Veeco Instruments Inc.

Dear ladies and gentlemen, and welcome to the VECO Instruments Q3 2024 earnings conference call. At this time, all participants will be in a listen-only mode. There will be an opportunity to ask questions later during the conference. If anyone should require operator assistance during the call, please press star and then zero on your telephone keypad. As a reminder, this conference is being recorded. I'd now like to turn the conference over to Anthony Papone, the head of investor relations. Thank you, and you may proceed, 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 and slide presentation to accompany today's webcast is available on the VECO website. To the extent that this call discusses expectations for future revenues, future earnings, market conditions, or otherwise make statements about the future. These forward-looking statements are based on management's current expectations and are subject to the risks and uncertainties that could cause actual results to differ materially from the statements made. These risks are discussed in detail in our Form 10-K Annual Report and other SEC filings. FICO 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. Unless otherwise noted, management will address non gap financial results. We encourage you to refer to our reconciliation between gap and non gap results, which you can find in our press release and at the end of the earnings presentation. With that, I will now turn the call over to our CEO, Bill Miller.

Thank you, Anthony. VECO delivered solid third quarter top and bottom line results above the midpoint of our guidance. Revenue total $185 million, non-GAAP operating income $31 million, and non-GAAP EPS of 46 cents. Our semiconductor business delivered record revenue, increasing 26% year-over-year and 13% sequentially, highlighted by an increase in shipments to leading-edge customers across several product lines. As announced in today's press release, a leading foundry, HBM manufacturer, and OSATs placed over $50 million in orders for our wet processing systems in 2024, driven by AI. Our advanced packaging wet processing business is a key driver of growth in our semiconductor business in 2024, and recent orders are extending visibility into 2025. I'll now provide an overview of VECO's role in the semiconductor manufacturing process, as well as an update on key technologies driving business today. VECO technologies are increasingly critical for several leading-edge semi-manufacturing process steps. The semi-roadmap requires advanced annealing capabilities to meet enhanced performance requirements from new architectures and shrinking geometries. Key capabilities include solutions with lower thermal budgets and surface level precision. As a result, the opportunity for laser annealing is expanding as device scaling with incumbent technology becomes more challenging. VECO is the market leader in laser annealing, with our LSA systems qualified as production tool of record for our logic and memory customers' most advanced nodes. Equally as important, our next generation nanosecond annealing technology achieves an even lower thermal budget at a nanosecond dwell time, expanding laser annealing capabilities to potentially enable industry inflections. During the quarter, LSA demand from leading edge customers increased, including shipments to several leading edge logic and DRAM customers. Turning to ion beam deposition for EUV mass blanks, VECO's IBD EUV system enables deposition of defect-free films for EUV mass blanks making VECO the market leader. Our ion beam deposition technology is a key enabler of the industry's roadmap, and we're in a strong position to support growing demand for EUV lithography. During the quarter, we shipped an IBD EUV system to a leading logic foundry for a new EUV mask blank application. This win provides opportunity for additional growth in the coming years, and is a great example of the expanding use cases for ion beam deposition in the semi market. As the leader in ion beam deposition technology, VECO is excited to expand adoption of the front end semi market. The semi roadmap is turning to new materials and technologies to scale and optimize performance and power consumption. As