Veeco Instruments Inc.

Welcome to the Vico Instruments Incorporated corporate hosted Q1 2021 earnings call. Today's call is being recorded. At this time, I would like to turn the conference over to Anthony Benzvenga, Head of Investor Relations. Please go ahead, sir.

Thank you, and good afternoon, everyone. Joining me on the call today are Bill Miller, VECO's Chief Executive Officer, and John Kiernan, our Chief Financial Officer. Today's earnings release is available on the VECO 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 VECO.com. This call is being recorded by VCO Instruments and is copyrighted material. It cannot be recorded or rebroadcast without VCO'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, including as a result of the COVID-19 pandemic. 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, an annual report to shareholders, and in our subsequent quarterly reports on Form 10-Q, current reports on Form 8-K, and press releases. VECO 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 Miller.

Thanks, Anthony. Good afternoon and thank you for joining the call. I hope everyone's doing well. VECO delivered strong first quarter results, which is a testament to our team's resilience, dedication, and hard work. We're excited about the prospects of returning to more normal operations as more people are vaccinated. However, we're entering this phase cautiously and with the health and safety of our employees in mind. Before we get started, I'd like to express my confidence in 2021 by letting you know we'll be increasing our full-year guidance for revenue and earnings as a result of our backlog position. John will have more detail on this in just a few minutes. I'll begin by discussing our Q1 highlights, a review of our markets, and then turn it over to John for financial update and guidance. Q1 marked another quarter of solid execution with results above the midpoint of our guidance. Revenue of $134 million was driven by semiconductor and data storage sales. Our gross margin came in above 41%, and we achieved non-GAAP operating income of $16 million, leading to diluted non-GAAP EPS of 25 cents. In addition, we generated $10 million in cash flow from operations and increased our cash in short-term investments by $8 million. We're seeing strong order momentum broadly across our semiconductor products. This is consistent with a healthy macro environment in the semiconductor equipment space. Several analysts are forecasting this improvement. For example, Goldman Sachs recently revised their 2021 wafer fab equipment forecast up for the third time. It's now forecasted to grow more than 20% in 2021 and another 10% in 2022. A survey of the large semiconductor companies in the U.S., Korea, and Taiwan clearly demonstrates the commitment to investing in additional logic, memory, and advanced packaging capacity. And when we look further at the sources of demand for this capacity, we find the continued proliferation of mobile devices with 5G wireless, high-performance computing for graphics, AI and data center applications, and applications such as automotive and cloud storage. These market drivers and capacity investments made by our customers align well with our near-term growth initiatives in laser annealing, 5GRF, and data storage, and our long-term growth initiatives in semiconductor and compound semiconductor markets. In addition to healthy market dynamics, we made more progress during the quarter engaging with our customers and shipping evaluation systems. I'll explain how this positions VECO for longer-term growth. Now, let's turn to our specific market opportunities. Beginning with our semiconductor market, we serve this market with three major product lines, our laser annealing products for advanced logic, our ion beam deposition systems for EUV mask blank production, and our lithography products for advanced packaging. Our laser annealing products enable high-performance computing. They're used by leading-edge device manufacturers at the most advanced logic nodes. And a memory customer is evaluating our laser annealing system for their manufacturing processes as well. For logic applications, we're currently production tool of record at multiple leading-edge customers for their most advanced nodes, including a recent third application win at one of these customers. And recently, we shipped multiple evaluation systems to both an existing customer and a new leading-edge logic customer at their next nodes. As these evaluations close over the course of the next year, we hope to receive multiple tool orders. So, in summary, current product demand coupled with ongoing evaluations for future nodes make laser annealing an important part of our 2021 and longer-term growth plan. And in support of the semiconductor growth plan, I'm pleased to report construction is well underway at our new San Jose manufacturing facility. EUV lithography is also an enabler for high-performance computing as it allows manufacturers to further shrink their device geometries. VECO's ion beam deposition systems are used to make mass blanks for EUV lithography. Leading-edge fabs are accelerating their adoption of EUV lithography at their advanced nodes, which is driving mass consumption, and this is forecasted to continue. We're experiencing this trend with continued customer engagement, and in fact, I'm excited to announce that during the quarter, we received an order for two ion beam deposition chambers for EUV mass blank production. Moving on to advanced packaging. In order for electronic device performance to continue to improve, our customers have incorporated advanced packaging techniques such as fan-out wafer-level packaging in addition to shrinking nodes along Moore's Law. High-performance computing such as CPUs and graphics processors are driving advanced packaging demand. VECO's lithography products are recognized by our customers for flexibility, superior process control, and high productivity. In fact, we're seeing promising signs of improved demand. During the quarter, we received a multi-tool order from a large OSAT for our lithography products, and we continue to see advanced packaging as a healthy and steady business for the company. We serve the compound semiconductor market primarily with two product lines, our wet processing equipment for RF filters and power amplifiers, and MOCBD equipment for power, RF, and photonics applications. Our wet processing equipment offers excellent process performance for our customers in the RF market. The frequency and power demands of 5G RF drives more content per mobile device. Accordingly, we continue to see strong demand as customers add filter and power amplifier capacity. We are encouraged by customer feedback and demo results from our gallium nitride and arsenide phosphide MOCVD platforms. These products enable fast charging and other power management solutions, 5G RF devices, and micro LEDs. Recent early stage wins and an evaluation shipment position VECO to grow with these emerging markets as they gain traction. Our third major end market is data storage. This market has been growing for multiple years, consistent with cloud and data center demand. Our customers who make thin film magnetic heads require additional capacity to keep up with increasing head demand driven by larger drives. After multiple years of customers accelerating their capacity additions, including in 2021, our visibility into 2022 is limited at this time. However, with data proliferation showing no signs of slowing, we feel confident about the long-term prospects of our data storage business. And lastly, we're beginning to see signs of a potential recovery in our scientific and other market. This market is largely driven by sales to universities and research institutes. Now, for an update on our 2021 priorities. First, we strive to maintain resiliency across all aspects of our operations. Overall, I've seen remarkable teamwork and dedication throughout the organization. It's our people that put Vico in a position to succeed and meet our short and long-term growth objectives. Second, we'll continue to focus on profitability, and we're off to a great start with our Q1 results. Third, we expect to deliver near-term growth with our laser annealing, 5G RF, and data storage solutions. And fourth, we continue to make investments in evaluation systems and our service infrastructure. Our goal is to win additional application steps leading to multi-tool orders that will position VECO for long-term growth. And with these four priorities, the VECO team is committed to making a material difference and building a stronger VECO. Now I'll hand it over to John.

