Shanye Hudson - Veeco Instruments, Inc. John R. Peeler - Veeco Instruments, Inc. Shubham Maheshwari - Veeco Instruments, Inc..

Patrick Ho - Stifel, Nicolaus & Co., Inc. Arthur Su - Needham & Co. LLC Stephen Chin - UBS Securities LLC Shivani Sood - Oppenheimer & Co., Inc. (Broker) Mark Miller - The Benchmark Co. LLC Daniel Baksht - Pacific Crest Securities Paul J. Chung - JPMorgan Securities LLC Brian Lee - Goldman Sachs & Co..

Good day, everyone, and welcome to the Veeco Instruments Third Quarter 2016 Earnings Call. Today's conference is being recorded. At this time, I would like to turn the conference over to Ms. Shanye Hudson, Vice President of Investor Relations. 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. And 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 as well in 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. Veeco delivered solid financial results in the third quarter, benefiting from improved industry conditions and solid operational execution. Revenue increased to $85 million, which was slightly above the top end of our guidance range.

Adjusted EBITDA returned to positive territory at nearly $3 million, well ahead of our guidance, and bookings improved by 73% to $118 million, marking a recovery in our MOCVD business. We generated positive cash flow from operations and grew our cash position to $337 million.

Overall, I'm pleased with our performance and the clear improvement in business fundamentals. We have also maintained our focus on improving profitability through business cycles. We've continued to execute against the restructuring initiatives we announced in early August.

More recently, we reduced investments in our atomic layer deposition technology development.

We weighed the investments necessary to establish and grow a position in ALD with the potential and expected timing for returns and although we continue to make progress in our development efforts for advanced semiconductor applications, the timing for potential revenue realization was delayed.

As a result, we decided to significantly reduce our ALD expenses. In total, we now expect to lower the company's cost structure by $30 million on an annual basis. These savings translate into an EBITDA break-even level at or below $75 million in quarterly revenue, starting in Q1 2017.

With that, I'll turn the call over to Sam to discuss our third quarter results..

Thank you, John, and good afternoon, everyone. I'll start by sharing a few bookings highlight prior to providing a more detailed breakdown of Q3 revenue. We recorded $118 million in bookings, an increase of $50 million over Q2. The growth was driven almost entirely by demand for our MOCVD products.

We received multiple tool orders from both Epistar and HC SemiTek in support of their LED production plans. We successfully won new EPIK business by demonstrating the performance and cost of ownership advantages of EPIK versus a lower cost competitor platform.

We secured follow-on orders for our recently-launched K475i product and we are seeing positive indications for additional MOCVD investment to occur in the near term. Now turning to revenue. We increased revenue by 13% to $85 million in Q3, which was higher than the top end of our guided range.

We were able to support customers' accelerated shipment requests for a couple of MOCVD systems by effectively utilizing existing inventory. Our sales into the Lighting, Display & Power Electronics markets doubled quarter-over-quarter and represented 58% of total Q3 revenue. Advanced Packaging, MEMS and RF accounted for 14% of Q3 revenue.

Sales in Advanced Packaging were lower in Q3, although year to date Advance Packaging sales have already exceeded that of full year 2015. We have broadened our PSP customer engagements in Advanced Packaging, and are now working with multiple OSATs and IDMs to further penetrate this market.

Our foundational business made up the remaining 28% of Q3 revenue. Scientific & Industrial was 16% supported by sales for thin film optical coating, and Data Storage contributed 12% of Q3 revenue. On a geographic basis, sales remained fairly dispersed with China representing 25%, EMEA 23%, and the U.S. making up 22% of Q3 revenue.

The rest of the world increased to 30%, driven by strong MOCVD sales. Quarter-ending backlog increased by $32 million to $177 million. Counting down the income statement, I'll provide financial information on both the GAAP and non-GAAP basis. Please refer to our press release for a detailed reconciliation between GAAP and non-GAAP measures.

Third quarter gross margins were in line with our expectations, and above the midpoint of our guidance range. Gross margin was 39.1% on GAAP, and 40.3% on non-GAAP basis. We remain focused on achieving non-GGAP gross margin at or above 40%. Turning to operating expenses.

