Veeco Instruments Inc Q1 FY2024 Earnings Call

Greetings, and welcome to the Veeco Q1 2024 Earnings Call. A question-and-answer session will follow the formal presentation. If anyone should require operator assistance. As a reminder, this conference is being recorded. It is now my pleasure to introduce Anthony Pappone, Head of Investor Relations. Thank you. You may begin.

Thank you, and good afternoon, everyone. Joining me on the call today are Will Miller, Veeco'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 makes 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. 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 turn the call over to our CEO, William Miller.

Thank you, Anthony. Veeco started the year with top and bottom line results towards the high end of our guidance. Revenue totaled $174 million, non-GAAP operating income, $29 million, and non-GAAP EPS of $0.45. Semiconductor revenue totaled a record for the second consecutive quarter, primarily driven by strong demand for our laser annealing systems. As announced in our press release earlier today, a customer placed a multitool laser annealing order, including a nanosecond annealing system for their 2-nanometer gate all around process. We're looking forward to supporting their future ramp plans. I'd now like to provide an overview of the technologies driving business today, our served available market expansion opportunities, and our investment strategy. Our portfolio of technologies, highlighted by our new products, is gaining traction, and we continue to expand our footprint to new applications. New device architectures and shrinking geometries require the precision of advanced annealing solutions to increase performance. Our LSA systems continue to gain share in customers' most advanced nodes, as evidenced by several recent wins. In ion beam deposition, our systems are the technology of choice to deposit defect-free films for EUV mask blank production, and we're working closely with industry leaders to enable their road maps. Looking ahead, we're well positioned to serve growing demand for EUV lithography as well as next-generation high NA lithography. Our wet processing solutions are used for advanced packaging applications, and we continue to see strong demand for high bandwidth memory. During the quarter, we shipped several FlexClean systems and received follow-on orders from leading foundry and memory customers. Veeco's strategy of investing in advanced logic and memory has enabled our semiconductor business to outperform WFE growth for three consecutive years. Moving forward, we're investing in new technologies to expand our served available market to a broad range of new applications. Beginning with laser annealing, we expect our served available market to grow from $600 million to over $1 billion, inclusive of both our laser spike annealing and nanosecond annealing products. We continue to receive follow-on LSA business for high bandwidth memory and are making progress towards winning additional memory customers. We're equally excited to expand our nanosecond annealing SAM to a broad range of advanced logic and memory applications. In ion beam deposition, we see opportunities for our SAM to grow to $350 million for front-end semiconductor applications where low resistance metals are critical. And in the compound semi market, we're focused on long-term opportunities within power electronics and photonics. Investment in our evaluation program has been essential to our growth strategy and will remain a top priority. We have two nanosecond annealing and two ion beam deposition evaluation systems outstanding with leading logic and memory customers. Each are progressing well, and our team is highly focused on executing. We're also targeting an LSA evaluation system to a second leading memory customer later this year in addition to evaluation shipments in the compound semiconductor market. I'd now like to take a deeper dive into two of our largest opportunities in the semiconductor market. Device scaling challenges at our customers' most advanced nodes are driving the need for new annealing capabilities. Our nanosecond annealing technology offers a substantial opportunity to broaden adoption of laser annealing to new logic and memory applications. Due to our unique laser architecture, our system can achieve a lower thermal budget and shorter dwell time versus today's most advanced annealing solutions. This results in a shallow anneal that can impact only tens to hundreds of nanometers into the wafer, enabling industry inflections such as backside power delivery and 3D devices. Our NSA system can also improve performance by changing the structure and properties of the device, opening the door to several material modification steps. As we look ahead, we see potential for initial high-volume manufacturing orders from logic customers in 2025. We're also pleased to see strong pull from memory customers excited to evaluate our system's new capabilities. Turning now to ion-beam deposition for 300-millimeter front-end semiconductor applications. Veeco is the industry leader in ion beam deposition technology, which is a key enabler in driving aerial density growth in the hard disk drive industry over decades. This core technology has direct applicability for advanced semiconductor wafer level manufacturing by solving our customers' high-value challenges. As device geometries continue to shrink, low resistance metals are essential to maintaining device performance and traditional deposition technologies are struggling to address scaling challenges. Our ion beam deposition technology differentiates itself from incumbent technologies through its ability to achieve superior thin film properties, making it ideal for advanced applications where low resistance films are critical. Based on Tier 1 customer data, our ion beam deposited tungsten and rejection films are demonstrating lower resistance compared to traditional deposition technology. In DRAM, this enables tungsten bit line scaling while maintaining electrical performance of the device. For logic, ruthenium metallization can enable new integration schemes at future nodes. Looking ahead, we see potential for high-volume manufacturing orders from memory customers in 2025. I'd now like to touch upon artificial intelligence and the role Veeco plays in the AI chip manufacturing process. Growth of AI is having a profound impact on leading-edge product road maps, requiring the most advanced technologies to manufacture higher-performance AI chips. As we look ahead, we expect several Veeco technologies to benefit from growing demand for AI chips. Our LSA systems for transistor formation and IVD systems for EUV mask blanks are our production tools of record for GPUs and HBM DRAM. Equally as important, we see future opportunities for our nanosecond annealing and ion beam deposition solutions for each of these applications. With that, I'll turn it over to John for a financial update.