Thanks, Bill, and good afternoon, everyone. I'll be discussing non-GAAP financial results and encourage you to refer to the Reconciliation to GAAP results in our press release or at the end of the earnings presentation. Turning to slide 8. As Bill highlighted, our revenue for the quarter came in at $134 million, which was at the top end of our guidance range. All markets exhibited year-on-year revenue growth, underpinning our full-year revenue growth projections, which I'll update in a minute. Semiconductor revenue was $52 million, which represented 39% of the total, driven by our laser annealing and lithography products. Compound semiconductor revenue was $25 million and made up 18% of total revenue driven by wet processing systems sold for RF applications. Data storage revenue was $41 million and made up 31% of our total revenue. And scientific and other revenue was $16 million and made up 12% of total revenue with systems sold for a variety of applications. Looking at our quarterly revenue by region, our Asia-Pacific region, excluding China, made up 41% of total revenue. The United States was 34%. China made up 15%. EMEA was 10%. And finally, rest of the world made up less than 1% of revenue for the quarter. Now turning to our non-GAAP quarterly results. Gross margin came in at 41.5%, which was toward the top end of our guidance. Operating expenses for the quarter were $39.3 million, or 29% of revenue. Tax expense for the quarter was approximately $400,000, with net income coming in at $12.6 million. And EPS was 25 cents on a diluted share count of 51 million shares. Now moving to the balance sheet and cash flow highlights. We ended the quarter with cash and short-term investments of $328 million, a sequential increase of $8 million. From a working capital perspective, our accounts receivable increased to $87 million. This drove DSOs to 59 days. Accounts payable increased to $43 million, with DPOs increasing to 49 days. Inventory increased approximately $10 million to $156 million to support a planned increase in volume in the second half of the year and investments in evaluation systems. Days of inventory came in at 173. Long-term debt on the balance sheet was recorded at $325 million, representing the carrying value of $389 million in convertible notes. Our CapEx during the quarter was $2 million and does not yet reflect any significant spending on our San Jose expansion project. Now, turning to our guidance. For Q2, revenue is expected to be between $125 million and $145 million, with non-GAAP gross margin between 40% and 42%. As a reminder, gross margins are influenced by a number of factors, and we do expect quarter-to-quarter variations. We expect Q2 non-GAAP OPEX to be between $38 and $40 million. GAAP BPS for Q2 is expected to be between a loss of $0.06 and earnings of $0.11 per diluted share. Non-GAAP EPS is expected to be between 17 cents and 35 cents per diluted share. Diluted non-GAAP EPS is based upon 51 million share count. For reference, we've included a table in the backup section of the earnings presentation to provide detail on the effect of the convertible notes on diluted share count. Now for an update beyond Q2. With growth expected in the second half of the year, we're increasing our view of full-year 2021 revenue to a range of between $540 million and $560 million. At the midpoint, this corresponds to 21% revenue growth year-on-year, up from our previous guidance of 17%. As a result, we expect non-GAAP EPS for the year to be between $1.10 and $1.30 per diluted share, which is a 40% increase year on year, up from our previous guidance of 28%. And with that, Bill and I will be happy to take your questions.

