Bill Miller - Chief Executive Officer Sam Maheshwari - Chief Operating Officer, Chief Financial Officer Anthony Bencivenga, Investor Relations.

Good day everyone, and welcome to the Veeco Instruments Q4 and Fiscal Year 2018 Earnings Conference Call. As a reminder, today's conference is being recorded, and at this time I would like to turn the floor over to Anthony Bencivenga, Investor Relations. Please go ahead..

Thank you and good afternoon everyone. Joining me on the call today are Bill Miller, Veeco's Chief Executive Officer; and Sam Maheshwari, our Chief Operating Officer and Chief Financial Officer. Today's earnings release is available on the Veeco website. Please note that we have prepared a slide presentation to accompany today's webcast.

We encourage you to follow along with the slides on veeco.com. This call is being recorded by Veeco Instruments and is copyrighted material. It cannot be recorded or rebroadcast without Veeco's expressed permission. Your participation implies consent to our recording.

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

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

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

Information regarding such non-GAAP financial measures, including reconciliation to GAAP measures of performance is available on our website. With that, I will turn the call over to Bill for his opening remarks..

Thank you, Anthony. Good afternoon everyone and thank you for joining the call. Veeco executed according to plan in Q4 and non-GAAP results were in-line with guidance provided. Q4 booking were $112 million in the quarter, led by Front-End Semiconductor market and our backlog has grown to $288 million. Revenue for the quarter was $99 million.

We've been communicating for some time that the commodity portion of the LED business, which includes the sale of our MOCVD Systems to the China LED market has been under pricing pressure and is becoming a smaller portion of our business. This trend continued in Q4.

Non GAAP gross margin was 36% and our non-GAAP operating income and non-GAAP EPS came in at a loss of $6.9 million and a loss of $0.16 respectively. We ended the quarter with $261 million in cash and short term investments. On our last earnings call, Sam indicated the possibility of a goodwill impairment charge in Q4.

After performing the analysis, it became clear the charge was required. We recorded a $123 million non-cash charge which Sam will describe in more detail. I would like to provide an update on the attack on our computer systems we announced on our last earnings call. Our internal investigation is largely complete.

However, we are still cooperating with an ongoing law enforcement investigation. We learned that our systems have been compromised various times over a period of years, unfortunately it is impossible to determine the extent and impact of the compromise.

But I assure you, we take the security of our information relating to our employees, customers and intellectual property seriously and we have taken steps and continue to work towards preventing a similar incident from occurring in the future.

Lastly, although we made our guidance, as we've indicated in the past we are reducing expenses and working towards growing our business by focusing on markets such as Front-End Semiconductor, Compound Semiconductor and Advanced Packaging. I’ll provide an update on our growth opportunities, and Sam will provide more details on the financials.

The first area we see growth is EUV Mask Blanks, using Ion Bean Deposition. EUV Lithography is enabling advanced semiconductor nodes at 7 nanometer, 5 nanometer and beyond. Every EUV Lithography step requires a Photo Mask and every Photo Mask starts as a Mask Blank.

Our Ion Beam Deposition technology, which enables the production of lowest Defect Density EUV Mask Blanks is a critical element of the EUV infrastructure. Artificial intelligence and high performance computing are drivers of the EUV adoption. As EUV is adopted for critical layers, the number of Mask Blanks required will increase.

During Q4 we booked an additional EVU Mask Blanks System and we expect another order in Q1. These are complex systems with nearly 12 month lead time and we will begin shipping our existing backlog starting Q2 this year.

The market opportunity is between $20 million and $50 million per year and Veeco is the leading provider of the specialized Ion Beam Deposition Technology. Laser Annealing within the Front-End Semiconductor market is another area of grow.

Our Laser Annealing technology serves a critical function in Front-End Semiconductor manufacturing and has been a process tool of record for manufacturing advanced logic devices from 40 nanometer, down to 14 nanometer.

Concurrent with EUV adoption for leading edge nodes, we are experiencing strong demand from leading foundries for our Annealing solutions. Our LSA backlog is the largest since the Ultratech acquisition.

