Veeco Instruments Inc.

Greetings and welcome to VECO's fourth quarter and full year 2022 earnings call. At this time, all participants are in a listen-only mode. A question and answer session will follow the formal presentation. If anyone should require operator assistance during a conference, please press star zero on your telephone keypad. As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Anthony Ben-Savanga, Head of Investor Relations. Thank you. You may begin.

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 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 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 factor 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. 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. Thank you for joining our call. I hope you and your families are well. To begin, I'd like to highlight some recent exciting news. On February 1st, we announced that VECO acquired EpiLuvac, accelerating VECO's entry into the high-growth silicon carbide epitaxy equipment market. I'll share more details on this in a few minutes. I'm going to take you through our 2022 and fourth quarter highlights and explain the acquisition. John will provide a financial update and guidance, and then I'll discuss our markets and technologies before taking your questions. As I look back at 2022, I'm proud of the resilience the VECO United team has exhibited and the accomplishments we made. For starters, as it relates to our growth strategy, we made solid progress advancing our product roadmaps in our semiconductor and compound semiconductor product lines. Several of our customer evaluations were accepted, and we completed our San Jose facility expansion, increasing our much needed semiconductor capacity. We achieved double digit revenue growth, and we grew non-GAAP operating income faster than revenue. An important part of our strategy involves consistently evaluating our product portfolio. As part of this process, we acquired EpiLuvac to participate in the silicon carbide epitaxy market, which we believe will enhance our long-term growth prospects. From a governance and corporate responsibility perspective, we appointed a third female director, Dr. Lena Nicolides, to our board, advanced our ESG program, by publishing our annual sustainability report, and we invested in our VICO United leadership team by implementing a leadership training curriculum. And lastly, with strong order activity, our backlog grew, and we strengthened our balance sheet with robust cash flow from operations. We're pleased with our progress in 2022, and we believe we're set up for solid performance in 2023. Switching gears to our full year financial highlights. 2022 was another year of growth for VECO. Revenue for the full year was $646 million, 11% growth over 2021. It was a record year of semiconductor revenue, which grew 50% year on year, driven by increased traction in both advanced and trailing node laser annealing systems. Orders exceeded revenue throughout the year as well, with backlog ending at $500 million of $60 million on the year. We had strong cash flow from operations of $108 million, a 60% increase over 2021. And non-GAAP operating income grew 15% to $100 million, with diluted non-GAAP EPS coming in at $1.57. We entered 2022 with supply chain challenges and strong demand. By the end of the year, the supply chain challenges persisted while demand became more mixed due to softness in consumer markets such as smartphones and PCs and a weakening macroeconomic environment in general. Overall, given the environment, we're pleased with our full year 2022 financial performance. Now for a look at our Q4 2022 highlights. Results for the fourth quarter were generally within our guidance range, with gross margin exceeding the high end of guidance. Revenue came in at $154 million on strength in our semiconductor market, and we achieved non-GAAP operating income of $24 million, leading to diluted non-GAAP EPS of 38 cents. In addition, we generated $33 million in cash flow from operations. During the quarter, momentum in the semiconductor market continued with strong bookings and revenue activity. The team did an excellent job mitigating supply chain challenges, and in fact, over the course of the fourth quarter, we started to see signs of improvement in supply chain on-time deliveries. Now, let me get into some more details regarding the EpiLuvac acquisition. Two weeks ago, we announced the acquisition of EpiLuvac, a Swedish designer and manufacturer of silicon carbide epitaxy systems. We're excited about this transaction because it accelerates our entrance into the high-growth silicon carbide epitaxy equipment market, which is principally driven by electric vehicle demand. The EpiLubac team has decades of CVD silicon carbide experience, leading to their well-designed system, which targets high productivity, ease of maintenance, and superior process control. The VECO team brings proven manufacturing and go-to-market capabilities to facilitate ramping and penetrating this high-growth market. We believe the EpiLubac team will be a great fit with VECO, and we couldn't be more excited to combine our capabilities, delay our customers, and create meaningful value as we grow the business. The power electronics market has historically been dominated by silicon devices. However, demand has been rapidly growing for higher voltage and higher power applications in automotive, energy, and industrial end markets, which silicon carbide is well suited to address. And in conjunction with large investments by many key players in the silicon carbide ecosystem, the device market is expected to grow at approximately a 30% CAGR from 2023 to 2027. This translates to a forecasted market growth rate for epitaxy equipment from approximately $250 million to about $500 million or a 15% CAGR over the same period. Now to provide an overview of the transaction. The purchase price for this transaction was $30 million paid in cash at closing, with up to an additional $35 million in performance-based earnouts. EpiLubac is an early-stage revenue company with 11 employees. The impact of VECO's non-GAAP financial results is not expected to be material in 2023. Beginning in 2024, as we leverage our manufacturing and global sales and service infrastructure, we expect volume revenue to begin, and for this transaction to be slightly accretive. And with that, I'll turn the call over to John for more details on full year 2022 and fourth quarter financials.

