% of these savings are in OpEx and the remainder is from the cost of goods sold area.

Due to these initiatives, we are recording a pre-tax charge of approximately $16 million in Q2, out of which $2 million is cash and $14 million is non-cash in nature. These charges are primarily due to facility and equipment related impairment, as well as severance charges. Now let me turn to our second quarter performance, starting with bookings.

We recorded $68 million in bookings, up $6 million from Q1 driven primarily by Advanced Packaging, MEMS and RF orders. Orders from Lighting, Display and Power Electronics remain soft and were relatively flat to the first quarter. On a positive note, multiple LED manufacturers are now indicating plans to add MOCVD capacity in the near-term.

While we cannot predict the timing of these orders, nonetheless, we are encouraged by these discussions. Advanced Packaging, MEMS and RF orders doubled from the first quarter. We continue to demonstrate the applicability of our solvent cleaning solutions for multiple packaging scheme.

It will take time to fully build this business; however, we are very pleased with our continued progress there. We are calling the Scientific, Industrial and Data Storage markets our foundational business, as this group of diverse markets has provided us with a relatively stable base business for multiple quarters.

In Q2 we saw a slight uptick in orders from Data Storage as disk drive manufacturers made incremental investment to unify their install base configuration. Now turning to revenue. Q2 revenue was $75 million and slightly below the guidance midpoint.

Lighting, Display and Power Electronics represented 33% of total revenue with an increase in sales to Chinese LED manufacturers during the quarter. Advanced Packaging, MEMS and RF accounted for 23% of total Q2 revenues following a record Q1. Our foundational business made up the balance of Q2 revenue.

Scientific and Industrial was 26%, supported by MBE systems for advanced research and Data Storage contributed 18% of Q2 revenue. On a geographic basis, sales were fairly dispersed. China increased to 33% driven primarily by demand for MOCVD product. The U.S. represented 27% of total sales supported by investments from mobile RF device manufacturers.

And finally EMEA and the rest of the world each represented 20% of Q2 revenue. Ending backlog was $144 million, down approximately $25 million from Q1. Our backlog was adjusted down by approximately $17 million in Q2 due to a partial order cancellation from one customer that was previously booked in early year 2015.

Continuing down the income statement, I will provide financial information on both GAAP and non-GAAP financial basis. Please refer to our press release for a detailed reconciliation between GAAP and non-GAAP measures.

We expanded gross margin by 70 basis points, exceeding the high-end of our guidance due to better product mix and certain onetime adjustments. GAAP gross margin was 41.7%. Non-GAAP gross margin was 42.4%, the highest level in four years. Going forward, we remain committed to our non-GAAP gross margin target of 40% or higher.

Turning to operating expenses, R&D and SG&A were $42 million on a GAAP basis. Excluding equity compensation, non-GAAP R&D and SG&A totaled $38 million, flat quarter-over-quarter and at the midpoint of our OpEx guidance range. GAAP loss per share was $0.82 and includes $16 million of restructuring and impairment charges.

Non-GAAP loss was $0.19 per share based on a share count of 39 million diluted shares. Adjusted EBITDA loss was $2.8 million, slightly better than the guidance midpoint. Now moving to the balance sheet metric.

We ended the quarter with $331 million in cash and equivalents, down approximately $18 million from the prior quarter, roughly $106 million of our cash was held offshore, which may be subject to taxes in order to repatriate.

The decrease in cash was mainly due to the dual effect of low business volumes driving losses in the past combined with an inventory build to prepare for a projected ramp in shipments.

Capital expenditures were $5 million as we continue to invest in engineering programs and equipment to support development activities associated with the Power Electronics and Advanced Packaging market. Accounts receivable decreased to $42 million, which equates to DSO of 50 days.

We made no share repurchases during the quarter as our highest priority for cash is to fund the near-term operational needs of the business. Now turning to guidance for the third quarter. Consistent with our prior disclosure and Q2 bookings performance, we expect Q3 revenues to be between $70 million and $85 million.

