Veeco Instruments Inc Q4 FY2024 Earnings Call

Ladies and gentlemen, greetings, and welcome to the Veeco Fourth Quarter and Full Year 2024 Earnings Conference Call. At this time, all participants' lines are in a listen-only mode. A brief question-and-answer session will follow the formal presentation. As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, 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 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 discuss non-GAAP financial results. We encourage you to refer to our reconciliation between GAAP and non-GAAP results, which you can find in our press release and at the end of the earnings presentation. With that, I will turn the call over to our CEO, Bill Miller.

Thank you, Anthony. 2024 was another successful year for Veeco. We reached several important milestones, grew the business, delivered solid profitability, and strategically invested in several exciting long-term growth opportunities. Beginning with strategic milestones, as announced in a press release earlier today, we shipped an LSA system to a leading-edge semiconductor company for high-volume production of 2-nanometer gate-all-around logic chips. We also reached an agreement to ship an LSA evaluation to a second leading memory customer in 2025, and we shipped a 300-millimeter gallium silicon evaluation system to a Tier 1 power device customer, with this customer providing positive feedback. Revenue from our semiconductor business reached another record in 2024, outperforming WFE growth for the fourth consecutive year. Our robust performance was primarily driven by record laser annealing revenue, including growth in LSA shipments to mature node customers as well as leading-edge shipments for high-bandwidth memory and gate-all-around. Another key driver of growth came from wet processing, where our system is production tool of record for 3D packaging for AI. While investing for growth is core to our long-term strategy, expanding profitability is also important. In 2024, we successfully grew non-GAAP operating income and EPS while continuing to invest in our largest SAM expansion opportunities. Switching gears to our full-year financial highlights. Veeco delivered top and bottom line growth with results coming in above the midpoint of our updated 2024 guidance. Revenue totaled $717 million, growing 8% from the prior year led by a 13% year-over-year growth in our semiconductor business. Non-GAAP operating income grew 6% to $116 million, and diluted non-GAAP EPS grew to $1.74. Now, before a look at our Q4 highlights. Revenue in the fourth quarter totaled $182 million, increasing 5% year-over-year. Non-GAAP operating income was $27 million, and non-GAAP EPS was $0.41. Our semiconductor business delivered another solid quarter of revenue highlighted by record laser annealing revenue, including shipments to two leading-edge customers' gate-all-around nodes. I'll now provide an overview of Veeco's role in the semiconductor manufacturing process as well as an update on key technologies driving our business today. Veeco technologies are critical for several leading-edge semi-manufacturing process steps. Leading-edge customer road maps require the most advanced annealing solutions to address scaling challenges associated with shrinking geometries and new architectures. Device scaling with incumbent technologies is becoming more challenging, and as a result, the number of steps available to laser annealing in both logic and memory is increasing. Veeco is the market leader in laser annealing with our laser spike annealing system qualified as the production tool of record for leading logic customers and one Tier 1 memory customer. Our recently launched next-generation NSA system expands laser annealing capabilities to enable precise anneals at a nanosecond dwell time and is under evaluation at two advanced logic customers for several new applications. Veeco is also the industry leader