Thank you. If you would like to ask a question, please signal by pressing star 1 on your telephone keypad. And if you're on speakerphone, please make sure that your mute function is turned off to allow your signal to reach our equipment. And that is star one for questions, and we'll pause just a moment. And we will go first to Rick Schaefer of Oppenheimer.

Hi, this is Wade Mock speaking on behalf of Rick Schaefer. Thanks for letting me ask a question. So congratulations on the quarter and the guide. So with the semiconductor supply chains constrained, it seems like there's been an increased sense of urgency through ramp capacity. There's been a lot of announcements recently on higher spending in the foundry area. So I was wondering if you guys can talk about the landscape. Are you seeing any demand pull-ins, any shift in order velocity?

Yeah, thanks for the question, Wei. We are seeing an uptick kind of aligned with the macro trends that you know, you've seen from all of the market makers. And we're really seeing a pull in our laser annealing opportunities. Historically, we've been process tool of record with one application with two customers. Last quarter, we announced that we want a second application step with one of those customers. And now we just announced winning a third step. And so that's really quite positive and gives us confidence to take up our 2021 numbers but also it's important to note that we recently shipped an evaluation system to a third logic customer and we have an ongoing evaluation uh with a d-ram memory customer so clearly we're seeing a lot of engagement uh in the semiconductor space You know, there's more announcements that EUV is going to be more broadly adopted, which is positive for our EUV mass blank deposition systems. You can see ASML increasing their capacities for scanners out into 2022 and beyond. So, we do see that as a solid business for us. between two to four systems per year. And I guess as ASML continues to increase their output, there's about 10 to 15 scanners per one of our systems. So that kind of puts us at the two to four range, but maybe that would tick up a little bit higher. And then finally, in advanced packaging, you know, we serve that market with litho and wet processing equipment. We are seeing continued pull and demand there. This has been a steady business, but we're starting to see some modest growth. We shipped a number of systems to a large OSAP this quarter, and we are seeing demand pick up. So, Generally, in the three areas where we participate in the semiconductor space, laser annealing, EUV mask blanks, and advanced packaging lithography, we are seeing those macro trends.

Great. Appreciate it. Thanks for the color. So as for my follow-up, I know you provided us a little bit update on your eval tools, but can you give us a little bit of a summary of how many tools have been delivered so far to your customers? And when can we expect, what is the expected timeframe for when a tool gets placed to a customer to design one?

