Earnings Call Transcript - VECO Q4 2020

Operator, Operator

Please stand by. We are about to begin. Good day. And welcome to the Veeco Instruments Q4 and Fiscal Year 2020 Earnings Call. At this time, I would like to turn the conference over to Head of Investor Relations, Anthony Bencivenga. Please go ahead, sir.

Anthony Bencivenga, Head of Investor Relations

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 expressed permission. Your participation implies consent to our recording. To the extent that this call discusses expectations about market conditions, market acceptance, and future sales of the company’s products, future disclosures, future earnings expectations or otherwise makes statements about the future, such statements are forward-looking and are subject to a number of risks and uncertainties that could cause actual results to differ materially from the statements made, including as a result of the COVID-19 pandemic. 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 may 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 Bill for his opening remarks.

Bill Miller, CEO

Thank you, Anthony. Good afternoon, everyone, and thank you for joining the call. I hope you and your families are well. I am excited to talk to you today about the strong progress we have made on our transformation. Our team executed through the quarter, operating remarkably well through this global pandemic. To begin, I will take you through our highlights, John will provide a financial update and guidance, and then I will discuss our markets and technologies before taking your questions. Reflecting on 2020, I am proud of what our Veeco united team has accomplished. We completed our organizational restructuring and began to reshape our product portfolio. We improved gross margins, reduced operating expenses, and improved profitability. We restructured our debt and strengthened our balance sheet. We also enhanced our governance, appointing an independent chair to the Board of Directors and assigning our second recently appointed female Board member to the audit committee. We improved our focus on ESG and published our first sustainability report. And importantly, we continue to focus on our employees and internal culture. Together, these actions, along with investments in R&D and service to support multiple evaluation systems are positioning Veeco for our next phase of growth and value creation in Semiconductor and Compound Semiconductor markets. Looking at our full year highlights, 2020 was a remarkable year of improvement for Veeco. Revenue for the full year was $454 million, compared to $419 million in 2019. Our gross margin improved by nearly 5 percentage points to 43% in 2020. As a result of our reorganization and expense management, we reduced operating expenses to $144 million in 2020 from $156 million in 2019. From an overall profitability perspective, we achieved $52 million in non-GAAP operating income and reversed our diluted non-GAAP EPS from a loss of $0.03 in 2019 to a profit of $0.86 in 2020. These results drove $43 million in cash flow from operations. Once again, the Veeco United team did an amazing job focusing on success and executing in a challenging environment. Now for a look at our Q4 2020 highlights, Q4 marked another solid quarter of execution driven by strength in our Semiconductor and Compound Semiconductor markets. Revenue came in at $130 million, which was above the high end of our guidance and diluted non-GAAP EPS came in at $0.30, which was at the midpoint of our guidance. Our gross margin came in at 41% and we achieved non-GAAP operating income of $18 million. In addition, we generated $15 million in cash flow from operations and increased our cash and short-term investments by $10 million. John will provide more details on the financials in just a few minutes. We are optimistic about our growth opportunities in 2021. Market drivers such as semiconductor, 5G, and data center demand are all trending positively and are aligned with Veeco’s near-term growth objectives in laser annealing, 5G RF, and Data Storage applications, and our outlook for 2021 is supported by our backlog. As we look out beyond 2021, Semiconductor demand is growing, and as such, we evaluated options that increase production capacity for our laser annealing systems. After considering a range of alternatives, we decided investing in a new facility offers the best solution. We are excited about the growth opportunity for our laser annealing product and we will be sharing more details on this in the near future. On a related note, we are also proud to announce that we received a multi-system order for our laser annealing product from a leading semiconductor customer for a second application at an advanced logic node. This further validates the capability of our laser annealing technology and provides momentum as we enter 2021. And with that, I will turn the call over to John for a review of the financials.