Thanks, Bill, and good afternoon, everyone. Today, I'll 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 or at the end of the earnings presentation. Now breaking down our full year revenue of $646 million by market. Our semiconductor revenue was $369 million, which represented 57% of the total and an increase of 50% over the prior year. Our semiconductor growth was driven by strong performance in all product lines led by laser annealing. Compound semiconductor revenue was $121 million, up 13% from 2021 and made up 19% of the total. Growth in this market was driven by systems for photonics applications. Data storage revenue was $88 million and made up 13% of our total revenue. This was a 48% decrease from the prior year in line with our expectations as hard disk drive customers slowed their pace of capacity additions for magnetic head manufacturing. And scientific and other revenue was $68 million, an increase of 12% from 2021, and made up 11% of total revenue. And now, looking at our full year revenue by region. Our Asia Pacific region, excluding China, made up 36%, driven by semiconductor customers. The United States made up 31% of total revenue driven by semiconductor and data storage customers. China made up 19% of total revenue. In the second half of 2022, we experienced an accelerated booking rate for trailing node semiconductor systems in China. Accordingly, we expect China revenue as a percentage of total revenue to increase in the first half of 2023. And finally, EMEA was 14% of total revenue for the year. Now turning to full year 2022 non-GAAP operating results. We achieved gross margin of 42%, which is in line with our annual guided range. Our operating expenses increased to $171 million, reflecting the R&D investments we've been making in semiconductor and compound semiconductor to execute our growth strategy. Our non-GAAP operating income increased 15% from $87 million in 2021 to $100 million in 2022. The looted EPS increased to $1.57 for the year. And now I'll provide a few additional full-year figures. For 2022, amortization expense was $10 million, Our equity comp expense was $23 million, depreciation was $15 million. Cash interest expense on our debt was $10 million, and net cash taxes for the year were $1.4 million. GAAP net income of $167 million included a tax benefit of $116 million, primarily from the reversal of our valuation allowance in the fourth quarter. After considering recent significant positive evidence, including a consistent pattern of earnings in the past three years, as well as forecasted future earnings, it was determined that a valuation allowance was no longer required for U.S. federal and certain state net deferred tax assets. During the year, we utilized all of our $166 million in U.S. federal NOLs from current taxable income. At year end, we had R&D and foreign tax credit carry-forwards of $45 million. And because of strong order intake, as Bill mentioned, we ended 2022 with $500 million in backlog, a $60 million increase from 2021. Turning to Q4 revenue by market and geography. Revenue totaled $154 million for the quarter, which was within our guidance range, the semiconductor market made up 61% of our total revenue for the quarter, led by multiple LSA systems for both leading and trailing nodes, as well as EUV and AP lithosystems. The compound semiconductor market contributed 16% of our revenue and was driven by systems for photonics applications. Data storage came in at 11% of total revenue, and our scientific and other market made up 12% of our revenue. Now looking at our