Veeco Instruments Inc.

Good day and welcome to today's VICO Quality 2022 earnings call. Today's conference is being recorded. At this time, I would like to turn the conference over to Mr. Anthony Bencivenga, Investor Relations. Please go ahead, sir.

Thank you and good afternoon, everyone. Joining me on the call today are Bill Miller, VICO's Chief Executive Officer, and John Kiernan, our Chief Financial Officer. Today's earnings release is available on the VICO 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 Veco Instruments and is copyrighted material. It cannot be recorded or rebroadcast without Veco'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 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 8K, 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 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. And with that, I will turn the call over to our CEO, Bill Miller.

Thank you, Anthony. Good afternoon, everyone, and thank you for joining us today. VECO delivered another solid quarter with robust year-on-year revenue growth driven by semiconductor sales. The VECO United team is performing well, continually innovating across our differentiated portfolio of technologies and executing in our supply chain to meet customer commitments. Today, I'll take you through our third quarter highlights, and discuss our markets and technologies. John will provide a financial update and guidance, and then we'll be happy to take questions. Our revenue of $172 million was above the midpoint of our guide and driven by another record quarter in semiconductor, with significant contributions from laser annealing as well as systems for advanced packaging and EUV mask blank production. Our solid execution led to non-GAAP operating income of $28 million and non-GAAP EPS of 45 cents, which were both near the top end of our guided range. And we ended the quarter with $272 million in cash and short-term investments, an increase of $40 million. As we look across our order book for the quarter, we see pockets of strength in an otherwise mixed demand environment. For example, we had multiple multi-system orders for our laser annealing systems for logic applications. We also had increased order activity in our data storage market for our I&B systems over the last two quarters. At the same time, the weakness in consumer and mobile device markets is impacting our wet processing and lithography product lines for 5GR filters, power amplifiers, and advanced packaging applications. As such, we've seen corresponding pushouts of shipments by one or two quarters and reduction in orders which are impacting near-term revenue for these product lines. Consequently, we're carefully balancing the risk associated with this mixed demand environment and the investments we're making to execute our growth strategy. And from a supply chain perspective, our team's been executing well and I would say there's a sense that the situation is improving. We're focused on flexibility in our supply chain and working with our partners to overcome issues as they arise. I'll switch gears to our specific markets and technologies, starting with the semiconductor market. There is a prevailing consensus among third parties that weight for fab equipment spending will decline in 2023 by over 20%. This forecasted decline is more heavily weighted to memory and stems from weakness in consumer, PC, and smartphone markets. Currently, Veco's semiconductor business is weighted heavily towards logic, with our laser annealing, advanced packaging, and EUV mask-blank products. So, while we're monitoring WFP carefully, at this time, we continue to invest in executing our growth strategy, are well positioned with attractive technologies, and we're optimistic about expanding our served available market. Despite current headwinds stemming from the consumer markets I just mentioned, over the long term, the semiconductor market is driven by secular growth drivers including megatrends such as AI and high performance computing, the transformation of the auto industry, and ongoing data center and cloud adoption. Veco is well positioned with exciting products in this market, which has grown from approximately 25% of our total revenue in 2018 to more than half of our total revenue in 2022. This reflects the execution of our vision and strategy over the last few years to grow in the semiconductor market. To start, our laser annealing systems have applicability in both leading and trailing logic nodes, helping our customers with AI and high performance computing, as well as mature automotive and consumer applications. This is Veco's largest product line, driving our growth in the semiconductor market. Commenting on our third quarter laser annealing order activity, the majority of orders came from China for trailing node logic applications. Based on our analysis of the new export regulations, which John will explain in a few minutes, we do not expect these orders to be export restricted. During the quarter, we achieved a significant milestone by shipping a laser annealing system with shorter dwell times to an important leading edge logic customer in support of their technology roadmap. These advancements in dwell