Veeco Instruments Inc Q3 FY2023 Earnings Call

Good afternoon, and welcome to the Veeco Instruments Q3 2023 Earnings Call. Today's conference is being recorded. Now at this time, I would like to turn the conference over to Anthony Pappone, Head of Investor Relations. Please go ahead.

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 make statements about the future, such statements are forward-looking and are subject to a number of risks and uncertainties that could cause actual results to differ materially from the statements made. 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 and 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. Today I'll take you through our third quarter highlights, provide an update on our markets and discuss a few significant growth opportunities in more detail. John will provide a financial update and guidance, and then we'll be happy to take questions. Veeco reported another quarter of strong top and bottom line results. Revenue totaled $177 million and non-GAAP EPS of $0.53, each above the high end of our guidance range. Our solid financial results were driven by continued strength in our semiconductor business and sequential growth in our data storage business. In addition to our strong results, we're also excited to share several key business wins. First, we shipped multiple laser annealing systems to our leading Tier 1 logic and memory customers. Second, we received our first laser annealing system order for a new application to serve the automotive market. Third, we received our first low defect density iron beam deposition system order for a new EUV pellicle mask blank application, and we continue to make progress with our nanosecond annealing and ion beam deposition products for wafer-level semiconductor manufacturing. As you may have seen in our press release today, Veeco announced the shipment of our first nanosecond annealing evaluation system to a Tier 1 logic customer representing a substantial milestone for our company. Further advancement of our laser annealing roadmap is an exciting piece of our strategy. I'll discuss this significant opportunity shortly. Veeco's laser annealing technology is growing in criticality at our customer's most advanced nodes as traditional technology struggles to meet performance requirements. For example, new gate all-around architectures and shrinking devices require precise higher temperature annealing technology to increase performance and minimize damage. In comparison to traditional lamp approaches, our laser annealing system has several advantages. These include a lower thermal budget, higher dopant activation, and pattern insensitivity to annealing. Veeco's laser annealing system continues to be adopted by new and existing customers for new applications, with recent wins validating our position. Shipments remained elevated during the quarter due to broad-based demand from logic and memory customers. Looking ahead, we're focused on gaining further adoption in new markets and applications. Veeco's low defect density iron beam deposition system is the technology of choice to deposit defect-free films for EUV mask blank production, and we're well-positioned to serve growing demand from adoption of EUV lithography. While we continue to see this market at about three to five systems per year, we see potential to expand our business beyond the current application space in areas such as pellicle deposition. In advanced packaging, our wet processing solutions are used for photoresist strip, solvent cleans and flux removal for high bandwidth memory and temporary bond material strip. During the quarter, leading foundry and memory customers placed orders for several Flux Clean systems that support advanced packaging for AI. Based on our strong year-to-date results and outlook, we expect our semiconductor business to outperform WFE and be up about 10% for the year. Moving to the compound semiconductor market, the market for epitaxy equipment provides Veeco with a substantial growth opportunity. Our silicon carbide CVD technology continues to advance, and we're making progress towards demonstrating tool performance to our customers. Interest in our single wafer solution is strong with several evaluation shipments to Tier 1 customers planned for next year. Looking ahead, our unique system design, years of experience with epitaxy technology and extensive go-to-market infrastructure position us well to capture share. Likewise, we're investing in GaN power and microLED as the long-term fundamentals in these markets remain positive. Lastly, looking at the data storage market, Veeco has the most advanced iron beam equipment in the industry with customers using our products to manufacture thin fill magnetic heads for hard disk drives. Equally as important, our core iron beam technologies are providing significant value as we leverage them for advanced node applications in the semiconductor market. Looking ahead, we're well-positioned to capitalize on the proliferation of data stored in the cloud. Based on year-to-date and scheduled shipments during the fourth quarter, we continue to expect year-over-year growth in 2023 as previously forecasted. Moving now to artificial intelligence and the role that Veeco plays in the AI chip manufacturing process. Growth of AI is having a profound impact on leading-edge product roadmaps, requiring the most advanced technologies to manufacture higher performance AI chips. As a result, demand for our technologies is growing with adoption of our products in three main areas. Beginning with GPU chips, Veeco's laser annealing systems for transistor formation and ion beam deposition systems for EUV mask blank manufacturing are established as production tools of record at our customer's most advanced nodes. In addition to our laser annealing technology, we believe there are opportunities for our nanosecond annealing and ion beam deposition systems in AI, GPU applications where traditional technologies are challenged. Second, our laser annealing systems are used in the manufacturing of high bandwidth memory or HBM DRAM. We've shipped multiple systems this year, planned to ship additional systems and are working to penetrate another Tier 1 memory customer's advanced nodes. Equally important, we see future opportunities for our nanosecond annealing and ion beam deposition solutions for AI memory applications. And third, Veeco wet processing systems for Flux Clean of microbuses support advanced packaging for AI at both the sub-module level for HBM and the system product level. I'd now like to take a deeper dive into two of our largest semiconductor growth opportunities. Beginning with nanosecond annealing. Continued innovation is essential to maintaining product leadership. As mentioned earlier, we shipped our nanosecond annealing evaluation system to a Tier 1 logic customer, which if successful, can significantly expand our served available market. Compared to traditional annealing solutions, our nanosecond annealing system can achieve a lower thermal budget enabled by a dwell time that can be up to 1,000 times shorter than today's most advanced anneals. Our nanosecond annealing system can rapidly heat the surface of the wafer and only affect tens to one hundredths of nanometers into the wafer. This may enable new applications such as backside power delivery, and contact anneal for advanced nodes. It also may enable new applications requiring material modification such as void removal, recrystallization, and grain growth. Pull from Tier 1 logic and memory customers is strong, and we plan another evaluation shipment in the coming months. As we look ahead, we see potential for initial high volume manufacturing orders in late 2024 or 2025. Turning now to iron beam deposition for advanced node semiconductor applications. Our core ion beam technology has been honed over decades and is the technology of choice in the semiconductor industry for EUV mask production. This core technology can also solve our customer's high value problems in advanced semiconductor wafer level manufacturing. Low resistance metals are becoming increasingly critical to maintaining device speed and performance as device geometries continue to shrink. Based on Tier 1 customer data, our iron beam deposited tungsten and ruthenium films are demonstrating substantially low resistivity compared to traditional PVD. For DRAM, this enables our customers to continue scaling down tungsten fit line thickness while maintaining electrical performance of the device. For logic, ruthenium based metalization can enable new integration schemes at future nodes. Pull from Tier 1 customers remains strong and we're on track to ship two evaluation systems in the coming months to DRAM customers. Although this opportunity is still in the early stages, we're quite excited to introduce iron beam deposition to the front end semiconductor market. With that, I'll turn it over to John for a financial update.