This may be an early signal for a potential inflection point in manufacturing the most advanced devices, as manufacturers push device performance, while facing geometry and physics limitations. Laser Annealing is becoming a critical technology for the single digit nodes, driven by demand for artificial intelligence and high performance computing.

We've been working with Foundries and IDM for insertion and their leading edge nodes. You will recall during Q3, after an evaluation period, we received an order for a Laser Annealing System from a market leader for their upcoming node. I'm pleased to announce that we received a follow on order for multiple systems.

We believe this validates our Laser Annealing technology, as well as its importance in enabling Leading Edge Semiconductor manufacturing. This market is about $100 million annually. The application of our MOCVD Technology to the 3D Sensing, VCSEL market is another exciting growth opportunity.

A VCSEL, A Vertical Cavity Surface Emitting Laser is a complex Semiconductor device used in optical and telecommunication. Recently VCSEL’s enabled a facial recognition application to unlock your smartphone. We expect VCSEL’s to proliferate into additional 3D Sensing applications such as World Facing Sensors and automotive LiDAR.

VCSEL’s are compound Semiconductors manufactured using MOCVD. Veeco has been a leading in MOCVD for many years. Today we have very little share of this market, but we are enhancing our TurboDisc platform to produce high performance epitaxial VCSEL stacks.

Excellent film performance, coupled with Veeco’s historic MOCVD TurboDisc advantages of productivity and cost of ownership, will provide a compelling industry solution. Our superior performance and productivity is being validated by our customers and we are working closely with them to place beta tools.

We believe this is a market opportunity of $100 million to $150 million per year. Our Advanced Packaging Lithography is another source of growth. In addition to providing individual device performance, manufacturers seen to improve system performance by combining multiple chips in a single package.

With megatrends such as artificial intelligence, mobile devices, and autonomous vehicles, manufacturers are turning to techniques such as fan out wafer Level Packaging and Copper Pillar applications to drive product performance.

We have been a leader in Advanced Packaging Lithography for several years and our systems are optimized for cost effective performance and automation. Early adopters of Advanced Packaging have been mobile phone manufacturers.

While this portion of the market has paused, we are seeing early adoption in DRAM Applications where we received a follow on order from a top tier DRAM manufacturer for our Copper Pillar Application. We believe we have the technology and customer relationships to see growth in Advance Packaging over the long term.

We believe this market is somewhere between $75 million and $100 million annually. In summary, we are focused on three things in 2019. The first is innovation. We have a long history of helping our customers solve their toughest, materials, engineering challenges.

We plan to continue this path by executing on our product roadmaps and releasing exciting new products and upgrades. The second is to penetrate new markets and to accelerate our growth in EUV Mask Blanks using Ion Beam Deposition, advanced Front-End Semiconductor with Laser Anneal, 3D Sensing VCSEL using MOCVD and Advanced Packaging Lithography.

And lastly, we are not waiting exclusively for the growth to return to profitability. As we have communicated, we initiated and are executing programs to reduce our operating expenses and improve our gross margins. With that, I'll turn it over to Sam for further details on the financials..

Thanks Bill and good afternoon everyone. Today I will be discussing or non-GAAP financial performance. You can find a detailed reconciliation between GAAP and non-GAAP results in the Press Release and on our website.

Q4 bookings were $112 million, bookings in LED Lighting Display and Compound Semi market were 12% due to reduced levels of China LED business. Advanced Packaging, MEMS & RF Filters market made up 19% of overall booking. Scientific and industrial market continued to be strong and was 33% of overall bookings.

Front-End Semi market was solid at 36% of our bookings due to strong momentum in EUV and LSA products. Now turning to Q4 revenue; Q4 revenue profile demonstrates reduced concentration in LED Lighting Display and Compound Semi market, driven by the anticipated reduction in commodity LED Revenue.

Scientific and industrial sales grew sharply and were 50% off overall revenue due to expansion by our data storage customers to increase Areal Density and respond to the growth in cloud storage. We have continued to make improvements to our Front-End Semi business and have contributed 22% of our Q4 revenue, driven by LSA for foundry customers.

