Veeco Instruments Inc Q1 FY2026 Earnings Call

Greetings, and welcome to the Veeco First Quarter 2026 Earnings Call. (Operator instructions were provided.) It is now my pleasure to introduce your host, Alex Delacroix, Head of Investor Relations. Thank you. 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. The 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, the timing and expected benefits of the proposed transaction with Axcelis, 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. Please note that we will not be addressing questions related to our pending merger with Axcelis. We urge you to read the joint proxy statement relating to the transaction with Axcelis. With that, I would now like to hand the call over to our CEO, Bill Miller.

Thank you, Alex, and thank you, everyone, for joining us today. Veeco executed well in the first quarter and we believe we're strategically positioned to benefit from the evolving semiconductor landscape, driven by artificial intelligence and high-performance computing. Reviewing our first quarter results, revenue was $158 million, non-GAAP operating income was $9 million, and non-GAAP diluted earnings per share was $0.14, all within our guidance ranges. Now let me take a moment to highlight our top 5 key takeaways for the quarter. First, we're poised to benefit from the significant industry inflection driven by the global build-out of AI infrastructure. Veeco is well positioned across our portfolio with highly differentiated process equipment aligned with high-growth opportunities. Second, order activity that accelerated in the second half of 2025 continued into the first quarter of 2026, and our pipeline of new opportunities continues to expand. Third, as it pertains to the compound semiconductor market, a stronger-than-expected opportunity has emerged for Veeco to capture multiyear revenue in the production of indium phosphide lasers. This is a result of the broader transition from copper to optics within data centers over the next few years for increased speed and bandwidth to meet the scale-up needs of the AI landscape. This opportunity for Veeco spans across multiple products, particularly for epitaxy and laser facet coatings, which I will provide more details on later in the call. Fourth, from an operational standpoint, we're expanding our manufacturing footprint and capacity to support increasing customer demand and enable timely deliveries. Lastly, as a result of accelerated bookings activity and ongoing customer engagements, we've increased visibility with significant orders for delivery well into 2027. Overall, we believe Veeco is well positioned for durable multiyear growth driven by AI infrastructure and high-performance computing, and we remain focused on disciplined execution to deliver long-term value. Before I move to the next slide, as a brief reminder, we continue to make progress on our proposed merger with Axcelis. The transaction has been approved by shareholders of both companies, and all regulatory approvals have been received other than antitrust approval in China. We remain engaged with the authorities in China and continue to expect the transaction to close in the second half of 2026. Integration planning is progressing well, and we remain excited about the strategic fit and long-term potential for value creation. Moving to the next slide, I'll discuss Veeco's critical role in the semiconductor manufacturing landscape, which represents the majority of our revenue. Capital spending is being driven by AI investments and is becoming increasingly concentrated at the leading-edge areas where Veeco is differentiated in technology. In logic and foundry, Veeco has a long-standing and trusted position supporting advanced annealing applications across leading nodes. Our LSA platform continues to be the production tool of record at all three Tier 1 logic customers, driving repeat business and strong customer engagement, pushing towards more complex device structures with low cost of ownership. At the same time, our next-generation nanosecond annealing platform is progressing through evaluations at Tier 1 logic customers, addressing critical low thermal budget applications such as contact annealing, materials modification and 3D device integration. These evaluations are advancing well, and we're anticipating an additional evaluation tool shipment to a third Tier 1 logic customer in the coming months. Expanding our penetration within our memory customers within the semiconductor market remains one of our most important strategic priorities. The transition toward AI-centric architectures, high-bandwidth memory and increasingly complex stack devices is driving new thermal and materials requirements, where we believe Veeco's technologies provide a clear advantage. During the first quarter, we continued to make solid progress with our top Tier 1 memory customers. In addition to serving as the production tool of record at a leading HBM supplier, we're advancing our LSA evaluation system at a second Tier 1 DRAM manufacturer with the potential for initial pilot line and high-volume manufacturing orders in 2027. We're also extending our memory opportunity through Ion Beam Deposition. Multiple IBD300 systems remain under evaluation at leading DRAM customers with activity extending throughout 2026. The systems enable low-resistance film deposition for advanced DRAM bit line metallization, providing an additional pathway to expand our served available market. Veeco remains a market leader in Ion Beam Deposition for EUV mask blanks, a critical enabling technology as logic and memory customers expand EUV adoption and prepare for high-NA lithography. We also have broadened our exposure to EUV pellicles, which are increasingly required to protect these critical masks as EUV usage scales. Advanced Packaging, supported by our wet processing and lithography tools, continues to be a significant revenue driver from AI-related demand. As we discussed last year, our Advanced Packaging business more than doubled year-over-year, reflecting strong customer adoption and accelerating capacity investments. During the first quarter, we secured major volume orders for our wet processing systems from leading OSAT customers, supporting high-volume manufacturing of next-generation AI accelerators built on 2.5D Advanced Packaging architectures. These systems are scheduled to ship throughout the remainder of 2026 and into the first half of 2027, providing strong revenue visibility. To support this growth, we're