Thanks Bill, and good afternoon, everyone. Today I will 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. Starting with Q3 revenue by market and geography. Revenue for the quarter was $177 million, increasing 10% from Q2. After a record in Q2, revenue from our semiconductor business came in at $98 million comprising 56% of total revenue. In the compound semiconductor market, revenue came in at 14% declining from the prior quarter. Revenue to our data storage customers increased to $34 million during the quarter, representing 19% of revenue as compared to 9% in Q2. And scientific and other met up 11% of revenue. Now turning to quarterly revenue by region. Revenue from the United States totaled 33% of revenue, an increase from 22% in the prior quarter due to an increase in shipments to data storage customers. Revenue from our Asia-Pacific region declined to 29% of total revenue as compared to 36% in the prior quarter, resulting from a decline in semiconductor sales. As forecasted, the percentage of total revenue from China decreased from 31% in the prior quarter to 23%. We expect an increase in China revenue in Q4 and expect full year revenue from China to be in the low 30% range. And lastly, EMEA was 15% of revenue, an increase from 11% in the prior quarter. Switching gears to our non-GAAP quarterly results. Gross margin came in at approximately 44%, a sequential increase from approximately 43%. Gross margin was positively impacted by higher volume and a more favorable product mix. Operating expenses came in at $46 million in line with guidance as we maintain our focus on cost management while also prioritizing investment for future growth opportunities. During the quarter, the projected annual effective tax rate was reduced from 14% to 11% due to increased benefits from R&D credits and other deductions. As a result, tax expense for the quarter was $2 million, yielding a 7% effective tax rate. Lastly, net income came in at $31 million and EPS was $0.53 on a diluted share count of 59 million shares. Turning to the balance sheet and cash flow highlights. We ended the quarter with cash and short-term investments of $287 million in line with the prior quarter. From a working capital perspective, our accounts receivable declined by $8 million to $122 million with DSOs for the quarter decreasing to 62 days. Inventory increased by $8 million from the prior quarter to $252 million, while days of inventory outstanding declined to 222 days. Accounts payable remained flat at $63 million, while days payable outstanding declined to 57 days. And lastly, long-term debt on the balance sheet was recorded at $275 million, representing the carrying value of our $282 million of convertible notes. Before turning to our Q4 non-GAAP guidance, I'd like to discuss the US Department of Commerce's update to export regulations on October 17th. While these new regulations are complex and still under our review, at this time we do not anticipate they will have a material impact on our business. Now turning to our Q4 non-GAAP guidance. Q4 revenue is forecasted between $155 million and $175 million with gross margin between 43% and 44%. We expect OpEx between $45 million and $47 million; net income between $20 million and $27 million; and EPS between $0.35 and $0.45 on a diluted share count of 60 million shares. Based on our year-to-date results and our fourth quarter guide, our full year 2023 revenue guidance is now $648 million to $668 million tightened and increased from our prior range of $630 million to $670 million. Moreover, we are again raising our profitability outlook for the year to account for higher revenue, stronger gross margin, and lower tax rate. We now expect non-GAAP EPS between $1.55 and $1.65 per diluted share. And for some additional color beyond Q4, based on market conditions and our visibility, Q1 2024 revenue is looking to be in a similar range to quarterly revenue in the second half of 2023.

