Veeco Instruments Inc. (NASDAQ:VECO) Q4 2023 Earnings Call Transcript

Veeco Instruments Inc. (NASDAQ:VECO) Q4 2023 Earnings Call Transcript February 14, 2024

Veeco Instruments Inc. beats earnings expectations. Reported EPS is $0.51, expectations were $0.43. Veeco Instruments Inc. isn’t one of the 30 most popular stocks among hedge funds at the end of the third quarter (see the details here).

Operator: Greetings, and welcome to the Veeco’s Quarter and Full Year Q4 2023 Earnings Call. At this time, all participants are in a listen-only mode. The question-and-answer session will follow the formal presentation. [Operator instructions] Reminder, this conference is being recorded. My pleasure to introduce your host, Anthony Pappone, Head of Investor Relations. Thank you, sir.

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 and slide presentation to accompany today’s webcast is available on the Veeco website. To the extent that this call discusses expectations for future revenues, future earnings, market conditions, or otherwise makes statements about the future, these forward-looking statements are based on management’s current expectations and are subject to risks and uncertainties that could cause actual results to differ materially from the statements made. These risks are discussed in detail in our Form 10-K, Annual Report and other SEC filings.

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. Please note, unless otherwise noted, management will address non-GAAP financial results. We 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 earnings presentation. With that, I will turn the call over to our CEO, Bill Miller.

William Miller: Thank you, Anthony. 2023 was a successful year for Veeco. I’m proud to say we grew the business, improved profitability, and most importantly, laid the groundwork for future growth by advancing our product roadmaps. Veeco reached two strategic milestones during the year. First, we launched our next-generation nanosecond annealing solution. And second, we launched our ion beam deposition system for low-resistance metals. Each of these technologies enables our customer to fabricate devices with higher performance and lower power consumption. Revenue from our semiconductor business reached a record in 2023, outperforming WFE growth for the third consecutive year. Our strong results included multiple laser annealing systems for advanced DRAM devices, despite industry-wide CapEx reductions, as well as our first HVM laser annealing systems to our third leading Logic customer.

While investing for growth is essential to our strategy, we’re equally focused on growing profitability. Our team’s execution allowed us to grow non-GAAP gross margin, operating income, and EPS. Lastly, we continue to allocate capital towards organic growth initiatives. In the second half of 2023, we shipped multiple EVALuation systems of key technologies and expect to further the valuation program in 2024. We believe these investments will lead to significant served available market expansion. Switching gears to our full-year financial highlights, Veeco reported another year of top and bottom line growth, with results coming in near or above the high end of our updated 2023 guidance. Revenue totaled $666 million, led by semiconductor revenue, which increased 12% year-over-year.

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Q&A Session

Gross margin improved to 43.5% in 2023, from approximately 42% in the prior year. And as a result, non-GAAP operating income grew 10% to $110 million and diluted non-GAAP EPS increased to $1.69. Now for a look at our Q4 highlights. Veeco reported another quarter of strong top and bottom line results. Revenue totaled $174 million. Gross margin improved sequentially to 45%, driving non-GAAP operating income to $32 million and non-GAAP EPS totaled $0.51. Our solid financial results were primarily driven by the semiconductor market, led by our laser annealing systems, with semiconductor revenue increasing 17% sequentially. I’ll now provide an update on our markets and review several exciting opportunities. Beginning with the semiconductor market, we’re growing our served available market by investing in advanced node logic and memory applications and winning new customers.

Because LSA technology is gaining share at customers’ advanced nodes as new device architectures and shrinking geometries require precise annealing to increase performance. Veeco’s technology advantages include a lower thermal budget, high dopant activation, and pattern insensitivity to annealing. In 2023, we’ve also experienced increased demand from mature node customers as they’ve achieved performance benefits from adopting laser annealing technology. As we look ahead, there are a number of growth opportunities for our laser annealing business, including winning new memory customers, driving additional applications in logic, and introducing our nanosecond annealing technology. Moving to our position in the EUV ecosystem, our Ion Beam technology is utilized to produce defect-free mass flanks.

We continue to work closely with industry leaders as we advance our technology to enable their roadmaps. Looking to 2024, we expect our semiconductor revenue to be at 5% to 10%. Moving to the compound semiconductor market, Veeco is focused on several long-term opportunities within power electronics and photonics. We continue to advance our silicon carbide technology, remain highly engaged with Tier 1 customers, and expect to ship two EVALuation systems this year. We believe our unique system design and extensive go-to-market infrastructure position us well to capture share in this high-growth market. For GaN Power, we’re working with Tier 1 power device customers and positioning ourselves at 200-millimeter and 300-millimeter wafer sizes for GaN on silicon solutions.

We expect to ship a 300-millimeter EVALuation system to a power device customer in 2024. Based on current visibility in the markets we serve, we expect our compound semiconductor business to be at 5 to 10% in 2024. Lastly, looking at the data storage market, Veeco provides Ion Beam equipment to manufacture thin-fill magnetic heads for hard disk drives. While we’re well-positioned to take advantage of long-term growth in the cloud, we’re focused on porting Ion Beam technology from data storage to the front-end semiconductor market. Based on the scheduled ship dates of our backlog, we expect our data storage business to be flat to up 10% in 2024. Moving now to artificial intelligence and the role 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.

Our laser annealing systems for transistor formation and IBD systems for EUV mask blanks are established as production tool of record for GPUs and HBM DRAM. Equally as important, we see future opportunities for nanosecond annealing and Ion Beam deposition solutions for these same applications. I’d now like to take a deeper dive into two of our largest opportunities in the semiconductor market. Our nanosecond annealing technology offers a substantial opportunity to expand our served available market to a broad range of new advanced node applications. Due to our unique laser and architecture, our system can achieve a lower thermal budget and shorter dwell time versus today’s most advanced annealing solutions. This results in a shallow anneal that can impact only tens to hundreds of nanometers into the wafer, which may be ideal for next-generation steps such as backside power delivery and contact anneal for advanced nodes and 3D devices.