Advanced Packaging, MEM’s RF Filter market was low at 14% of our revenue due to a continued low smartphone business environment. U.S. was 41% of total Q4 sales, EMEA was 17%, rest of the world was 33% driven by Front-End Semi shipments to Taiwan and Korea.

Please note China at 9% was lower compared to previous quarters, but indicative of our revenue profile going forward. Our backlog at the end of Q4 was $288 million. Now turning to the P&L. We recorded a goodwill impairment charge in the fourth quarter.

Due to stock price decline during the fourth quarter our adjusted market Cap was below book value of the equity resulting in a goodwill impairment charge of $123 million. I would remind you that this is a non-cash charge and does not impact our liquidity or operations in any way.

Since this impairment is largely driven by the share price, we may be required to take additional impairment charges in the future if the stock trades below the December ending price on a sustained basis. However, if the stock price goes up, goodwill is not written up and the impairment charges are not reversed.

For the quarter we met guidance for all the non-GAAP financial metrics. Revenue for Q4 was $99 million and non-GAAP gross margin was 36%. Gross margin was down sequentially from Q3 as volume impacted negatively offset by product mix benefit. Non-GAAP OpEx for Q4 was $42.6 million, which included $0.7 million related to the cyber security intrusion.

For sequential comparison, I want to remind you that Q3 had benefited by a one-time credit from reversing a $2.2 million accrued compensation charge. Non-GAAP taxes for the quarter was a benefit of $0.8 million, non-GAAP EPS was a loss of $0.16 on the diluted share count up $47 million shares.

Let me now take a moment to cover some other full-year financial numbers. For fiscal 2018 depreciation was $17.6 million, amortization was $32.4 million and equity comp expense was $16.1 million. Dilution rate from employee equity was less than 1% of outstanding shares.

Cash interest expense on our debt was $9.7 million and cash taxes were $4.8 million. At year end we had federal NOLs of $281 million. During 2018 the total backlog cancellations were $6 million relating to order that no longer met our bookings criteria; this was approximately 1% of total booking.

Total capital expenditure for the year was $12.7 million. Now moving to the balance sheet. Cash flow from operations in Q4 was $2 million and we ended the quarter with $261 million in cash and short term investments. Out of this, $67 million of our cash was held off-shore.

Accounts receivable improved to $67 million and accounts payable reduced to $40 million due to low purchases. Inventory remained elevated as we ramp EUV Mask Blank Systems production, continued to invest in new products for MOCVD and continued to engage key customers with evaluation system.

Long term debt on the balance sheet was recorded at $287 million, representing the carrying value of $345 million in convertible notes. There were no share repurchase in Q4. For the full year we repurchased 950,000 shares or roughly 2% of the market cap at an average price of $11.88 per share.

I would like to take this opportunity to provide an ad-hoc view of our annual revenue to give you future visibility of our underlying businesses. 2018 revenue was made up of several revenue streams that we consider foundational.

In addition to this foundational portion of our business, we are working on certain key growth initiatives that Bill already described. As we look at 2019, we expect the combination of foundational and growth businesses to grow, while the commodity MOCVD business declined.

All in, we currently expect 2019 revenue to be higher than the current quarterly revenue run rate would suggest. The foundational business is comprised of our global service, Wet Etch & Clean, Data Storage and Optical Coating businesses, along with system sales to universities and research labs for various applications.

Our service business supports our installed base of thousands of system with parts, upgrades and service contracts. This business grows as we ship more tools to the market. Our Wet Etch & Clean Systems are sold to a variety of end markets and due to this reason remains less cyclical.

Our data storage business includes Ion Beam Deposition and Etch Systems to manufacture thin film magnetic heads for the hard disk drive industry. With the current end market dynamics, we expect data storage to remain a healthy business for us.

We also sell a variety of products like MBE an Optical Coating Systems to research labs, universities and industrial applications worldwide, which are not tied to typical Semiconductor cycles. Individually these foundational businesses may fluctuate, but in aggregate they are relatively stable year-to-year.

These are profitable businesses and support our growth initiatives as we head into 2019. Now turning to Q1 guide. Q1 revenue is expected between $85 million and $105 million. Non-GAAP gross margin is expected between 34% and 36%.