quarterly revenue by region, our Asia Pacific region excluding China made up 42% of our total revenue driven by semiconductor system sales. The United States was 25% of revenue driven by a broad range of customers. China made up 19% of total revenue primarily driven by trailing node semiconductor systems. And finally, EMEA was 14 percent of total revenue for the quarter. Switching gears to our quarterly non-GAAP results, gross margin came in at 42 percent, which was above the high end of our guidance due to a more favorable product mix and lower manufacturing and service costs. Gross margins are influenced by a number of factors, and we expect quarter-to-quarter variations. Operating expenses for the quarter were $41 million, down from Q3 and lower than our guided range due to favorable SG&A expenses. On a non-GAAP basis, tax expense for the quarter was $500,000, with net income coming in at $22 million. And EPS was 38 cents on a diluted share count of 63.4 million shares. Gap net income of $129 million for the quarter included the impact of the valuation allowance reversal I highlighted earlier. Now moving to the balance sheet and cash flow highlights. We ended the quarter with cash and short-term investments of $303 million, a quarterly sequential increase of $31 million. This increase was primarily due to $33 million in cash flow from operations, and as of the end of the quarter, we were cash debt positive. From a working capital perspective, our accounts receivable decreased by $19 million to $124 million. DSOs for the quarter came in at 73 days, down from 75 in the prior quarter. Inventory was $207 million, and days of inventory came in at 196, both up from the prior quarter. Accounts payable was roughly flat at $52 million. Long-term debt on the balance sheet was recorded at $275 million, which represents the carrying value of the $278 million of convertible notes. In January 2023, $20 million of the outstanding 2.7% convertible senior notes matured and were fully settled by payment in cash. Our resulting convertible debt principal amount is $258 million. More information on the convertible notes can be found in the backup section of the earnings presentation. And finally, our CapEx during the quarter was $3 million, bringing CapEx for the year to $25 million. Now turning to Q1 guidance. In the current weaker demand environment, customers across certain segments of our business have lowered fabulization to address elevated levels of inventory. In some cases, they've taken steps to reduce both capital and operating expenses, including spare parts and service. Taking this into account, Q1 revenue is expected to be between $130 million and $150 million. We expect the following non-GAAP financial metrics for Q1. Gross margin between 39% and 41%, OPEX between $42 million and $44 million, net income between $6 and $15 million, EPS between 12 cents and 28 cents per diluted share, and now for some additional color beyond Q1. Based on our current visibility supported by our backlog, our revenue outlook for 2023, as previously disclosed, remains between $630 million and $670 million. We expect revenue in the second half of the year to exceed revenue in the first half based upon the scheduled shipments of our backlog, and we continue to target diluted non-GAAP EPS for the full year to be between $1.15 and $1.35 per share, which includes the increased tax provisions going forward as a result of the valuation allowance reversal in the fourth quarter of 2022. And with that, I'll turn it back over to Bill for a market update.

