Veeco Instruments Q3 2024 Earnings Call Transcript

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November 6, 2024

There are 6 speakers on the call.

Operator

ladies and gentlemen, and welcome to the Veeco 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 related during the conference. 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.

Operator

Thank you, and you may proceed, sir.

Speaker 1

Thank you, and good afternoon, everyone. Joining me on the call today are Bill Miller, Vigo'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 Veeco 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 ks, Annual Report and other SEC filings.

Speaker 1

Veeco 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 now turn the call over to our CEO, Bill Miller. Thank you, Anthony.

Speaker 2

Veeco delivered solid 3rd quarter top and bottom line results above the midpoint of our guidance. Revenue totaled $185,000,000 non GAAP operating income $31,000,000 and non GAAP EPS of $0.46 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 in OSATs placed over $50,000,000 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 Veeco's role in the semiconductor manufacturing process as well as an update on key technologies driving business today.

Speaker 2

Veeco Technologies are increasingly critical for several leading edge semi manufacturing process steps. The semi road map 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. Veeco 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.

Speaker 2

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 mask blanks. Veeco's IBD EUV system enables deposition of defect free films for EUV mask blanks, making Veeco 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.

Speaker 2

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, Veeco 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.

Speaker 2

Veeco's recently launched IBD-three hundred 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 3 d 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.

Speaker 2

In advanced packaging lithography, we're seeing a pickup in order and quoting activity from across the spectrum of foundry, IDM and OSAT 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 twenty twenty five. Veeco's investments in core technologies targeting leading edge inflections has enabled our semi business to outperform WFE growth for 3 consecutive years, and we're forecasting a 4th year of outperformance in 2020 4. In annealing, we have opportunity to grow our SAM from $600,000,000 to over $1,000,000,000 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.

Speaker 2

In memory, new technologies and architectures such as high bandwidth memory and 3 d devices are driving customers to adopt laser annealing to address new challenges. In ion beam deposition, we have opportunity to expand our SAM to $350,000,000 for high value front end semi applications requiring critical film performance. The semi road map is turning to new technologies and materials to enable continued device shrinks and address the growing need for energy efficient compute performance. Our IBD-three hundred system can achieve lower resistivity through improved thin film properties for critical metals, potentially enabling HBM DRAM scaling

Speaker 3

as well as new integration schemes at future logic nodes. In ion beam deposition for EUV mask blanks, leading logic and memory customers expect EUV and high NA EUV lithography to

Speaker 2

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 mask blank applications, we have the opportunity for our SAM to more than double to over $100,000,000 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

Speaker 3

we

Speaker 2

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.

Speaker 2

Many evaluations are targeting several applications, which can result in follow on business between $30,000,000 to $60,000,000 per application win, assuming 100,000 wafer 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.

Speaker 4

Thank you, Bill. Starting with revenue for the quarter. Revenue came in at $185,000,000 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 $16,000,000 totaling 8% of revenue.

Speaker 4

Data storage revenue declined slightly to $33,000,000 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.

Speaker 4

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 $50,000,000 also in line with guidance. Income tax expense was approximately $3,000,000 resulting in an effective tax rate of approximately 11%.

Speaker 4

Net income came in at approximately $28,000,000 and diluted EPS was $0.46 on 62,000,000 shares. Looking at our GAAP results, operating expenses declined by approximately $4,000,000 from the prior quarter due to a $5,000,000 gain from a change in estimate related to the Epi Luvac acquisition. Now moving to the balance sheet and cash flow highlights. We ended the quarter with cash and short term investments of $321,000,000 a sequential increase of $16,000,000 From a working capital perspective, our accounts receivable increased by $40,000,000 to $132,000,000 primarily due to timing of shipments as well as a change in customer mix. Inventory decreased by $3,000,000 to $242,000,000 and accounts payable increased by $3,000,000 to $50,000,000 Customer deposits included within contract liabilities on the balance sheet increased by $1,000,000 to $60,000,000 Cash flow from operations came in at $18,000,000 and CapEx $4,000,000 Turning to our Q4 and full year 2024 outlook.

Speaker 4

Q4 revenue is expected between $165,000,000 $185,000,000 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 4th 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.

Speaker 4

We expect gross margin between 43% 44%, OpEx between $48,000,000 $51,000,000 net income between $21,000,000 $27,000,000 and diluted EPS between $0.35 $0.45 on 61,000,000 shares. Based on year to date results and our Q4 guide, our 2024 revenue guidance is now narrowed to $700,000,000 to $720,000,000 from our prior range of $690,000,000 to $730,000,000 Correspondingly, we now expect diluted non GAAP EPS for the full year between $1.68 $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 3 d packaging, providing the opportunity for revenue growth in 2025.

Speaker 4

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.

Speaker 4

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 $60,000,000 to $70,000,000 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.

Speaker 2

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 $1,000,000,000,000 in the 2,030 timeframe, contributing to expectations for long term growth in wafer fab equipment spending. 2nd, Veeco has a portfolio of enabling technologies that are increasingly critical for several leading edge semi manufacturing process steps. 3rd, our strategy of investing technologies to enable industry inflections in advanced logic and memory continues to gain traction.

Speaker 2

4th, we believe our exposure to these high growth areas of the market can enable our SAM to grow faster than growth in WFE spending. And finally, we expect our execution to generate long term value for Veeco shareholders. With that, I'll now turn the call over to the operator to open up Q and A.

