Veeco Instruments Inc.

Greetings and welcome to the VCO first quarter 2025 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 the conference, please press star zero on your telephone keypad. It is now my pleasure to introduce your host, Anthony Papon, Head of Investment 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 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. 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. Unless otherwise noted, management will address non-GAAP financial results. We encourage you to refer to our reconciliation between GAAP and non-GAAP results, which you can find in our press release and at the end of the earnings presentation. With that, I will turn the call over to our CEO, Bill Miller.

Thank you, Anthony. VECO delivered solid top and bottom line results. Revenue total $167 million above the midpoint of our guidance. Non-GAAP operating income $24 million. and non-GAAP EPS of 37 cents above the high end of our guidance. Our semiconductor business had another quarter of strong performance, growing both sequentially and year over year. Growth was led by an increase in advanced packaging, including wet processing systems to a leading foundry and HBM manufacturer, as well as lithography systems to an IDM and OSATs. We also shipped several LSA systems to leading customers for gate all around and high bandwidth memory. In addition to our solid results, I'm excited to share an important customer award and several significant strategic wins. First, Vico was awarded Intel's 2025 Epic Supplier Award due to our excellence in anneal technology. As one of 37 recipients in Intel's global supply chain, receipt of this award acknowledges us for our commitment to quality, excellence, and dedication to technology innovation. Recognition from a market leader such as Intel has been an internal goal of Vico's, and we believe this milestone validates us as a top supplier in the semiconductor industry. Second, during the quarter, Vico received laser annealing system orders from two leading-edge Logic customers for their gate all-around nodes, including one customer's second NSA500 nanosecond annealing system. for a high bandwidth memory, our customer continues to place laser annealing system orders as demand remains strong. Third, two leading logic customers have designated Vico's laser spike annealing platform as production tool of record for new applications at their most advanced gate all around nodes. Expanding adoption of laser annealing at the leading edge is core to our SAM expansion strategy. Both wins are a culmination of ongoing collaboration with each customer and a great example of our market-leading position in laser annealing. Fourth, we recently announced an IDM qualifier wet processing platform for two new applications and placed initial orders in Q1. These wins validate the growing use cases for our technology for new applications tied to a growing SAM. Before moving ahead, I'd like to address recently enacted tariffs and the prospect of further tariff policy escalations which are resulting in uncertainty across VECO's business. Recently enacted tariffs are currently causing some customers to delay shipments, could impact future and market demand, and has also resulted in an increase in certain costs. Given the dynamic nature of the situation, we continue to evaluate potential implications to our business. While uncertainty may persist for some time, we remain confident in our long-term strategy and believe each of the wins previously highlighted reflect our strengthened market position, which we expect will enable us to capitalize on long-term semiconductor industry growth. I'll now provide an overview of our role in the semiconductor manufacturing process and then an update on key technologies. Beko technologies remain critical for several leading-edge semi-manufacturing process steps. Beko is the market leader in laser annealing, with our laser spike annealing system qualified as production tool of record for leading logic customers and one tier one DRAM customer. Our recently launched next generation NSA system expands our capabilities to enable new applications, and we're pleased to report our evaluations at advanced logic customers are progressing well. Equally as important, interest from logic and memory customers to evaluate our system remains high. During the quarter, we saw continued demand for our laser annealing systems from leading-edge customers, primarily driven by end-market demand for high-performance computing and AI. In addition, recent orders for Gate All Around and HBM are contributing to expectations for strong growth in our leading-edge laser annealing business in 2025. VECO is also the market leader for deposition of defect-free films for EUV mass blank production with our IBD EUV system. Our ion beam deposition technology is critical to the industry's roadmap and we're in a strong position to support growing demand for EUV lithography. We see opportunity for growth in this business as our technology continues to expand to adjacent mass blank steps. Growth in AI is accelerating adoption of new technologies and materials that enable device scaling and address the growing need for energy-efficient compute performance. As device geometries continue to shrink, traditional technologies are struggling to achieve resistivity requirements, driving Tier 1 customers to consider new solutions to address their high-value challenges. VECO's recently launched IBD300 system differentiates itself from traditional technologies through its ability to achieve improved thin-film properties and lower resistivity with critical metals in memory and logic, which can directly impact device performance, speed, and battery life. Looking ahead, we remain highly focused on working with our customers to integrate our technology into their manufacturing processes and evaluate new applications. In advanced packaging, our wet processing system is production tool of record at a leading foundry, HBM manufacturer, and multiple OSATs. Our system's unique capabilities have enabled our strong position in 3D packaging for AI, providing expectations for growth to accelerate in 2025. And in advanced packaging lithography, we're seeing a recovery led by capacity expansion for AI and high-performance computing, highlighted by today's announcement of $35 million in orders from IDM and OSAT customers. contributing to expectations for growth in 2025. Demand for VECO technologies is being accelerated by leading edge inflections such as gate all around, high bandwidth memory, EUV lithography, and 3D packaging. Our exposure to each of these high growth areas of the market offer opportunities to expand our SAM in several areas. In annealing, we project our SAM to grow to around $1.3 billion. Customer roadmaps require precise annealing solutions with tighter thermal budgets to address scaling challenges associated with shrinking geometries and new architectures, resulting in an increase in steps available to laser annealing. In logic, gate-all-around architecture and new technologies such as backside power delivery are increasing laser annealing intensity. In memory, High bandwidth memory and 3D devices