continuing to expand our manufacturing footprint and production capacity, positioning the business to meet sustained customer demand as Advanced Packaging plays an increasingly critical role in AI infrastructure. As we turn to the next slide, we outline our forecast served available market within our semiconductor segment through 2030. This outlook continues to be driven by sustained investment in AI and high-performance computing. In annealing, we project the SAM to be $1.3 billion by 2030 as devices continue to shrink and shallower and more precise anneals are required to improve performance. These trends support long-term opportunities for both LSA and next-generation NSA platforms. Next, in Ion Beam Deposition, our IBD300 platform for low-resistance metals, together with our leadership position in IBD EUV mask blanks as well as the emerging opportunity in pellicles where we're the production tool of record at a leading customer, all represent meaningful market opportunity and total a SAM projection of $500 million by 2030. As devices become more power constrained and EUV adoption broadens, the opportunities for our technologies continue to increase. Finally, in the back-end semiconductor process, our Advanced Packaging business for our wet processing and lithography tools continues to expand rapidly, and the SAM is projected to reach $1 billion by 2030. We continue to demonstrate our ability to support our customers' high-volume manufacturing ramps driven primarily by AI. Moving to the next slide. I want to spend time discussing our stronger-than-expected momentum in the compound semiconductor market. We're seeing a clear industry inflection point underscored by NVIDIA's recent investments in optical networking leaders. In silicon photonics, the industry is transitioning from copper interconnects to co-packaged optics as AI data centers require higher speeds, greater bandwidth density and improved power efficiency. Indium phosphide laser manufacturing is a critical component of this shift and a foundational technology for next-generation AI optical infrastructure. As the industry transitions towards future capacity requirements, we believe this represents a growth opportunity of approximately $2 billion over the next several years. Veeco plays a critical role across multiple steps of the indium phosphide laser manufacturing process, and we're seeing rapidly accelerating order demand across several of our product lines. Beginning with epitaxy, MOCVD is a critical step, and we're seeing increasing orders for our Lumina MOCVD indium phosphide platform as leading photonics customers expand capacity to support AI-driven data center growth. We also support downstream process steps with our WaferEtch and WaferStorm wet processing technologies for advanced etching and surface preparation. What I would like to highlight for investors is the laser facet coating and epitaxy opportunities are similar sized and significant for the manufacturing of indium phosphide lasers. Our SPECTOR Ion Beam Deposition system designed for the critical laser facet coating step is essential to the process. Veeco is a market leader in Ion Beam Deposition and is differentiated from traditional approaches such as e-beam evaporation, ion-assisted deposition or PVD. Compared to other approaches, the SPECTOR Ion Beam Deposition tool delivers low loss optical films with tight control of thickness, uniformity and reflectivity. Precision is required for anti-reflective and highly reflective facet coatings on indium phosphide lasers. We have engagements with industry leaders that will drive the growth of our SPECTOR IBD business in 2027 and beyond. As announced in today's press release, we received over $250 million in orders from multiple customers for our MOCVD, wet processing and Ion Beam Deposition tools to support the manufacturing of indium phosphide lasers with delivery starting in 2026 and significantly accelerating in 2027. A large portion of these orders is for our SPECTOR IBD system from leading suppliers of next-generation 800-gig and 1.6 terabit optical transceivers for hyperscale customers. This significant order activity underscores the long-term value of our Ion Beam Deposition technology leadership and our expanding role in this rapidly growing market. We have long-standing partnerships with our customers spanning more than two decades, and we are well positioned across our multiple differentiated products to meet their growing needs in silicon photonics. Our focus remains on supporting customer production ramps, executing early deployments and expanding our footprint to meet customer demand. With that, I'll flip to the next slide to share our projected served available market within the compound semi space. In silicon photonics, specific to the manufacturing of indium phosphide lasers, we project our SAM to be $700 million in 2030. As we discussed on the previous slide, demand is accelerating across several of our products driven by AI data centers. Our Lumina MOCVD batch platform, WaferStorm and Etch and our SPECTOR Ion Beam Deposition for the laser facet coatings are gaining significant traction. Other photonics driving SAM growth include red MicroLEDs, solar cells for low earth orbit satellites and AR/VR applications. Additionally, a global optoelectronics solution provider accepted and qualified our Lumina Plus MOCVD system for high-volume arsenide phosphide production, including for use in MicroLEDs. We expect these other photonics application SAM to total $550 million by 2030. In GaN Power, we project our SAM to be $250 million by 2030 as we continue to see strong long-term drivers tied to AI data center power efficiency, electrification and high-power density applications. Importantly, at a leading power IDM customer, we have an evaluation for our Propel 300 system in place, and we received a pilot line order for a multi-chamber system, which we previously announced at the end of 2025. This represents an important validation point as customers move from development to early production. Looking ahead, as this customer ramps and finalizes long-term capacity plans, there is potential for additional system orders in the second half of 2026 for delivery in 2027. In the next several years, we expect our compound semiconductor served available market opportunity to meaningfully grow as AI, power efficiency and advanced connectivity continue to reshape the industry. I would now like to hand the call over to John to walk through the financials.