GAAP gross margin is expected between 38% and 40%. Non-GAAP gross margin is expected between 39% and 41%. GAAP loss is expected in the range of $0.62 to $0.46 per diluted share. And Non-GAAP loss is expected in the range of $0.26 to $0.10 per share. Q3 adjusted EBITDA is expected in the range of negative $6 million and breakeven.

And now to provide some color on Q4. Based on our current visibility and improved outlook, fourth quarter revenues are trending higher than Q3 at this time. With that, I'll turn the call back to John for a further business update..

Thanks Sam. We've spoken at length in the past about the challenges LED manufacturers are facing and resulting impact on our MOCVD business. We're now seeing signs that the industry conditions are improving across the supply chain. Starting with the end markets, sluggish TV demand has been a key factor behind the slowdown in LED units.

Display backlighting remains the second largest demand driver for LEDs, and is expected to represent approximately 33% of LED unit shipments in 2016, a meaningful figure. IHS predicts TV shipments will pick up in 2017, reversing a two-year trend of declining TV demand.

The improvement in LED TV demand combined with the continued adoption of LEDs for general lighting bodes well for LED manufacturers. Over the past several quarters, LED manufacturers have been plagued by overcapacity conditions and intense price pressures.

More recently, the pace of LED bulb price declines has slowed, which eases some of the financial pressures chip suppliers have faced. We're also seeing customers decommission or replace their older toolsets and transition production to newer, more cost-effective platforms which can improve their profitability.

Over the past couple of months, MOCVD utilization rates appear to have stabilized and modestly improved, and this suggest supply and demand are moving closer to equilibrium. Multiple LED manufacturers have indicated plans to add MOCVD capacity over the next 12 months.

It remains to be seen whether these investments are intended as positioning for market share gains or to address future demand. In either case, Veeco is well positioned to capture the resulting opportunities with our EPIK platform. EPIK forms the foundation of our MOCVD product portfolio and remains the preferred solution for GaN LED production.

We've continued to defend and increase our share by helping customers produce high-quality LEDs, while lowering their manufacturing costs. LED technologies continue to evolve and MOCVD process requirements have grown increasingly challenging.

For example, the latest digital science employ fine-pitch LEDs, which require greater MOCVD process repeatability for high-yield and EPIK is ready for the challenge. Our multiple generation product roadmap addresses our customers most pressing technology needs, both today and in the future.

Just as EPIK is the right tool for blue LEDs, the K475i reactor is making waves in red, orange and yellow LED production. Red, orange and yellow LEDs are used increasingly for signage and automobiles, and we are gaining customer momentum for these applications.

The K475i is built on the same TurboDisc technology, as EPIK and it delivers exceptional process uniformity and repeatability at a competitive cost of ownership advantage. In addition to red, orange and yellow LEDs, the K475i is well suited to the growing photonics market, including applications such as optical lasers and IR sensors.

We're leveraging the high performance K475i platform to capture these incremental growth opportunities. Our strategy and our success has come from developing the right technology solutions, which address our customers' most challenging requirements.

Like the EPIK and K475i, our Propel GaN Power (sic) [Propel Power GaN] tool accomplishes exactly that compared with batch reactors, Propel single wafer designs offers unrivaled film thickness uniformity and process repeatability.

These capabilities translate into higher device reliability and yield, both crucial for the development of commercially viable GaN power devices. We're focused on helping customers transition from R&D to volume production for these types of devices which we expect to occur in the late 2017 timeframe.

Overall, we have a rich set of opportunities in MOCVD and the right technology platform to compete and win. The same can be said for our PSP product family. PSP is the established leader for single wafer solvent clean, our proprietary ImmJET technology enables the removal of difficult films and underlying residues on a single platform.

This technology helps to catapult our success in metal lift-off the applications which are used in the creation of RF, MEMS and other compound semiconductor devices. The majority of our sales were historically derived from these markets and from customers in North America and European regions.