Thanks, Will. Turning first to our revenue for the quarter. Revenues came in at $174 million, above the midpoint of our guidance range, up 14% from the prior year and flat sequentially. The Semiconductor revenue increased 29% year-over-year and 5% sequentially to a record $120 million, comprising 69% of total revenue. Sales to the semiconductor market continue to be driven by strong demand for our laser annealing systems. In the compound semiconductor market, revenue increased from the prior quarter to $21 million, totaling 12% of revenue. Revenue from our data storage customers contributed 10% and lastly, scientific and other made up 9%. Now turning to quarterly revenue by region. Revenue from the Asia Pacific region, excluding China, totaled 42%, an increase from 34% in the prior quarter driven by semiconductor customers. The percentage of revenue from China totaled 37% during the quarter, in line with the prior quarter, led by South to mature node semiconductor customers. Revenue from the United States totaled 16%, followed by EMEA at 5% of revenue. Switching gears to our non-GAAP quarterly results. Gross margin totaled approximately 44%, above the high end of our guidance. Operating expenses totaled $48 million in Q1, in line with guidance. Tax expense for the quarter was approximately $4 million, resulting in an effective tax rate of 13%. Lastly, net income came in at approximately $26 million and diluted EPS was $0.45 on 60 million shares. And moving to the balance sheet and cash flow highlights. We ended the quarter with cash and short-term investments of $297 million, a sequential decline of $9 million. From a working capital perspective, our accounts receivable increased by $4 million to $107 million. Inventory increased by $5 million to $243 million, while days of inventory declined to 218 days and accounts payable increased by $12 million to $54 million. Customer deposits included within contract liabilities on the balance sheet declined by $25 million to $72 million. Cash flow from operations came in at $9 million, and CapEx was $6 million. Now turning to Q2 non-GAAP guidance. Q2 revenue is expected to be between $165 million and $185 million, with gross margin between 43% and 44%. We expect OpEx between $46 million and $48 million, net income between $22 million and $29 million, and diluted EPS between $0.38 and $0.48 on 61 million shares. And now for some additional color beyond Q2. Based on our current visibility, we are reiterating our 2024 revenue outlook between $680 million and $740 million. We also continue to target diluted non-GAAP EPS for the full year between $1.60 and $1.90 per share. With that, I'll now turn the call over to the operator to open up Q&A. Thank you.

Ladies and gentlemen, at this time, we'll be conducting questions. Our first question comes from the line of Charles Shi with Needham & Company.

Congrats on the good results, steady execution for another quarter. Maybe the first question, I want to dig a little bit into the laser new product. You guys put out the press release this morning. You may have addressed this before, but I think the top of the mind for a good amount of folks is the nanosecond; is it the incremental opportunity on top of what you already have with the laser new on the best nodes? Or maybe one replaces another, and maybe a little bit of cannibalization going on there?