Non-GAAP OpEx is expected to be approximately $41 million, non-GAAP operating losses is expected between $12 million and $3 million, GAAP-EPS losses is expected between $0.59 and $0.39 per diluted share. Non-GAAP EPS loss is expected between $0.37 and $0.10 per diluted share. And now for some additional color beyond Q1.

At this time based on our backlog and current visibility we see Q2 sales cracking slightly above Q1. We are on track to meet or target of $40 million of OpEx for Q2 2019. And with that, Bill and I will be happy to take your questions. Operator, please open the lines..

Thank you, sir. [Operator Instructions]. We'll take our first question from Patrick Ho with Stifel..

Thank you very much. Bill, first off the historical track recorded for Veeco on the MOCVD space has been quite successful, particularly on the Blue LED side where you came from a lower share position to become the leading player over time.

Can you give a little bit of color in terms of your technology differentiation and what you offer to customers on the power semiconductor in the pixel's side of things that could potentially give a similar track record for this product base on a going forward basis?.

Sure Patrick, thanks for the call. So if you look back where we had been successful gaining share in the LED market against our competitor, we were able to gain share and win many production customers as volumes ramped, because our fundamental technology, the TurboDisc technology can run campaigns in hundreds of runs.

So it can run without interruption for a month or so, whereas the competition needs to stop and maintain their machine at a much higher frequency. Also our run-to-run variability is much better and so in high volume mass production applications, our experience is that our customers prefer our architecture over the competitors.

Some of the challenges that we have faced and why we have a low share today is the uniformity of our films and composition of our films, and so we just started developing a product about a year and a half ago to address those shortcomings.

Last quarter I mentioned that we were delayed about at least three months and I'm happy to report that actually we made some very good progress in our lab during this last quarter and we are sharing that data with all of the customers. They certainly seem very excited and want to pursue further discussions.

So I think once we have these technical issues behind us, I think the fundamental advantage of our products will come through over of the fullness of time..

Right, that's helpful. And maybe as my follow-up question for Sam, obviously gross margins are impacted still today because of the lower revenue levels.

As you look at the progression though 2019, I'm not asking for an exact forecast; what’s going to be the biggest influence for gross margins? Is it just going to be the revenues ramping up again or is it the mix as you look at the – in terms of product mix and how the year progresses, will that be a bigger influence?.

Yeah actually, actually Patrick, all of these factors would play in. You know as such our structural efforts to improve gross margins are progressing very well. You know I'll cover all the aspects and try to then provide a little bit more color, which might be more pronounced, which asset might be more pronounced.

So first, you know we announced cost reduction initiatives last quarter and those initiatives are progressing well and the cost reduction initiative would be completed in Q1. So you would begin to see that benefit from Q2 onwards fully.

And then secondly on the product mix side, we are already seeing the benefit from reduction in the commodity portion of our revenues. However, we expect a mix driven benefit to accelerate further from Q2 onwards as we begin to shape EUV tools and certain other new products that we’ve been talking to you about.

And then the last aspect of gross margin as you know is the volume and of course as you correctly said, right now due to the low revenue levels our gross margins are getting impacted, but we are expecting to grow sequentially through the quarters here and expecting ’19 to be higher than the current run rate of the current quarter.

So that should also help overall from a – part of our gross margin as we go forward from here. I think in terms of all the three aspects, I would say product mix is the biggest aspect. We are seeing some benefit due to reduction of commodities revenues as I said.

But the positive mix benefits would be the strongest and it should play out much more strongly in the second half of this year.

And then I want to remind everybody outside of the structural changes to our gross margin, we do have similar concentration or product concentration and due to that reason gross margin can always fluctuate from one quarter to another.

But we are working on all the three structural elements of our gross margin to improve it as we go through 2019 here..

Great, and maybe as a final question for you Sam, as a follow-up to the gross margin question. I think you guys have done a really good job on the OpEx level and it continues to come down.

However, you given some of the business segments, particularly on the Semiconductor side, whether it's Advanced Packaging or even on the front end like LSA, they can have volatile trends.

How quickly can you turn OpEx up when business trends turn favorable for those business segments?.