However, our highly versatile platform and extensive process expertise make PSP a cost-effective solution for a much broader range of applications, customers and end markets. To capture these opportunities, we're focusing on three areas.

First, we're extending our global reach to expand into underrepresented regions in Asia by leveraging our existing infrastructure and process leadership. We're focused on increasing our customer engagements across the region and are making solid progress in our penetration efforts.

Second, we're expanding into adjacent markets by demonstrating how our unique technology and process advantage is well suited for a wide range of Advanced Packaging schemes.

Our ImmJET technology serves as the foundation of a suite of applications addressing both Fan-out and through-silicon via technologies, making great strides in demonstrating competitive performance and continue to win new business within this space. Third, we are capturing new applications.

Device trends such as the move towards higher densities and tighter dimensions in Advanced Packaging create more process complexity and require tighter process control. PSP single wafer technology and process flexibility are ideal for addressing these challenges.

We're heavily engaged with customers to demonstrate process and cost advantages for multiple filmstrip and wet etch applications. We're executing on these multiple growth levers and while we still have work to do, I am pleased with our progress.

On a broader scale these actions reflect our continued focus on positioning the company for longer term growth. We are maintaining our leadership in the Scientific & Industrial and Data Storage markets, which collectively form a stable foundation to build on.

We are strengthening our MOCVD and PSP positions by capturing additional opportunities within our core Lighting and Display and RF and MEMS markets. We're leveraging these core technologies to drive new growth factors into adjacent markets, including Advanced Packaging and Power Electronics.

Operational execution also remains a fundamental objective and returning Veeco to profitability is a top priority, by rightsizing the company and streamlining our operations, better position for success and profitability through industry cycles.

And finally, as we look at the second half of this year, we're excited about the signs of recovery in the MOCVD market. With that, we will start the Q&A session..

Thank you And we will now go to our first question from Brian Lee with Goldman Sachs..

Hey guys. Thanks for taking the questions. First one was just on, Sam you mentioned Q4 revenue is tracking ahead of Q3. It's not necessarily customary for you guys to give the out year – sorry out-quarter visibility.

So just wondering if you can give us some sense of the magnitude of the upside and whether it's all being driven by MOCVD or if it's another categories just since it seems like you mentioned MOCVD orders haven't yet materialized despite the indications of interest?.

Sure. Thanks Brian. Actually, beginning with the last quarter we have started to provide some sort of a directional guidance on the out-quarter, and so here at this time we are looking at Q4 meaningfully up above Q3.

The order patterns that we have seen already in this month, in the first month in Q3 give us confidence that we can have a meaningfully high revenue in Q4. And your other question in terms of the strength of the uptick – or strength or the uptick in revenue that's really coming from MOCVD.

Although, our other businesses have been doing very well during this year, we've been having difficult time in MOCVD in the first half as John mentioned, but given the current strength, the uptick in Q4 is largely driven from MOCVD..

Okay. Thanks. That's helpful. And just quick follow-up related to that.

Can you maybe provide a bit more detail with respect to the MOCVD commentary around what regions and for what applications you're seeing the demand environment improving? And then also, I'm assuming it's for the EPIK, but if you could comment also on what tool platform you are seeing the demand both in the near-term but also regarding with respect to John's comments around indications of interest over the next 12 months? Thank you..

Yeah. So John here. We have seen the increased interest from at least three different regions. So it's not one region, it is largely EPIK, although our new ASP platform is doing well. And the magnitude is that the MOCVD orders we've received in July from multiple customers are already bigger than what we had in Q2.

So I think that's what gives us confidence that there is a turnaround starting. Thanks Brian..

All right. Thanks guys..

And we'll now take our next question from Krish Sankar with Bank of America Merrill Lynch..