Yeah, that's a really timely question. We are planning to have 10 evaluation systems in the field throughout 2021. Today, we have six in the field and four are planned to ship the rest of this year. And really, here, we are investing to win. We're making large investments in, you know, 24 by 7 service support. So we're really over-supporting these. And of those 10 tools, you know, five are laser annealing. Two are MOCBD, particularly in 8-inch power and micro-LED. Two in advanced packaging. And one is a core technology, VCO core technology and SEMI we're not really ready to discuss. Most of these evals are lasting one year post-installation. And so there may be a few that will be signed off late this year, but I would expect that not to be overly significant. I would think mostly we'll be seeing those in the first half of 22. Great. Thank you. Thank you, .

And we'll move to our next question from .

Thank you very much, and congrats on a nice quarter on Outlook. Bill, I'll be first for you in terms of the strength you're seeing in the advanced packaging market. You mentioned that a large OSAT took orders this quarter. As you look forward to the next couple of quarters, do you see that demand being a little more broad-based between both chip makers and OSATs, or is this still going to be heavily concentrated towards the OSATs?

That's a solid question, Patrick. What we are seeing is the customer base, the interested expanding to foundries and IDMs as well as OSATs. We do see the opportunity broadening.

Great, that's helpful. And maybe as a follow-up question for John, in terms of just the OpEx management and even capacity management that you guys are undergoing, obviously as you become more and more of a bigger semi-player, I think, Bill, you mentioned 24-7 support. It's a lot different from your other businesses previously. If you could provide a little bit of color in terms of how much more, quote, investments you need to make on the support side, especially on the semiconductor end, to keep pace with the demand that's out there.

Sure, Patrick, and thanks for the question. So, you know, we are upping our OpEx, you know, guide here, you know, a bit. We did see OpEx for Q1 come in at just over $39 million or 29% of revenue for Quarter 1, and we're given a similar guide. for quarter two in that same range. So, you know, we do expect to increase OPEX as revenue increases, and we support these opportunities. But we expect that as a percentage of revenue that OPEX will continue to come down, and that's our, you know, current, you know, forecast. And to your point also, you know, Patrick, we're also investing in the area of spending in service infrastructure to support, you the growth in business as well as to support the evals. And those investment costs go into our COGS expenses and get included in our gross margin results. So we're investing in there, you know, at the same time as well. So we're currently guiding from a gross margin perspective, you know, gross margins in the same range for Q2 as we experienced in Q1, and expect a little bit of, you know, gross margin growth in the second half of the year. Great. Thank you very much.

Thank you, Patrick.

And we'll go to our next question from Brian Lee of Goldman Sachs.

Hi, team. Sam Purefoy here on for Brian Lee. I've just got a quick one for you guys around supply chain. So, you know, with respect to the semi-supply chain at large, can you update us, you know, in general on your exposure to any tightness there, whether for, you know, raw materials or subcomponents, and, you know, what your mitigation process there looks like?

Yeah, I would say at the beginning of the pandemic, we did have to resource a few hundred fabricated metal components out of Asia back to the U.S. for continuity of supply chain. But that was completed quickly. three quarters ago. I would say right now our supply chain is holding up pretty well, and it's not really a constraint right now. We are obviously on top of it very aggressively, but we are able to manage through the supply chain issues.

Okay, great. Thanks. With respect to if you do have to qualify new suppliers or build out inventory, what does that timeline look like?

For the specific machine parts I was speaking of, those are built-to-print parts. And so the process is really a first article process. It doesn't take a long time to change. For a larger controlled OEM component, that would be a longer process of becoming qualified with a customer, particularly a critical semi-application. But we have not experienced that yet.

Got it, okay, thank you very much for the quote.

Thank you.

And we'll move on to our next question from Tom O'Malley of Barclays.

Good evening guys. Thanks for taking my question and congratulations on the really nice results. Uh, my question really centers around the data storage business. You guys had got it to some strength in the middle of this year, but it looks like a lot of that came in in the March timeframe. Uh, with that lead time about around nine months, can you talk about what happened? Uh, why you saw March coming a bit better and then maybe talk about, um, you and your prepared remarks, talk about the visibility there, but just anything more around the visibility for the rest of the year after that strong March.