Thank you, Bill. Revenue came in at $158 million, slightly below the midpoint of our guidance and the previous quarter. Our semiconductor business reported $109 million, a decline of 1% and comprising 69% of revenue. Revenue in the semiconductor market was largely driven by laser annealing systems for leading foundry, logic and memory customers and wet processing systems for Advanced Packaging. Compound semiconductor revenue totaled $19 million, a 6% decline from the prior quarter, totaling 12% of revenue. Data storage revenue was $10 million, flat to the prior quarter, representing 6% of revenue. Scientific and other revenue declined 16% to $20 million, comprising 13% of revenue. Turning to the quarterly revenue by region: revenue from the Asia-Pacific region, excluding China, was 57%, no change from the prior quarter. Sales were driven by leading semiconductor customers in Taiwan for our laser annealing systems and wet processing systems for Advanced Packaging. The U.S. accounted for 20% of revenue, an increase from the previous quarter, primarily from semiconductor customers. Our China portion was 13% of revenue, a decrease from the previous quarter. EMEA and the rest of the world accounted for 10% of revenue. Turning to the first quarter non-GAAP results: first quarter gross margin came in at 36% and operating expenses totaled $49 million. Income tax expense was approximately $1 million, resulting in an effective tax rate of approximately 11%. Net income was approximately $9 million and diluted EPS was $0.14 on 62 million shares. Moving to the balance sheet and cash flow highlights: we ended the quarter with cash and short-term investments of $383 million, a decline of $7 million. From a working capital perspective, our accounts receivable increased by $40 million to $151 million. Inventory increased by $7 million to $282 million and accounts payable increased by $5 million to $60 million. Customer deposits included within contract liabilities on the balance sheet increased $19 million to $69 million. Cash flow from operations totaled $8 million and CapEx totaled $5 million during the quarter. Next, I'll turn to our second quarter non-GAAP outlook. Second quarter revenue is expected to be between $170 million and $190 million. Gross margin is expected to be between 38% and 40%. We expect OpEx between $52 million and $55 million, net income between $12 million and $21 million and diluted EPS between $0.20 and $0.32 on 64 million shares. Based on our current visibility, we're reiterating our full year 2026 revenue guidance between $740 million and $800 million, with growth accelerating in the second half of the year as well as reiterating our diluted non-GAAP EPS between $1.50 and $1.85. I'll now provide additional commentary for each of our markets. Beginning with the semiconductor market, in 2026, we expect strong growth from our Tier 1 customers driven by AI and high-performance computing, more than offsetting declines in the mature node China business. Additionally, our advanced packaging wet processing systems are forecast to contribute to revenue growth as customers increase manufacturing capacity to support AI workloads. In the compound semiconductor market, we see strong growth in silicon photonics, particularly for indium phosphide laser manufacturing driven by AI data center demand. We are also seeing emerging opportunities for low earth orbit satellites, MicroLEDs, AR/VR applications and GaN Power. We have received significant orders in the first quarter across this market, which is driving meaningful revenue growth into 2027. In data storage, we secured orders in the second half of 2025 and experienced continued order activity in 2026 for our Ion Beam equipment. We are seeing increase in AI-driven demand for higher capacity HDDs, supporting investments in capacity and new technologies such as HAMR. Customer engagements remain strong with our business fully booked in 2026 and extending into the first half of 2027. As we look ahead, we are seeing continued acceleration across several of our core markets, supported by increased customer engagement, expanding pipelines and strong order visibility. Our focus remains on disciplined execution as we support customer production ramps and deliver against the next phase of growth. I would now like to turn the call to the operator for Q&A.