We executed well against our cost reduction plans and accelerated OpEx savings by one quarter. As a result, third quarter R&D and SG&A expenses were lower than guidance. On a GAAP basis, R&D ad SG&A combined were $39 million. Operating expenses on a non-GAAP basis, which exclude equity compensation, were $35 million, down $3.5 million from Q2 level.

GAAP loss per share was $1.78, and included charges of $56 million, primarily for ALD asset impairment and $2 million for restructuring. Through the combination of higher sales volume and accelerated OpEx-related cost reductions, we narrowed our non-GAAP loss to $0.05 per share based on 39 million diluted shares.

Adjusted EBITDA swung positive to $2.9 million, significantly above the top end of our guidance range. Now moving to the balance sheet metrics. We generated approximately $7 million in cash from operations, supported by an increase in customer deposits.

Consistent with our expectations for cash to stabilize in the second half, we ended the quarter with $337 million in cash and equivalents, an increase of about $6 million from the prior quarter. Approximately $108 million of our cash was held offshore and may be subject to taxes in order to repatriate.

Days of inventory declined to 163 days as we began shipping MOCVD systems to meet customer demand. Days sales outstanding and days payables outstanding were in line with historical averages at 53 days and 48 days, respectively. Now turning to guidance for the fourth quarter.

We expect revenues to increase in Q4 and guide between $85 million and $100 million. GAAP gross margin is expected between 37% and 39%. Non-GAAP gross margin is expected between 38% and 40%.

Q4 gross margin guidance includes the impact of temporary inefficiencies due to duplicative labor and facility costs associated with manufacturing consolidation activities. This initiative is progressing well as part of our plan and we expect to begin seeing benefits from it by late Q1 of 2017.

Operating expenses are expected to remain relatively flat quarter-over-quarter. Savings from ALD cost reduction activities are expected to materialize from Q1 of 2017. GAAP loss is expected in the range of $0.34 to $0.19 per diluted share. Non-GAAP EPS is expected in the range of negative $0.07 to positive $0.07 per share.

Adjusted EBITDA is expected in the range of breakeven to $6 million. We are executing our cost reduction plans and expect to lower EBITDA breakeven to $75 million or below in quarterly revenues starting from Q1 of 2017. Now to provide some color on Q1. Historically, Veeco's first quarter revenues have been seasonally lower than the fourth quarter.

However, based on current visibility and outlook, first quarter 2017 revenues are trending in the same range as Q4. With that, I'll turn the call back to John for a further business update..

Thanks, Sam. Over the past quarter, LED industry conditions have stabilized and recovery is underway. In the display markets, TV panel demand was better than expected in the second quarter, driving a slight increase in unit shipments. At the same time, inventory at panel suppliers tightened and their utilization rates moved higher.

These factors, combined with expectations for TV unit shipments to be seasonally stronger in the second half, create a more stable LED demand environment heading into 2017. Turning to the lighting markets. Government initiatives, such as India's UJALA program, are spurring near-term LED unit demand.

Since its launch last April, more than 173 million bulbs have been distributed, which translates to energy savings of $3 million per day, an astonishing figure. The International Energy Agency is now looking to replicate the program's success in other regions.

Also seeing strong demand for applications such as digital signage, which use fine pitch LEDs. These large-scale displays are being rapidly adopted for stadiums, billboards and a variety of indoor applications.

These trends have driven an improvement in LED demand and enabled LED manufacturers to raise chip prices, which should ease their financial pressures. MOCVD utilization rates have remained stable to slightly higher and we started to see customers making investments in MOCVD capacity.

Veeco is benefiting from these positive near-term demand trends and we believe there are meaningful MOCVD opportunities ahead of us over the long term. Our strategy is focused on delivering value through differentiated technology which offers customers a competitive advantage.

For instance, EPIK's proprietary TurboDisc technology is enabling customers to lower their cost of ownership and improve overall yield. Customers trust EPIK to help them achieve their LED production goals and we continue to win new LED lighting opportunities. We are leveraging our winning MOCVD technology to capture the breadth of LED opportunities.