Yeah. Hi, thanks for taking my question. I had a couple of them. Can you guys help categorize what do you think the MOCVD reactor market is going to look like for this year, if you can quantify it will be very helpful..

Well, it's a little hard to read 2016 because we came through the first part – first half of the year was very weak.

I think on a more normalized basis, if we look at what the markets looked at for the last four years or five years, it's tended to be 230 to 250 or more K465i equivalents, and I think obviously 2016 will be lower than that, but there is a lot of building interest here..

Got you. Got it. All right. And then another question is, with regards to China, it looks like your China sales picked up in Q2 almost 33% of the mix.

Was that all MOCVD and how many customers was it?.

It is largely driven – as you know Krish, it is largely driven by the pickup in MOCVD. And it's a few customers. I would not say many, but it's a couple of customers..

Got it. Got it. That's very helpful. And then one other final question I had was, in terms of market share for this year, what kind of market share do you guys think you are at today and what do you think is going to be exiting 2016 for the MOCVD part? Thank you..

Well, look I think market share is – IHS has us at over 80% for blue LEDs, and I think that's a reasonable estimate. I think the other thing that I would add is that EPIK has been very successful for every customer that's bought it. They are finding they are getting better productivity than any of the other platforms.

The customers who have purchased it have done really well. So I think we're winning most of the business or certainly a good bit of it. I can't say exactly market share projected ahead for the year. But I think in recent times, it's been in the 80% plus, and I don't see a big reason for that to change..

Thanks, John..

Thanks, Krish..

We will now take a question from Stephen Chin with UBS. Your line is open, Mr. Chin..

Hi, John and Sam, thanks. I also had a follow up question on the MOCVD demand.

Is the demand you're seeing also related you think to the fact that Veeco has a better MOCVD out there in the market and perhaps the customers are migrating to Veeco because there may or may not be a legitimate second supplier of MOCVDs out there?.

Well, yes. I think there are a number of factors. We mentioned the increase in TV's demand in 2017, we are seeing that projected by a number of companies. We are also seeing more customers shut-off older reactors and basically start replacing older systems with EPIK, so we are seeing a more of a trend along that line.

And then, I think everybody's built a lot of confidence in the EPIK that it's the right product and that they can do very well with it. So I think those are all things that are happening. If you are running a bunch of older reactors and trying to compete in today's markets, it's very hard to do.

You really need highly productive, highly cost of ownership effective tools. So I think that's what's happening..

Okay. Thanks for sharing that. And then just for Sam, on this foundational business that you call out, this consistent business that has pretty consistent EBITDA profitability, is there a level of EBITDA margin that we should think about modeling this business going forward? It seems like it has relatively stable revenues.

I mean, is there any ballpark range that you could help us model this business in terms of consistent profit? Thanks..

Yeah. So, Stephen, if you look at the foundational business, you are right in terms of revenue level, it ranges somewhere between $30 million to $36 million in that range. And we typically do not provide gross margin or EBITDA margin by product lines or by business units.

And the reason for that is, we have a unified manufacturing and service infrastructure and various other functions. It is a profitable business and it is growing modestly, and we are very happy to have this business and continue to run the business for profit here..

Okay. Thanks Sam. Thanks John..

Thank you..

We will now take a question from Colin Rusch with Oppenheimer..

Thanks so much.

As you guys see this generational change in the MOCVD tools, are you seeing any raw material changes in the spare parts and service business as we go forward?.

In terms of the service business, in the last one or two quarters, the service business has been impacted somewhat while the fabs have been running on the low utilization side. But we are beginning to see that business also come up.

Now in terms of the change in materials or chemistry or any such thing, there isn't really much of a change that we are seeing. The other dynamic is industry continuously moving towards larger wafer size and that is happening. It is a little bit more advanced in U.S.

and Europe than other countries or other manufacturers, and other geographies are also migrating in that direction. So nothing fundamentally changing from the way the process works essentially other than the effect of the cyclical utilization up and down..

Okay, great.