are driving customers to adopt laser annealing to solve new challenges. In ion beam deposition for front and semi applications, we forecast growth in our SAM to approximately $350 million for high value steps requiring critical film performance. In ion beam deposition for EUV mask blanks, we see our SAM growing to over $120 million as the market adopts EUV and high NA lithography. And customers continue to evaluate new use cases for our technologies. And in advanced packaging, we see potential SAM growth for our enabling wet processing solutions for a growing number of applications supporting AI and high performance computing. As we look ahead, we believe our portfolio of enabling technologies for key inflections, Positions are semi-business to outperform WFE growth over the long term. I'll now provide additional details on our evaluation program, which is core to our investment strategy and essential to capturing our largest opportunities. Many evaluations are targeting several applications, which can result in follow-on business between $30 to $60 million per application when assuming 100,000 wafer starts per month. While the timing of adoption by system, customer, and market will vary, customers are excited about the value proposition our technologies offer, and we're highly focused on executing. Our evaluations in the field are progressing well, and we're also investing in additional systems to win new business in logic and memory. We expect to ship an LSA evaluation system to a second Tier 1 memory customer in the coming months, as well as an NSA evaluation system to a third logic customer later this year. There's also potential for additional NSA and IBD 300 evaluation shipments later this year or in the first half of 2026. 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 $167 million above the midpoint of our guidance, down 4% from the prior year and 8% sequentially. Our semiconductor business had another strong quarter, growing 10% sequentially and 3% year over year, representing 74% of total revenue. Our results included strong performance from our laser annealing products with shipments to leading edge customers for gate all around and high bandwidth memory. Both sequential and year over year growth were led by an increase in advanced packaging. In the compound semiconductor market, revenue declined from the prior quarter to $14 million, totaling 9% of revenue. Data storage revenue decreased to $7 million, totaling 4% of revenue in line with our expectations as highlighted on recent earnings calls. Revenue for the quarter was only derived from service and aftermarket support. Also in line with our expectations, scientific and other revenue declined to $22 million, from $33 million in the prior quarter, totaling 13% of revenue. Turning to quarterly revenue by region. Revenue from China customers was flat in Q1 from Q4, with the percentage of revenue increasing from 39 to 42%. Revenue from Asia Pacific region, excluding China, was 36%, an increase from 31% in the prior quarter, led by sales to semiconductor customers in Taiwan. The United States came in at 15% and EMEA 7%. Switching gears to our non-GAAP quarterly results. Gross margin total approximately 42% in line with guidance. Operating expenses totaled approximately $46 million below our guidance as we maintain our focus on cost management. Income tax expense was approximately $3 million, resulting in an effective tax rate of approximately 12%. Net income came in at $22 million and diluted EPS was 37 cents on 60 million shares. Now moving to the balance sheet and cash flow highlights. We ended the quarter with cash and short-term investments of $353 million, a sequential increase from $345 million. From a working capital perspective, our accounts receivable increased by $18 million to $114 million. Inventory increased by $7 million to $254 million, and accounts payable increased by $14 million to $58 million. Customer deposits included within contract liabilities on the balance sheet decreased by $8 million to $40 million. Cash flow from operations totaled $20 million, and CapEx totaled $7 million during the quarter. Before providing our Q2 outlook, I'd like to offer additional insights into the potential impact of recently announced tariffs, which have resulted in an elevated level of uncertainty across our business with possible direct and indirect implications. A substantial majority of VECOs and our contract manufacturers' operations are located in the United States. Products manufactured in the United States shipped to customers in China are subject to substantial tariffs unless otherwise exempted. This is currently causing some China customers to delay shipments. While we are monitoring changes to tariff and trade dynamics, we continue to work closely with our customers to mitigate impacts. Outside of China, we've not seen material changes to our customers' plans. However, the potential impact on the macroeconomic environment from global trade uncertainty are difficult to predict. We are experiencing higher costs due to tariffs on imported materials from overseas suppliers, as well as increased costs from domestic suppliers incurring tariffs on their imports. While tariff dynamics continue to evolve, our team is working diligently with suppliers to mitigate the impact on costs. Taking this into account in relation to our Q2 outlook. Q2 revenue is expected between $135 and $165 million. The midpoint of our guidance range assumes approximately $15 million in shipments to China customers will be delayed. Our guide also includes a wider than normal range to account for increased risk associated with China customers. Gross margin is expected between 40 to 42%, which includes an approximate 100 basis points impact primarily from lower volumes due to tariffs and tariff-related costs. We expect OPEX between $47 and $48 million, net income between $7 and $20 million, and diluted EPS between 12 and 32 cents on approximately 60 million shares. I'll now provide qualitative commentary for each of our markets. Beginning with the semiconductor market, Despite expected headwinds from our mature node business in China, we see opportunity for growth in 2025. We continue to see strength in leading-edge investment in areas driven by AI and high-performance computing, providing the potential for gate all-around and advanced packaging revenue to approximately double in 2025 versus 2024. We remain confident in our long-term growth outlook due to our strong product portfolio in laser annealing, iron beam deposition, wet processing, and lithography. In the compound semiconductor market, we see opportunities in GaN power, solar, and photonics, which provide potential for revenue growth beginning in late 2025 into 26. In data storage, while service revenues picked up due to higher customer utilization, customers are not investing in capacity additions. In line with our prior forecast, we do not expect system shipments to data storage customers in 2025. And in scientific, we'll continue to see strength in research areas such as quantum computing, which have the potential to provide growth in 2025. With that, I'll now turn the call over to the operator to open up Q&A.