in ion beam deposition for EUV mask blanks with our IBD EUV system, enabling deposition of defect-free films for EUV mask blank production. Our ion beam deposition technology is critical to the industry's roadmap and is expanding to adjacent mask blank steps as customers continue to explore new use cases. The growing need for energy-efficient computing is driving the semi-roadmap to consider new materials and technologies to scale, optimize performance, and reduce power consumption. As device geometries continue to shrink, incumbent technologies struggle to lower resistivity, driving Tier 1 logic and memory customers to consider new solutions. Veeco's recently launched IBD300 system differentiates itself from incumbent technologies through its ability to preferentially deposit low-resistance metals. This can result in improved thin film properties and lower resistivity for critical metals in logic and memory, which directly impact device performance, speed, and battery life. Looking ahead, we're highly focused on working with Tier 1 customers to integrate our technology into their manufacturing processes and evaluate new applications. In advanced packaging, our wet processing system is the production tool of record at a leading foundry, HBM manufacturer, and OSATs. Our system's ability to support challenging process capabilities has enabled our strong position in 3D packaging for AI, which drove strong growth in 2024 and expectations for growth to accelerate in 2025. And in advanced packaging lithography, capacity expansions in the AI and mobile markets have led to expectations of recovery in 2025, driven by a broad range of customers. Our strategy in the semiconductor market has been focused on expanding our served available market by investing in core technologies to enable industry inflections. Veeco technologies have exposure to leading-edge inflections in logic, memory, and advanced packaging, enabling technology transitions such as gate-all-around, high-bandwidth memory, EUV lithography, and 3D packaging for AI. In annealing, we forecast our SAM to grow from approximately $800 million to around $1.3 billion. We expect this to be driven by an increase in laser annealing intensity as logic and memory customers adopt laser annealing to address new challenges. In ion beam deposition, we project our SAM to grow to approximately $350 million for high-value front-end semiconductors requiring critical film performance. Growth in AI is accelerating adoption of new technologies and materials that enable device scaling and address the growing need for energy-efficient compute performance. We believe our IBD300 system has unique capabilities that can address each of these high-value challenges. In ion beam deposition for EUV mask blanks, we project our SAM to increase to over $120 million as ASML expands EUV and high NA capacity, and customers adopt our systems for new applications. And in advanced packaging, we see SAM expansion opportunities for our enabling wet processing technology for an increasing number of applications supporting AI and high-performance computing. As we look ahead, we believe our portfolio of enabling technologies for key inflections positions our semi business to outperform WFE over the long term. I'd now like to provide additional detail on our evaluation program. Our evaluation program is essential to expanding our position in logic and memory, and we're investing in several evaluation systems to capture our largest SAM growth opportunities. Many evaluations are targeting several applications, which can result in follow-on business between $30 million to $60 million per application win, assuming 100,000 wafer starts per month. While the timing of adoption by system, customer, and market will vary, customers are excited about the value proposition our technologies offer, and we're highly focused on executing. With that, I'll turn it over to John for a financial update.