I think Patrick as Bill mentioned, you know we are fully funding all the front and semi product lines and all the R&D efforts. In terms of our SG&A, we have to support front and semi. I think we are also fully funding there.

So overall as these businesses pick up, at least at this time I'm not seeing a demand from the business units to increase spending there.

At the same time, I would say this to you that you know there are industry headwinds on front and semi, and our exposure to memory is very, very low, but our exposure is a much more nuance towards logical and foundry.

In case the industry headwinds go stronger, then I think we have to go back and look at our OpEx again and we may need to reduce it as we are seeing stronger headwinds. But so far due to the logic and foundry nature and due to the growth that we are expecting driven by the strong backlog that we are carrying so we seem to be set very well right now.

I'm not looking at really increasing it a whole lot, a little bit might be needed as I said, as we shift these tools and meet the needs of our customers.

But I do want to remind you that in case industry headwinds go stronger, then we’ll come back and look at our OpEx again and we may need to treat it further, but that is not the scenario we are planning right now..

So just to add one comment to Sam's point is, this last round of OpEx reduction we really worked on SG&A pretty hard and really left our R&D investment in place, and so I think we are trying to fund ourselves for success, but if we do see these headwinds, we will take action..

Great, thanks a lot guys..

Thanks Patrick..

Moving on, from Goldman Sachs we have Brian Lee..

Hey guys, thanks for taking the questions. Sam, I just wanted to make sure I interpreted this correctly.

I know you said as you moved through 2019 the current revenue run rates you are seeing aren’t indicative of how you think the full year is going to pan out, i.e., revenue is going to end up being better than what your quarterly run rates are inferring.

With relation to Patrick’s question on gross margins, were you inferring that 2019 gross margins will also be better than the March gross margin levels you are currently tracking at.

Was that the inference you are making?.

Yes, I think that would be a natural outcome, because we would be getting product mix benefit and we should also get further volume benefit and then cost reductions should be completed. So yes, 2019 gross margins for the full year should be higher than the gross margins at current quarter we are guiding or suggesting, yeah..

Okay, so you are comping that against the 34 to 36, not the 36 per se you just you posted in Q4, I just want to be clear about that?.

Correct..

Okay. And then may just as a follow up to that question. I might have missed it in the prepared remarks, but you are essentially guiding to the same revenue outlook that you had for Q4 into Q1, but gross margin guidance is down several hundred basis points.

Could you walk us through what's driving that?.

Yeah. So, on the gross margin you know the revenue levels are the same, essentially what we guided in Q4 versus what we are guiding for Q1, and gross margin, about 100 basis points lower.

You know what happens here is nothing is structural, everything is the same, except that we do have product concentration and customer concentration and due to this reason, gross margins can fluctuate from quarter to quarter, and that these low revenue levels, what happens is any one product or any one customer concentration can impact the overall gross margin at the company level.

As you know, some of our tools, our pricing is between high single digits, $7 million, $8 million, $9 million tool. So they can move the gross margin for the entire company for a given quarter.

So that fluctuations is what is being reflected here in Q4, Q1 cadence so to say, but my comments in terms of gross margin improvement structure at least still stay in place and we continue to expect to have gross margin improvement during the year. Did I answer your question Brian? I hope I did..

Yeah, no, that was crystal clear, thank you. Maybe last one form me and I’ll pass it on as the – you did $99 million in revenues this quarter. Cash flow was basically breakeven roughly.

Is that the way to think about breakeven going forward, you know this sort of $100 million revenue level is where your cash flow breakeven or do you have room or plan to move even lower than that?.

Sure. I’ll try to answer your, but try to answer your question a little bit differently. The way I look at the business right now, we are breakeven on a non-GAAP EPS basis at $110 million per quarter.

Cash is somewhat lumpy, because it gets impacted by working capital, so due to AR collection or AP payments, etcetera, it can be somewhat volatile from quarter-to-quarter. So I would say our breakeven is $110 million for non-GAAP EPS. We are guiding Q1 to have an operating income loss, so I am expecting cash consumption during Q1.

Obviously with volume improvement and bottom line improvement it should change during the year, but that’s how I’m looking at it right now..