Thank you. We will now be conducting a question and answer session. If you would like to ask a question, please press star one on your telephone keypad. A confirmation tone will indicate your line is in the question queue. You may press star two to remove yourself from the queue. For participants using speaker equipment, it may be necessary to pick up the handset before pressing the star keys. One moment, please, while we pull for questions. Our first question comes from the line of David Dooley with Steelhead Securities. Please proceed with your question.

Thanks for taking my question.

I guess the first thing is, could you just elaborate a little bit more on the advanced packaging orders for your lithography tools? It's been some time since... I can't remember the last time you've announced a large order in this segment of the business. And I know you mentioned AI and high-performance computing applications. I was wondering if you could just dig in a little bit more. Is there some sort of packaging change? Or, you know, what exactly is driving this rekindling of this business at this point?

Sure, Dave. The first part, we did have a press release just recently for $35 million in list of orders over the past few quarters from IDM as well as a number of OSATs. And it's really kind of picked the business up. significant year over year growth for us in 25. And really, all of this is really attached to advanced packaging lithography. And I, you know, if I look more broadly at advanced packaging, excuse me, our advanced packaging business is going to probably double this year to about $150 million in 25, partially on this lithography business that we just press released, but also a lot of the activity that we have going on in our wet processing business. So there's a lot of excitement with foundries and OSATs, and it's really being driven by AI, particularly high bandwidth memory and 3D device stacking. So it's an exciting space and we've announced we actually won some new applications and we're actually looking to kind of further expand our service available market and think there's some room to run here with some SAM expansion with some of the products that we have here in wet processing.

Yes, that's a nice piece of business there and it's also I guess I was wondering, were you expecting the advanced lithography business to be this robust, or did this kind of surprise you? And what exactly inside, who's ever advanced packaging business that this is driving these incremental orders? Is there a new adoption of a CPU in some sort of package, or I'm just kind of wondering, What sort of technology shift in the marketplace is all of a sudden driving a lot of orders for you guys?

Yeah, I would say it's really more capacity buys. I would say there's a number of customers there, as I mentioned, OSATs and IDM, adding capacity because of this demand really driven by AI and the like.

Okay. And as far as the...

The impact from China and the inability to, or the hesitancies of customers to take shipments, is there, could you talk about which in markets those are associated with, number one? And number two is, you know, what sort of mitigation strategies do you have to be able to ship into China? Can you get to another location first and then, you know, ship it into China or how? How can you get around the current tariff structures to ship tools into China?

