Veeco Instruments Inc. (NASDAQ:VECO) Q3 2023 Earnings Call Transcript

Veeco Instruments Inc. (NASDAQ:VECO) Q3 2023 Earnings Call Transcript November 6, 2023

Veeco Instruments Inc. beats earnings expectations. Reported EPS is $0.53, expectations were $0.37.

Operator: Good afternoon, and welcome to the Veeco Instruments Q3 2023 Earnings Call. Today’s conference is being recorded Now at this time, I would like to turn the conference over to Anthony Pappone, Head of Investor Relations. Please go ahead.

Anthony Pappone: Thank you, and good afternoon, everyone. Joining me on the call today are Bill Miller, Veeco’s Chief Executive Officer; and John Kiernan, our 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 express 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 make 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, management’s discussion and analysis and Risk Factors 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 will 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 our CEO, Bill Miller.

William Miller: Thank you, Anthony. Good afternoon, everyone, and thank you for joining our call today. Today I’ll take you through our third quarter highlights, provide an update on our markets and discuss a few significant growth opportunities in more detail. John will provide a financial update and guidance, and then we’ll be happy to take questions. Veeco reported another quarter of strong top and bottom line results. Revenue totaled $177 million and non-GAAP EPS of $0.53, each above the high end of our guidance range. Our solid financial results were driven by continued strength in our semiconductor business and sequential growth in our data storage business. In addition to our strong results, we’re also excited to share several key business wins.

First, we ship multiple laser annealing systems to our leading Tier 1 logic and memory customers. Second, we received our first laser annealing system order for a new application to serve the automotive market. Third, we received our first low defect density iron beam deposition system order for a new EUV pellicle mask blank application, and we continue to make progress with our nanosecond annealing and ion beam deposition products for wafer level semiconductor manufacturing. As you may have seen in our press release today, Veeco announced the shipment of our first nanosecond annealing evaluation system to a Tier 1 logic customer representing a substantial milestone for our company. Further advancement of our laser annealing roadmap is an exciting piece of our strategy.

I’ll discuss this significant opportunity [technical difficulty]. Veeco’s laser annealing technology is growing in criticality at our customer’s most advanced nodes as traditional technology struggle to meet performance requirements. For example, new gate all-around architectures and shrinking devices require precise higher temperature annealing technology to increase performance and minimize damage. In comparison to traditional lamp approaches, our laser annealing system has several advantages. These include a lower thermal budget, higher dopant activation, and pattern insensitivity to annealing. Veeco’s laser annealing system continues to be adopted by new and existing customers for new applications, with recent wins validating our position.

Shipments remained elevated during the quarter due to broad-based demand from logic and memory customers. Looking ahead, we’re focused on gaining further adoption in new markets and applications. Veeco’s low defect density iron beam deposition system is the technology of choice to deposit defect-free films for EUB mask blank production, and we’re well-positioned to serve growing demand from adoption of EUV lithography. While we continue to see this market at about three to five systems per year, we see potential to expand our business beyond the current application space in areas such as pellicle deposition. In advanced packaging, our wet processing solutions are used for photo resist strip, solvent cleans and flux removal for high bandwidth memory and temporary bond material strip.

During the quarter, leading foundry and memory customers placed orders for several Flux Clean systems that support advanced packaging for AI. Based on our strong year-to-date results and outlook, we expect our semiconductor business to outperform WFE and be up about 10% for the year. Moving to the compound semiconductor market, the market for epitaxy equipment provides Veeco with a substantial growth opportunity. Our silicon carbide CVD technology continues to advance, and we’re making progress towards demonstrating tool performance to our customers. Interest in our single wafer solution is strong with several evaluation shipments to Tier 1 customers planned for next year. Looking ahead, our unique system design, years of experience with epitaxy technology and extensive go-to-market infrastructure, position us well to capture share.

Likewise, we’re also investing in GaN power and microLED as the long-term fundamentals in these markets remain positive. Lastly, looking at the data storage market, Veeco has the most advanced iron beam equipment in the industry with customers using our products to manufacture thin fill magnetic heads for hard disk drives. Equally as important, our core iron beam technologies are providing significant value as we leverage them for advanced node applications in the semiconductor market. Looking ahead, we’re well-positioned to capitalize on the proliferation of data stored in the cloud. Based on year-to-date and scheduled shipments during the fourth quarter, we continue to expect year-over-year growth in 2023 as previously forecasted. Moving now to artificial intelligence and the role that Veeco plays in the AI chip manufacturing process.