And then, as you look at the potential acquisition pipeline that you guys have right now, could you characterize it versus what you saw six months ago, 12 months and 24 months ago?.

Well, I think there are a number of opportunities. There is maybe not as many as we'd like, but there are a multitude of opportunities. It's a matter of trying to pick the ones that are going to do the best over the longer term and make the right selection. Probably a little less than it was a couple of years ago, but still there are opportunities..

Okay, thanks so much..

Thanks Colin..

Our next question will come from Patrick Ho with Stifel, Nicolaus..

Thank you very much. John, first off on your comments about the replacement versus capacity buys on the MOCVD front, at some level they do kind of go hand-in-hand.

But can you just give a little bit of color of where you are starting to see the bias from your customers whether they are replacing the existing capacity with your EPIK tools or are you seeing "new facilities" that have been left open for some time with those are getting filled?.

Well, I think they're sum of both. And I think there's more adding just new raw capacity than replacement.

I think the replacement is still modest, but we've seen it in a number of cases where for instance a company can replace quite a few older tools with a small number of EPIK's and basically improve their economics, but also free up a lot of fab space. So if they want to expand more in the future they have that ability.

But I think more of what we're seeing is new units.

We have had a number or several customers just out-and-out scrap units that aren't that old, or have gone through and bought something used and then upgraded it and regretted that or regretted that they went down that path because when they got all of their costs and they said it just wasn't worth it, we wouldn't do that again..

Great that's helpful.

And my second question in terms of the Advanced Packaging market, there's also a lot of talk out there about fan-out, TSV in the future, even copper pillar applications, given some of the order flow that you saw this past quarter, how sustainable do you see these kind of trends carrying by at least in the second half of the year? And maybe if you can give us just some thoughts on from your business standpoint some of the opportunities in 2017 where do you see some of the greatest application drivers for your PSP business?.

Okay. Well, look in the near-term, TSV adoption is moving pretty slowly. We have a great product there. We think it can do really well, but there's just not a whole lot happening there, there's some work. So, really fan-out, copper pillars are more of the close-in opportunity, and I think give us good opportunities both near and long-term.

I can't predict when TSV is going to take off because I think we've all been misestimating that for quite a while. The good thing is, with the PSP product line, is that the portfolio we have really fits all of these technologies.

So as long as the customers are fitting or executing on Advanced Packaging, we can find good places to win and I think that's helpful. And as people move from more batch to single wafer, as they tighten their tolerances and go to smaller geometries, that's good for us because it's where we do really well..

Great. Thank you..

Thanks Patrick..

Thanks Patrick..

We'll go to our next question from Edwin Mok with Needham & Company..

Great. Thanks for taking my questions. First question, I think Sam you mentioned on your prepared remarks there was a big backlog adjustment on the quarter.

I was wondering, I mean can you kind of give us some color on that, and do you see any other big orders out there that might see (36:00) adjustment risk?.

Sure.

So this was a partial order cancellation from one customer, and this is related to MOCVD and the customer is Tier 2, Tier 3 type customer out of China, and they were having difficulty accessing capital and not because of the market or any such thing, just because of their own specific reasons why they were not able to access this capital in order to open the lines of credit for us to be able to ship the tools.

And so this went on one or two times and eventually we kind of felt it is prudent to go ahead and cancel this order in the sense we are not clear when we will be able to ship the product. So it was very local, very specific and to one customer only..

Okay. Great. That's helpful. And then comp, again sticking with MOCVD....

Sorry to add to that, we're not seeing any other capital access or credit related issues with anybody else. In fact, customers are actually gearing up to give us more orders and all that side has eased up quite a bit, so it was again just one very specific one customer..

Okay great. Second question I guess possibly then was that you mentioned you have a pretty meaningful pickup in the orders in the month of July, right.