Thank you, Bill. Starting with revenue for the year. Revenue came in at $717 million, increasing 8% over the prior year. Our semiconductor business delivered $467 million in revenue, up 13% year-over-year and comprising 65% of revenue. Growth in the semiconductor market was largely driven by our laser annealing and advanced packaging wet processing systems. Compound semiconductor revenue totaled $78 million, a decline from the prior year representing 11% of revenue. Data storage revenue totaled $99 million, increasing 12% year-over-year and comprising 14% of total revenue. And scientific and other revenue was $74 million, a slight decline from the prior year, making up 10% of revenue. Moving to revenue by region. China comprised 36% of revenue, up from the prior year, driven by growth in sales to semiconductor customers. Our Asia Pacific region, excluding China, made up 32% of revenue, led by shipments to semiconductor customers. United States totaled 23% of revenue, primarily driven by data storage customers. And lastly, EMEA was 9% of revenue for the year. Our order backlog ended the year at approximately $410 million, down approximately $80 million from the prior year, primarily attributed to our data storage business. Now, looking at our full year 2024 non-GAAP operating results. Gross margin came in at 43.3%, relatively consistent with the prior year. Operating expenses increased 8% to $194 million, primarily driven by an increase in R&D investment. Operating income increased 6% from the prior year to $116 million and net income increased to $104 million with tax expense of $15 million, yielding an effective tax rate of 12%, an increase from 10% in the prior year. Diluted EPS increased to $1.74 for the year on 61 million shares. I'll now provide selected GAAP full year data. Amortization expense was approximately $7 million, our equity compensation expense was $36 million, depreciation $18 million, and net interest income was approximately $2 million. GAAP net income of $74 million included a $28 million impairment charge resulting from our silicon carbide business not meeting our market expectations. This charge was offset by a $21 million gain from a reduction in the estimate of contingent consideration and $12 million in related tax benefits, resulting in a net benefit of approximately $5 million. Turning to Q4 revenue by market and geography. Revenue came in at $182 million, up 5% from the prior year and down 1% sequentially. In line with our prior forecast, semiconductor revenue declined sequentially after a quarterly record in Q3, comprising 62% of revenue. In the compound semiconductor market, revenue increased from the prior quarter to $23 million, totaling 13% of revenue. Data storage revenue declined to $14 million, comprising 8%. And as previously expected, scientific and other revenue increased to $33 million from $12 million in the prior quarter, which included shipments for quantum computing and research applications. Scientific and other made up 18% of revenue during the quarter. Turning to quarterly revenue by region. The percentage of revenue from China increased to 39% due to an increase in semiconductor sales. Revenue from the Asia-Pacific region, excluding China, was 31%. The United States came in at 19%, and lastly, EMEA was 11%. Switching gears to our non-GAAP quarterly results. Gross margin totaled approximately 41.5% below our guidance, driven by a shift in product mix and additional spending for our evaluation programs. Operating expenses totaled $48 million at the low end of guidance. Income tax expense was approximately $4 million, resulting in an effective tax rate of approximately 14%. Net income came in at approximately $24 million, and diluted EPS was $0.41 on 60 million shares. Now, moving to the balance sheet and cash flow highlights. We ended the quarter with cash and short-term investments of $345 million, a sequential increase of $24 million. From a working capital perspective, our accounts receivable decreased by $35 million to $97 million, primarily resulting from the timing of when customer payments were due. Inventory increased by $5 million to $247 million, and accounts payable declined by $6 million to $44 million. Customer deposits included within contract liabilities on the balance sheet decreased by $11 million to $49 million. Cash flow from operations increased from the prior quarter to $28 million, bringing our total for the year to $64 million, and CapEx totaled $5 million during the quarter and $18 million for the year. Turning to our Q1 outlook. Q1 revenue is expected to be between $155 million and $175 million. We expect gross margin of approximately 42%, OpEx between $47 million and $49 million, net income between $16 million and $22 million, and diluted EPS between $0.26 and $0.36 on 61 million shares. Turning to some additional color beyond Q1. Based on market conditions and our visibility, we expect Q2 revenue to be in a similar range to Q1 levels. I'll now provide qualitative commentary for each of our markets. Beginning with the semiconductor market, we continue to expect a decline in investment for mature node customers in China. Outside of China, growth in AI and high-performance computing is driving an increase in leading-edge investment in areas such as gate-all-around, high-bandwidth memory, and advanced packaging. As a result, we expect AI revenue to grow to 20% or more of revenue in 2025 from approximately 10% in 2024. We continue to advance our roadmaps in laser annealing, ion beam deposition, and advanced packaging and are well-positioned to take advantage of growth in leading-edge investment. In the compound semiconductor market, we continue to see opportunities in solar and photonics, which provide potential for revenue growth beginning in late 2025 into 2026. We also remain excited about the potential to expand in GaN Power without 300-millimeter GaN on silicon solutions. In data storage, our expectations are for approximately $60 million to $70 million decline in revenue in 2025. And in scientific, we're continuing to see strength in research areas like quantum computing, which have the potential to provide growth in 2025. Before we turn the call over to Q&A, I'd like to highlight why we believe Veeco is a compelling investment opportunity. First, some industry analysts and leading equipment providers project growth of the semi-industry to over $1 trillion in the 2030 timeframe, contributing to expectations for long-term growth in wafer fab equipment spending. Second, Veeco has a portfolio of enabling technologies that are increasingly critical for several leading-edge inflections. Third, we believe our exposure to several high-growth areas of the market can enable our SAM to grow faster than growth in WFE spending. And fourth, we expect our investment strategy and 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&A.