device geometries continue to shrink, Traditional technologies are challenged to achieve resistivity requirements, driving Tier 1 logic and memory customers to evaluate new solutions. VECO's recently launched IBD300 system differentiates itself from incumbent technologies through its ability to achieve improved thin-film properties and lower resistivity with critical metals in logic and memory. Looking ahead, we're excited to continue working closely with our Tier 1 customers to solve their high-value materials challenges. In advanced packaging, our wet processing system is production tool of record at a leading foundry, HBM manufacturer, and OSATs for select applications. Heterogeneous integration and 3D packaging for AI are driving strong year-over-year growth. Based on recent order activity, we're gaining confidence our wet processing business can continue its growth trajectory in 2025. In advanced packaging lithography, we're seeing a pickup in order and quoting activity from across the spectrum of Foundry, IDM, and Oset customers driven by capacity expansion for AI and mobile. As a result, we expect a recovery in this business as recent orders extend visibility into the first half of 2025. Vico's investments in core technologies targeting leading-edge inflections has enabled our semi-business to outperform WFE growth for three consecutive years, and we're forecasting a fourth year of outperformance in 2024. In annealing, we have opportunity to grow our SAM from $600 million to over a billion dollars, driven by industry inflections in logic and memory. In logic, gate all around architectures and new technologies such as backside power delivery are increasing laser annealing intensity, resulting in more steps requiring precise anneals and tighter thermal budgets. In memory, new technologies and architectures such as high bandwidth memory and 3D devices are driving customers to adopt laser annealing to address new challenges. In ion beam deposition, We have opportunity to expand our SAM to $350 million for high-value front-end SEMI applications requiring critical film performance. The SEMI roadmap is turning to new technologies and materials to enable continued device shrinks and address the growing need for energy-efficient compute performance. Our IBD300 system can achieve lower resistivity through improved thin film properties for critical metals, potentially enabling HBM DRAM scaling, as well as new integration schemes at future logic nodes. In ion beam deposition for EUV mass blanks, leading logic and memory customers expect EUV and high NA EUV lithography to be integral to their future roadmaps. The industry has historically required one of our IBD EUV systems for every 10 to 15 ASML EUV lithography systems shipped. Given ASML's plan to expand EUV and high NA capacity in the coming years, as well as recent wins for new mass blank applications, we have the opportunity for our SAM to more than double to over $100 million. And in advanced packaging, we see SAM expansion opportunity for our enabling wet processing technology for an increased number of applications supporting AI and high performance computing adoption. As we look ahead, we believe our portfolio of enabling technologies for key inflections is well positioned to drive our semiconductor SAM to grow faster than WFE. I'd now like to provide additional detail on our evaluation program and its importance in capturing several of our largest opportunities. Our evaluation program has been essential to penetrating new opportunities in the front end semiconductor market, and we have several evaluation systems outstanding with Tier 1 logic and memory customers. Looking ahead, we're increasing investment in our laser annealing and ion beam deposition programs to capture our largest SAM opportunities. Many evaluations are targeting several applications, which can result in follow-on business between $30 to $60 million per application win, assuming 100,000 waiver starts per month. While the timing of adoption by system, customer, and market will vary, we're excited about the value proposition our technologies offer, and our team is highly focused on executing. With that, I'll turn it over to John for a financial update.

