Greetings. Welcome to the Veeco Instruments, Inc. First Quarter 2023 Earnings Call. As a reminder, this conference is being recorded. I will now turn the conference over to your host, Anthony Pappone, Head of Investor Relations. You may begin.

Thank you, and good afternoon, everyone. Joining me on the call today are Bill Miller, Veeco's Chief Executive Officer; and John Kiernan, our Chief Financial Officer. Today's earnings release is available on the Veeco 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 veeco.com. This call is being recorded by Veeco Instruments and is copyrighted material. It cannot be recorded or rebroadcast without Veeco's express permission. Your participation implies consent to our recording. To the extent that this call discusses expectations about market conditions, market acceptance and future sales of the company's products, future disclosures, future earnings expectations or otherwise makes 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. These factors are discussed in the Business Description, Management's Discussion and Analysis and Risk Factors sections of the company's report on Form 10-K and annual report to shareholders, in our subsequent quarterly reports on Form 10-Q, current reports on Form 8-K and press releases. 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. 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. With that, I will turn the call over to our CEO, Bill Miller.

Thank you, Anthony. Good afternoon, everyone, and thank you for joining our call today. Veeco executed well in Q1 with solid top- and bottom-line results. Our team continues to perform well and remains focused on executing our growth strategy to create value for our customers and shareholders. Today, I'll take you through our first quarter highlights and discuss our markets and technologies. John will provide a financial update and guidance, and then we'll be happy to take questions. Revenue in Q1 came in at $154 million, non-GAAP operating income totaled $20 million, and non-GAAP diluted EPS came in at $0.30, all above the top end of our guided range. This quarter's results reflect solid execution. Revenue for our semiconductor products remained elevated, increasing by 20% year-over-year, led by laser annealing. Our team did an excellent job of managing supply chain during the quarter. While material lead times remained elevated, our suppliers' on-time deliveries have improved. We're starting to see some signs that material lead times could improve in the second half of the year. As we look ahead in 2023, we remain committed to investing in the semiconductor and compound semiconductor markets with differentiated solutions positioning Veeco for long-term growth. Now switching gears to our markets and technologies. As we've discussed in the past, there are four key megatrends driving growth in our three primary markets of semiconductor, compound semiconductor and data storage. These trends are high-performance computing and AI, mobility and the immersive user experience, the transformation of the automobile industry and the cloud. Turning first to the semiconductor market. Our strategy is to expand our served available market by delivering differentiated solutions at the leading edge. We accomplished this with three key technologies. First, our laser annealing product line, which reduces thermal budgets at advanced nodes is gaining momentum. This is demonstrated by recent orders for additional annealing steps at leading logic customers. We're also seeing traction within the memory market for advanced nodes, which represents a significant long-term growth opportunity for the company. Second, our ion beam deposition system for EUV is another differentiated technology that new and existing customers continue to adopt. These systems are used to manufacture nearly defect-free EUV mask blanks and have been the system of choice for many years. We expect continued demand for our ion beam deposition systems as customers add capacity to support increased adoption of EUV lithography. ASML recently reiterated their plans to ship around 60 EUV lithography systems in 2023, with approximately one of our systems required for every 10 to 15 EUV lithography systems. We sized the market at three to five systems per year. And third, we provide advanced packaging lithography and wet processing solutions to IDMs, foundries and OSATs. Our lithography systems serve applications such as copper pillar bumping, redistribution layers and wafer-level packaging. Our wet processing systems are primarily used for photoresist strip and solvent cleans. As widely reported, the prevailing consensus for wafer fab equipment spend is to decline this year by somewhere in the range of 15% to 25%. The forecasted decline is weighted more heavily towards memory than logic. As our semiconductor business is currently more exposed to logic, we remain confident that our semiconductor market sales will outperform WFE spend in 2023. A few key highlights from Q1 that further support our positive outlook include: multiple LSA orders for DRAM devices from a world-leading memory device manufacturer despite industry-wide CapEx reductions, additional production orders from our most recent advanced logic customer, shipment of an advanced node logic LSA evaluation system for a second application, further advancement toward an evaluation system over the next quarter for our next-generation annealing solution, and we're making progress toward shipping an ion beam deposition evaluation system for low resistivity metals. We expect growth in our LSA and EUV mask point product lines to more than offset softness in our advanced packaging lithography and wet processing business due to weak consumer electronic demand. As such, we expect our semiconductor revenue to be slightly up in 2023. Now on to the compound semiconductor market. We primarily serve this market with our wet processing equipment for RF filter and power amplifier devices, along with our epitaxy equipment for power electronics and photonics applications. Our wet processing business has been weak over the last six to nine months due to softness in the smartphone market. Timing of the market recovery is not yet clear. However, the power electronics and photonics markets offer promising opportunities for growth. In power electronics, we're focused on GaN with our legacy MOCVD technology and with CVD silicon carbide, which we recently acquired. Integration of the acquired CVD technology is progressing well with our system expected to be demo-ready in the second half of 2023. Our system represents a significant opportunity for a differentiated solution to address growing power electronics demand in the electric vehicle market. Our epitaxy equipment to address micro LED applications continues to display promising long-term growth potential. We're making ongoing investments in this area, including R&D, supporting customer demos and evaluations to penetrate these market opportunities. Now looking at our data storage market. Veeco's ion beam equipment is used to manufacture our customers' magnetic heads. Despite the industry's widely reported challenges such as excess capacity and inventory, we continue to expect revenue growth in 2023 based on ship dates of orders in our backlog. Taking a step back, the long-term trends in the HDD industry continue to remain promising. According to Gartner and our internal estimates, nearline hard disk drive exabyte shipments are expected to grow at an approximate 25% CAGR over the next five years. In addition, Seagate recently stated they have not let up on executing their heat-assisted magnetic recording or HAMR-based product roadmap and are tracking well to their plan to recognize initial revenue in the second quarter of the year. Larger drives use more magnetic heads and newer recording technologies like HAMR use more complex heads. The adoption of this technology offers an opportunity for increased deposition and etch equipment. As such, we remain positive on the long-term opportunity as the industry recovers from its current challenges. Moving on to our 2023 priorities. As always, our first objective is to keep our employees safe and healthy and to promote a culture that prioritizes teamwork and execution. During the quarter, we maintained our commitment to improving our corporate culture by launching our biannual employee survey to assess our progress on key initiatives. We also reiterated our commitment to further improve transparency, diversity, inclusion and our environmental responsibility by issuing our fourth sustainability report. In regard to execution, focusing on our supply chain is one of our top priorities as on-time delivery and quality metrics are essential to maintaining and improving customer satisfaction. Our investments in future innovation and product development are critical to our future success and growth strategy. We'll continue to engage our customers through evaluation system shipments and remain focused on penetrating the rapidly growing silicon carbide market. Lastly, we're focused on outperforming WFE growth expectations with our semiconductor products, which should support us in maintaining profitability levels. With these priorities in mind, we're committed to making a material difference and building a stronger Veeco that serves all stakeholders. With that, I'll turn it over to John.