Yeah, so, Dave, we see some customers continue to take shipments, you know, as scheduled, and we're seeing other customers delay shipments as we anticipate in In Q2 currently, and as we guided about a 15Million dollar impact on our, our Q2 guide, and we mentioned that we are principally ship product from United States. So, to the extent it's our customers are importing those goods, they would have to pay for the tariffs unless there's some exemption in place. Now, there have been some unofficial reports that certain products are being exempted from the tariffs, and our China customers are already seeking exemptions that could mitigate the exposures. Our customers have indicated that they'll take the shipments if tariffs are resolved there. So, in the near term, You know, we are manufacturing those systems in the US, not really much in the very near term that, you know, we can, you know, we can do now we are looking at, you know, plans and we've had plans as we look at our semiconductor business for expansion and expansion outside of the US. But that's not going to help in the very, in the very near term. You also asked about. I think, in what areas of the business here in China. I would say in Q2, it's about evenly split between customers in scientific markets, where we anticipated shipping systems to, and about half in the semiconductor market.

Okay, final question from me is, you've got a lot of moving parts in your semi-business. Could you just Maybe just recap again, which parts do you think are going to grow in 2025?

Yeah, I think that's a, you know, great, you know, question. You know, Dave, I'm going to start and then, you know, Bill may choose to add in here a bit. So really in the semi-business, there's really two, you know, main, you know, drivers. In the one sense, irrespective of tariffs, you know, our expectation was we had good visibility. for our semi-business in China for the first half of, you know, 2020, 2025, and we expected that business to fall off in the second half of the year. Now, you add a little bit more uncertainty, you know, around, you know, tariffs there. On the other hand, we're seeing strength in our advanced, you know, business, call it, with strength in high bandwidth memory and in gate all around being driven by high performance computing and AI. And high performance computing and AI are also impacting growth in our advanced packaging business. So when we look at, you know, the business attached to gate all around and advanced packaging and high bandwidth memory, we see those areas of the business have the opportunity to double year-over-year that could potentially, you know, offset or more than offset where we can see growth in our semi-business overall year-over-year.

So, Gait all around doubling AP, advanced packaging doubling in China coming down, netting out neutral to positive.

And then, what about lithography?

Lithography is counted for in the advanced packaging numbers.

Okay, great.

Thanks, Dave. Thank you, Dave.

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

Yes, thanks for letting me ask a couple questions. Just real quick on some of the WINS and the process tool of records, could you just help me understand Are these new? You mentioned new applications and wins, and I just want to understand, are you winning an existing customer's new layers? Is this, you know, an expansion, or is this the result of a takeoff?

This is a valuation system. with existing customers in advanced logic gate all around where we have had an application at these customers and now we have a second application that we've won with two different customers. So, it is incremental. And just to give you a feel for the size of that, Gus, that would be, you know, a $40 to $50 million revenue increase per application per 100,000 wafer starts as they build out the FAB over a year or two or so. But obviously, it's very sensitive to the customer's ramp and their business conditions. So, that's the variable there. But it is incremental business, but the timing for HVM is unknown still.

likely to you know be more in the 26 time frame than in the 2025 time frame okay and these are incremental steps on the gate all around correct yes and had have you won any backside metal um have those decisions been made at this point or were you still waiting on um customers to make a decision on thermal processing

Yeah, they're they're still considering. They're still assessing with these systems. Where they're going to insert, but a decision has not been made on specifically on backside power.

OK, got it. And then just, you know, to understand that the guidance that you know it looks like from the mid from midpoint, guidance came down 15 million and it was just primarily all China related. There wasn't anything else there that caused you to be a little bit more conservative in guidance relative to consensus. Am I understanding that correctly?

Yes, Gus. So we had previously, you know, guided earlier in the year that, you know, we expected, you know, Q2 to be in a similar range to to Q1 numbers. So at that time, roughly $165 million quarters for Q1 and Q2. And absent of customers delaying shipments in Q2 in China until tariffs get resolved, we would have been right in that same range. So that is an accurate assessment, Gus. Got it.

Got it. All right. And then the last one for me. On GaN power, you know, are we any closer to, you know, process tool of record and, you know, primary versus secondary supplier for those that application you're demoing now or being evaluated for?

Yeah, we continue to work with the customer and make progress. We are meeting all of the in film and electrical device performance that the customer needs to move forward. Their plan is to start a pilot in 2026. And we're working to meet their deliverables for kind of a high volume manufacturing configured machine. If their plans continue, they'll probably continue to ramp through 27 and beyond. So it's an exciting opportunity. And, you know, we've been told very positive things. We don't have a purchase order yet.

Got it. Got it. All right. That's it for me. Thank you so much.

Thank you, Gus.