Bill Meyer Thanks, John. Turning now to an update on our markets. We'll start with our semiconductor market, where our strategy is to invest in the leading edge with differentiated solutions. We accomplish this with our laser annealing products, which reduce thermal budgets for our advanced node customers. We're expanding our served available market with our laser annealing product line as we win additional annealing steps at Logic customers' current and next nodes, and by introducing laser annealing to the memory space. Our ion beam deposition systems are another differentiated solution in our semiconductor market. They're used to manufacture EUV mask blanks and have been the process of choice for many years as ion beam deposition can deposit a nearly defect-free film. In addition to our strategic initiatives in the semiconductor market, we provide laser annealing equipment for trailing edge capacity, and we also provide advanced packaging lithography and wet processing solutions to IDMs, foundries, and OSAPs. Our technologies are tightly aligned to the semiconductor market, which is driven by all four of the mega trends that we've defined. High performance computing and artificial intelligence, mobility and the immersive user experience, transformation of the automobile industry, and the cloud. We think our semiconductor business will outpace overall wafer fab equipment spending, or WFE, in 2023. In fact, we expect our semiconductor revenue to be flat to slightly up in 2023, and this is significantly better than WFE, which is forecasted to be down 20% or more for the year. During the fourth quarter, we had several signs of momentum that support our positive view of the semiconductor market. We had record bookings in the fourth quarter as well as the full year. In laser annealing, order activity and shipment activity for both leading and trailing nodes remained elevated. We shipped an LSA evaluation system to a leading manufacturer for a new advanced node logic application step. In our EUV mask blank system business, we had strong orders and now have the full year 2023 booked into backlog. Although consumer products such as smartphones and PCs have slowed, driving softness in our advanced packaging lithography and wet processing product lines, we expect the positive momentum in our LSA and EUV mask blank product lines to offset these challenges. Switching gears to the compound semiconductor market, we serve this market today primarily with our wet processing and MOCBD equipment. With weakness in consumer end markets, our wet processing business has been experiencing a slowdown. However, the compound semiconductor end market we're working to penetrate with MOCVD, such as GaN power electronics and micro LED, show promising signs of growth over the long term. We're committed to continuing our R&D investments, demos, and evaluations with customers, and ultimately realizing growth in these markets. And, as described earlier, we're entering the silicon carbide market with our newly acquired silicon carbide CVD system to address growing power electronics demand in the electric vehicle market. While 2023 is shaping up to be a challenging year for us in compound semi, the markets we're working to penetrate are emerging, growing, and have enormous potential over the long run. Now, looking at our data storage market. We've been forecasting a growth year in 2023 for some time now, and our opening backlog position in data storage supports this growth. The long-term trends in the data storage industry appear intact. According to Gartner, near-line hard disk drive exabyte shipments are expected to grow at approximately 25% CAGR for the next five years. Recently, Seagate announced they expect to launch a 30 terabyte drive with heat-assisted magnetic recording in the second quarter of this year. Larger drives use more magnetic heads, and newer recording technologies like HAMR use more complex heads, both of which require more deposition and etch equipment. In addition, against the backdrop of challenging times for our data storage customers, recent analyst reports point to a potential bottoming in the hard disk drive cycle. turning to our 2023 priorities. We enter the year cautiously optimistic given our backlog position, coupled with the mixed demand environment within which we're operating. As a result, we recognize the importance of keeping our employees healthy and safe and maintaining the progress we've made on our culture so we can continue to execute. And speaking of execution, we're focused on our supply chain on-time delivery, and quality metrics to maintain and improve customer satisfaction. We'll continue to work with our customers and invest R&D in our product roadmaps. This leads to customer demos and further evaluation system shipments, a critical part of our strategy. And following the EpiLuvac acquisition, we're focused on integrating the team and the technology and penetrating the silicon carbide epitaxy equipment market. And lastly, we're focused on outperforming WFE growth with our semiconductor products and growing in the data storage market as we maintain profitability during near-term macroeconomic challenges. With these priorities in mind, we're committed to making a material difference and building a stronger VECO that serves all our stakeholders. One last item before we take your questions. I'd like to thank Anthony Bencivenga for his dedication to the company over the last 12 years. This will be his last quarter with us as head of investor relations, where he developed strong relations with the investment community. He's leaving us to head up investor relations for a large distributor of electronics and enterprise computing. I'd also like to introduce Anthony Popone. Anthony has led the FP&A function at Vico for the last several years, and will now take on the added responsibility as our head of investor relations. We're thrilled to have him in the IR role. And with that, John and I will be happy to take your questions. Operator, please open the line.