times along with other advancements in optics, demonstrate our commitment to help our customers with their most difficult materials challenges. Beko's laser annealing platform is the production tool of record at the world's leading Logic players for select annealing steps. In addition to Logic, we've introduced laser annealing to the memory market. In fact, after a recent DRAM evaluation sign-off, we anticipate volume purchase orders in the 2023 to 2024 timeframe. Overall, our laser annealing business is growing as we win process steps and new customers. Now, looking at our advanced packaging lithography product line. We continue to see good potential in applications such as fan-out wafer-level packaging, copper pillar and bumping, driven by GPU production and high-performance computing. And we expect our advanced packaging lithography products to continue to be a contributor to our semiconductor market as manufacturers seek to increase IO densities and integrate diverse chips in packages to improve performance. Switching gears to the EUV mask blank product line, our ion beam deposition technology has been identified as the technology of choice to deposit defect-free films to create EUV mask blanks. We expect this product line to remain in demand as customers plan their capacity additions to keep up with the adoption of EUV lithography. ASML recently reiterated their plans to ship over 60 EUV lithography systems in 2023, and they're working on capacity expansion plans to ship 90 systems annually by 2025. With approximately one of our systems required for every 10 to 15 EUV lithography systems, we currently size this market at three to five ion beam systems per year. Our semiconductor business is performing well today and driving VECO's performance in 2022 and beyond. Now, looking at our compound semiconductor market, we're working to penetrate this market with our MOCVD solutions by targeting power electronics applications and photonics applications, including micro LED. Our gallium nitride MOCVD system is in the field under evaluation with a leading customer for an 8-inch power application. We believe there are opportunities in the consumer, automotive, and data center power markets to enable improved cost of ownership with an 8-inch GAN solution while delivering best-in-class film properties. During the quarter, we shipped multiple deposition systems to support photonics applications, and we received evaluation acceptance for our Lumina Arsenide Phosphide MOCVD system. This system was being evaluated for a red micro-LED application and we're now working with this customer to further optimize their manufacturing process. We continue to believe both power electronics and micro-LED are attractive markets and a good long-term opportunity for the company. As such, we're focusing R&D investments in these areas. Our third major end market is data storage. In the data storage market, the mix of hard disk drive shipments for PCs, servers, and cloud data centers has been transitioning for some time. Overall number of drives shipping has been declining in the consumer markets. But in the growing enterprise markets, the capacity and number of magnetic heads per hard drive have been increasing in response to a 30% growth rate in data stored each year in cloud and data center applications. In fact, the absolute number of heads shipped has been steadily increasing for years and is forecast to continue to increase. In addition, the complexity of heads has been increasing and is expected to continue to increase as disk drive makers advance their technology roadmaps. Because ion beam equipment is used to manufacture our customers' magnetic heads, and based on these industry dynamics I just described, we believe the data storage market will provide growth over the long term. After a multi-year period of growth, and based on reduced order activity in 2021, Data storage performance in 22 is paying out as we expected, as customers slow the pace of capacity additions. As we look forward, however, based on current order activity, we expect 23 data storage revenue to grow over 2022. Now, let's review our 2022 priorities. The VECO team is performing well in a challenging macroeconomic environment. Employee health is a top priority. We've lifted most safety protocols in our facilities, but we're monitoring and staying flexible. Our customer evaluation program continues to be successful. During the quarter, we received another customer acceptance for one of our systems. We're developing exciting products in annealing and ion beam that solve customers' high-value problems, and we're planning to ship systems for customers to evaluate in the coming year. Another key focus for us in 2022 has been managing our supply chain to deal with global shortages of certain components and commodities. We've been doing just that. And I remain committed to remain within our full year 2022 revenue guidance. In fact, I'm confident our technologies are well aligned with growth markets driven by global megatrends I highlighted earlier. And we're well positioned to capitalize on these megatrends to drive VECO's long-term growth and profitability. And with that, I'll turn it over to John.