Thank you. Ladies and gentlemen, we will now begin the question-and-answer session. The first question comes from the line of Charles Shi from Needham & Company. Please go ahead.

Hi, good afternoon. A couple of questions. I want to start with China. I think that you guys provided qualitative guidance that China will decline this year. That's the same you've had for a while. But I want to ask about Q1, all the peers who reported before you, some of them seem to be guiding to flattish China in Q1, but some are probably seeing more of an immediate drop in China revenue. So what do you see into Q1? And since I believe China probably accounts for a good amount of the backlog. Supposedly, you have good visibility on how much China can decline. Mind me if you give us a little bit more than quantitative and anything you can provide quantitatively, that would be great.

Sure, Charles. I'm happy to do so. So we do have good visibility into the first half of China and backlog, and we expect our China revenue in the first half of 2025 to be about 25% to 30% of total revenue, down from last year; China for the full year, it was about 36% of our total revenue, with that slightly more weighted to Q1 than Q2.

Got it. Thanks, John. That's very helpful color. The other question I want to ask you is more on the advanced packaging side. I did notice you talked about the wet processing product, and it looks like you already saw strong growth for last year. Do you think it will accelerate in 2025? Mind if you provide us a little bit more color on what's driving that and maybe a little more quantitatively? Do you see more of the acceleration in the first half or in the more immediate quarter, or are you seeing something more coming up in the second half of the year?

Yes. Good afternoon, Charles. We're really excited about the advanced packaging opportunity. We see this as an opportunity doubling in 2025 over 2024, and that's largely driven by wet processing. So we're really benefiting from capacity expansions at a leading foundry and HBM manufacturer, as well as multiple OSATs. So we see this as a multi-year opportunity. Also in lithography, our business in 2024 was pretty modest, and we're seeing that business pick up with a lot of breadth in advanced packaging as well. So as I said, our advanced packaging, including wet processing predominantly and secondarily lithography, is doubling, from $75 million to $150 million.

That's a full year comment, right? $75 million to...

Yes.

Okay. Any color on…

Yes. I would say, John, it's ramping, but it's going to probably continue to grow from Q1 into Q2 and Q3, I think through the year.

Yes. And so we entered the year with a good backlog. And maybe, Charles, this ties back to your first question a little bit as well about visibility into the backlog. We're entering 2025 with virtually the same backlog in semiconductors that we started the year with. So the backlog is flat. But the composition in the backlog is different. At the beginning of the year, we had a higher concentration of backlog with our China customers for their mature business. As we enter 2025, a higher concentration and an increase in the semi backlog come from areas like two-nanometer gate-all-around and advanced packaging. So we've got reasonable visibility there as well.

Thanks. I really appreciate the color. Thanks. I will be back in the queue.

Thanks, Charles.

Thank you, Charles.

Thank you. The next question comes from the line of Rick Schafer from Oppenheimer. Please go ahead.

Hi. This is Wei Mok on the line for Rick. Thanks for taking my question. Congrats on your NSA shipments. This customer looks like it's separate from the other two customers that you currently have on the NSA evaluation program. So I was wondering, has this customer been on the evaluation program before? Or what are you going to comfort and the decision to make this purchase ahead of the other two that are still on evaluation?

So this shipment was part of a multi-tool laser system order from this customer in 2024. Their aim is to enter the market at the 2-nanometer gate-all-around. This was not for evaluation; it was a direct sale. We are now qualified for all advanced logic customers targeting gate-all-around nodes for LSA. We anticipate growth in gate-all-around to accelerate in 2025 with these customers. Regarding the NSA evaluation you mentioned, those evaluations are progressing well, and the customers are considering us for multiple applications.

Great. Thanks. I appreciate that. I just wanted to go back to a question on China. I know in the past, you guys commented on seeing China exposure normalizing to around 20% or getting back there. So in light of the export restrictions and everything parts, so I guess you're not seeing any direct impacts on that in the first half of the year. So is it fair to say that you're seeing more of that coming in the second half of the year? And anything has changed with that 20% China bogey? Could it be lower? Thanks.

So thanks for the question, Wei. Yes. What we've seen from changes in regulations really didn't have an impact on our near-term view on China. We didn't have backlog with customers that were added to the entity list for systems backlog, nor did any regulations come out that change licensing requirements for our products. So in the near term, it's not an impact. Our long-term view of regulations, how regulations may change and what the impact there is. Our view on China had been that we were seeing less of these new opportunities or new fabs and new projects coming being funded or invested in. That's what had us say that we see business slowing down for China, as equipment purchases over the last couple of years get digested, and that we have good visibility for about half a year. As I said in an earlier question, we see about 25% to 30% of our total revenue coming from China in the first half of the year and a lesser number in the second half of the year.

