Veeco Instruments Inc.

and welcome to the VECO Instruments Inc. Corporate Hosted Q2 2021 Earnings Call. As a reminder, today's call is being recorded. At this time, I would like to turn the conference over to Mr. Anthony Bencivenga. 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 running release is available on the Beco 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 Beco.com. This call is being recorded by Beco Instruments and is copyrighted material. It cannot be recorded or rebroadcast without Beco's express permission. Your participation applies consent to our recording. To the extent that this call discusses expectations about market conditions, market acceptances, 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 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. VQIP 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, everyone, and thank you for joining the call. I'd like to start today by thanking the Vito United team for their continued dedication and hard work. They delivered exceptional second quarter financial results and made excellent progress advancing our strategic growth initiatives. We continue to feel confident about the remainder of 2021. Our near-term growth plans are unfolding as expected, and the investments we're making today are also on track, giving us confidence in our longer-term growth plans. I'll expand on this in a few minutes, but first I'll discuss our Q2 highlights, then turn it over to John for a financial update and guidance. VECO continues to execute well, with Q2 results at the high end of our guidance. Strong shipments from our semiconductor and data storage customers drove revenue of $146 million. Our non-GAAP gross margin came in at 42%, and we achieved non-GAAP operating income of $21 million, leading to diluted non-GAAP EPS of 35 cents. Both the top and bottom line results are sequentially better than last quarter and significantly improved from the year-ago quarter. In addition, we had generated $10 million in cash flow from operations and improved our cash position. We continue to improve our operating model while making investments for future growth. I'm particularly excited about our semiconductor market momentum, which is led by our laser annealing and advanced packaging lithography systems obtained with our Ultratech acquisition. We're pleased that the strategic rationale for the acquisition is now serving as a cornerstone to the overall VECO growth strategy. Before we get into a detailed discussion on each of our four end markets, let's look at the megatrends driving our business. The first of these megatrends is mobility, with people and machines always on the move and always connected via devices like smartphones and sensors. A healthy market outlook is driven by exciting technologies like 5G, which, along with the edge of the platform, will enable many exciting use cases for consumers and businesses alike. Increases in mobility will drive leading-edge semiconductors, advanced packaging, and display technologies. High-performance computing is another megatrend driven by large-scale data center applications and artificial intelligence. High-performance computing creates demand for leading-edge semiconductors and advanced packaging. The third major market trend is the transformation of the automotive industry with electrification and autonomous advancements. This market trend is arguably in its early stages and is expected to be a driver of power electronics, 3D sensors, artificial intelligence, and 5G communication. And finally, the cloud is another megatrend driven by enormous amounts of data stored and processed. Forecasts showed stored data growing at a 35% CAGR for years, in turn creating demand for hard disk drives and high-speed communications. These market trends are expected to be in place for some time, driving our longer-term growth initiatives. Now, let's turn to our specific market opportunities. beginning with our semiconductor market. Wafer fab equipment spending has been revised up several times recently, and analysts are now forecasting approximately $80 billion for 2021. This underscores the healthy equipment market today. And looking ahead, longer-term forecasts predict spending up to $100 billion annually. We serve this market with three major product lines, our laser annealing products currently used in production at Advanced Logic Nodes, our ion beam deposition systems for EUV mask blank production, and our lithography products for advanced packaging. Our laser annealing products are used by leading-edge device manufacturers in their most critical process steps. We're currently a production tool of record at multiple customers, which underscores the unique advantages of our laser annealing systems as device geometries shrink. We continue to work with our semiconductor customers on their next nodes by supporting evaluation systems in both logic and memory as we build sustainable, long-term relationships. Our laser annealing is closely tied to the trends I talked about earlier. Mobility, along with high-performance computing, are megatrends that drive demand for advanced memory and logic devices. These devices, in turn, require laser annealing solutions today and for the foreseeable future. Furthermore, regarding our semiconductor market, we're happy to see further evidence of EUV adoption during the quarter as another memory manufacturer announced their commitment to EUV lithography. This is not unexpected as device geometries continue to shrink. With most leading semiconductor manufacturers now planning on adopting EUV lithography, we expect continued demand for ion beam systems used for EUV mass blank production. Moving to advanced packaging. In the context of Moore's Law slowing down, the semiconductor industry is turning to innovative packaging technologies to support system scaling demands and performance improvements. Our advanced packaging lithography and wet processing systems are used for advanced packaging technologies such as heterogeneous integration and fan-out wafer-level packaging. Graphics processing and artificial intelligence are examples where advanced packaging is used to improve system performance. We had strong order activity during the quarter for our lithography products, and we see growth coming from advanced packaging into 2022. We're experiencing strong momentum across all three products in our semiconductor market. This momentum is expected to continue and is the reason we're expanding our manufacturing footprint for laser annealing and lithography products. And I'm proud to say our San Jose capacity expansion remains on schedule. We serve the compound semiconductor market primarily with two product lines, our wet processing equipment for RF power amplifiers and filters, and MOCBD equipment for power, RF, and photonics applications. We continue to see strong demand for our wet processing equipment from our RF customers. 