Thank you, Bill. Starting with revenue for the quarter. Revenue came in at $185 million above the midpoint of our guidance, up 4% from the prior year, and 5% sequentially. Our semiconductor business delivered record revenue during the quarter, comprising 67% of revenue, led by strength across several product lines. In the compound semiconductor market, revenue declined from the prior quarter to $16 million, totaling 8% of revenue. Data storage revenue declined slightly to $33 million, comprising 18%, and lastly, scientific and other made up 7%. Turning to quarterly revenue by region. Revenue from Asia Pacific region, excluding China, was 33%, and the United States came in at 32%. In line with expectations, the percentage of revenue from China decreased to 30%, due to a decline in semiconductor sales. We continue to expect China revenue for the full year to be around 33% of revenue. And lastly, EMEA was 5%. Switching gears to our non-GAAP quarterly results. Gross margin totaled approximately 44% in line with guidance. Operating expenses totaled $50 million, also in line with guidance. Income tax expense was approximately $3 million, resulting in an effective tax rate of approximately 11%. Net income came in at approximately $28 million, and diluted EPS was 46 cents on 62 million shares. Looking at our GAAP results, operating expenses declined by approximately $4 million from the prior quarter due to a $5 million gain from a change in estimate related to the EpiLuvac acquisition. Now moving to the balance sheet and cash flow highlights. We ended the quarter with cash and short-term investments of $321 million, a sequential increase of $16 million. From a working capital perspective, our accounts receivable increased by $40 million to $132 million, primarily due to timing of shipments as well as a change in customer mix. Inventory decreased by $3 million to $242 million and accounts payable increased by $3 million to $50 million. Customer deposits included within contract liabilities on the balance sheet increased by $1 million to $60 million. Cash flow from operations came in at $18 million and CapEx $4 million. Turning to our Q4 and full year 2024 outlook. Q4 revenue is expected between $165 and $185 million. We expect semiconductor revenue to decline in Q4 from record levels in Q3. Looking at the full year 2024, we forecast our semiconductor business to grow approximately 10%, outperforming WFE growth for the fourth consecutive year and coming in at the high end of our original expectation for growth between 5% to 10%. In the compound semiconductor market, we expect a sequential increase in Q4 revenue driven by shipments to photonics and solar customers. Turning to our data storage business, revenue is forecasted to decline in Q4 as we execute shipments in backlog. And in scientific, we expect to increase in shipments to several customers, including a shipment for quantum computing. We expect gross margin between 43 and 44 percent, OPEX between $48 and $51 million, net income between $21 and $27 million, and diluted EPS between 35 and 45 cents on 61 million shares. Based on year-to-date results, and our Q4 guide, our 2024 revenue guidance is now narrowed to $700 to $720 million from our prior range of $690 to $730 million. Correspondingly, we now expect diluted non-GAAP EPS for the full year between $1.68 and $1.78 per share from our prior range of $1.65 to $1.85 per share. And now for some additional color beyond Q4. Beginning with the semiconductor market. While demand from customers in China has been strong in 2024, recent engagement has moderated, resulting in expectations for decline in China revenue in 2025. Outside of China, we're seeing increased investment in AI and high performance computing, including gate all around, high bandwidth memory, and 3D packaging, providing the opportunity for revenue growth in 2025. In the compound semiconductor market, we continue to invest in long-term opportunities in power electronics and photonics. In the silicon carbide market, while the transition to 200 millimeter production continues, weaker demand from a slowdown in EV adoption has resulted in customers delaying investment. In GaN power, Emerging use cases have driven some traditional silicon power electronic manufacturers to consider adoption of GaN on silicon for 300 millimeter production, which is an exciting opportunity. We're also seeing opportunities in solar and photonics. Turning to the data storage market, while customer utilizations are improving, they remain below peak levels from a few years ago. and customers have indicated they are not planning to invest in new systems to expand capacity in 2025. As a result, we expect an approximately $60 to $70 million reduction in data storage revenue in 2025. Taking the market outlook comments into consideration, as we look ahead to Q1 2025, we currently expect revenue to be in a similar range to Q4 2024. I'll now pass it back to Bill.