Great. Thank you.

Thank you, Wei.

The next question comes from the line of Mark Miller from Benchmark. Please go ahead.

I'm just wondering if you can provide some more color on high-bandwidth memory. And also NAND reported very strong sequential improvements in shipments to the NAND customers. I'm just wondering what you’re seeing, if you're seeing anything in NAND?

We currently do not have any involvement in NAND. While we are at the stage of conducting preliminary demonstrations with our nanosecond annealing system in NAND, we have not initiated any evaluations yet, so we have minimal exposure there. In the area of high-bandwidth memory, our LSA systems are officially recognized as a production tool with one DRAM customer. We have successfully secured their logic die and peripheral logic at each level of the high-bandwidth memory stack. Additionally, we recently announced a new agreement with a second DRAM customer, and we plan to start an evaluation around mid-2025. Looking ahead to 2025, as the business develops in HBM, we expect to ship volume in 2024 as well.

Okay. Thank you.

Thank you, Mark.

Thank you. The next question comes from the line of Gus Richard from Northland Capital. Please go ahead.

Yes. Thanks for taking my question. On the LSA, I want to make sure I understand. Have you been qualified for gate-all-around with LSA?

Yes. All the customers were qualified for the gate-all-around.

Okay. And then is NSA being looked at by the logic guys for the incremental application backside power?

They are evaluating various applications for extending more traditional front-side annealing, as well as exploring backside options. When considering growth drivers for 2025, we anticipate that gate-all-around will significantly accelerate, possibly doubling our results in 2025 compared to 2024. This growth should help offset some of the challenges we face in China, as mentioned by John earlier.

Got it. And then just in terms of your hard disk drive revenue at this point, I'm assuming that, that is just purely spares and service?

Yes. Yes, correct. We didn't really have any significant systems bookings in 2024. And given our lead time, that window is closed on 2025 systems revenue.

I understand. Just out of curiosity, on the scientific side and others, there's typically a surge in budget spending in the fourth quarter. You had an outstanding quarter there. Are you anticipating a similar revenue range? Or is quantum computing starting to create additional demand for tools that serve that market?

Gus, I would say we are seeing an increase in quantum computing activity year-over-year. So these are larger systems. They're going to show up kind of lumpy in our numbers, whether we have a system or two or we don't on top of our base scientific business. So we're forecasting our scientific segment to grow in 2025.

Okay. And I'm assuming that's molecular beam epitaxy?

Correct, yes. They are kind of Frankenstein-type tools. They may have an ALD off the side of it, but largely they're predominantly MBE with modifications.

Got it. So the price tag is more than single-digit millions?

When they're all packaged together, they can be over $10 million. They may come in as separate bits, but yes, they are big opportunities. That's why they're pretty lumpy.

Got it. All right. Thank you very much.

Thank you, Gus.

Thank you. The next question comes from the line of Dave Duley from Steelhead Securities. Please go ahead.

Yes. Thank you very much for taking my question. I guess just to start with you talked about the first half of the year. Could you give us an idea of what you think for total revenue is first half versus second half? And then the same thing for semi. That would be very helpful.

Yes. So, yes, Dave, let me try to cover that by the markets for the full year. I'll start with data storage. We expect that the data storage revenue to be down about $60 million to $70 million year-on-year; we're not expecting to ship systems to customers and just a service and aftermarket business there. If I look at the semiconductor market, there's really, as we've described on this call so far, really two elements to the semiconductor market for 2025. We do see the opportunity for that market to have growth in 2025. On one side, we expect the China business to be down. On the other hand, Bill has mentioned that we expect our advanced packaging business and our business supporting gate-all-around to have the opportunity to double. Therefore, taking that into consideration we see the potential for growth in the semiconductor business despite the China headwinds. I would say for the compound semiconductor side, we are coming off low volumes in 2024, but we do see some opportunities in solar and photonics providing the opportunity for revenue growth in the second half of the year in that segment. As Bill just mentioned, we expect strength in areas like content computing as well on the scientific side that we do see an opportunity for growth there.