(Operator instructions were provided.) As a reminder given the pending merger with Axcelis, the Veeco management will not be addressing questions related to the transaction. (Operator instructions were provided.) Our first question comes from Denis Pyatchanin with Needham & Company.

So maybe we can start with this $250 million order with the orders beginning in 2026. Could you tell us maybe which quarter would you expect this to start Q3 or Q4? And then at what point in 2027 do you think this will hit its revenue quarterly peak?

Denis, I would say we'll start shipping against those $250 million plus of aggregate orders in the third quarter. But I would say probably the most significant ramp will start in Q1 2027.

Great. And then for these systems for the Lumina, for the SPECTOR and for the WaferEtch, what are your current lead times? And what do you think your maximum capacity is to meet demand for these systems on an annual basis?

We have plans to increase our SPECTOR IBD capacity about 10x from its base level today and start to hit that level in early 2027. And we're looking at future capacity needs to potentially double that again. In wet processing, we're looking to add expansion capacity to our existing facility as well as engaging an outsourced partner contract manufacturer in Southeast Asia for further capacity expansion.

Great. And then my final one is about gross margins. So it looks like we came down a little bit to 36.2% from 37.7%. Is this predominantly due to mix like heavier advanced packaging? Or were there some other variables contributing?

Yes. I think specifically in Q1, one of the factors contributing is that we had one less system, an LSA system, to a China customer. We were recently informed by BIS that that customer would require a license to ship to certain fabs for that customer. So that had about an $8 million impact on the top line for Q1 and also put us outside, as you mentioned, the gross margin guidance range.

(Operator instructions were provided.) Our next question comes from David Duley with Steelhead Securities.

A few other questions on the significant order activity. It sounds like there are three tools involved in the big order here. Are they equally split? Could you talk about the volume of each tool in the $250 million order? And as far as the ramp-up of this business, did you take this business from another competitor? I'm curious about the competitive dynamics. Are you sole sourced or sharing the business?