I'll take a shot at that, Tom. Maybe John can fill in.

Yeah, I would say just in terms of the March revenue, you know, that number was within our expectations, right? So we shipped in Q1 what we were, you know, expecting to ship. We were expecting an increase, you know, based upon our backlog position compared to the Q4. And You know, some of the ASPs of these systems are in excess of, you know, $5 million or more just moving around one or two, you know, shipments, you know, could impact the quarterly trend. But, you know, Q1 is within our expectations. And then maybe, Bill, you want to talk about the market just a little bit in more detail.

Yeah, well, we – Obviously, when we gave guidance for the year of 2021, that was based on our strong backlog position, and nothing has changed there. So we expect to have a strong data storage year here in 2021.

Great. That's helpful. A two-part question here. One, can you describe what kind of LED revenue you got in the March quarter? Do you have any plan for the June quarter? And could you walk through what your expectations are for the four different segments headed into June just to get us to that midpoint of guidance? Thanks a lot, guys.

Sure. So let me cover it by market here. I'll start with... that, you know, by market, we see a fairly flat quarter at the midpoint of our guide from Q2 compared to Q1. And what we see is an increase in data storage as our expectation in our Q2 guide and flat to down in the other markets. Then more specifically on your question, in our compound semi where we would include the data storage, we don't see any significant LED sales in our Q2 numbers for compound semiconductor.

Thanks again, guys. Nice results.

Thank you. Thanks, Tom.

And we'll go on to our next question from Gus Richard of Northland.

Yes, thanks for taking the question. Just real quick on on the data storage side, you know, can you talk about the, you know, number of passes or the intensity of your iron beam etch and depth tools, you know, when you go from perpendicular according to advanced to hammer, you know, each generation, how much more equipment does your customers need?

yeah it's uh you know we've seen you know our customers have seen the amount of data stored continuing to grow at 35 percent annually and we're benefiting from from two factors first the the size the form factor of the drives is increasing significantly and the number of overall heads being produced or required to be produced is increasing and so the industry is looking at that as an 8% to 10% growth in heads. And then, as you just alluded to, as they move from perpendicular recording to energy-assisted magnetic recording, the complexity of the head increases significantly, and that is expected to likewise increase by about 8% to 10% per year. And so what I mean is, the the number of passes that a head needs to go through because equipment is forecast to grow at about eight to ten percent so if you take take those eight to ten percent they're they're they're supportive of the market got it so what what you're saying is um you know all things being equal you know 16 to 20 percent um growth um

you know, going forward for, you know, the intensity, you know, assuming, you know, heads per drive continues and, you know, drives are effectively flat and you just have, you know, more bits than a drive. Is that the way to think about it?

Yes, that is. I mean, I'll just add that the, you know, customers buying patterns for capital equipment, you know, don't work effectively. you know, 8% to 10% or, excuse me, 16% to 20% per year. And so that could move around a little bit. But generally, over a longer period of time, over many years, that's a good calculus, 16% to 20%.

Yeah, got it. Got it. That makes complete sense. And obviously, it's cyclical. And then on the compound semi side, you know, there's a lot of emerging markets there, micro mini LED displays, LIDAR. health monitors, GAN Power, GAN RF. Could you just walk through, you know, which ones of those applications, you know, sort of the opportunity first and, you know, which ones do you see coming later on?

Yeah. So, you know, generally in compound semi, we have two product lines. One is wet processing, where we are seeing significant demand from customers for RF filters and RF power amplifiers, really driven by 5G adoption in handsets. So that's clearly happening now. And in the MOCBD space, our business is at low levels after exiting the commodity LED business. We've obviously restructured that business and the like, and we go to market with two products. One is gallium nitride. We have a single wafer reactor, and that is really tuned for the power electronics industry. RF, and innovative silicon-based micro-LED applications. What we're seeing now is growth in GaN power applications, particularly at 8 inches. So customers are moving from six-inch to eight-inch format, and those customers that are doing that are choosing VECO. So that's a driver of growth this year into next year. And then if I were to think about longer-term opportunities like micro-LED that you mentioned, I would say that is still farther out on the horizon. Like in the two plus, three plus years out, but could be a nice opportunity for us.