Okay. And essentially, you've already kind of taken the down draft in the hard disk drive business. So, now all these moving parts really come down to the semiconductor growth outside of China versus the semiconductor decline inside of China. Is that kind of...

Correct. I think when you merge those together, our view is that's flat to up.

Okay.

And it's clear the first half to the second half. We're not totally clear yet how that's going to go.

Okay. And then there's been a lot of chatter on HBM spending. Some customers seem to have been qualified and are moving forward with spending and some others aren't. In total, what would you expect your HBM business to do in 2025 versus 2024? I can't remember if you've actually quantified how big it is. If you could help us understand how meaningful it is, that would also be great.

Yes. I would say, we've been shipping high-bandwidth memory laser annealing tools to one customer where we are qualified, and our view is that will remain robust for 2025. As I said, we just entered into an evaluation agreement with the second customer, and that tool is going to ship in the middle of 2025. So that's not going to have any revenue impact on 2025. Our HBM revenue is nearly flat and steady with this one customer.

Okay. As we look at the NSA evaluation and when we expect to see NSA ramp up into volume production, can you help us understand how much of this will be truly additive versus how much might overlap with applications we've already secured that could have been addressed by an LSA tool?

A lot of the applications are probably incremental, with over 80 percent being new. We are making significant modifications by only altering the shallow surface rather than heating the entire structure. This results in a machine operation that is quite different from our traditional laser annealing system. However, in some gate-all-around applications, we might see an incremental addition for gate-all-around annealing, which could involve nanosecond annealing while still retaining the laser annealing steps. Overall, I would say that it is primarily incremental rather than cannibalistic.

Okay. Thank you.

Thank you, Dave.

Thank you. The next question comes from the line of Mark Miller from Benchmark. Please go ahead.

I just want to revisit where you're at in the ion beam for thin tungsten films. I believe you were in two customers, anything new there?

Yeah. We have two tools at DRAM memory makers. We're continuing to work with them and we probably will continue that through 2025. There's a lot of customer engagement. And as you know, Mark, this is a pretty exciting opportunity to introduce the fourth deposition technology into the fab, which is quite exciting. The customers are engaged, and we're jointly working together through integration issues, downstream integration issues to incorporate the ion beam deposition system into their production line. So I would say, I expect that evaluation to continue throughout 2025 at both customers with high engagement.

Can you give us an estimate of the potential for follow-on orders in that business?

We estimate that for memory-type applications, the cost is likely between $30 million and $40 million per application per node for each customer based on 100,000 wafer starts.

Thank you.

Thank you, Mark.

Thank you. The next question comes from the line of Dave Duley from Steelhead Securities. Please go ahead.

Yeah. I wanted to just slip one more question in here. Regarding the gross margins through the first half of the year and perhaps in the second half, given the mix that you expect from all your segments. You sound like you have a pretty good idea about the directional pieces of the business. How should we think about gross margins progressing through the year?

We ended 2024 with a gross margin of 43%, and we anticipate that gross margins for 2024 will be around 42%. The main reason for this expectation is the decrease in revenues from our customers in China and in data storage, which impacts our gross margins since these areas typically have higher margins. While we do expect growth in the advanced packaging sector, which usually has slightly lower margins, we have several ongoing initiatives aimed at improving gross margins. These include enhancing manufacturing efficiencies and other operational improvements. Currently, we expect gross margins to be closer to 42% as we move into 2025.

Do you think that the 42% will decline with the change in business, given that there is a reduction in China and essentially no hard drive systems business?

That's what I'm saying. That's the principal reason we're seeing and calling about a 42% gross margin for 2025 coming down from about 43% in 2024.

Okay. Thank you.

You're welcome.

Thank you.

Thank you. As there are no further questions, I now hand the conference over to Bill Miller, CEO, for his closing comments.

I'd like to thank our customers and shareholders along with the Veeco team for their continued support. Have a great evening. Bye.

Thank you. The conference of Veeco has now concluded. Thank you for your participation. You may now disconnect your lines.