Yes, Dave, let me give you some color because we haven't historically talked a lot about the indium phosphide solutions that we have. There are really three pieces that Veeco serves in indium phosphide laser manufacturing. First is the epi step, which is well known and discussed. Veeco and our competitor provide MOCVD equipment to make the business end of the laser, the indium phosphide epitaxy that makes the device. We also have wet processing for wet etch and wet clean steps as part of the formation of the laser. Then another part that may not be as well known by investors is Veeco has an Ion Beam Deposition product called the SPECTOR that deposits the anti-reflective and highly reflective coatings to create the laser facet coatings. As you might guess, having followed the company, Ion Beam Deposition can deposit films much better than PVD or e-beam deposition. We can deposit films with much better optical properties, similar to how we make IBD EUV films or Ion Beam Deposition films for low-resistance metals. So this is another example of core ion beam technology where Veeco sold over 100 tools during the dot-com boom lighting up DWDM fiber and then that business went away for a long time. During that time, Veeco maintained deep technical relationships with key customers where we are the process tool of record in their laser facet coating business. When you look at the size of the three opportunities in front of us, the epitaxy market and the laser facet coating market opportunities are about the same size and are significant markets. I would characterize our laser facet coating opportunity where we have a very strong incumbent position in a number of key companies. Whereas in the epitaxy space, our competitor has a strong incumbent position, but Veeco has developed products over the past number of years to improve our competitiveness. In that $250 million plus of orders, we did receive a number of MOCVD orders as part of that ramp. A large portion was for the IBD laser facet opportunity, but it also includes important orders for wet processing because that's a critical step in device manufacturing as well as the epitaxy step.

Okay. So the epi step is the one where you've gone head-to-head with AIXTRON and others. Would you say you're a second source or a primary source? Also, the press release mentioned multiple customers; could you elaborate on your positioning?

I would say in laser facet coating, we have a very strong incumbent position. In the epitaxy step, we are probably more the second provider today as a second source. And in wet processing, we have a strong position with a number of leading customers.

Okay. Final question for me: the GaN opportunity—you've received an order in the past from a 300-millimeter GaN customer. How big do you think that market could be if you penetrate and capture some of the business? I assume these GaN parts are going into the data center; could you elaborate on that?

Yes, Dave, you're right. Adoption of 300-millimeter GaN on silicon is squarely targeted at AI data centers. We've had a tool out with a major IDM for some time. The performance of our tool set is doing quite well. We have a pilot line tool order from the customer, we're manufacturing that, and we would expect to ship it toward the end of the year. So yes, it's definitely targeted at AI data center applications.

(Operator instructions were provided.) Our next question comes from Gus Richard with Northland Capital Markets.

Congratulations on the huge order momentum. To hit the high end of the range for the full year, what are the levers to get there? Is it delivery times?

Thanks for the question, Gus. I think our opportunity to reach the higher end of the range primarily rests in the semiconductor piece of our business. Areas of laser annealing and lithography are probably the drivers there. Looking at other markets, for example data storage, given our lead times and how we work with our customers on build-to-order models, there could be some upside in service and aftermarket business, but the systems business is pretty much booked out for this year, and we're booking orders into next year. In the compound semiconductor market, we're able to get some of this new business into the back half of the year, as Bill mentioned about some tools coming into Q3 and Q4. We anticipated that as part of our view for the year already. The predominant increases in capacity and meeting customers' ship dates principally happen in 2027.

Got it. And the SPECTOR—does that have a similar three-quarter lead time as ion beam for HDD?

We'll work on that lead time. We've been in this business for a long period. Recent business is a few tools a quarter, and yes, the lead times are more in that sort of nine-month range. As we look to ramp up this business, we'll look to reduce lead and cycle times to meet customer shipment requirements. Mainly, we'll see a step-up in output starting in Q1 of 2027.