John Kiernan, CFO

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 or at the end of the quarterly earnings presentation. Before turning to our revenue by market and geography, I would like to remind everyone that we modified the way we report revenue by end market to align with the company’s evolving strategy. Today, we are providing revenue in our new end markets. In the backup section of the earnings presentation, you can find historical data reclassified to the new end markets for comparative purposes. As shown on the slide, our new end markets are Semiconductor, which includes front-end and back-end semiconductor, as well as EUV mask blank systems. Our second market is Compound Semiconductor, which includes RF filter and device applications, power electronics, and photonics applications such as VCSELs, laser diodes, and microLED display. Our third market is Data Storage, which includes equipment supporting thin-film magnetic head manufacturing. And our fourth market is Scientific & Other, which includes research institutions and other applications. Looking at full year revenue, our Semiconductor revenue was $166 million, which represented 36% of the total, and a decline of about 6% from the prior year. We expect this market to grow in 2021 on strength in laser annealing systems. Compound Semiconductor revenue was $108 million, a 26% increase from 2019, and made up 24% of the total, driven by photonics and RF applications. Data Storage revenue was $123 million, a 47% increase over the prior year and made up 27% of our total revenue, as hard disk drive customers added capacity for thin-film magnetic head manufacturing. And Scientific & Other revenue was $57 million, a decline of 23% from 2019 and made up 13% of the total revenue. And looking at our full year revenue by region, please take note that we have modified our region naming convention. Our Asia-Pacific region, excluding China, made up 39% of total revenue. The United States was 32%, EMEA was 16%, China made up 13%, and finally, the rest of the world made up less than 1% of our revenue for the year. Turning to Q4 revenue by market and geography. Revenue totaled $139 million for the quarter, which was a sequential increase of 24% and a year-on-year increase of 23%. We had strong performance in our Semiconductor market, which made up 41% of our revenue, driven by multiple laser annealing systems and an EUV ion beam system shipment. The Compound Semiconductor market contributed 33% of our revenue and was driven by multiple system shipments for 5G RF applications and shipments to photonic customers. Our revenue in this market also included the sale of commodity LED systems, which enabled us to monetize slow-moving inventory. Our Data Storage market came in at 14% of total revenue. We expect growth in 2021 in our Data Storage market based upon our order backlog going into the year. And finally, the Scientific & Other market made up 12% of our revenue, with system ship for a variety of research applications. And looking at our quarterly revenue by region, our Asia-Pacific region, including China, made up 48% of total revenue. The United States was 26%, China made up 14%, EMEA was 12%, and finally, the rest of the world made up less than 1% of our revenue for the quarter. And now turning to non-GAAP operating results. On full year 2020 basis, as Bill mentioned, we achieved gross margin of 43% and reduced our annual operating expenses to $144 million. These improvements reflect the impact of our transformation effort. Our non-GAAP operating income increased significantly, from $5 million in 2019 to $52 million in 2020. This drove diluted EPS of $0.86 for the year. And now I will provide a few additional full year figures. For fiscal 2020, non-GAAP depreciation was $15.1 million, amortization was $15.3 million, and our equity comp expense was $12.7 million. Cash interest on our debt was $10.8 million and cash taxes were $300,000. At year end, we had federal NOLs of $219 million, which are fully reserved. While we no longer provide bookings on a quarterly basis, we do provide backlog in our 10-K. When we file, you will see that as a result of a strong year of order intake, we ended 2020 with $366 million in backlog. The biggest contributor by market is Data Storage, followed by Semiconductor, Compound Semiconductor, and Scientific & Other in that order. A significant portion of the increased Data Storage backlog is anticipated to be delivered in the second and third quarters of 2021. We are proud of the progress we made on our transformation execution, and our 2020 financial results are a reflection of that hard work. We are now