The K475i Arsenic Phosphide tool employs the IsoFlange TurboDisc technology, which offers best-in-class uniformity and process repeatability to achieve higher yields. The K475i has quickly gained momentum for red, orange and yellow LEDs used in fine pitch digital signage as well as growing infrared LED markets.

Today we have K475i systems running production at multiple customers and are generating interest from others. I'm really pleased with the product's performance and market reception. Turning to our PSP business. Market trends are playing to our strength and we're focused on capitalizing on the growing number of opportunities.

Demand for mobile bandwidth has exploded in recent years, driven by the insatiable appetite for data and connectivity. As the number of frequency bands grew, the number of RF filters and smartphones increased dramatically. Today an average smartphone may contain 50 RF filters and that number is forecast to double by 2020.

PSP is poised to benefit from this trend. We are the recognized leader for the most challenging solvent processes including metal lift-off which is used in the creation of RF filters. Backed by our proprietary ImmJET technology, PSP is able to completely remove difficult resist films and underlying residues on a single platform.

In Advanced Packaging, the transition to denser and more complex packaging arrays is giving rise to new opportunities. Finer dimensions require new resist films which are more challenging to remove, especially for batch cleaning tools.

PSP's single wafer solution offers differentiated process performance and as much as a 25% cost of ownership advantage versus batch tools. As Sam mentioned earlier, we're working with multiple OSATs to evaluate our process solution and have received positive feedback on our capabilities.

We continue to responsibly manage our Ion Beam and Molecular Beam Epitaxy, or MBE, businesses and we see opportunities in adjacent markets where our technology expertise makes us uniquely suited to address emerging trends.

For decades now, hard disk drive manufacturers have relied on Veeco's Ion Beam Deposition and Etch technologies to produce their thin film magnetic heads. Today, our expertise in magnetic materials processing has given rise to new opportunities. For example, our Ion Beam Deposition technology is producing the mask blanks required for EUV lithography.

We're also working with a leading semi equipment manufacturer to apply our Ion Beam Etch technology for magnetic memory, or MRAM, development. We achieved the development tool of record status with a leading memory manufacturer and we're now seeing interest from multiple other IDMs.

In MBE, we continue to expand our lead for advanced materials research and recently booked our 25th GENxplor R&D system. Our MBE technology is also used for a wide range of production applications including high-power laser diodes for material processing and infrared detectors used in defense and medical applications.

This diverse set of opportunities makes up our foundational businesses and support stable revenue stream of between $25 million and $35 million per quarter. For Veeco, our focus has not changed. We are positioning the company for growth and improved profitability through industry cycles to enhance shareholder value.

We're strengthening our existing positions by addressing our customers' technology and productivity needs. We are leveraging our technology expertise to capitalize on organic growth opportunities across our product portfolio.

We are evaluating inorganic growth opportunities which offer value creation potential for both Veeco and our customers, and we're driving operational leverage in our financial model. We're executing plans to lower the company's quarterly EBITDA breakeven level to $75 million or below by Q1.

I'm pleased with our performance in the third quarter and the recovery in MOCVD demand. As we look ahead to 2017, I'm encouraged by the positive momentum in our business. And, with that, we'll start the Q&A session..

Thank you. Ladies and gentlemen, the question-and-answer session will be conducted electronically. and your first quarter will come from Patrick Ho with Stifel, Nicolaus..

Thank you very much. John, maybe first on the MOCVD business. You mentioned some in your prepared remarks about both the lighting as well as the TV panel backlighting part of the business.

Can you discern the pickup in orders that you saw this past quarter whether it was driven more by one or the other?.

We can't tell exactly what the customer is going to use the product for, but the weakness in the panel market just allowed manufacturers over the last six months or so to apply their systems to make lighting products and not have to buy more to deal with the lighting growth.

So the fact that the panel market's picked up a little bit just keeps it from taking away from the general market. The overall growth in the market is driven by LED lighting. So I think on one hand you could infer that the product's really going for lighting..

Great. That's helpful.

And maybe, Sam, in terms of the supply chain and as you see business trends moving forward over the next couple of quarters, how are you managing the shipment ramp in terms of inventories? And what potential impact do you see on both working capital as well as on the inventory side of things?.