Growth of AI is having a profound impact on leading edge product roadmaps, requiring the most advanced technologies to manufacture higher performance AI chips. As a result, demand for our technologies is growing with adoption of our products in three main areas. Beginning with GPU chips, Veeco’s laser annealing systems for transistor formation and ion beam deposition systems for EUV mask blank manufacturing are established as production tool of record at our customer’s most advanced nodes. In addition to our laser annealing technology, we believe there are opportunities for our nanosecond annealing and ion beam deposition systems in AI, GPU applications where traditional technologies are challenged. Second, our laser annealing systems are used in manufacturing of high bandwidth memory or HBM DRAM.

We’ve shipped multiple systems this year, planned to ship additional systems and are working to penetrate another Tier 1 memory customer’s advanced nodes. Equally important, we see future opportunities for our nanosecond annealing, and ion beam deposition solutions for AI memory applications. And third, Veeco wet processing systems for Flux Clean of microbus support advanced packaging for AI at both the sub-module level for HBM and the system product level. I’d now like to take a deeper dive into two of our largest semiconductor growth opportunities. Beginning with nanosecond annealing. Continued innovation is essential to maintaining product leadership. As mentioned earlier, we shipped our nanosecond annealing evaluation system to a Tier 1 logic customer, which if successful, can significantly expand our served available market.

Compared to traditional annealing solutions, our nanosecond annealing system can achieve a lower thermal budget enabled by a dwell time that can be up to 1000 times shorter than today’s most advanced anneals. Our nanosecond annealing system can rapidly heat the surface of the wafer and only affect tens to one hundredths of nanometers into the wafer. This may enable new applications such as backside power delivery, and contact anneal for advanced nodes. It also may enable new applications requiring material modification such as void removal, recrystallization, and grain growth. Pull from Tier 1 logic and memory customers is strong, and we plan another evaluation shipment in the coming months. As we look ahead, we see potential for initial high volume manufacturing orders in late 2024 or 2025.

Turning now to iron beam deposition for advanced node semiconductor applications. Our core ion beam technology has been honed over decades and is the technology of choice in the semiconductor industry for EUV mask production. This core technology can also solve our customer’s high value problems in advanced semiconductor wafer level manufacturing. Low resistance metals are becoming increasingly critical to maintaining device speed and performance as device geometries continue to shrink. Based on Tier 1 customer data, our iron beam deposited tungsten and ruthenium films are demonstrating substantially low resistivity as compared to traditional PVD. For DRAM, this enables our customers to continue scaling down tungsten fit line thickness while maintaining electrical performance of the device.

For logic, ruthenium based metalization can enable new integration schemes at future nodes. Pull from Tier 1 customers remains strong and we’re on track to ship two evaluation systems in the coming months to DRAM customers. Although this opportunity is still in the early stages, we’re quite excited to introduce iron beam deposition to the front end semiconductor market. With that, I’ll turn it over to John for a financial update.

John Kiernan: Thanks Bill, and good afternoon, everyone. Today I will be discussing non-GAAP financial data and would encourage you to refer to our reconciliation between GAAP and non-GAAP results, which you can find in our press release and at the end of the quarterly earnings presentation. Starting with Q3 revenue by market and geography. Revenue for the quarter was $177 million, increasing 10% from Q2. After a record in Q2, revenue from our semiconductor business came in at $98 million comprising 56% of total revenue. In the compound semiconductor market, revenue came in at 14% declining from the prior quarter. Revenue to our data storage customers increased to $34 million during the quarter, representing 19% of revenue as compared to 9% in Q2.

And scientific and other meet up 11% of revenue. Now turning to quarterly revenue by region. Revenue from the United States totaled 33% of revenue, an increase from 22% in the prior quarter due to an increase in shipments to data storage customers. Revenue from our Asia-Pacific region declined to 29% of total revenue as compared to 36% in the prior quarter, resulting from a decline in semiconductor sales. As forecasted, the percentage of total revenue from China decreased from 31% in the prior quarter to 23%. We expect an increase in China revenue in Q4 and expect full year revenue from China to be in the low 30% range. And lastly, EMEA was 15% of revenue, an increase from 11% in the prior quarter. Switching gears to our non-GAAP quarterly results.

Gross margin came in at approximately 44%, a sequential increase from approximately 43%. Gross margin was positively impacted by higher volume and a more favorable product mix. Operating expenses came in at $46 million in line with guidance as we maintain our focus on cost management, while also prioritizing investment for future growth opportunities. During the quarter, the projected annual effective tax rate was reduced from 14% to 11% due to increased benefits from R&D credits and other deductions. As a result, tax expense for the quarter was $2 million, yielding a 7% effective tax rate. Lastly, net income came in at $31 million and EPS was $0.53 on a diluted share account of 59 million shares. Turning to the balance sheet and cash flow highlights.