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 and at the end of the quarterly earnings presentation. Turning to Q1 revenue by market and geography. Revenue totaled $154 million for the quarter, flat to the prior quarter, coming in above the high end of our guidance. This was driven by sales to our semiconductor customers, which increased 20% year-over-year. Our semiconductor business comprised 60% of total revenue, in line with the prior quarter with significant contribution coming from our laser annealing product line. The compound semiconductor market contributed to 14% of our revenue versus 16% of revenue in the prior quarter. System shipments for photonics applications were the primary contributor of revenue for the quarter. Moving along, our data storage business totaled 14% of revenue versus 11% of revenue in the prior quarter. And scientific and other made up 12% of our revenue, similar to last quarter. Now looking at quarterly revenue by region. As expected, revenue from China was higher in Q1 compared to prior quarters, totaling 40% of revenue. This increase was primarily driven by LSA systems to trailing edge customers. While China revenue in Q2 is forecasted to remain elevated, we expect a sequential decline from Q1 and a further decline in the second half of the year. Revenue from our Asia Pacific region, excluding China, totaled 25% of total revenue, led by semiconductor system sales. The United States came in at 20%. And finally, EMEA was 15% of total revenue for the quarter. Looking forward to the second half of the year, we expect revenue growth to be led by Tier 1 advanced semiconductor and data storage customers. Switching gears to our non-GAAP quarterly results. Gross margin came in at 41.5%, a decline sequentially from 42.3%, but above the high end of our guidance range. Higher revenue, favorable product mix and operation spending were contributing factors to gross margin for the quarter, exceeding our guidance. Operating expenses for the quarter were $43 million, in line with guidance. We continue to be cautious in adding expenses in the current macroeconomic environment while funding our growth initiatives to expand our served available market. Tax expense for the quarter was approximately $3 million, an increase of approximately $2 million from Q4. Post reversal of the valuation allowance, our effective tax rate was 15% in Q1, net income came in at $17 million, and EPS was $0.30 on a diluted share count of 63 million shares. Now moving to the balance sheet and cash flow highlights. We ended the quarter with cash and short-term investments of $253 million, a sequential decline of $50 million. This reduction was the result of using $30 million of cash for the Epiluvac acquisition and paying $20 million for extinguishing the remaining 2023 notes. Cash flow from operations came in at $14 million and CapEx was $7 million. From a working capital perspective, our accounts receivable declined by $4 million to $120 million, with DSOs for the quarter declining to 70 days. Accounts payable increased sequentially by $10 million to $62 million, with the corresponding increase in days payable to 62 days. Inventory increased by $19 million from the prior quarter to $226 million, with days of inventory also increasing to 213 days. This was driven by an increase in inbound materials to support higher expected revenue in the second half of the year and to build the level of safety stock that was depleted as a result of the supply chain challenges. Debt was recorded at $255 million on the balance sheet and represents the carrying value of our $258 million in convertible notes. Now turning to Q2 non-GAAP guidance. Q2 revenue is expected to be between $145 million and $165 million with gross margin of approximately 42%. We expect OpEx between $44 million and $46 million, net income between $14 million and $20 million and EPS between $0.26 and $0.34 per diluted share. Now for some additional color beyond Q2. Based on our current backlog and visibility, we reiterate our 2023 revenue outlook of between $630 million and $670 million, with growth in the second half of the year. We also continue to target diluted non-GAAP EPS for the full year to be between $1.15 and $1.35 per diluted share. And with that, Bill and I will be happy to take your questions. Operator, please open the line.