Okay. And what is the interest in arsenide phosphide 3,5? I think you mentioned that.

Yeah, that's... Yeah, so we go to market with a Lumina batch tool. And that's tuned for applications in photonics, such as indium phosphide lasers, Vixels, as well as red micro-LED. We just recently shipped an evaluation system for micro-LED with this product, but it's still farther out, but that's certainly an opportunity for the company.

Got it, got it. And then on the eval tools, I'm sorry for the housekeeping question, but Could you just list off how many of each type of tool are in the eval right now? Sure.

So we have a total of 10 that we're planning. Six are already in the field under evaluation or various stages of installation for our plan to ship the rest of this year. And so of those 10, half of those are laser annealing for logic and memory. The third logic customer, the other two customers, but they're next to most advanced nodes and as well as DRAM memory applications. We also have two evaluation systems. One, as I mentioned, in power, 8-inch power we're planning, as well as micro-LED. So that's seven. We have two in advanced packaging. That's a subset of SEMI. And one is a core VECO technology that we're developing for the SEMI market and planning to ship later this year.

Got it.

Got a lot of detail there.

Yeah, no, it's real helpful. And then spares and service in the quarter. And I'll leave you guys alone.

Okay, spares and service in the quarter. Give me a second here. I believe was 38 million.

Yes. 38 million.

Great. Thanks so much. Thanks, guys.

And we'll go to our next question from Mark Miller, Benchmark Company.

Congrats on the quarter. The disk drive industry is just starting to transition to hammer, emir heads. And I'm just wondering, you supplied both deposition and edge tools for thin film heads. How does the transition to the hammer and emir type heads, does that require more your tools, less your tools? I'm just wondering. as we transition over the next couple of years, what that means for VECO in terms of their data storage equipment?

Yeah, Mark, that's a very timely question. I would say that it's a positive, overall very positive for VECO that technology transitioned to HAMR or MAMR because as the heads become more complex, requires more passes through VECO's equipment, and that's about 8% to 10% due to the technology transition. That's what we're figuring it to be right now. So it's overall positive.

Okay. More an opportunity for etch or for DEP?

It's probably more DEP, but I'd have to probably go back and check that. Okay. I think modestly more towards that.

In terms of projecting your growth opportunities over the next 12 to 18 months, in terms of the mix of the tools you'll be selling, is it a higher mix or similar to you did guide to somewhat higher margins, I believe, in the second half of the year? Are you seeing a mix-up, or do you expect mix to improve as this year goes on into 2022, or will it be similar?

So, Mark, our expectations for growth in the second half of the year, Bill mentioned, you know, earlier in taking up our guide for the second half of the year, you know, is coming from the SEMI side, and particularly, you know, laser annealing, and we are seeing a pickup in advanced packaging as well. Now, we also expect, and what was included in our previous guide, was increased revenue coming from data storage in the second half of the year as well that we see growth coming in Q2. and in the second half of the year.

How would you rank in terms of your tool margins? It used to be advanced packaging and litho tools were the highest, followed by ion beam tools and then laser anneal. Is that correct, or are they all similar in terms of margin contribution?

Yeah, I would say that, you know, Without going into too much detail about the products here, we could really get bogged down. I think if we look at by the market components, I would say that the gross margins are within a couple of percentage points up and down from the company average.

I'm sorry for the extra question. Taxes for next year, I think we were told you're running around $2 million for this year. What will taxes look like for next year?

Yeah, I don't think we've given that, you know, outlook for next year and, you know, for taxes. I would say we still have, you know, the NOLs. So from a, you know, cash perspective, you know, we at this point, you know, don't see a substantive change to our, you know, cash, you know, cash taxes as we still, you know, shielded with NOLs.

Thank you.

Thanks, Mark.