Yes, Charles, let me give a little background. So we've been working, as you know, on future nodes for many years with our most advanced customers in logic. And our laser spike anneal is qualified at all leading logic customers for their gate all around architectures. Separately, we have NSA or nanosecond evaluations at two of the three leading logic players and have pulled from the third for an evaluation system. So NSA is being evaluated for gate all around, but also backside power distribution and 3D structures. So as you mentioned in that press release, during the quarter, we received both LSA and NSA orders for a new customer for their 2-nanometer gate all around project. But to get to the crux of your question regarding NSA potentially cannibalizing LSA. So historically, the contact annealing stuff for a transistor consisted of multiple anneals followed by an LSA step. As the customers are moving towards gate all around, customers are considering replacing one of the multiple anneal steps with LSA and they're evaluating nanosecond anneal NSA for a follow-on step. Although decisions have not been finalized with our customers, it does appear in gate all around that NSA does not cannibalize, let's say, for gate all around. And that being said, NSA opens up unique opportunities for the company in applications like backside power distributions and 3D structures. So I would say largely, it does not cannibalize LSA.

Got it. Understood. Maybe we'll keep asking you this question. But hopefully, we get a firm confirmation on this being incremental to OSA opportunities. Secondly, I want to ask about the HCM opportunity specifically regarding the LSA for HPM. A couple of quarters ago, there was uncertainty about where the LSA was qualified. Is it the standard DRAM versus HBM? Based on your prepared remarks, you mentioned more assertively that this is going into high bandwidth memory. Just want to confirm, am I overthinking this or is this indeed the case?

Initially, we were qualified in the logic chip for the first level of high bandwidth memory. Now, we've been qualified with one customer for the peripheral logic on the DRAM stack devices. We progressed from having the annealing step on the logic device to adding the peripheral steps on all of the HBM memory stack. Is that clear for you, Charles?

Yes, it seems like that's the foundation, right? I think HPM is the first aspect. However, I would like to delve deeper into the peripheral circuit of each DRAM stack. Isn't that also part of the standard DRAM manufacturing? I'm just trying to understand the extent of the opportunity here. Is it truly confined to the second application, or is it exclusively related to HBM, or does it also encompass all standard DRAM, like DDR5 or more advanced variations?

So that's the area I don't have crystal clear understanding. I think to the first order, the peripheral logic in the HBM stack and in standard DRAM are very similar, but I'm not sure of the exact details of that to answer that affirmatively yet.

This has been very helpful. I'll hop back to the queue.

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

This is Wei Mok on the line for Rick. Congrats on the results and the LSA NSA order announcements. So my question is, considering you guys didn't update your 2024 outlook, is it fair to say that these incremental orders start to ship in 2025? So I was curious, how do you guys think about that outlook looking into 2025?

Yes. So when we gave our guidance for the year, if we ship one system at the end of this year, beginning of next year, the timing really doesn't have a significant impact on our full year view for 2024.

Okay. Great. My next question is on backlog. I think you guys have around $500 million in backlog entering the year led by semi. So considering this backlog, what is the mix of your LSA between trailing and leading edge today? And how does this mix look at the end of the year?

Yes. I would say what we saw in our business in 2023 and into the beginning of 2024 was more laser annealing for the trailing node and particularly China. So that we saw strength there. And that was sort of a change from, if you go back prior to 2020, '23 where we saw typically two-thirds of the business would come from the leading edge. I think as we progress throughout 2024 the expectation is, and we start to see engagements with customers that we would see a pickup in the leading edge in the second half of this year and could probably sort of exit the year with a more balanced backlog.

Got it. And maybe one last question, if I may. It's on NSA. Considering this is next generation and a more advanced technology compared to LSA, how much of like a pricing uplift do you expect from NSA compared to LSA?

Yes. We do expect a higher price for our NSA for the additional capabilities and value there. I would estimate the 10% to 15% higher ASPs would be our expectation.

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

On your compound semi business, can you give us a little bit of update on GaN power and sort of placements of evaluation tools in that market?

Yes, Gus. As you know, we have been putting a lot of effort into focusing our business on power electronics, specifically in silicon and silicon carbide. We have observed a shift from 6-inch to 8-inch production over the past 1.5 years. However, some customers are now aiming to jump directly to 12-inch, especially certain Tier 1 silicon power electronics manufacturers who are keen on incorporating wide bandgap materials into their standard products. We are also preparing to send a 300-millimeter evaluation system to this customer in the upcoming quarters, and we are excited about this transition to 300-millimeter technology.