Okay, alright. Thanks guys..

Thanks Brian..

[Operator Instructions]. And moving on we have Mark Miller from The Benchmark Company..

Thank you for the questions. Just was wondering, what gives you reason to be somewhat optimistic about data storage with Seagate and Western Digital certainly under some pressure.

In your market are these new process changes or they are just constrain and capacity?.

Sure Mark, great question. What we are seeing certainly is obviously some softness overall from our customers there, but actually if you look, even though drives are down actually heads per drive and heads overall are increasing, so that’s a piece drive – that’s the piece that drives our business, it's really heads not drives.

And the second element is we are very engaged with those customers on improving areal density.

And so we are working very closely with them to basically get more density out of each head, which requires different steps and flows and basically it's a combination of technology changes on our side, as well as an increase in the numbers of passes through our equipment. So the combination of both is actually the answer to your question..

Mark, I would add there, on the tactical basis we do have a significant amount of backlog from that side of the business. So these products are sold with six to nine to 10 months type of a lead time and we do have a good amount of backlog. So that also gives us confidence in terms of the growth potential here..

Well, it looks like there for a long wait at HAMR technologies is starting to appear on the horizon.

Are there any changes that could be opportunities for you as we go to these new head type designs?.

Yes, there are and so some of what my previous answer did center on those applications as well, as today's drives..

Sam, I just want to make sure I understood something. You're projecting and it seems like here for this quarter an up-ticket in revenues per quarter.

Are you driving the non-GAAP OpEx even though revenues are increasing down to $40 million as the year progresses or did I get that confused?.

No, that is correct. We are driving non-GAAP OpEx to be $40 million by Q2 and that’s what we are driving towards..

Okay by Q2 okay and even with higher revenues. Alright, well thank you for the questions..

Thanks Mark..

Thanks Mark..

Moving on from Northland we have Gus Richard..

Thanks for taking my question. On the MOCVD business, is it fair to say that all that business now is RF and power..

Hi Gus, how are you? Yeah, a good question. If we do yes, it's largely service RF, Power, those type applications. We do have some amounts of commodity business, but its pretty deminimus..

Okay, got it. And then....

We also by the way have red, orange, yellow applications as well, so just to be clear..

Yeah, and when do you think you might ship a beta tool for VCSEL?.

That's the million dollar question. So we are working very closely with all the key players. We are going through demos; we are building tools in inventory in anticipation of selling them and we are working as a high priority to land those beta customers.

So other than giving you a specific date, we don't have a beta agreement yet, and so I – well I would think it’s going to be coming up. It's certainly one of the next steps after having an agreement, we’ll be shipping a tool..

Got it.

And then on the advanced packaging in memory, is that high-end bandwidth memory?.

Yes, it is. It's a new application. We recently won and then had some follow-on repeat orders as well..

And on the LSA, how many layers is that product used for in the advanced processes?.

At the moment we are qualified for one. At the node, we are in with one customer, and we are working, we've been invited to the next node and obviously our goal is to gain more applications, the next node, as well as we are working with other customers, doing some demo work to enter there, but we have one customer, one application at the moment..

Got it.

And I guess the last one for me on the advanced packaging on mobile phone apps, processors on fan-out, is there still just one customer consuming that capacity or have other companies doing APs, we started to adopt that process?.

Yes, so there is – if you're talking about what I think you're talking about, yes, I think they have just one application. But certainly, we are seeing opportunities for advanced packaging in the OSATs. So we are selling to the largest OSAT. I think we press released that as well.

So I think we are seeing both the foundries, and foundry is sitting kind of quiet, but the OSAT is doing some buying at the moment..

Got it. Thanks you so much..

Thanks Gus. I appreciate the question..

And ladies and gentlemen, it looks like that does conclude our question-and-answer session for today. I'd like to turn the floor back to Bill Miller for any additional or closing remarks..

Thank you, operator. So thank you for joining our call today. I do look forward to updating you next quarter on our continued progress. Thank you for your time..

Ladies and gentlemen, that does conclude our call for this afternoon. Once again, we thank you for joining us. You may now disconnect..