I was wondering is that all blue LEDs, driving the EPIK or is it the split between blue and red, orange, yellow? Any kind of color around that? We've heard some customer moving older capacity to red, orange, yellow, is that one of the drivers why they start to come back and buy EPIK, because that EPIK obviously is much more economical for them..

I think what we've seen in July so far is mostly blue and related to lighting and backlighting. We did launch our K475i recently, we're getting some good traction there and we've gotten orders there and expect a lot more, because it has some real advantages over the previous products.

But the bulk of what we've seen so far is really in general lighting..

I see.

First question I have on gross margin, what drove the upside in the second quarter? And why do you guys guide margin to be down in the third quarter?.

Sure. So, Edwin, as I look at the business, we feel comfortable going forward in terms of gross margin north of 40%, so we are guiding you to model 40% to 41% gross margin.

Now, particularly, for Q2, our performance was better than the guidance range that we had provided and that was really due to two factors, one was we had some one-time adjustments in the sense our product was working very well, EPIK particularly, and that drove some credits on the P&L due to service cost reduction and warranty-related reserve release.

So that drove margins up. And then the second area where we got some benefit was also a slightly better than anticipated product mix. So going forward, as we position the business, we are looking at 40% to 41% gross margin. Here and there, in a given quarter or something you might have some excursionary effects on the gross margin.

It might go above this range or maybe sometime little bit below, but overall we feel pretty comfortable north of 40%..

Okay. Great. That's all I have. Thank you..

Thank you..

Thanks Edwin..

We'll take our next question from Mark Miller with Benchmark..

Congratulations on your orders, John and Sam..

Thank you..

I was just wondering, you said older tools were being replaced by the EPIK, are these prior to K465i reactors prior to 2010 tools?.

They are mostly before K465i tools, so K465 we've seen those replaced less so on the i side, but they are mostly in that 2007 through 2009, maybe type of vintage..

Any help on the tax guidance for the next quarter? Will it be similar to the rate you saw low single digit percent for the second quarter?.

Sure Mark. I will try answer that question. In terms of our tax situation, generally you could model $1 million to $1.5 million a quarter in terms of expenses.

At these levels, using percentages does not really help a whole lot because numbers can move around, but you could model about $5 million to $6 million in terms of annual tax expense for the modeling purposes..

Hey Mark, I would just add on the replacement cycle too. It's certainly not just our tools, I think we are seeing on a larger scale basis using EPIKs to replace other vendor's older tools. And they might come forward in time a little bit more..

You mentioned you were seeing multiple MOCVD orders, but I believe Epistar just within the last 10 days or so said they were seeing a need to increase production, but they were talking about retrofitting, I believe most of their tools, and I was just wondering if other major customers might be similar to Epistar?.

Most of the larger orders we've had have all been new purchases. I think we've had some smaller orders on the replacement side, but multiple customers, multiple regions, I think would be the key point..

Okay. I'm not sure if you gave this, if you did you can just email me, I don't want to take up time.

But did you actually breakout the bookings by segments and geographies?.

Sure, Mark. No, we have not provided the bookings by end customer segment so to say. And we are deciding to provide that on revenue going forward because what happens is order patterns are inherently lumpy and they change quite significantly from quarter-to-quarter, and then that does not drive meaningful conversation.

So for that purposes we're providing overall bookings number for the quarter and then breaking down the revenue which is a little bit more stable and more thematic by the end customer segment essentially..

Thanks, Mark..

And we will now take our question from David Duley with Steelhead Security (sic) [Securities]..

Thanks for taking my question.

I was wondering currently what are your MOCVD lead times and does the manufacturing consolidation that you have contemplated or you are going underway have any change to the lead times?.

Hi, David, this is Sam. We have been talking to customers, and the engagements and discussions with them took quite a positive turn six weeks to eight weeks back beginning from that timeframe. So we have built up our inventory on one side, you can see that on the balance sheet in order to be able to satisfy this demand, that's one.