focused on investing to drive growth in 2021 and beyond. Now turning to our quarterly results, gross margin came in at 41%, which was lower than guidance. This was due to monetizing slow-moving LED inventory, as well as service costs related to both 5G installations and future semiconductor growth. Gross margins are influenced by a number of factors, and we expect quarter-to-quarter variations. Operating expenses for the quarter were $40 million and, as a percentage of revenue, declined sequentially from 32% in Q3 2020 to 29% in Q4 2020. We incurred higher variable expenses associated with the increase in revenue and order intake. Additionally, we strategically increased R&D expenses as planned in support of our growth initiatives. On a non-GAAP basis, tax expense for the quarter was a benefit of approximately $300,000, with net income coming in at $15 million, and EPS was $0.30 on a diluted share count of 50 million shares. It’s worth noting that our Q4 GAAP net loss of $100,000 includes a non-cash charge of $4.8 million, resulting from our convertible debt exchange completed in the quarter. Now moving to the balance sheet and cash flow highlights. We ended the quarter with cash and short-term investments of $320 million, a sequential increase of $10 million. From a working capital perspective, our accounts receivable remained flat at $80 million on increased revenue. DSOs for the quarter came in at 52 days, an improvement from the prior quarter. Accounts payable also remained flat at $34 million. Inventory increased approximately $3 million to $146 million resulting from investments we are making to ship evaluation systems in support of our growth strategy in Semiconductor and Compound Semiconductor market. Days of inventory came in at 159, an improvement from 200 days in the prior quarter. Long-term debt on the balance sheet was recorded at $321 million, representing the carrying value of $389 million in convertible notes. Our CapEx during the quarter was $3.5 million, bringing CapEx total for the year to $6.8 million. Now, turning to our convertible notes. As outlined on the slide, the actions we took over the course of 2020, we went from a single $345 million tranche of debt due in January 2023 to a more manageable debt structure with three maturities roughly evenly staggered over the next six years. Our annual cash interest expense is expected to be approximately $13 million on a go-forward basis. With this debt structure and strong balance sheet, we have the flexibility and capital to focus on driving long-term organic growth across our business. Now turning to Q1 guidance. Q1 revenue is expected to be between $115 million and $135 million with non-GAAP gross margin between 40% and 42%. Our gross margin estimate reflects our anticipated product mix, as well as service costs related to both evaluation systems and customers’ 5G RF ramp. We expect non-GAAP OpEx to be between $37 million and $39 million, a reduction from Q4 principally in SG&A expenses. GAAP EPS is expected between a loss of $0.09 per diluted share and earnings of $0.09 per diluted share. Non-GAAP EPS is expected between $0.12 per diluted share and $0.30 per diluted share. Diluted non-GAAP EPS is based upon a 50 million share count at stock prices of about $20 per share. Bear in mind taking our convertible notes into account, the share count for the diluted EPS calculation will increase by about 300,000 shares on average for every dollar increase in the average stock price over the course of the quarter. We have included a table in the backup section of the earnings presentation to provide detail on the effect of the convertible notes on the diluted share count. And now for some additional color beyond Q1. Based on our current visibility and backlog, we are increasing our revenue outlook for 2021, announcing that revenue for the full year to be in the $520 million to $540 million range. And we are targeting non-GAAP EPS for the full year to be between $1 and $1.20. I’d like to provide a little bit more information on the capacity expansion plans that Bill mentioned earlier. We are currently in the final stages of lease negotiations for San Jose property of approximately the same size as our current facility, but with a better footprint allowing us to increase the size and efficiency of our production space. Capital expenditures associated with this project are expected to be between $30 million and $40 million over the next two years. Additionally, there will be a period of duplicate expenses until the transition to the new facility is completed. And with that, I will turn it back over to Bill for market update.