Sure. Yeah. Thank you, Patrick. When we started Q3, we had started building up some inventory, so the inventory in Q3 came down as you compare it to the Q2 levels. And that's what enabled us to ship a few tools quite quickly in Q3. But if you look at our days of inventory even now, I think it is high, and over time, it would come down.

On the MOCVD side, we are largely outsourced, so we should be able to bring our days of inventory down and generate some cash from inventory while at the same time being able to support the ramp up in shipments..

Great. Thank you..

Thanks, Patrick..

From Needham & Company, we'll hear from Edwin Mok..

Hi, guys. This is Arthur on for Edwin. Moving on to the MOCVD side, obviously bookings were a lot better this quarter. Just want to get a sense of the sustainability of the bookings trend you see going into the first half of 2017.

It sounds like the various drivers you're picking up, but just want to see if you could provide a little bit more color on that, and how confident you are..

Sure. Well, look, our visibility is limited to four months or maybe six months. But what we do see is, we're talking to four, five customers in multiple regions about a potential purchases of new MOCVD systems for increased capacity. So the market's heating up. There are more customers planning to buy. And I think that bears well for the future.

And we see a number of applications continuing to grow, whether it's the program like UJALA in India, where we talked about. I think there are a number of other regions, countries, and cities doing that type of thing.

We're starting to see more and more commercial companies change their fluorescent tubes, to LED tubes, for a savings of 40%, or so, and in many cases, with some subsidy from their local utilities, see an increased in signage. So there's a lot of sources of the growth.

And I think after a very weak 12 months prior, which started in 2015, the market's come back..

Great. Thanks for that color. Next question is on the Advanced Packaging business. I saw during the quarter it declined slightly. Just want to get a sense on how we should think about that business going into 4Q.

And what are some of the drivers that can bring some growth to that segment?.

Sure. So while the PSP business, which sells into Advanced Packaging, MEMS and RF, there are a number of things to note. First of all, that's really a combination of markets that relate to RF as well as Advanced Packaging. If we look at the Advanced Packaging portion of that business, it's actually grown.

Our sales so far this year have exceeded all of last year's sales. A lot of the sales in that business go to the RF and MEMS areas. And there were some very large purchases in 2015 for those applications and we've been in a bit of a digestion period here so far in 2016. So I think you have to take it apart to see it, but the business is very healthy.

It's doing well and we're quite pleased with it..

Great. Thanks..

Next we'll hear from Stephen Chin with UBS..

Great. Thanks. Hi, John, Sam. Nice results. So I just had a follow-up question on the customer diversity. It sounds like customer diversity was pretty concentrated in the third quarter, but it sounds like diversity should be improving in the next couple of quarters. It sounds like maybe you're in discussions with a few customers.

Is that how you see the customer diversity improving? Thanks..

It's hard to read. We're talking with four or five customers who are planning to do purchases, but hard to say whether they're going to be in one quarter or that's going to be spread over two or three quarters. It will likely be spread over multiple quarters.

So from a customer standpoint, I think it's still likely to be lumpy with one or two big buys per quarter or big customers per quarter. But maybe the other side of this is that there's regional diversity. So it's not just a China thing.

There are multiple regions and nearly all of them that are talking about some sort of purchasing in the upcoming year. So probably a better way to look at it is regional diversity..

Okay. Thanks for sharing that, John. And then just a follow-up question, Sam, on the first quarter sales commentary. I appreciate you sharing some color on sales being better than seasonal. Is most of the first quarter sales strength from the MOCVD business? Or is there also some relative strength in the PSP business? Thanks..

Sure. So, yeah. Generally, if you look at our last five or six years of results, you would see seasonally between Q4 and Q1 revenues decline on an average 15%, 20%. And that is really driven by some of our businesses where the customers are accelerating shipments to use up their year-end budgets.

And then on the Q1 revenues, they get impacted because of the Chinese year and that is largely an MOCVD effect. But this time, we are really looking at Q1 running flat to Q4 largely on the back of the strength of the MOCVD industry situation.