Thank you, John. Before concluding our prepared remarks, I'd like to highlight why Veeco is a compelling investment opportunity. We see significant growth opportunities for Veeco in the coming years, and we're investing to take full advantage of these opportunities. Our successful evaluation program has been foundational to our growth in the semiconductor market and is a top priority for 2024. Likewise, we expect our strategic R&D investments in the semiconductor and compound semiconductor markets to further strengthen our unique portfolio of differentiated technologies. As a reminder, our laser annealing technology is well established and our efforts to expand our footprint to new markets, applications and products are gaining traction. We're particularly excited for the opportunity to expand our served available market to new applications as we advance our laser annealing roadmap to nanosecond annealing. In iron beam deposition, our decades of experience and core technology give us confidence as we introduce iron beam for wafer-level advanced node semiconductor applications. We believe our iron beam deposition technology has unique advantages versus traditional technologies like PVD, and our team is laser-focused on executing. Lastly, we have a long-term opportunity to capitalize on growing demand in the compound semiconductor equipment market for power electronics and photonics applications. And with that, we'll be happy to take your questions. Operator, please open the line.

Thank you. We will now be conducting a question-and-answer session. Our first question comes from Charles Shi with Needham. Please proceed with your question.

Thanks for taking my question. Good afternoon, Bill and John. I'm curious about the NSA tool you shipped to the Tier 1 customer. You mentioned that you expect repeat orders as early as late 2024 or 2025. That seems like a quick turnaround from the initial shipment to repeat orders. Can you provide some context on the adoption of these tools or the evaluation tool? Are you replacing some existing applications, and why do you anticipate such a rapid transition from shipment to repeat purchases? Thank you.

Yeah. Charles, that's a thoughtful, lengthy question there. I would say we are really excited about the shipment of this first evaluation system to a Tier 1 logic customer. I believe it represents a significant milestone for the company to introduce this technology after working on it for a number of years. I think it's important for our investors to understand that this is really a complementary technology to our existing laser annealing technology. And effectively we can reduce the thermal budget significantly because we have about a 1,000 times less dwell time, which opens up a new class of applications that we can compete for. And then I think just to follow up on one of your first sub-questions here, what we have done is we've shipped a system to a logic customer, and these are one-year evaluations. And they usually start after the tool is installed. And so let's say we've shipped it now and we could have it installed by the beginning of the year, that would start the clock on the evaluation cycle. If this goes well and the integration runs smoothly, it would not be unheard of for us to receive an order before the evaluation is signed off. But you are right. First orders could be in 2025 very easily as well. So hopefully that provides the clarity you're looking for.

Could you provide more details about your new application for EUV pellicles? I'm also interested in your thoughts on when you might start receiving high volume manufacturing orders. Do you think this is more dependent on the adoption of high-end EUV technology, or do you anticipate these orders could come in sooner based on your conversations with customers? Thank you.

I would say, Charles, that pellicles are being introduced today. And just for our investors, pellicles, as you know, are a thin, transparent membrane that's mounted on the photo mask to improve yield and reduce defects. So this is a new application for us. Our traditional IBD iron beam deposition low defect density tool, the industry needs one of these for every three to five ASML scanners shipped. So we're still sizing that market at three to five systems per year as a function of ASML scanner shipped. So we see this as an incremental opportunity. And our thought is this first tool will be used to make production pellicles over time.

So, just a slight clarification. One of our EUV tools for every 10 to 15 ASML scanners that are shipped into the market, which then turns into a three to five system requirement for us.