Okay. In terms of some of the evaluations going on, like the Ion Beam for the memory market, do you think you can reach conclusions on those evaluations in the next quarter or two? What are your prospects for getting over the finish line?

The feedback from our customers is it's not a matter of if, it's a matter of when. They're very impressed with the film performance of the IBD. Where we're working closely with them is in areas such as particle performance, automation and reliability. They've extended their evaluations through the end of 2026, and we're working on a few continuous improvement improvements to the tool to address some of those shortcomings. So the customer is quite excited about the opportunity, but we do have some engineering work left to do to demonstrate the high-volume requirements of front-end semiconductor manufacturing.

(Operator instructions were provided.) Our next question comes from David Duley with Steelhead Securities.

Could you talk a little bit more about the hard disk drive business? What sort of second half growth profile should we expect versus the first half? You've talked about having the order book full and manufacturing booked for 2026. Are you expanding capacity for 2027 at this point? It would seem the HDD guys will add capacity given AI data center demand, but maybe I'm wrong.

Yes, Dave. We're looking to double that business in 2026 over 2025, and the trajectory is more second-half loaded. I think the first system shipment is planned to happen in Q2, none in Q1, and then ramping in Q3 and Q4 based on lead times. We operate a build-to-order model rather than build-to-forecast, which keeps us aligned with customers. Year-to-date, both of our major customers continue to place orders for front-end equipment at the wafer level and for the back end, the slider fabs, indicating they're increasing the number of heads they are producing. Based on the order activity in early 2026, the first half of 2027 should remain strong. Commercial activity remains positive. John, I don't know if you'd like to add.

I think that sums up where we are with 2026 and what visibility we have into 2027 at this time.

What would you expect as a rough cut for your semiconductor revenue growth in 2026? I assume it will grow higher in 2027, but could you elaborate on the puts and takes for growth in both 2026 and 2027?

We see a mostly positive environment in 2026 and expect WFE growth moving into 2027. Segments attached to AI and high-performance computing are expected to grow: advanced foundry logic with our laser annealing product, high-bandwidth memory where we've penetrated a customer, and continued strength in Advanced Packaging. The headwind is declining business in China for mature nodes, which more than offsets some strength in other areas. We've been foreshadowing this decline for the past two years. It's predominantly LSA product business for 40- and 28-nanometer fabs, and they don't see the same level of new fab investment as a couple of years ago. Taking all that into consideration, we see our semiconductor business growing this year over last year in the mid-teens.

Since you're taking the Chinese decline this year, I would guess your growth rate accelerates next year.

We're looking at a very positive WFE environment, and we have strong attachments to the areas expected to drive WFE. Early looks at 2027 look positive. Bill mentioned earlier that we are increasing capacity for Advanced Packaging and see opportunities to continue growth into 2027, so we're making investments to increase capacity there as well.

It's worth mentioning a lot of the WFE estimates include pieces of the silicon photonics market, which will show up in our compound semiconductor segment. So when you look at semiconductor alone, some of the compound semiconductor work will be categorized more broadly as WFE. Our compound semiconductor business is probably going to grow about 50%. So when you take the mid-teens John spoke about and include the fast-growing portions, our growth is likely higher on a WFE basis.

At this time, we have no further questions. I would now like to turn the call over to Bill Miller for closing remarks.

Thank you. As we look ahead, we believe Veeco is well positioned to meet the evolving needs of our customers as the silicon photonics industry reaches an inflection point driven by AI and high-performance computing. Our technologies across logic, memory, Advanced Packaging, compound semi and data storage are becoming increasingly critical as customers push for greater performance, scale and efficiency. With strong customer demand, expanding served available markets and disciplined execution, we see meaningful long-term growth and remain focused on delivering sustained value for our shareholders. I'd like to thank our employees for their hard work as well as our customers, partners and shareholders for their continued trust in Veeco. Have a great evening.

Ladies and gentlemen, the conference call of Veeco has now concluded. Thank you for your participation. You may now disconnect your lines.