Our system has the capability to change the structure and properties of the device, enabling steps like void removal, re-crystallization, and grain growth. In Q4, we shipped our first two NSA EVALuation systems to two leading Logic customers. As we look ahead, we see potential for initial high-volume manufacturing orders in 2025. Turning now to Ion Beam deposition for 300-millimeter front-end semiconductor applications. Veeco is the industry leader in Ion Beam technology, which has been honed over decades. This core technology can also solve our customers’ high-value challenges in advanced semiconductor wafer-level manufacturing. As device geometries continue to shrink, lower-resistance metals are important to maintaining device performance.

Traditional deposition technologies like PVD are struggling to meet performance criteria. Based on Tier 1 customer data, our Ion Beam deposited tungsten and ruthenium films are demonstrating approximately 20% lower resistance compared to traditional PVD. For DRAM, this enables tungsten bit-line scaling while maintaining electrical performance of the device. For Logic, ruthenium-based metallization can enable new integration schemes at future nodes. In Q4, we shipped our first two IBD300 EVALuation systems to two DRAM customers. As we look ahead, we see potential for initial high-volume manufacturing orders in 2025. With that, I’ll turn it over to John for a financial update.

John Kiernan: Thanks, Bill. Turning first to our revenue for the year, revenue came in at $666 million, increasing 3% over the prior year. Revenue from our semiconductor business reached $413 million, increasing 12% from the prior year and comprising 62% of total revenue. Growth in the semiconductor market was primarily led by our laser annealing systems. Compound semiconductor revenue came in at $87 million, a decline from the prior year, representing 13% of total revenue. The year-over-year decline primarily resulted from a decrease in wet processing systems for 5G RF devices due to softness in the handset market. Data storage revenue totaled $88 million, flat to the prior year, comprising 13% of total revenue. And scientific and other revenue was $78 million, an increase of 15%, making up 12% of revenue.

Moving to revenue by region, the China region made up 33% of revenue, an increase from 19% in the prior year, driven by matured node semiconductor sales. Our Asia-Pacific region, excluding China, made up 31% of revenue, with the largest contribution coming from semiconductor customers. The United States made up 24% of total revenue, led by data storage and semiconductor customers. And lastly, EMEA was 12% of revenue for the year. Now, looking at our full-year 2023 non-GAAP operating results, we achieved gross margin of 43.5%, an increase from 42% in the prior year. Gross margin improvement continues as a focus, with actions targeted to achieving our 45% target model in the future. Operating expenses increased 5% to $181 million, as we increased R&D investments.

Operating income increased 10% from the prior year to $110 million. And lastly, net income increased to $98 million, with tax expense of $11 million, yielding an effective tax rate of 10%. Diluted EPS increased to $1.69 for the year, on 61 million shares. I’ll now provide selected GAAP full-year data. Amortization expense was $8 million. Our equity comp expense was $29 million. Depreciation $16 million. And net interest expense was approximately $1 million. GAAP net loss of $30 million included a $97 million extinguishment loss from refinancing a substantial portion of our convertible notes. Turning to Q4 revenue by market and geography, revenue for the quarter was $174 million near the high end of our guidance range. Semiconductor revenue increased sequentially by 17% to $115 million, comprising 66% of total revenue, the increase in revenue was led by laser annealing systems.

Compound semiconductor revenue came in at 10%. Data storage contributed 11%. And scientific and other made up 13%. Now, turning to quarterly revenue by region, the percentage of revenue from China increased to 38% in Q4 due to mature node semiconductor sales. Revenue from our Asia Pacific region, excluding China, made up 34% of revenue, led by sales to semiconductor customers. The United States totaled 22% of revenue, primarily driven by data storage and semiconductor customers. And lastly, EMEA was 6% of revenue. Switching gears to our non-GAAP quarterly results, gross margin came in at approximately 45%, a sequential increase from 44%. Operating expenses for the quarter totaled $47 million, up $1 million from Q3. Tax expense for the quarter was approximately $3 million, a slight increase from the prior quarter, resulting in an 8% effective tax rate.

Lastly, net income came in at $30 million, and diluted EPS was $0.51 on 60 million shares. Now, moving to the balance sheet and cash flow highlights. We ended the quarter with cash and short-term investments of $306 million, a sequential increase of $19 million. The increase was primarily driven by $29 million of cash flow from operations, partially offset by CapEx. From a working capital perspective, our accounts receivable declined by $19 million to $103 million, while day sales outstanding for the quarter, decreasing to 53. Inventory declined from the prior quarter by $14 million to $238 million, while days of inventory came in at 231. Accounts payable declined by $21 million to $42 million, while days payable declined to 41. Long-term debt on the balance sheet was recorded at $275 million, representing the carrying value of our $282 million of convertible notes.

And finally, our CapEx during Q4 totaled $11 million, bringing total CapEx for the year to $28 million. Now, turning to Q1 non-GAAP guidance. Q1 revenue is expected to be between $160 and $180 million, with gross margin between 43% and 44%. We expect OpEx between $46 and $48 million, net income between $21 and $27 million, and diluted EPS between $0.36 and $0.46 on 60 million shares. And now for some additional color beyond Q1. Based on our current visibility, we’re reiterating our 2024 revenue outlook between $680 million and $740 million. We expect revenue in the second half of the year to exceed revenue in the first half based upon timing of scheduled shipments from our backlog, as well as forecasted orders. And we continue to forecast diluted non-GAAP EPS for the full year to be between $1.60 and $1.90 per share.