Thank you. Ladies and gentlemen, at this time, we will be conducting a question and answer session. If you'd like to ask a question, you may press star 1 on your telephone keypad. A confirmation tone will indicate your line is in the question queue. You may press star 2 if you would like to remove your question from the queue. For participants using speaker equipment, it may be necessary to pick up your handset before pressing the star key. Our first question comes from the line of Tom O'Malley with Barclays. Please proceed with your question.

Hey, guys. Thanks for taking my question. And to Anthony, congratulations on the new role. Thank you for the help over the years. I just had two quick ones. The first one is you put out a an 8K in early February and talked about some slowing trends. Could you talk about what has changed since then? Was this always the expectation for Q1 of the year with a stronger second half? Or has anything changed since that 8K? And then two, on the compound semi side, you're obviously saying it's a weaker year. Is that really just related to some of the wet processing? Or is there any additional weakness that you see there? Thank you.

Sure, so commenting on Q1, our guide for Q1 is for top line, Tom, $130 to $150 million, so $140 at the midpoint. And we did consider that in putting out our guided revenue range for the year. So we've guided our revenue range for 2023 at $630 million to $670 million, so relatively flat compared to 2022. In setting that guidance, we've taken into consideration, as Bill highlighted in the prepared remarks, that we have increased the backlog to $500 million in by the end of 2022. So that's about a $60 million increase from the beginning of the year. So all that, you know, taken into consideration in a strong booking quarter, you know, in the fourth quarter, you know, we remain, you know, our guidance range remains where we previously disclosed it. I think you had a second question there as well, Tom, if you don't mind repeating that.

Yeah, no, I was going to just pivot. That answered actually both. But I guess the other part of the equation is you mentioned that China orders were a little stronger in the first half of 23. Is the increase in backlog directly correlated to those Chinese customers ordering a bit more? Or could you just describe where you're seeing the increase in orders that's giving you that better visibility? Thank you.

Sure, Tom. So we did see in the second half of this year our order rate pick up in China. We were running revenue about 20% of revenue in 2022 coming from customers in China. And that we've seen that now on the order side, you know, pick up to about 27% of orders for the year in 2022. having us exited 2022 with a backlog of about 27%. So we're expecting a higher revenue rate in the beginning part of 2023 as those orders are scheduled to ship out.

Thank you.

Thanks, Tom. Thank you, Tom.

Our next question comes from the line of Gus Richard with Northland. Please proceed with your question.

Yes, thanks for taking the question, Anthony. Thanks for all your help over these years, and best of luck. Thank you, guys. You're welcome. And then on the bookings in the fourth quarter, you said there's a record, and I'm just wondering if you could kind of get a little bit of color on, is that coming from data storage and semis? Is it, you know, just what comprised that strong bookings?

Yeah, just one quick clarification. I think Bill will cover it in a little bit more detail, Gus. It was a record booking only in our semiconductor segment in the fourth quarter and for the year in semiconductor, not the company as a whole.

Yeah. Thanks for the clarification, John. You know, Gus, just to give a little more color to that, I would say Gus, we're in a mixed demand environment, and we are seeing, as John just said, and we said in our prepared remarks, our semi-business is strong, and we think we're going to be flat to slightly up for 2023. I think we're going to be well beyond WFE, which is forecast to be down 20% or more. As we just said, we had record bookings in the fourth quarter. Our laser annealing business... was strong, we had order and shipment activity for both leading and trailing nodes during the quarter. And our EUV mass blank system business, we also had strong orders in Q4, and now the full year 2023 is booked into backlog. Now, the flip side is there's some areas of the semispace that aren't doing as well. You know, the consumer products such as smartphones and PCs have slowed, and this is driving softness in our advanced packaging lithography and wet processing product lines. So, we expect the positive momentum in our LSA and EUV mask blank products to offset these challenges in SEMI. If I just were to expand for a second on compound SEMI, compound SEMI is setting up to be a challenging year. in the near term driven by weakness in 5GRF related to the smartphone weakness. In a longer term, we do feel better about compound SEMI because these markets we're working in to penetrate, such as power electronics and micro LED, are growing and have enormous potential for us. And as we just talked about here, we're really excited about entering the silicon carbide epi market. with the epi luvac acquisition so um you know this really kind of accelerates our entrance into into this space um and uh it does add some served available market for us to the tune of 200 to 300 million in 23 growing to 500 million in 2027. got it thank you very very helpful and then just on the epi luvac acquisition um you know can you

basically talk a little bit more about what you purchased. Was it just a chamber? Is it, you know, hooked up to a mainframe? Do they have customers? You know, have they, you know, are they in beta? You know, are there schools running in production? And, you know, sort of what do you guys need to do to get it to high volume?

Yeah, that's a lot of questions, Gus. Well, let me kind of try to lay the land out a little bit more clearly here. So we acquired this 11 person Swedish engineering and technology company. They had developed silicon carbides previously for four inch and six inch. And so this is a new eight inch single wafer silicon carbide reactor and mainframe. So it's an automated system that can run independently. They have placed one system into the field and it's currently under installation. And part of our integration plan is we're going to put the second tool shipment is actually going to ship to our Somerset, New Jersey lab where we're going to facilitize it and use that as a dedicated demonstration tool to sell equipment. So we're planning a sales kickoff meeting here in the next week or so. And the addition of, I believe, Veco's worldwide sales footprint, our service footprint, and manufacturing operations, we think we have a very good chance to be competitive in the silicon carbide epi market. Most likely, though, given the timing of all this, not much revenue in 23. but hopefully some revenue growth, incremental business in 24. Got it. Thanks. That's very helpful. Sure, Gus.