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

Thank you for the question. From the picture you've been painting during the call, I'm just thinking about second half revenue. I know it's very uncertain, but in the absence of any new developments with tariffs, it sounds like we're looking at least a flattish second half in sales. Would we be off base modeling that?

Thank you for the question, Mark. Given the macro uncertainty and potential changes in global trade policies, you know, we're not really providing a specific quantitative guidance for the second half of the year, you know, primarily due to a larger range of outcomes. But, you know, that being said, we are continuing to see strength and gait all around in advanced packaging, providing opportunity for our semi-business to grow despite the China market headwinds and tariff headwinds. You know, our view on data storage is that the same, like, we don't see system revenue picking up in the second half of the year. We're not, you know, forecasting any system revenue in the first half or the second half. So, yeah, I think taking all of that into consideration, you know, we could see, you know, second half 2025 business activity at a similar level to the first half.

Okay. Are you seeing any improvements in your tool utilization at the disk drive manufacturers? Is it around low to mid 70%?

Yeah, we have seen that steadily pick up. Our customers are bringing capacity online in a judicial manner, and that's showing up for us in terms of service revenue and spare parts and the like as they bring equipment back on. Um, and their utilization rates are picking up from what we, what we hear they're continuing to pick up. But, um, but, you know, certainly the, the order activity from a server from a system standpoint, excuse me. Uh, is, uh, is not there yet.

Thank you.

Thank you, Mark. Thank you, Mark.

Thank you. Our next question comes from the line of Ross Cole with Needham and Company. Please proceed with your question.

Thank you for taking my question. I just wanted to clarify a little bit in the semi-segment regarding offset with between China as well as the GAA and advanced packaging strengths. So it sounds like you're expecting that to still be relatively flat to slightly up. Is that correct?

Year over year. Year over year in our semiconductor market. Is that the question?

Yes, thank you.

Yes, yes, that's what we're saying is 1 cents. We've got the headwinds and in China and as we said, irrespective of Paris, we expected that business after 2 very strong years and in laser kneeling to moderate in in 2025. we had good visit in China. We had good visibility, you know, for the first half of the year. Second half of the year, we're not seeing, you know, the type of projects continue and that we expect, you know, fall off in that business. And then on the flip side of it is, on the positive side, that we are seeing in our advanced pieces of the business and business tied to high bandwidth memory, gate all around, and in our packaging business, we're seeing the opportunity for that to, you know, offset or more than offset the headwinds in China, given the opportunity, you know, for Fladish to, you know, growth in the semiconductor piece of our business in 2025. Great.

That was helpful. And then I'd also be curious about maybe some indirect tariff impacts. Are you, where are you seeing potential other issues? Like, could the compound semi maybe have any impact from, you know, indirect tariffs from suppliers or anything like that?

Yeah. So, so, So, yeah, if we separate out on the demand side, we only have seen impact on the demand side to customers in China where there would be substantial impacts on on importing. And so no, no, no impacts for demand outside of outside of China. Now, as we think about. We, Vico, as a manufacturer in the US, we do import parts from suppliers outside the US that would be subject to tariffs. Think about steel and aluminum that are subject to tariffs or some of the universal tariffs. And we principally import from Europe and Southeast Asia. That's the principal areas. And then, you know, indirectly, what we're seeing is we have a U.S. supply base and suppliers, and certain of those suppliers also import parts. And they're seeing, you know, sort of cost increases, you know, there for the same type of, you know, same type of parts. So, we are seeing, you know, potential for, you know, cost increases there as well. So, we are trying to, you know, mitigate that as much as possible. We're looking at, like, logistics and to the extent of you know, using parts for, you know, services and supporting install base, not bringing those, you know, parts into the U.S. and using logistics outside the U.S. to the extent those, you know, parts are being, you know, procured. So, that's also, you know, an area of indirect that we're looking to mitigate.

Great. Thank you so much.

Thank you, Russ.

Thank you. And we have reached the end of the question and answer session. I would like to turn the floor back to Bill Miller for closing remarks.

Before we end the call, I'd like to just reiterate our confidence in our long-term strategy. This was further solidified by several strategic wins we announced this quarter, all of which reflected progress in the semiconductor market. As we look at the full year 25, we're continuing to see strength in areas tied to AI. resulting in expectations for gate all-around and advanced packaging relative to double, and providing our semiconductor business the opportunity to grow. With that, I'd like to thank our customers, shareholders, along with the VECO team for their continued support. Have a great evening.

Thank you. This does conclude today's teleconference. We thank you for your participation. You may disconnect your lines at this time.