I just want to follow up on that because it seems like you expect pellicles to be introduced today with the current standard EUV tools, rather than the advanced EUV tools that might be available in a few years. Is that accurate?

I don't want to go into too much detail. My understanding is for a small number of EUV mask steps, pellicles are being introduced. I wouldn't want to really hypothesize what that percentage goes to with high NA.

Thanks.

Thank you, Charles.

Thank you. Our next question comes from the line of Brian Lee with Goldman Sachs. Please proceed with your question.

Good afternoon, everyone. I appreciate you taking my questions. I have two inquiries. First, regarding the data storage segment, you've mentioned in previous quarters that your backlog is sufficient to support revenues, and you've reported a strong quarter as well. Can you provide insight into the current state of the data storage cycle? Additionally, you offered some preliminary guidance for Q1; does this indicate that the backlog extends into that quarter? Furthermore, what should we anticipate for this business segment as we look ahead to next year? I have a follow-up question as well.

The data storage industry conditions remain challenging, with excess inventory that the industry is trying to manage. We've heard from a couple of our public company customers mentioning early signs of recovery, but it will take some time to determine if it is a sustained bottom. Looking at the long term, both of our customers anticipate exabyte growth over the next three to five years at approximately 25% CAGR, which would benefit Veeco. Regarding our perspective for 2024, we can't provide a specific quantitative outlook yet, but we do have backlog extending into 2024, and we don't expect it to be significantly different from 2023. We will provide more details in the near future.

Okay. Fair enough. That's helpful. And then, you kind of headed it off as well with your prepared remarks, but as you think about the China exposure, I know there's been incremental concerns across different markets and industries with respect to the China macro and signs of weakness in industrial and maybe some other categories. Can you kind of maybe level set us? I know you're giving us sort of the real-time updates around where your exposure is and how you're navigating it, but what are you hearing on the ground there and are you anticipating as you look into 2024? Maybe a similar question, like, should we expect that China continues to fall as a percent of sales that you're making elsewhere and other geos and other end markets? Or do you see some stabilization here as you think about that preliminary view you gave out into Q1? Thank you.

Sure, Brian, I'll take that. This is John. We experienced strong revenue in the first half of this year in China, and while we previously indicated that China's contribution to our overall revenue would decrease compared to that period, we are still forecasting that about 30% of our revenue will come from China this year. We expect to see an increase in our business in China in the fourth quarter compared to the third quarter. As for 2024, it's a bit early for us to make definitive predictions about the business levels we anticipate for the entire year. However, I can say that our current engagement with customers remains robust, and we continue to witness demand from our customers in China. We're aware that they are making ongoing investments in various areas, particularly for mature nodes. Therefore, we believe the business environment with our customers in China remains favorable at this time.

Okay. Fair enough. Thanks guys. I'll pass it on.

Thanks Brian.

Thank you, Brian.

Thank you. Our next question comes from the line of Tom O’Malley with Barclays. Please proceed with your question.

Hey, I just wanted to follow up again on the China question there. So depending on what you guys are defining as low thirties for the entire year, you could have China revenue in the fourth quarter near record levels. Could you just describe where that's coming from? Is that in the semi business, I know you're guiding that up for 10% on the year or so, so are you seeing the mix in your semi business move back towards majority of that revenue being in China, or just any comments on that into the fourth quarter would be helpful?

Yeah. Tom, I think that's a good question there. So our expectations for where we expect it to be in the second half of the year is holding out just on scheduled delivery dates. We had more scheduled deliveries in Q4 for these customers than Q3. So I don't really think it's really a change in the demand. There just so happened on how the systems were scheduled to be shipped. So yeah, we expect in the high 30% range of revenue in the fourth quarter coming from customers in China.

Got it. And just as a follow up to that one, is that all coming from the trailing edge? Could you just describe maybe the disparity? Is it a little more leading edge than it was before? Has there been any change in ordering patterns there? Just trying to figure out where that demand's coming from.

Yeah. So no change in the pattern there, Tom. What we've seen this year is as revenue increases to about 30% of revenue coming from China and over the past couple of years is about 20% of the company's revenue. It's principally been in our laser annealing product line, is where the growth has been coming from. And that's where we see that continuing into the fourth quarter and into the beginning of next year.

Gotcha. And just one more quick one, if I could sneak it in. You mentioned that for Q1, your expectations are for revenue rates similar to Q3 and Q4. There's a noticeable difference between September and December. Are you suggesting to average that out for March? Additionally, any insight into whether you have an outlook supporting that better than expected or at least stable guidance into March would be helpful. Thank you.