Thanks, John. Despite near-term headwinds in our data storage business, we remain confident our strategy can deliver long-term value for shareholders. First, some industry analysts and leading equipment providers project growth of the semi-industry to over $1 trillion in the 2030 timeframe, contributing to expectations for long-term growth in wafer fab equipment spending. VECO has a portfolio of enabling technologies that are increasingly critical for several leading-edge semi-manufacturing process steps. Third, our strategy of investing in core technologies to enable industry inflections in advanced logic and memory continues to gain traction. Fourth, we believe our exposure to these high-growth areas of the market can enable our SAM to grow faster than growth in WFE spending. We expect our execution to generate long-term value for VECO shareholders. With that, I'll now turn the call over to the operator to open up Q&A.

Thank you. At this time, we will be conducting a question and answer session. If you would like to ask a question, please press star and then 1 on your telephone keypad. You may press star and then 2 if you would like to remove your question from the queue.

Please hold while we pause for questions. The first question comes from Mark Miller from Benchmark. Please proceed with your questions, Mark.

Recently, ASML gave a forecast that was somewhat below expectations, and one concern was that their equipment is not being used as many process steps as previously thought. I'm just wondering if you're seeing any impact from that.

Yeah, thanks for making some time for us today, Mark. Appreciate it. Our outlook for this year, 24, is flat, very similar to ASML's outlook in the 3 to 5 system range. And then looking forward to 25, we also are expecting a 3 to 5 system range, as we've discussed, that The industry needs one of our systems for every 10 to 15 ASML scanner shipments. We do expect some new application wins to provide the opportunity for revenue growth beyond that. And I would say that's probably potentially, you know, one system every year or so. But so we're still very comfortable with our view of three to five on average going forward. Obviously, as ASML scanner shipments continue to increase as they're planning, our business would increase kind of in parallel with that.

You mentioned that China will be down somewhat. Is that primarily driven by the slower EV market or other factors there?

I'll take a shot. Maybe John can fill in. I would say largely our China market is really in the semi-space. And so, I would say, really, the demand for China has been strong in 24. As John mentioned in our prepared remarks, you know, our recent customer engagements have moderated, and we expect China revenue to decline as customers digest capacity. So, you know, it's a bit too early to definitely say how much China revenue will decline. You know, we generally have about six months visibility, and over time, we could see revenue moving towards more normalized rates.

Thank you.

Thank you, Mark.

Thank you. The next question comes from Ross Cole from Needham & Co. Please proceed with your questions, Ross.

Hi. Thank you for taking my question. I was wondering if you could provide any directional color for the different business segments for at least maybe the first quarter of 2025 or some guidance for the full year there? Thank you.

Sure. I'll take a stab at that, Ross. So as we look into 2025, I would say for the full year, it's a bit early to provide detailed quantitative guidance. but we certainly can provide some qualitative commentary on the markets as we head into 2025. You just heard Bill describe that recent customer engagements, if I'm talking about the semiconductor market here, that recent customer engagements in China have moderated a bit. And despite that view, we see the opportunity for growth in the semiconductor business in 2025. driven by AI growing from about 10% of our business to 20 plus percent in 25. This includes our web processing business where we're seeing growth accelerating into next year. We also see a recovery in our AP lithography business that's been light as customers are adding capacity expansions to AI and mobile. We continue to be excited and see recent wins for our LSA business in both logic and memory. And as Bill also just mentioned, we see opportunities in our EUV mask business as well. we see opportunity for growth in the semi market in 2025. If I move on to the compound semi market, in GAN power, we see emerging use cases have driven some traditional silicon power electronic manufacturers to consider adoption of GAN on silicon for 300 millimeter production, which is a pretty exciting opportunity. In the sick power market, while the transition to 200-millimeter production continues, weaker demand from a slowdown in EV adoption has resulted in customers delaying investments there. We're also seeing some opportunities for several austenite phosphide photonics and solar applications. And given that, we see potential for growth related to these activities. in the second half of 25 and moving into 2026, but a bit too early to call the extent of that. The one area we see a headwind in 2025 is in the data storage side. So our customers' utilizations are improving, but they remain below peak levels from a few years ago. And we generally work with about a year worth of lead time with our customers. And in discussions with customers, they've indicated they're not planning to invest in new systems to expand capacity in 2025. And as a result of that, we expect about a $60 to $70 million reduction in our revenue from our data storage business in 2025 compared to 2024. Great.

Well, I really appreciate the extra color there. Thank you.

Thanks, Ross.

Thank you. Ladies and gentlemen, just a reminder, if you'd like to ask a question, please press star and then one. The next question comes from Dave Dooley from Steelhead Securities. Please proceed with your questions, Dave.

Yes. Thanks for taking my questions. I guess, first off, on the $50 million worth of orders in the web processing business, could you give us a rough cut how it's split between DPUs and... high bandwidth memory?