Our first question comes from Tom O'Malley with Barclays.

I just wanted to walk through, obviously, your products have longer lead times, but there are certain areas where you can take advantage of some quick turnarounds. Obviously, with the much better numbers you've seen, an improvement a little quicker than you originally expected. Could you just point to the specific areas where you are seeing that improvement? And do you think that's more of a cohort of demand where people are looking to capitalize in the short term? Or do you see a sustained recovery here where you've already kind of seen the bottom of this short-term downturn?

Thanks for the questions, Tom. I think as we look at Q1 as it compared to our initial guide, there were really two things that drove the higher revenue: an additional semiconductor system, LSA system, and an additional data storage system. And I would say that those were on the fence of either happening at the end of Q1 or the beginning of Q2, and we included them in our guide more or less happening in Q2. So we don't see anything structurally changing there or particularly in some of the areas where we have less visibility.

I would like to add, John, that regarding the shorter lead time products like lithography or wet processing, we are not observing any recovery, especially in lithography. However, we are beginning to engage in more positive discussions with our customers about projects either later this year or in 2024. This is the first encouraging news we have had in lithography for the last six to nine months.

I wanted to clarify the guidance on data storage in relation to market trends. Western Digital is reporting tonight, and Seagate has already reported a decline in HDDs. Seagate indicated they don't expect a recovery until the fourth quarter. Can you discuss what this implies for capital spending? They have already revised their guidance, but are you observing any further weakness from those customers? Or are they maintaining their spending according to your expectations for the year?

Tom, I would say, clearly, we're seeing the softness, having excess capacity and burning down inventory. I would say that is negatively impacting our spare parts and our service revenue business here in the short term, modestly. We'll have to kind of wait and see how that inventory gets burned off and when that happens. Our outlook for the second half increase in data storage is really driven by the orders that we actually have in backlog and are building now for the second half of the year. And we've recently confirmed those ship dates. That's what gives us the ability to have a higher second half.

Helpful. And let me just sneak one more in, if I may. You guys have been pretty helpful about giving some segment detail into the June quarter. Could you just talk about sequentially through your business segments, what you're expecting to get to the midpoint of guidance?

Yes, Tom. So we're expecting a fairly similar quarter overall, but some changes in the makeup by market. So we are expecting semi to be up in Q2. And call it, closer to the $105 million range. We're looking at compound semi in the $25 million range. These are all at the midpoint of our guide. Data storage, as we talked about, the first half, we see exactly as we initially planned out. But as I just mentioned earlier, we had one more system shipment in Q1. So we now are expecting Q2 to be more in the $15 million range, but the first half being right on schedule. And scientific, we sort of see in the $10 million range or so in Q2.

Our next question comes from the line of Rick Schafer with Oppenheimer.

This is Wei Mok on the line for Rick. Congrats on the quarter and the recent LSA announcements. I believe this is your first entry into the DRAM memory space. I was wondering if you could help us size this market? And how does it compare to the logic market? And when do you expect to ship your first system?