And as a reminder, this is Star 1 if you do have a question at this time. We'll hear next from David Dooley of Steelhead.

Yeah, I'm sorry. My phone dropped off for a couple moments there. So I apologize if I'm asking a question you already answered. But you mentioned that you had a strong backlog entering the second quarter. Could you help us understand what the size of the backlog is or give us a reference point, how much it grew, or any sort of color there so we can understand why you're so confident about your backlog.

Sure. So thanks, Dave. You know, we did report backlog at the end of the year last year. You know, we've gone away from providing quarterly bookings and backlog. I would just say that the trend has been positive. And that, as Bill mentioned and we talked about, we saw or we entered the year with strength in data storage in our backlog. We're executing against that backlog. And, you know, we entered the year with the biggest contributor to the backlog was data storage and followed by semiconductor, and I would say that trend is still in place.

And could you just remind us what the backlog was? I guess you're not going to tell us what it was.

Sure. So we entered the year – Yeah, we entered the year with backlog of $366 million, which was a $100 million increase in 2020 over where we ended 2019 in backlog.

And I'm just assuming, based on your commentary, that the backlog was up sequentially in Q1.

Yeah, you can read into that.

Okay, thanks. And just as far as the LSA business goes, thank you for the update on all the advanced nodes. But, you know, I think a big chunk of that business is with trailing edge nodes. Could you talk about what you're seeing in trailing edge nodes throughout Asia? Because that's mostly where that business is. In fact, most of it is in China, I think.

Is this a laser annealing question? Yeah, laser annealing. Yeah, I would say 75% to 80% of the business right now is actually at the leading edge nodes. logic customers, and I would say 20% plus or minus is in the trailing edge node, and it's staying at about that ratio. I don't know if you can add any more color to that, John.

No, I think that's right, Bill. I think that's what we've seen over the last trailing quarters, number of trailing quarters, and we don't currently see a change in that trend.

I would say, though, the growth that we've seen is really by the leading edge nodes, winning application steps at the leading edge nodes.

Okay. And as far as just a related topic somewhat is, are you having any restrictions on shipping product to China? You know, a lot of people have been waiting for licenses and have a backlog of unshipped tools. What are you seeing in this area?

Sure. So we're subject to those same export compliance, you know, rules. What I would say, Dave, is that, you know, we've seen our revenue as a percentage of business coming from China's stabilized, you know, exiting the LED, you know, business at the end of, you know, 18. You know, we were in a period of time where we saw our business in China as an overall percentage declining. And now it's about, you know, 15% or so of total revenue. And that's for us is pretty broad in terms of both the products that we're selling into China and the customer base. And some of that requires export licenses, some doesn't. Some customer base, you know, requires, you know, export license and others don't. So, you know, for us, you know, we see this business in this current range. And, you know, to the extent that export licenses are required and we don't have those export licenses, we don't include that, you know, in our backlog or, you know, put that in our guidance expectations.

Have you – well, I'll just kind of continue to elaborate on this particular topic. I'm just kind of curious if you've seen – if you have not been able to make shipments to China because of export restrictions – And if that's the case, I'm kind of wondering what the size of what's been held back is, because eventually that might flow through and that could be a positive.

Right. So as an example, if you're specifically, you know, talking about a customer like, you know, SMIC, as an example, we've not obtained any export licenses yet. to ship to a company like SMIC, if that's what you're referring to. And if we were able to get export licenses to a company like SMIC, we could see an increase in the business in China.

It's probably also worth noting that since those kind of requirements came from the government, we have not booked POS subsequent to that into our backlog. So there's not a risk of backlog evaporate much backlog evaporation either.

Okay, thanks.

Thanks, Dave.

And there are no further questions in the queue at this time. I'd now like to turn the conference back to the presenters for any additional or closing remarks.

Thank you, Operator, and thanks for joining our call today. We are excited about 2021, and I want to thank our customers, shareholders, along with the entire VECO team for their continued support as we execute our growth strategy. I do look forward to updating everyone at upcoming conferences. Have a great evening.

And again, that does conclude the call. We'd like to thank everyone for your participation. You may now disconnect.