We ended the quarter with cash and short term investments of $287 million in line with the prior quarter. From a working capital perspective, our accounts receivable declined by $8 million to $122 million with DSOs for the quarter decreasing to 62 days. Inventory increased by $8 million from the prior quarter to $252 million, while days of inventory outstanding declined to 222 days. Accounts payable remain flat at $63 million, while days payable outstanding decline to 57 days. And lastly, long-term debt on the balance sheet was recorded at $275 million, representing the carrying value of our $282 million of convertible notes. Before turning to our Q4 non-GAAP guidance, I’d like to discuss the US Department of Commerce’s update to export regulations on October 17th.

While these new regulations are complex and still under our review, at this time we do not anticipate they will have a material impact to our business. Now turning to our Q4 non-GAAP guidance. Q4 revenue is forecasted between $155 million and $175 million with gross margin between 43% and 44%. We expect OpEx between $45 million and $47 million; net income between $20 million and $27 million; and EPS between $0.35 and $0.45 on a diluted share count of 60 million shares. Based on our year-to-date results and our fourth quarter guide, our full year 2023 revenue guidance is now $648 million to $668 million tightened and increased from our prior range of $630 million to $670 million. Moreover, we are again raising our profitability outlook for the year to account for higher revenue, stronger gross margin, and lower tax rate.

We now expect non-GAAP EPS between $1.55 and $1.65 per diluted share. And for some additional color beyond Q4, based on market conditions and our visibility, Q1 2024 revenue is looking to be in a similar range to quarterly revenue in the second half of 2023. With that, I’ll now turn the call over to Bill for closing remarks.

William Miller: Thank you, John. Before concluding our prepared remarks, I’d like to highlight why Veeco is a compelling investment opportunity. We see significant growth opportunities for Veeco in the coming years, and we’re investing to take full advantage of these opportunities. Our successful evaluation program has been foundational to our growth in the semiconductor market and is a top priority for 2024. Likewise, we expect our strategic R&D investments in the semiconductor and compound semiconductor markets to further strengthen our unique portfolio of differentiated technologies. As a reminder, our laser annealing technology is well established and our efforts to expand our footprint to new markets, applications and products are gaining traction.

We’re particularly excited for the opportunity to expand our served available market to new applications as we advance our laser annealing roadmap to nanosecond annealing. In iron beam deposition, our decades of experience and core technology give us confidence as we introduce iron beam for wafer level advanced node semiconductor applications. We believe our iron beam deposition technology has unique advantages versus traditional technologies like PVD, and our team is laser focused on executing. Lastly, we have a long-term opportunity to capitalize on growing demand in the compound semiconductor equipment market for power electronics and photonics applications. And with that, we’ll be happy to take your questions. Operator, please open the line.

Operator: Thank you. We will now be conducting a question-and-answer session. [Operator Instructions] Thank you. Our first question comes on the line of Charles Shi with Needham. Please proceed with your question.

Charles Shi: Hey, thanks for taking my question. Good afternoon, Bill and John. Maybe the first question about that NSA tool you guys shipped out to the Tier 1 customer. Kind of curious, because you mentioned you were expecting maybe repeat orders as early as late 2024, 2025. That seems to be a quite quick turnaround from the first — from a shipment of a turnaround, but the eval tool to like repeat buys. Can you provide a little bit of context behind the adoption of this — I mean the adoption of these tools or maybe the evaluation tool here? Is it the dropping, replacing some existing application and why you are expecting such a rapid turnaround from the shipment to the repeat buys? Thanks.

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Q&A Session

William Miller: Yeah. Charles, that’s a thoughtful, lengthy question there. I would say we are really excited about the shipment of this first evaluation system to a Tier 1 logic customer. I believe it represents a significant milestone for the company to introduce this technology after working on it for a number of years. I think it’s important for our investors to understand that this is really a complimentary technology to our existing laser annealing technology. And effectively we can reduce the thermal budget significantly because we have about a 1000 times less dwell time, which opens up a new class of applications that we can compete for. And then I think just to follow up on one of your first sub-questions here, what we have done is we’ve shipped a system to a logic customer, and these are one year evaluations.

And they usually start after the tool is installed. And so let’s say we’ve shipped it now and we could have it installed by the beginning of the year, that would start the clock on the evaluation cycle. If this goes well and the integration runs smoothly, it would not be unheard of for us to receive an order before the evaluation is signed off. But you are right. First orders could be in 2025 very easily as well. So hopefully that that provides the clarity you’re looking for.

Charles Shi: Yeah. So maybe the second question, I want to ask you to provide a little bit more color on your new application wing for EUV pellicles. Also kind of curious, what do you think about the timing for you to receive high volume manufacturing orders? Is it something that’s more tied to the high-end EUV adoption? Or do you — from your discussion with your customers, do you kind of expect maybe it can be earlier? That’s my second question. Thanks.