Yeah, it's, Dave, I would say, you know, this is a lot of it's in our wet processing business, and clearly we're seeing it as a key driver of business this year and continuing to see it strong in 25. And I would characterize it as business from a leading foundry to as well as high bandwidth memory manufacturer and as well as OSATs. So the exact breakdown of that is kind of hard to say, but clearly we have exposure in all those steps that you just asked about there. And, you know, we have about, you know, those 50 orders, you know, we're about 20 systems of business. And from continuing discussions on, you know, and planned orders, you know, we're getting quite confident 25 would be a strong year. And as John mentioned, you know, we're seeing AI-related business, whether that's in FoundryLogic, HBM, or OSATs, kind of growing from about 10% of our business to 20% of our business plus in 25. So exciting opportunity.

I'm just curious. If you're calling this out now because you just got a big piece of the $50 million of cumulative orders, or has this been kind of ongoing split throughout the year? Just regarding the timing, I guess.

Yeah, it's been ramping the business throughout the year. I would say we were kind of undersizing it previously, and now I think we're getting our hands around the opportunity now and have some good visibility into next year.

Okay. And then... You know, one of the hot buttons for everybody is China and what exactly is going to happen there. You know, I guess you characterized it as, you know, you expect the Chinese revenue to decline. And you said one of the comment about normalizing. Maybe you could just help us understand, you know, where you would expect Chinese revenue to be. What is normal? And it sounds like normal is going to be sometime in 2025. So I'm just kind of trying to figure out how much it's going to go down, what percentage it's going to equate to.

You know, I think it's a little bit more nuanced than that, Dave. You know, clearly it's kind of too early for us to kind of call the year. We have only about six months of visibility. And so I would say over time, I'm not exactly sure how that's going to roll off. Over time, I think it's probably safe to say whether that's the end of 25 or into 26, we'll probably get to what, you know, what I think John characterized as more normalized rates. And so if you go back a few years, you know, China ran about 20% or plus or minus range of our business. So I would say, you know, we don't see that rolling off right away early on, but, you know, we would think that eventually we'd probably come back to normalized rates at some point.

great and then um as far as your progress on your evaluation systems um you know you gave us some pretty good uh detail on the segments of your business and the directions i was just curious do you expect let's say in the first half of 2025 for any of these evaluation systems uh to start to contribute to revenue or maybe do you think you have placed a um

another evaluation system in the high bandwidth memory segment and that's it from me thanks great thanks dave i'll give you i'll give you a brief update kind of in semi you know we have uh the two evaluations in their nanosecond annealing uh in in logic uh we're actually being uh assessed for multiple applications that the customers are evaluating us for we've had some positive uh feedback As a matter of fact, we actually have strong pull for a third evaluation at the third logic customer, as well as a memory customer that we're trying to manage through our resources on. You know, I would say there are potential for NSA follow-on orders in late 25 at the rate we're kind of going here. So very positive there. And I would say in The IBD 300 tool that we have for low-resistance metals in the memory applications, we're making good progress there. We continue to work with the customers, and we're working with them now at the point of trying to integrate this new kind of fourth deposition technology into the FAB and helping them integrate this technology into their upstream and downstream processes. and once again we are receiving strong pull from two logic customers where we're probably considering probably putting one at least one and maybe two evaluations in the field in in 25 and I would think here we're probably looking at initial follow-on orders late 25 but probably more like 26. we're also planning to put Um, eval, uh, LS laser annealing, LSA evals out to a second leading memory customer, uh, in the first half of 25 as well. So a pretty full slate of, uh, tools, uh, in the field that we're supporting and, uh, some planned, uh, incremental investments here in 25.

Hey, thank you very much.

Thanks.

Thank you, ladies and gentlemen, we have reached the end of the question answer session, as they all know, for the questions. And I'd like to turn the call back to Mr. Baumiller for closing remarks. Thank you, sir.

Thank you. I do want to thank our customers and shareholders along with the VECO United team for their continued support and wish you all a great evening this evening. Thank you.

Thank you. Ladies and gentlemen, that does conclude today's conference. Thank you very much for joining us. You may now disconnect.