So the weaknesses and other seasonal declines from other businesses would be offset by the improved situation in MOCVD..

Okay. Thanks, Sam..

Thank you..

Next we'll hear from Vishal Shah with Deutsche Bank..

Hi, guys. This is Tyler (27:54) on for Vishal.

Could you provide some color around booking visibility and utilization rates as it pertains to different regions you operate in?.

Okay. Well look, on bookings visibility, it's fairly limited. We can look at the overall market and the market's heating up, but as far as what's going to happen more than six months out, our visibility is pretty limited as it has been for quite a long time. Utilization rates are overall up a little bit.

In China, the Tier 1 customers are about flat at 85% or 86%. The Tier 2s have come up, which I think is a good thing. Taiwan's in the upper-80s. Korea has come up from the mid-70s to the mid-80s. So overall we've seen some increases and I think they're at a very healthy level..

Great. Thank you..

Thanks, Tyler (29:04)..

Colin Rusch from Oppenheimer..

Hi. This is Shivani Sood on for Colin.

Can you just tell us the booking numbers for MOCVD quickly? And then also, how are you seeing the competitive landscape evolving over the next 12 months? Are you seeing tougher competition coming up or are you seeing kind of an ebb in that?.

Thanks, Shivani. We typically do not provide bookings by product, or booking segmentation. I would share this, though, that the growth in bookings in Q3 here was largely or almost entirely driven by our business in Lighting, Display & Power Electronics, and other businesses were largely flat in terms of orders.

The growth in booking is coming from MOCVD business eventually.

I'm sorry, could you please repeat your second question, Shivani?.

Just in terms of the competitive landscape, how do you see it evolving over the next 12 months? Are you anticipating more difficult competition coming up?.

Well, for the competitive landscape, we've – our position has really been growing in strength over the last couple of years. I think IHS has us at over 80% market share in MOCVD for lighting, and over 63% for the overall MOCVD market.

So we have been very focused on continuing to develop our technology, and continuing to improve cost of ownership and build a portfolio of new things to release. So I think we're prepared to do quite well. Thanks, Shivani.

Next question?.

And next question will come from Krish Sankar with Bank of America Merrill Lynch..

Hey, this is Sharag Odev (31:14) on for Krish. Just one quick question.

Is it safe to assume that most sales in China are MOCVD related?.

I would say a majority of sales in China are MOCVD related, but it is not entirely MOCVD. So, yes, a large part of sales in China are MOCVD..

Okay.

And would you be able to provide any more color on that?.

The growth in China and the growth in revenue in terms of MOCVD shipments, they are, as I said, largely core (31:56) related. I'm not sure of any other color that you are looking for. Maybe you can help me out..

No, I was just looking for like a rough estimate, but a large portion, I think that's pretty clear..

Okay..

Yeah. Thanks..

We'll take a question from Mark Miller with The Benchmark Company..

Good afternoon. You mentioned that there were multiple factors you see supporting this recovery in the display area. I'm just wondering if you could give us a little more color.

Is one of these a growth of 4K TVs with the greater usage of LEDs?.

Yes, I believe it is. I think we saw an increase in panel shipments. I think, we saw a decrease in inventory in the channel for TVs, and there's generally an expectation that the second half of the year picks up here, so, 4K panel – 4K TVs use more LEDs. And I think, as they pick up, that will be a good thing for us..

And roughly double what's currently being used in non-4K TVs in terms of LEDs?.

I'm not sure. I think I'd have to look at that..

Were there any....

We'll send you something..

Okay. Thank you. Are there any signs that some of these legacy MOCVD tools that have been around prior to 2010 are getting retired, or are they still using these tools? And they've got to be becoming increasingly cost non-competitive. I'm just wondering. I think there's 200 tools out there..

Yeah, I think the things that are built before 2009 are largely non-competitive, and I don't think – we don't see any of those being sold, or moved, or whatever. And we do see customers taking some of these older tools, 2007, 2008, and turning them off.

One of the real advantages of an EPIK is that you can replace a bunch of legacy tools with one EPIK in a lot less fab footprint. So there's a real benefit to that, especially if your fab's getting full. I think the other thing that we've seen is there were a lot of systems built and sold in 2010 and 2011.