Operator

Thank you. At this time, we will be conducting a question and answer The first question comes from Mark Miller from Benchmark. Please proceed with your questions, Mark.

Speaker 5

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. And I'm just wondering if you're seeing any impact from that?

Speaker 2

Yes. Thanks for making some time for us today, Mark. Appreciate it. Our outlook for this year, 2024 is flat, very similar to ASML's outlook in the 3 to 5 system range. And then looking forward to 2025, we also are expecting 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.

Speaker 2

We do expect some new application wins to provide the opportunity for revenue growth beyond that. And I would say that's probably potentially one system every year or so. But so we're still very comfortable with our view of 3 to 5 on average going forward. And then obviously as ASML scanner shipments continue to increase as they're planning, our business would increase kind of in parallel with that.

Speaker 5

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

Speaker 2

I'll take a shot and 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 2024. As John mentioned in our prepared remarks, our recent customer engagements have moderated and we expect China revenue to decline as customers digest capacity. So it's a bit too early to definitely say how much China revenue will decline.

Speaker 2

We generally have about 6 months visibility and over time we could see revenue moving towards more normalized rates.

Speaker 5

Thank you.

Speaker 2

Thank you, Mark.

Operator

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

Speaker 3

Hi. Thank you for taking my question.

Speaker 5

I was wondering if you

Speaker 3

could provide any directional color for the different business segments for at least maybe the Q1 of 2025 or some guidance for the full year there? Thank you.

Speaker 4

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 2025.

Speaker 4

This includes our wet processing business where we are 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 for 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. So we see opportunity for growth in the semi market in 2025.

Speaker 4

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 SiC 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 austinophosphide photonics and solar applications. And given that we see potential for growth related to these activities in the second half of twenty twenty five 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.

Speaker 4

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 $60,000,000 to $70,000,000 reduction in our revenue from our data storage business in 2025 compared to 2024.

Speaker 3

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

Speaker 2

Thanks, Ross.

Operator

Thank you. The next question comes from Dave Duley from Steelhead Securities. Please proceed with your questions, Dave.

Speaker 3

Yes. Thanks for taking my questions. I guess, first off on the $50,000,000 worth of orders in the wet processing business. Could you give us a rough cut how it's split between DPUs and high bandwidth memory?

Speaker 2

Yes. It's Dave. I would say, 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 'twenty five. And I would characterize it as business from leading foundry as well as high bandwidth memory manufacturer and as well as OSATs. So the exact breakdown of that is kind of hard to say.

Speaker 2

But clearly, we have exposure in all those steps that you just asked about there. And we have about those 50 orders equipped, about 20 systems of business. And from continuing discussions on and planned orders, we're getting quite confident 'twenty five will be a strong year. And as John mentioned, 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 2025. So exciting opportunity.

Speaker 3

Just curious, if you're calling this out now because you just got a big piece of the $50,000,000 of cumulative orders or has this been kind of ongoing split throughout the year? Just regarding the timing, I guess.

Speaker 2

Yes. 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.

Speaker 3

Okay. And then, one of the hot buttons for everybody is China and what exactly is going to happen there. I guess you characterized it as you expect the Chinese revenue to decline. And you said one other comment about normalizing. Maybe you could just help us understand where you would expect Chinese revenue to be?

Speaker 3

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?

Speaker 2

I think it's a little bit more nuanced than that, Dave. Clearly, it's kind of too early for us to kind of call the year. We have only about 6 months of visibility. And so I would say over time, I'm not exactly sure how that's going to roll out. Over time, I think it's probably safe to say whether that's the end of 2025 or into 2016.

Speaker 2

We'll probably get to what I think John characterized as more normalized rates. And so if you go back a few years, China ran about 20% or plus or minus range of our business. So I would say we don't see that rolling off right away early on, but we would think that eventually we'd probably come back to normalized rates at some point.

Speaker 3

Okay, great. And then as far as your progress on your evaluation systems, you gave us some pretty good 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 twenty twenty five for any of these valuation systems to start to contribute to revenue? Or maybe do you think you have placed another evaluation system in the high bandwidth memory segment? And that's it from me.

Speaker 3

Thanks.

Speaker 2

Great. Thanks, Dave. I'll give you a brief update kind of in semi. We have the 2 evaluations in their nanosecond annealing in logic, we're actually being assessed for multiple applications that the customers are evaluating us for. We've had some positive feedback.

Speaker 2

As a matter of fact, we actually have strong pull for a third evaluation at the 3rd logic customer as well as a memory customer that we're trying to manage through our resources on. I would say there are potential for NSA follow on orders in late 'twenty five 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 4th deposition technology into the fab and helping them integrate this technology into their upstream and downstream processes.

Speaker 2

And once again, we are receiving strong pull from 2 logic customers where we're considering probably putting 1 at least 1 and maybe 2 evaluations in the field in 2025. And I would think here we're probably looking at initial follow on orders late 2025, but probably more like 26. We're also planning to put eval laser annealing LSA evals out to a second leading memory customer in the first half of 'twenty five as well. So a pretty full slate of tools in the field that we're supporting and some planned incremental investments here in twenty twenty five.

Speaker 3

Thank

Operator

you. Ladies and gentlemen, we have reached the end of the question and answer session as there are no further questions. I'd now like to turn the call back to Mr. Bill Miller for closing remarks. Thank you, sir.

Speaker 2

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

Operator

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

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