5G communication is driving an increase in content per mobile device, and our customers are responding by adding capacity for RF power amplifiers and filters. In fact, we had strong shipment and order activity during the quarter for RF applications. Our gallium nitride and arsenide phosphide MOCVD systems enable fast charging and other power management solutions, 5G RF devices, and micro LEDs. These markets have tremendous growth potential, and we're looking to build our market position. Recent early-stage wins and evaluations underway for power and micro-LED applications give us confidence we'll grow in these emerging markets. Our third major end market is data storage. This equipment market has been growing for multiple years, consistent with increasing amounts of data stored in server, enterprise, near-line, and surveillance applications. Hard disk drive exabyte capacity shifts hit a new record last quarter. This corresponds to an increase in the number of heads shipped. And since our customers seek to improve their aerial density to enable larger capacity drives, head complexity is also increasing. These tailwinds have been creating a robust market environment for our customers who are adding capacity to keep up with increasing demand. After several years of capacity additions, including in 2021, our data storage order rate has slowed in the first half, and we believe 2022 will likely be a period of equipment digestion. However, with the amount of data generated showing no signs of slowing, we're confident about the long-term prospects of our data storage business. If there is a data storage decline, given our traction in semiconductor and compound semiconductor applications, we see multiple paths to growth at the company level. Now for an update on our 2021 priorities. First, in addition to making safety a priority during the global pandemic, we sought to improve our VECO United culture. While this initiative has been ongoing, our recent culture survey has shown remarkable improvements and we're focused on further improving throughout the year. Our employees and the positive culture that permeates our organization is essential to our success. Second, we continue to focus on profitability. Our Q2 results are reflective of this effort, and we're on track to meet our 2021 financial targets. Third, we're on track to deliver 2021 revenue 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 achieve additional evaluation successes, leading to lasting customer relationships and long-term growth. And with these four priorities, the VECO United 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 will 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. Looking at revenue, revenue for the quarter was $146 million, representing a 9% increase sequentially and a 48% year-over-year increase. The increased revenue from Q1 2021 was largely driven by data storage, which grew 27% in the quarter. Semiconductor, compound semiconductor, and data storage all contributed to a year-on-year increase in revenue from $99 million, with the following details providing a little more color. Semiconductor revenue increased by 43% to $54 million, which represented 37% of total revenue, driven by our laser annealing and lithography products. Data storage revenue increased by 84% to $52 million, and made up 35% of our total revenue driven by both capacity and technology additions by our customers. And compound semiconductor revenue increased by 37% to $24 million and made up 17% of total revenue driven by wet processing systems sold for RF applications. A few comments on Q2 revenue by region. The United States region made up 46% of total revenue and was driven by ion beam systems shipped to data storage customers. Our Asia Pacific region, excluding China, was 34%. China made up 14% of overall revenue, and we expect the revenue percentage from China to trend higher given our recent order activity and improving ability to obtain export licenses. Now turning to our non-GAAP quarterly results. Gross margin came in at 41.6%, which was flat to last quarter and toward the top end of our guidance. Operating expenses for the quarter were $39.6 million, flat to last quarter, and 27% of revenue, a reduction from 29% in Q1. Operating income of $21.3 million for the quarter increased 32% sequentially and more than doubled from the same quarter last year. Tax expense for the quarter was approximately $400,000, with net income coming in at $17.9 million. EPS was $0.35 on a diluted share count of 51.8 million shares. Now moving to the balance sheet and cash flow highlights. We ended the quarter with cash and short-term investments of $330 million, a sequential increase of $2 million. From a working capital perspective, our accounts receivable increased to $108 million due to the timing of shipments in the quarter. This drove an increase in DSO to 67 days from 59 days in the prior quarter. Accounts payable increased to $55 million, with most of the increase related to construction invoices for our capital expansion project. As a result, DPOs increased 58 days from 49 in Q1. Inventory increased approximately $8 million to $164 million to support increased shipment volume and investments in evaluation systems. On increased volume, days of inventory declined to 167 from 173 in Q1. Long-term debt on the balance sheet was recorded at $328 million, representing the carrying value of $389 million in convertible notes. Our cap tax during the quarter was $7 million. This includes $4 million for the San Jose expansion project and approximately $3 million in other capital spending. We expect half of spending on our facility expansion project to increase in the coming quarters. Now, turning to our guidance. For Q3, revenue is expected to be between $135 million and $155 million, with non-GAAP gross margin between 41% and 43%. We expect Q3 non-GAAP OpEx to be between $40 million and $42 million, A slight uptick for us as we add resources in R&D along with increases in selling and marketing to support our growth. We are on pace, however, for full-year OPTX as a percentage of revenue to decline compared to 2020. GAAP EPS for Q3 is expected between $0.02 and $0.20 per diluted share. Non-GAAP EPS is expected between $0.25 and $0.44 per diluted share. Diluted non-GAAP BPS is based upon 52 million share count. For reference, we've included a table in the backup section of the earnings station to provide detail on the effect of the convertible notes on diluted share count. Now for an update beyond Q3. We expect Q4 to be in the same revenue range as our Q3 guidance. which at the midpoint would project full year revenue around $570 million, which is above the high end of our previous provided guidance. We expect non-GAAP DPS for the year to be toward the high end of our previously reported guidance, which was $1.30 per diluted share. I would like to add one quick announcement before we open up the call for questions. We'll be hosting a virtual analyst day in September where we plan to share more detail about our strategy, markets, and technologies. Please keep an eye out for a formal announcement in the coming weeks. We hope you'll join us. And with that, Bill and I would be happy to take your questions.