And some of those have changed hands, as companies exited the business, and moved out of the LED business. And what we've seen is some customers who have bought those at relatively low prices.

By the time they got them working again, got them upgraded to a reasonable level, moved and all that, that they really regretted doing it – because the cost of bringing the old tool up, it just wasn't worth it, versus buying new tools.

So the stuff before 2009 is really going obsolete – is obsolete, and the other product, although, people can still run them, it's a bad idea to try to move them from fab to fab and bring up old tools..

I'll jump back in the queue. I do have another question though..

Okay. Thanks, Mark..

Thank you..

And we'll hear from Daniel Baksht with Pacific Crest Securities..

Yeah. Hi. Thanks very much. Couple of questions. First, curious why gross margin is being guided down in Q4 at the midpoint, especially with the restructuring efforts underway.

I guess I imagine it's due to mix?.

So thanks, Daniel. Sam here. What's happening with the gross margin, as you know, we outlined plans to do cost reduction. And so right now we are in the middle of our manufacturing consolidation activity. So we are moving manufacturing from two or three locations and then consolidating them in our New Jersey location.

So what we have right now is duplicate labor we literally have many people in both the sides. And then we currently have duplicated labor cost and duplicated facility cost. We expect most of that consolidation to be completed by the end of Q1. So right now there we have a temporary inefficiency.

But in the longer term hereafter, say March, we should begin to see benefits from it. So those cost reduction efforts in gross margin have largely not played out yet. In fact, we have a reverse effect going on while we implement this project. Hopefully that answers your question, Daniel. Now coming back to the mix aspect, yes, that is there.

And we'll see really gross margins are lower than our corporate average gross margin. So higher contribution from MOCVD revenue does have a downward pressure on the overall gross margin of the company. And as MOCVD mix increases in the overall revenue mix, it would have a downward pressure.

However, we plan to offset it by the time March rolls around and we are beginning to see benefits from these savings. So overall we still guiding above 40%. That's our target. That's the goal we are and we feel good about it once all these consolidation and cost reduction activities are behind us by the time Q1 ends..

Great. Got it. Thanks.

Then second, wondering if you could provide some color on your market share in the K475i tools and if that's been growing?.

Okay. We launched the K475i last year. It's been well-received. We've got a number of customers using it in manufacturing of red, orange and yellow LEDs, solar cells and photonics products. So, I think it's going well. There's a lot of interest in it.

I would say our market share is below 50% in that market and there's an opportunity for us to grow because this product has really excellent cost of ownership and great benefits. So, we think the share will grow there..

Okay. Thanks..

Thanks, Daniel..

Thanks, Daniel..

And we'll go to Mark Miller with The Benchmark Company..

You mentioned some people, including you, have seen strong orders from OSATs for your precision surface polishing group earlier this year. I think that was more related to wafer-level fan-out. Other people also saw strong orders related to wafer-level fan-out for different processes.

Some of these firms are now projecting that there's another batch of orders coming this quarter or next.

I'm just wondering if you think that's conceivable for a rebound and from the OSATs over the next quarter or two in terms of orders?.

So last year in Q4 we had a really big quarter in our PSP business. And that was actually followed by a weaker quarter in Q1. The business is doing well and there is a lot of interest. It's hard for us to tell whether Q4 is going to pop up again or not. And I know there's a lot of interest in it in May, but we're not sure of that.

One thing to note is that in this Advanced Packaging area, different type of technologies have different lead times. So if you're in, let's say, a lithography business and you have a year or nine-month lead time, you tend to get orders very much at the very beginning of the cycle.

In our case, where we've got a lead time of three months or so, 12 weeks, we tend to get purchased a little later in the cycle. But the business is doing well. Our Advanced Packaging business, a portion of the business is up. So I think if the market trends up, we would expect to do quite well..

How exposed are you to 3D NAND? Because that's one of the biggest areas of growth next year..

I don't think I can answer that. .

Mark Miller - The Benchmark Co. LLC:.

Operator:.

Hi. This is Paul Chung on for Coster. Thanks for taking my question.