Thoughtful question, Wei. I would say we're really excited about the opportunity in DRAM. It's been a fair amount of work to get these follow-on orders. We size each customer, each application at each step kind of in the $25 million to $35 million range over a 12- to 24-month period of time. So we now have one customer and one application. We expect to start shipping tools, I think, in this quarter right now, the second quarter and throughout the rest of this year. So hopefully that gives you a little bit of color on that.

Great. Appreciate it. As for my follow-up, it looks like the equipment and the design win is going to be manufactured in your new San Jose facility that you expanded into last year. I was just wondering if you can kind of walk through how much capacity do you have at this facility? And do you have enough ample space to support this new order?

Yes and yes. So the new space in San Jose, as a reminder, gave us the opportunity in the same overall square foot building to double our manufacturing output or more than double our manufacturing output. And we have not reached that capacity at this point. So yes, for this business that we're planning on for this year and going into next year, the San Jose facility has adequate capacity.

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

Yes. Just in terms of MOCVD and GaN, I know you've had an evaluation system out there for a while in Asia. And I think you've been talking to customers about MOCVD for GaN. And I was just wondering if you could kind of give us an update on what you're seeing in that market? And what's the opportunity over the next 12 to 18 months?

Yes. We do have an evaluation system for GaN power electronics. It's for the transition from six-inch to eight-inch. The product is running, and we're in a competitive situation there. Our customers asked us to extend that evaluation through this year, which we are going to do. And so it's a little slower taking off than we had originally planned, and we're still working on it. I would say we probably won't see any meaningful gain on silicon power activity beyond where we are today until the 2024 timeframe. That being said, we also have GaN on silicon for micro LED, where we're working with a few customers on opportunities there, and that continues to develop as well for GaN silicon.

Our next question comes from the line of Dave Duley with Steelhead Securities.

My first question is about LSA. You mentioned that you have multiple customers from whom you won new applications in the foundry and logic space. Could you provide more details on that?

Yes. In our press release, we used customers because we had follow-on volume orders for our third logic customer. So it's a first volume win there in foundry logic. And we also had a win in DRAM with multiple tool orders. So those are the two customers that we have specifically, one from foundry logic and one in memory.

Okay. So it wasn't two new wins in the foundry and logic space?

No. It was one new win in foundry logic and one in memory.

Okay. Great. A little bit topic to silicon carbide. You've made this acquisition. And I thought you've talked about, if I'm not mistaken, having a demo later just late this calendar year. Could you help us understand the size, the market opportunity that you're chasing in the silicon carbide marketplace? And who the key competition is for this deposition tool I guess, that you're talking about?

Yes. So according to Yole, they're sizing the silicon carbide device market at $2 billion going to about $6 billion in 2027, and the corresponding epitaxy equipment market is about $250 million these days going to about $0.5 billion by 2027. There are a few participants in that market today, namely ASMI, NuFlare, and Aixtron are our competitors in that space.

Okay. And was it accurate that you will have a demo later this year? And then when would you expect to have, I guess, meaningful revenue from this particular opportunity?

Yes, thank you for the reminder about the first part of your question. Currently, we are in the process of shipping our demo tool from Sweden to our demo lab in Somerset, New Jersey. We are working towards being demo ready in the second half of the year. We have met with several Tier 1 and Tier 2 players in this market, and they are all very enthusiastic about the acquired technology, especially given our global service presence. We are nearing a key milestone of having the demo tool capable of applying films that can be measured and sent to our customers. We expect to have evaluation systems for some Tier 1 clients in 2024 and will also start selling directly to select Tier 2 customers. Therefore, we anticipate some modest revenue in 2024, but we expect more significant revenue in 2025.

Okay. And thanks for giving the competitive layout. Who would you say is the leader in this space now? And I would imagine you're going to have to show a fairly significant cost of ownership advantage versus whoever that leader is, what would be the key reasons that you can show a superior cost of ownership?

The market varies significantly by region and tier. We recognize that cost of ownership is crucial, as is yield, which plays a major role in this. From our discussions with customers, they see an opportunity for us to establish a cost of ownership advantage over existing market options.

And we have reached the end of the question-and-answer session. I'll now turn the call back over to CEO, Bill Miller for closing remarks.

Thank you. I do want to thank our customers and shareholders along with the Veeco United team for their continued support as we execute our growth strategy. Have a great evening, everyone. Thank you.

And this concludes today's conference, and you may disconnect your lines at this time. Thank you for your participation.