Our next question comes from the line of Dave Dooley with Steelhead Securities. Please proceed with your question.

Yeah, thanks for taking my question. Just a kind of follow-up along the lines of Gus's questions. As far as FICO goes in the compound semi-business, historically, how much of your revenue in that business comes from power electronics of various types, either standard silicon or GaN or silicon carbide?

Well, prior to the acquisition, we don't have any silicon power or silicon carbide power. We had our GaN on silicon, GaN nitride on silicon, and equipment for 200 and now some 300 millimeter power applications. John, I don't know if we have that number off the top of our heads.

Yeah, it's not been the predominant number driving the compound semiconductor revenue. We were getting more of the compound semiconductor revenue recently from 5G related and particularly with our wet processing business there. So that is the largest share recently in the compound semispace. And as Bill mentioned, that is a part of the space right now where we are seeing weakness in that market.

Okay. You mentioned about trailing nodes. I think that's mainly China, but it might be throughout Asia. But just out of curiosity, do you see the trailing node business growing faster than your overall semi-business, or will it be in line? I'm just trying to get a gauge on how that segment's performing.

Yeah, we have seen an increase in trailing nodes, particularly in laser annealing. I would say that I know John put a particular focus on China, but there's been a decent number of U.S. bookings and shipment at the trailing node as well. I would say on the leading edge logic, the activity in the business remains strong. We actually shipped... an evaluation system to a very bleeding edge logic type application. And that was shipped in the fourth quarter. And so activity remains strong at the leading edge as well.

Okay. And as far as could you help us understand maybe what your targets, you know, if you're successful in the silicon carbide CBD business you know what would be your market share expectations or or you know let's say three years from now what will be your goals as far as market share of this market go of the segment goes and perhaps you could help us understand what you think you touched on it briefly in your prepared remarks but why do you think this system will be able to take market share from whoever the incumbent is we think

We've met with many of the leaders and the leading customers in the silicon carbide epispace, and we've also benchmarked our capabilities with the competition, and we think we can stand up pretty well from our cost of ownership. We've certainly had some very good early engagements with... with customers, but as I said in Gus's question, this is still early revenue for this company and we're putting a demo tool in our facility. We won't really know for some time until we start doing real demos and putting competitive films down and starting to ramp this business and really get fully engaged into this market. We're not really ready to put down a longer-term target. We do know that it's a $250-approximately-million-dollar market today, and it's growing. And we think this technology and this design, along with Vico's infrastructure, is a very nice match for us.

Thank you.

Thanks, Dave.

Our next question comes from the line of Mark Miller with the Benchmark Company. Please proceed with your question.

Anthony, I certainly enjoyed working with you through the years and wish you the best in your new position.

Great. Thank you, Mark.

You're welcome. You mentioned the LSA leading eval tool for a Logic customer. What other evals? Can you give me status of other evals you have in the field?

Yes, we just put that one in for Semilogic and I would say that's just being installed now. During the last year, we've actually been very successful signing off our evaluation systems that we had previously placed and we've had some follow-on volume orders for some of them, and we're working with our customers to see those volume orders continue into the future. We have a pretty strong slate of evaluation systems we're planning to put into the field this year. And I would say, really, those evaluation tools largely align with our strategy to grow in semi and compound semi where we've been making the investment. So we have a next generation laser annealing system that we've been working with customers for some time and we're planning to put one, maybe two of those eval systems out into the field and as well as two of these 300 millimeter low resistance ion beam deposition systems into the field for both logic and memory type applications, as well as a few others. So I would think we'll probably exit the year of 2023 with kind of refilling and ending up with six to seven evaluations in process as we exit 23. Okay.

Um, your, your tax rate for 2023 after all this valuation on that one's reversal, what, what should we estimate 19% or so?

Yeah, I think high teens, uh, would be appropriate for non gap and slightly lower for gap. Okay.

Thank you.

Thank you, Mark. Thank you, Mark.