So how has the uncertainty regarding your nearest peer influenced customer decisions? Are you winning business as a result?.

What was that? I missed part of that..

Could you please repeat, Paul?.

Yeah, the uncertainty regarding your nearest peer influenced customer decisions, are you winning business as a result?.

I believe your question is relative to MOCVD with the acquisition that's going on by the Chinese of AIXTRON..

That's correct..

And how that might be influencing business..

We've continued to sustain a very high market share in the lighting business. So our product has proven superior to the other products on the market. We came into the year with 80%-plus market share and we won't know exactly how we come out until the end of the year and we usually look to IHS or others.

But I think we're doing really well on the market share perspective in all regions. So really independent of region, if it's for a lighting application we've done very well..

Okay. Thanks. And then can you talk about the shape for fiscal year 2017, given that you expect flattish quarter-on-quarter in 1Q, how should we think about sequential growth in 2Q and then the second half? Thank you..

So, Paul, this is Sam. it's really difficult to answer regarding 2017, but what we can share with you and we have been saying that last quarter and this quarter, industry seems to be coming back from a really – from deep low that we were experiencing in the first half of 2016.

So right now the bookings' momentum looks good, industry conditions look good, and the color on Q1 is more around because of seasonality issue that's a flat color on Q1. Beyond that, I think you need to wait for us to talk to you again after three months and we'll provide more color as we go along here.

But the industry conditions are quite good at this time..

Okay..

And that's as much as we can share in terms of our future outlook..

And moving on, we'll hear it from Brian Lee with Goldman Sachs..

Hey, guys, thanks for squeezing me in here. And apologies, I dialed in late, so if you did cover this, apologies. Sam, last quarter, you mentioned that the breakeven was going to be down to $75 million to $80 million by Q4. It's now $75 million by Q1. So, a little bit lower, but that's despite the ALD cuts.

So wondering if some of that is being absorbed elsewhere in the business, or what the run rate on ALD was for OpEx. It doesn't seem to be having that much of an impact on the breakeven here in the next couple quarters. And then, related to that, if you could also quantify what's still remaining in the cost structure, in regards to the ALD business..

Sure. Sure. Okay. Thanks, Brian, and thanks for the question .Would be happy to clarify that. So our cost reduction program started from, say, towards the end of Q2. And between Q2 of 2016 to Q2 of 2017, our overall program is to reduce cost by analyzed basis, $30 million. At this time, we have already executed half of it.

But the half of it is still ahead of us. So, before the ALD cost reduction program, we had highlighted to you that the cost reduction program is for $20 million. And the ALD cost reduction is about $10 million. At that time, we had guided you in terms of $75 to $80 million as the breakeven quarterly revenue level.

And now, what we are saying is – it is below $75 million, so $75 million is kind of the high watermark. So I think if you look at the $10 million of ALD reduction that is definitely having an impact on our breakeven revenue level.

Now, in terms of specific to the ALD question, we have been spending, up until now, somewhere around low teens on an annual basis in ALD technology. And we are going to reduce it by about $10 million. So we are still investing, but much, much lower amount. And the ALD reduction program is supposed to be complete by this calendar year end.

So it should have its impact right from the beginning of Q1. Hopefully I answered all your questions, Brian..

No, that's super helpful. And maybe just one quick follow-up on ALD. It sounded just a few quarters ago like you guys were a bit more optimistic on the outlook in semiconductor applications, potentially working with a partner, subcomponent type of platform potentially.

Has that just pushed out to the right? Or are those programs you think no longer moving forward in the outlook and you're talking about other ALD opportunities for keeping the small amount of investment that you still have on the books for ALD? Thanks..

Yeah, I think you're right, Brian. We were more optimistic and what we found is that some of the competitive technologies solved their problems and that any kind of revenue stream for us was going to push out two or three years. And with that, it's not that there is no opportunity but any kind of near-term opportunity pushed out.

So we felt the need to reduce the spending for that..

Okay. Thanks, guys..

Okay. Thanks, Brian, and thank you, all, for joining us tonight..

Thank you..

Ladies and gentlemen, that does conclude today's presentation. We do thank everyone for your participation..