William Miller: I would say, Charles, that pellicles are being introduced today. And just for our investors, pellicles, as you know, are a thin, transparent membrane that’s mounted on the photo mask to improve yield and reduce defects. So this is a new application for us. Our traditional IBD iron beam deposition, low defect density tool, the industry needs one of these for every three to five ASML scanners shipped. So we’re still sizing that market at three to five systems per year as a function of ASML scanner shipped. So we see this as an incremental opportunity. And our thought is this first tool will be used to make production pellicles over in due time.

John Kiernan: So, just a slight clarification. One of our EUV tools for every 10 to 15 ASML scanners that are shipped into the market, which then turns into a three to five system requirement for us.

Charles Shi: Yeah. Sorry, John. I just really want to follow up onto that, because it sounded like you are expecting pellicles to be introduced today with today’s standard EUV tools, not just — not the heightened EUV tools that maybe just a few years, still a few years down the road. Is that a fair statement?

William Miller: I don’t want to go into too much detail. My understanding is for a small number of EUV mask steps, pellicles are being introduced. I wouldn’t want to really hypothesize what that percentage goes to with high NA.

Charles Shi: Thanks.

William Miller: Thank you, Charles.

Operator: Thank you. Our next question comes from the line of Brian Lee with Goldman Sachs. Please proceed with your question.

Brian Lee: Hey, guys. Good afternoon. Thanks for taking the questions. I had two. I guess the first one on the data storage segment. I know you guys have been talking about in recent quarters, you have enough backlog breadth to kind of support revenues. You had a nice quarter here as well. Can you kind of give us a sense of where you think the data storage cycle is today? And as you think about — you gave a little bit of a preliminary view here in the Q1, is the backlog extending all the way into Q1? And then kind of maybe beyond that, what should we be thinking about in terms of that business segment for you as we move into next year? And then I had a follow up.

William Miller: Brian, I would say the data storage industry conditions kind of remain challenging. There’s still an excess inventory across the channel that the industry is trying to work off. We have heard commentary from two of our public company customers, talking about maybe early stages of recovery, but clearly we would have — they would have to see that for some time before we can call it a sustained bottom. I would say, the one thing of interest when I look longer term, both of our customers do project exabyte growth over the next three to five years at about 25% CAGR. And clearly that would be very good, a good tailwind for Veeco. And so your specific question on our view towards 2024, I would say, we’re not going to really be able to give quantitative view of 2024, but I would suffice it to say that we do have backlog into 2024 and wouldn’t think it would be substantially different from 2023. But we will give more color here in the near future.

Brian Lee: Okay. Fair enough. That’s helpful. And then, you kind of headed it off as well with your prepared remarks, but as you think about the China exposure, I know there’s been incremental concerns across different markets and industries with respect to the China macro and signs of weakness in industrial and maybe some other categories. Can you kind of maybe level set us? I know you’re giving us sort of the real time updates around where your exposure is and how you’re navigating it, but what are you hearing on the ground there and are you anticipating as you look into 2024? Maybe a similar question, like, should we expect that China continues to fall as a percent of sales that you’re making elsewhere and other geos and other end markets? Or do you see some stabilization here as you think about that preliminary view you gave out into Q1? Thank you.

John Kiernan: Sure. Sure, Brian, I’ll take that. This is John. So we had strong revenue in the first half of this year in China, and we had indicated that we would see China as a percentage of our overall revenue, not as high as the first half of the year. But that being said, is that we were also forecasting about 30% of our revenue coming from China this year. We continue to see that. So we will see a bit of a pickup in the fourth quarter compared to third quarter for our business in China. I think as we look into 2024 at this point in time, it’s a bit early and we’re not really ready to call. Do we see that business at — what business levels that we expect to see there for full year 2024. But what I can comment on is that, the current activity with our customers is still pretty strong.

We do see ongoing demand for China customers. We are aware that customers are continuing to make investments in several areas for mature nodes. So at this point in time, we still see a pretty good environment for business with our China customers.

Brian Lee: Okay. Fair enough. Thanks guys. I’ll pass it on.

William Miller: Thanks Brian.

John Kiernan: Thank you, Brian.

Operator: Thank you. Our next question comes from the line of Tom O’Malley with Barclays. Please proceed with your question.

Thomas O’Malley: Hey, I just wanted to follow up again on the China question there. So depending on what you guys are defining as low thirties for the entire year, you could have China revenue in the fourth quarter near record levels. Could you just describe where that’s coming from? Is that in the semi business, I know you’re guiding that up for 10% on the year or so, so are you seeing the mix in your semi business move back towards majority of that revenue being in China, or just any comments on that into the fourth quarter would be helpful?