Secondly, on the MOCVD manufacturing side, we will continue to leverage our external manufacturing partners. And the manufacturing consolidation that we announced to you today is largely related to consolidation of Ion Beam Etch and optical and other businesses that were being manufactured in different places within the State of New York.

So essentially, we're taking the non-MOCVD manufacturing activity and consolidating it all along with the MOCVD manufacturing activity and at the same time keep leveraging the external manufacturing partners. So, we feel pretty good about our situation.

And you know in the past, if you go back to 2010, 2011 timeframe, we have successfully demonstrated as a company that we can meet significant growth and demand on a very short notice. So given our history, given our experiences and what we're doing here, we feel very comfortable in terms of being able to meet the upcoming ramp in shipments..

Great.

One other thing for me is, has there been any change in the competitive environment with AIXTRON over the last few months?.

We have not really seen that, I think – and of course, they haven't had a particularly strong position in the LED space. So we haven't noticed any changes at this point..

Does the bump up in gross margin have something to do – have they backed up on the aggressive pricing? I was just wondering if pricing had something to do with the improved gross margins that you are recently seeing?.

I think there are a couple of factors here, David, in terms of our gross margin performance.

First of all, about 12 months back or maybe a little bit more than that, we embarked upon a very strong cost reduction program on EPIK tools and those materials and – EPIK materials cost reduction went through the inventory and now actually it is showing up on the P&L. So that's one.

Secondly, even though the volumes have gone down which has impacted the gross margin, but as you know, our MOCVD gross margins are lower than the corporate average gross margin. So the product mix effect has been beneficial on the overall company gross margin as the MOCVD effect – proportion of the overall revenue has gone down.

So that has helped too. Pricing, has been fine for us. EPIK is very, very strong, and we are doing good in terms of gross margin on that business as well. So pricing has been okay for us..

All right. Thank you..

We will now take a question from Vishal Shah with Deutsche Bank..

Hi, thanks for taking my question. So John and Sam, maybe you can talk about the $75 million to $80 million run rate EBITDA for EBITDA breakeven.

What percentage of the revenue will be from the non-MOCVD segment and how do you think about the MOCVD portion of revenues in that run rate?.

Sure. So I would say that more than half of the revenue in that figure would normally be attributed to the MOCVD business. That has been typically the largest business for the company. Of course, from a quarter-to-quarter basis, it will fluctuate somewhat.

So it should generally be in the 60% range, but do not be surprised sometimes it may go up from there or sometimes it might be lower. But even in those scenarios, we feel good because of the strength of the cost reduction initiatives that we have taken that we would be breakeven on EBITDA at those levels by Q4, by the time we end this year..

That's helpful.

And then, can you just talk a little bit about the bookings environment? When you talk to your customers, what kind of visibility do you have with their spending plans? Do you think that this pick up in bookings that you are seeing in Q3 is sustainable over a monthly-quarter period, can you just provide us some color on how you think the rest of the year as well as the first half of next year looks like from a booking standpoint?.

Well I think, first of all, we talk to a number of different customers. We have substantial orders from a couple. I know there are others out there working on a similar type of deal, so do expect it to last for a while. I can't say how long it will last in 2017, but I think there is business that we see planned for the first half of 2017.

So I think we're going to have a reasonable length in the upturn here..

That's helpful. And then just one last question, you mentioned the bookings in the month of July were more than all of Q2.

Are you talking all of Q2 MOCVD bookings or the $68 million that you reported for Q2?.

Q2 MOCVD are what we call the Lighting, Display and Power Electronics. So what we have booked in July in that segment is more than what we booked in that segment for all of Q2..

Okay. I appreciate it. Thank you so much..

Okay..

Thank you, Vishal..

And it appears there are no further questions. At this time, I'd like to turn the conference back to management for any additional or closing remarks..

All right. Well, thank you for joining us today and we'll look forward to seeing you in the coming months..

Thank you..

Good night..

This concludes today's call. Thank you for your participation. You may now disconnect..