I believe we exceeded the high end of our revenue guidance for Q3. We shipped a couple more systems, and for the entire second half of the year, we are on track with our expectations for revenue growth. It's important to consider the average of Q3 and Q4. We envision our performance being in a similar range in Q1 of 2024.

Thank you very much guys.

You're welcome, Tom.

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

Yes. Thanks for taking the questions. Bill, I think on your commentary, you talked about semis being up 10% year-on-year. And if I just plug in the number for Q4, you kind of got to do $111 million, $112 million to hit 10%. Am I doing the math right there?

Yeah. So Gus, this is John. Yeah. We expect full year semiconductor revenue at the midpoint of our guide to be somewhere around $405 million for the year. That's up roughly 10%. So Q4 revenue numbers should be around $105 million in that range at the midpoint of our guide. So I think you're in the right zip code there.

Okay. Got it. Shifting back to the EUV mask opportunity and pellicles, I have a couple of questions. Is the pellicle customer the fabs or the blank manufacturers? As we move to high-end high NA EUV, transitioning to a six-inch by nine-inch substrate, will that necessitate a different set of tools or modifications to the existing tools to accommodate the larger substrate?

To address the first part of your question, this tool we sold for pellicles is not intended for our traditional mask blank customers. Additionally, as we move towards high NA with the larger format size, we are collaborating with the industry to prepare for the EUV mask blank deposition equipment. We are actively working on that as well.

Okay. I'll take my question offline. Thank you.

Thank you, Gus.

Thank you. Our next question comes from the line of Rick Schafer with Oppenheimer. Please proceed with your question.

Hi, this is Way Malcolm on the line for Rick. Thanks for taking the questions and congrats on the results and shipping the first NSA tool. My first question is on customer order patterns. Did you see any customer expedite orders for 3Q? Was there anything that was pulled from 4Q into 3Q?

My first inclination is no. We did over ship a little bit, but I don't think it was anything related to any pull-in at the system level. Maybe some upgrades are part in the like, but I don’t know, John, any more color there?

No. I think if you looked at the high-end of our guide range that we gave that it had a couple of more systems in the high-end of the guide range, and essentially that's what we shipped out. During the quarter was the biggest thing that drove the revenue for the quarter, but not new order activity. It was something that was already in that backlog and scheduled towards either the end of Q3 or the beginning of Q4.

Got It.

Just excuse me, I'll add that. I think our on-time delivery for systems was, if not 100%, extremely close to 100%. So our factories were getting closer to on time.

Thank you. I appreciate it. My second question is about the NSA system, as it seems developments are progressing quickly in this area. I would like to understand this opportunity in relation to LSA. Have you noticed a shift in customer interest from LSA to NSA, or do you view NSA as a completely separate opportunity? Additionally, do you think NSA will take some market share from LSA?

I would say NSA is a really complimentary, incremental served available market opportunity for us in both logic and memory. I would say, if I were to look right now, our LSA served available market totals about $500 million, $400 million in logic and about $100 million in memory. I would say if I were to confirm that and project forward to 2027, I would say probably two-thirds of our business will be in LSA, our traditional LSA. We're actually planning to put evals out in the field for customers' next node roadmap. So it's clearly an active product and about one-third from nanosecond annealing. And so we're right now sizing the 2027 market at $600 million in laser annealing and about $300 million in this incremental NSA business, both kind of equally split between logic and memory.

Appreciate it. Thank you.

Thank you, Way.

Thank you. Our next question comes from the line of David Duley with Steelhead Securities. Please proceed with your question.

Thank you for taking my question and for the helpful information. First, you mentioned the potential for evaluation systems to be shipped to a second high bandwidth memory customer. Can you remind us of the current size of the high bandwidth memory opportunity and how much larger it might get with this new customer? Also, if you had to estimate, when do you expect to see production systems for this second customer?

Yeah. So we see numerous opportunities in AI overall, split between GPUs, high bandwidth memory, and advanced packaging. In totality, we've kind of sized that business at about 10% of Veeco's revenue this year. And I think, obviously as we bring on a second HBM memory provider, I would think that would probably drive incremental revenue. I don't have the number right at the tip of my thumb here, but I would say probably $30 million, $50 million over a year, two-year period for that customer. I would say, Dave, at this point, we are in the demo phase and not yet to the point of an evaluation agreement. So from the time we place an eval, that would probably be a year of evaluation plus integration. So I don't believe we would expect any revenue in 2024, and maybe this would probably be out more in mid-2025 timeframe.