Got it. And then your hard side business has been kind of lagging. The dry business looks like it's bottoming and starting to turn, are you starting to see more activity there where your spares and service can kind of start to pick up in that market? Or is it just still looking flattish?

I would characterize it, Gus, as clearly our customers have been running at very low utilization. And clearly, that's been reading out in our service numbers in terms of spares and whatnot. I would say when we look at our data storage kind of run rate business weekly and monthly, it's been running at very low levels here. And maybe we've seen a number of weeks, maybe a month or two of a bit of an uptick, but clearly nowhere near the historical run rate. But maybe going in the right direction, I'd say.

Got it. That's helpful. And then the last one for me is on ion beam deposition, a couple of quarters ago, you had a customer that was going to utilize it for EUV mass pellicles. And I was wondering if anything ever came of that, if there was any interest in an additional system? Any color there?

Yes. They're actually, I would say, pressuring us pretty hard to accelerate the shipment of these tools going to ship here in the coming months, and we're prepared to install it and fully support it at the customer. And assuming we have success, I wouldn't be surprised if we have another follow-on order in a year or so.

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

I was looking at one of the slides in your slide deck with the architecture of high-bandwidth memory next to the GPU die. And you talked about earlier to someone else's question that you're working on, I think, both the logic-based logic die and the high-bandwidth memory stack itself. So I was kind of wondering, is that true you're working on both the individual high bandwidth memory and then the base logic die, if that's the case? And then also help us understand what sort of performance improvement the customer gets from using an LSA tool versus a flash annealing tool.

I would say, just to be clear on that cartoon, I don't have it right in front of me at the moment, but I would say the comment was not the GPU kind of left-hand side of the picture, but it was really about the logic underneath the stack. So we were qualified for that. And now, in the cartoon, you see four blue HBM DRAM die, there's actually peripheral logic on each of those four dies. So you can imagine the opportunity, and this is just a cartoon, would be multiplied by the amount of area of time four for the HBM DRAM die. Does that answer your question?

Yes, partially. And then as a follow up, similar to the foundry and logic space, where you've gone from one annealing step to two or three at a couple of these leading customers. I think there's multiple annealing steps in this process as well. Do you think there's opportunity for you to repeat that performance you've seen in high-end foundry and logic to pick up more than one in elite in the stack?

It is possible. Today, we are qualified. My understanding is for just one application step, but there are potential opportunities, and we actually are working with our customers' R&D group to address that. And I would also say that, going back to your previous question on the performance, it's very hard to attach the speed of the HBM device, but I can tell you that the customer does have very high-performance HBM. And I'm not sure it's directly attributable to LSA; if I did, I would love to tell you, but...

Okay. Given that you're likely to grow your HBM business with the current customer, do you anticipate starting to recognize revenue from other customers? In other words, has interest from these other customers increased to the point where things are advancing?

Yes, Dave, we've been doing demos with the other two customers for some time, and we are really pushing to target an evaluation system to that to a second customer by year-end or early 2025 at the latest. So that's an internal goal that we have to try to place the second memory evaluation system. And just like we did in logic, kind of win one customer, win one application and then expand to more applications and more customers. That's definitely part of the plan.

Our next question comes from the line of Mark Miller with the Benchmark Company.

Congratulations on your orders. Just wondering what is your outlook for data storage this year? When do you feel that data storage will start feeling growth from AI-type applications? Are we still a year away there?

Thank you for the question, Mark. I'll begin with our outlook for data storage for the year. Including our spare parts and service, we anticipate our data storage business to be flat to up 10% compared to last year. We have good visibility into our systems and our backlog with confirmed ship dates from customers. I believe that's within a fairly tight range. The potential upside to this range could come if our service business improves faster than we are currently forecasting. Regarding your second question about the impact of AI on the data storage industry, we have spoken with our customers, and two of our largest clients expect generative AI to drive strong long-term growth in data storage. They are predicting growth rates of around 20% CAGR in the medium to long term, which would significantly contribute to a thriving industry and a supportive equipment sector.

There are no further questions in the queue. I'd like to hand the call back to management for closing remarks.

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

Ladies and gentlemen, this does conclude today's teleconference. Thank you for your participation. You may disconnect your lines at this time.