Our next question comes from the line of Rick Schaefer with Oppenheimer. Please proceed with your question.

Hi, this is Wei Mak on the line for Rick. I'd like to echo my congrats to Anthony and the new row and to welcome the new Anthony to the IRO. My first question is on the backlog. Yes, my first question is on the backlog, 500 million. It seems like it's led by semiconductors, but I was wondering if you can break this out even further. What's the split between semiconductors, some compound semiconductors and data storage? And as part of that answer, I was wondering if you could give us any color on the data storage for 2023?

Sure. So, I think as we look at the backlog, not surprising, you know, given the bookings, you know, rate in that the semiconductor has been, you know, more than 50% of our business recently. More than half of the backlog is in semiconductor. If I look at the next larger piece of the backlog, about 20% of our backlog or so comes from data storage, and then the rest of the backlog is split evenly between compound, semi, and scientific and other.

Great. Thank you. As for my second question, gross margin, it was at 42% for fourth quarter. You guided to a similar range. You guys exceeded your guidance for fourth quarter, and you guided to a similar range in first quarter. So I was wondering what led to that upside, and what are some of the puts and takes to gross margins?

Yeah, so good question there. Fourth quarter gross margin did come in at 42%, which was better than what we expected at the beginning of the quarter when we guided first. And we had a more favorable product mix. And then we also saw, for the first time in a while here, lower logistics costs. And we have done some cost controls. And we had manufacturing and service costs come in more favorable as well. So for the full year, 2022, we ended up coming in at 42% gross margin, which was in line with our guide for the year. As we look at gross margin for the full year 2023, we do expect that range of gross margin in 2023 to be similar to the full year 2022 gross margin. But as you noted, for Q1 2023, we're guiding gross margin at 40% midpoint. And that's lower than the expected average for the rest of 2023, you know, due to a less favorable mix and lower volume. And we do expect improvement in the remaining quarters of 2023.

Great. Thank you. If I can sneak one last one in there, it's on EpiLuvac. It seems like this technology is complementary to MOCVD So I was wondering, as part of your strategy, is there any potential revenue synergies you could think of between the two equipment, between that silicon carbide epi and MOCBD? Thank you.

Yes, Wei. We're actually integrating the epi-luvac acquisition into our MOCBD product line. And, you know, we certainly would look if there may be opportunities because many power companies are looking or investing in not only silicon carbide, but also gallium nitride. So there could be some sales synergies and also common architectures that we could head towards to mix and match different chambers on the same front end, if you will.

Okay, great. Thank you.

Thank you, Wade.

As a reminder, ladies and gentlemen, it is store one to ask a question. Our next question is a follow-up question from the line of Gus Richard with Northland. Please proceed with your question.

Yes, thanks for indulging me once again. In terms of ion beam deposition edge, are you guys, you know, sort of booked out through the year given the lead time for that equipment?

In the data storage space specifically, Gus? Yes.

No, I mean both EUV mass flanks and data storage.

Yes, we're in a very strong booking position there. I would think, yeah, we are booked out in data storage and in EUV mass flanks. And there may be one or two tools that may come into the year, slip out of the year, but as a general statement, Our backlog is very strong in ion beam right now.

Yeah, I get it. And then you mentioned that you're going to put out some demo tools for ion beam deposition in SEMI. And I know you've been working on it for a while. Are those tools going to go first half, second half? You know, sort of how do you expect the evals to go?

Yeah, I would – the first one we're getting fairly close on. And if anything, believe it or not, it may be gated by customer facilities. And so we're really – maybe we have a chance for the first half, but I would conservatively put it in the second half. But we're working with them to try to find space for them to put this machine. The machine's ready to go. Got it.

Got it. All right. Well, small gains, small gains. Thanks so much.

Thank you, Gus.

There are no further questions in the queue. I'd like to hand the call back to management for closing remarks.

Thank you, operator, and to all joining us on today's call. I also want to thank our customers and shareholders, along with the VECO United team, for their continued support as we execute on your behalf. Have a great evening. Thank you.

Ladies and gentlemen, this does conclude today's teleconference. Thank you for your participation. You may disconnect your lines at this time and have a wonderful day.