Could you clarify the potential size of the high bandwidth memory opportunity? Specifically, how much revenue do you expect Veeco to generate from that market in 2023 or 2024?

Yeah. It's hard to say, David, here's why. Last quarter, we became qualified with our first customer in HBM. We've now learned that we're qualified in their more advanced generic memory. And so for us, we can't now know before I could say these shipments were going to high bandwidth memory, but now we don't really know what's the mix between high bandwidth and standard memory. So it gets very hard for us to look at it in totality. But if I step back and look at it at a higher level in laser annealing, we see ultimately the opportunity in aggregate for laser annealing to be a $900 million market in 2027. And about half of that in memory. The mix between …

I was going to…

Go ahead, Dave.

Just to clarify. So you basically said your first high bandwidth memory customer has now taken your LSA product not just into high bandwidth memory, but into standard DRR5 and other products.

Yes.

Okay. Did you have anything to add to what you were saying because I interrupted you?

No, I'm fine. Thanks, Dave.

Okay. And then, this nano LSA, TAM information, thank you very much. That was awesome. Do you think the applications in the foundry logic business are going to be tied to backside power and gate all around? Or is that the way we should be thinking about it and that's when we would expect the ramp of that type of revenue? Or maybe just elaborate a little bit more for us. Thanks.

Yeah. I would say, yes, there are opportunities in backside power distribution that customers are very interested in evaluating our nanosecond annealing tool for, but there are also other applications that they're just starting to explore things like void reduction, recrystallization, and really we haven't sized those markets, but when we talk to customers, they're very interested in trying those types of applications out with this new product.

Could you provide an update on when you expect to have demos and evaluations for the epi tool for silicon carbide? Also, I understand you use a single wafer approach, while others in the market prefer a batch approach. What is the reasoning behind your approach, and what do you see as its advantages? Thank you.

I would say, Dave, that we are on track with our plan following the acquisition of our silicon carbide epi equipment company in January of this year. We have a tool operating in Somerset, New Jersey, and we are running films. We've demonstrated a high growth rate, good film quality, and uniformity, and we're making progress on our demo activities. Our goal is to be demo-ready by the end of the year, and we are working diligently toward that, aiming to place a few silicon carbide evaluation systems in the field next year. I believe we are on schedule with the original plan we established. Regarding your question on single wafer versus batch, we have spoken to many Tier 1 customers in the industry, and we feel very confident in our single wafer approach. Currently, there is no solution on the market that meets all our customers' needs. Customers have expressed their appreciation for the simplicity of the machine after interacting with it, and they value the design's capability to transition smoothly during maintenance cycles. Since these tools require significant maintenance, which adds to the cost of ownership, and given the number of machines in these fabs, it's crucial that they are operable without necessarily requiring PhD-level expertise. Veeco has a strong history of successfully deploying large fleets of equipment, and we are quite comfortable with our position in the silicon carbide market today.

Thank you.

Thanks, Dave.

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

Thank you for the question. Congratulations. Another good quarter. Just was wondering, in terms of your data storage business, are there opportunities as we transition into Hammer type technology for upgrades that you would expect next year or this year also?

There may be some opportunities, but I would not consider them a major contributor to our business. A more interesting aspect is that as Hammer gains wider adoption, the complexity of its head increases, which should lead to a higher number of deposition and X steps. This, in turn, could create a favorable situation for equipment demand as Hammer becomes more commonly used.

Okay. Your guidance for this quarter and also last quarter, margins have come up. I'm just wondering about your current backlog. What does the margin profile look like similar to what you've been seeing in the last two quarters?

Yeah. I think, Mark, we've been working quite hard on improving our gross margins. That's been a real focus for the company. And you're right, we've increased our gross margin as the year progressed. We did see some favorable areas in terms of providing that gross margin improvement, and things like, getting better efficiencies, better utilizations, as we think about our manufacturing, our servicing of customers, and we've spent quite a bit of effort on that. I'm not going to specifically give a guide going into next year for gross margin. But I would say that we continue to make progress against our target margins. And we'll give as much effort next year as we gave this year to improve gross margins going forward.

Thank you.

Thanks, Mark.

Thank you. There are no further questions at this time. I would now like to turn the floor back over to CEO, Bill Miller, for closing comments.

Thank you, operator. 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. Goodnight and have a great evening.

This concludes today's teleconference. You may now disconnect your lines at this time. Thank you for your participation.