Bill Miller, CEO

Turning to the markets we serve and our technologies. With the first phase of our transformation behind us, we will continue to focus on the second phase of our transformation, growing the company organically in the Semiconductor and Compound Semiconductor markets. We think of this growth in two phases, near-term 2021 growth and longer term 2022 and beyond. Our near-term growth outlook is supported by recent semiconductor orders from our advanced-node logic customers, demand for 5G RF-related capacity, and market demand and backlog in Data Storage. Looking beyond 2021, we have been investing in our core technologies, which will drive the next phase of Veeco’s growth that enable game-changing applications like artificial intelligence, virtual and augmented reality, and electric vehicles. We are well-positioned to continue playing a meaningful role with our customers that are making the necessary investments in R&D, service, and evaluation systems to deliver and support products they need. In fact, evaluation agreements are already in place for our laser annealing systems for logic and memory applications, and our MOCVD systems for early-stage micro LED development. Now looking more specifically at each of our four markets. In our Semiconductor market, we won an additional laser annealing step at one of our existing customer’s advanced nodes. In addition to that, we see multiple growth vectors we believe will drive growth in laser annealing. We continue to make progress with our customers on their next nodes. In fact, we expect to ship evaluation systems to multiple customers in the coming quarters. We are making progress with a third logic customer at an advanced node. And lastly, while our LSA product line has historically been applied to logic applications, a top-tier memory customer is currently evaluating Veeco’s laser annealing solutions. This is a one-year evaluation and could result in a significant new market opportunity, which could produce revenue growth in 2022 and beyond. In summary, our laser annealing technology with its unique process capabilities and advanced nodes is providing near-term strength and it’s also an important component of our longer-term growth strategy. In the EUV mask blank market, we ship the system in the quarter and we continue to work closely with our customers on future plans for capacity expansion as the industry progresses. ASML recently announced they shipped 31 EUV lithography systems in 2020, up from 26 in 2019 and they enter 2021 with 42 systems in backlog. With roughly one of our mask blank systems required for every 10 to 15 ASML systems in the field, we continue to see our market opportunity as two to four systems per year on average. In advanced packaging, we saw positive order activity during the quarter for our lithography and wet processing systems, for applications such as flip chip and fan-out wafer level packaging, and we continue to engage with our customers to solve their next-generation advanced packaging challenges. Moving to Compound Semiconductor, we serve this market primarily with our wet processing and MOCVD equipment. Our wet processing equipment offers excellent process control and flexibility for many Compound Semiconductor applications. We shipped multiple systems during the quarter and we are seeing further demand for RF customers as they add filter and power amplifier production capacity. Looking at our MOCVD business, we have pivoted away from the commodity LED market and towards providing high-value solutions for our customers. We have strengthened our product portfolio, which we believe is now well-positioned to compete in exciting high-growth markets. These include applications in photonics such as indium phosphide lasers and VCSEL, as well as microLED with our Lumina MOCVD arsenide phosphide platform and our propelled gallium nitride MOCVD system used for power electronics, RF devices, and microLED applications. Now looking at our Data Storage market, we have been experiencing consistent growth for multiple years driven by cloud and data center demand. Our ion beam technology enables our customers to increase the areal density of their read, write heads. This improved performance in their high-capacity drives using cloud and data center applications. Additionally, the absolute number of head shifts has been increasing and is forecasted to continue to increase for several years. Based on our visibility in this market, we expect strong performance to continue through 2021. And finally, our Scientific & Other market is largely driven by sales to governments, universities, and research institutes. We experience lower sales in this market in 2020 compared to 2019, which we believe was due to COVID-19 impacts. Now turning to our 2021 priorities, with the actions we have taken to execute our transformation and position Veeco for success, as John said, we expect significant revenue growth in 2021. As we move toward that near-term goal, we are keeping our four main priorities in mind. First, we will maintain resiliency and flexibility across all aspects of our operations. Second, we will continue to focus on products and services that align with market trends and generate the strongest results for our customers and shareholders. Third, we will execute relentlessly on our near-term transformation objectives. And fourth, we will continue our efforts to position Veeco for longer-term growth in 2022 and beyond. With these four priorities in mind, we are committed to making a material difference and building a stronger Veeco that serves all our stakeholders. And with that, John and I will be happy to take your questions. Operator, please open the line.

Operator, Operator

Thank you. We will take your first question from Patrick Ho with Stifel.

Patrick Ho, Analyst

Thank you very much and congratulations on a nice end to the year and the outlook for 2021. Bill, maybe first off in terms of the laser spike anneal business. It’s great to hear that you are getting a second application entry with a customer. As the industry continues to migrate especially in the logic and down every shrinking nodes and with the future of gate-all-around. Do you see the potential applications continuing to increase or have you kind of reached a saturation point, let’s say two applications?

Bill Miller, CEO

Yeah. Thanks, Patrick. We really love that question and here’s why. In the short term, laser annealing is really driving our business in ‘21. You just mentioned the second application with one of our existing customers, that’s certainly driving us in ‘21. But longer term, we see opportunities. We are working with our existing customers at their next nodes replacing evaluation systems there. We are actually closely engaging a third logic customer with an eval with their most advanced nodes. And we recently placed two tools at a DRAM memory customer, which is really the first penetration we have had into memory and it makes a lot of sense because memory lags behind logic a bit. And what we are seeing is as the nodes advance and the technologies change from, say, FinFET to Gate-All-Around, the one thing that remains is the need to continuously reduce the thermal budgets, heat to a high temperature for a shorter duration of time. And our laser annealing product is uniquely positioned to take advantage of that. So we see very, very bright horizons not only this year, but probably continuing on as we open up memory markets and fill more slots, if you will, of the annealing steps with our existing and hopefully new customers.

Patrick Ho, Analyst

Great. That’s really helpful. As a follow-up question for John, can you discuss the increase in demand for your Semiconductor business heading into the New Year, especially considering your strong working capital management despite this demand? Your Days Sales Outstanding are at attractive levels, even with inventory building. What are the key factors influencing your working capital management? Additionally, how does your supply chain currently look, given the various supply shortages in parts of the ecosystem?

John Kiernan, CFO

Sure. Sure, Patrick. So on the working capital side, we did see a slight increase in the inventory, but that did decrease the day’s outstanding given the increase in volume. As Bill mentioned, we do see investments coming in 2021, both on our increase in revenue, as well as the increasing the amount of evaluation tools that are being placed into the field, expected to be put in place in the field in 2021. So we will continue to try to manage that working capital requirement as efficiently as possible. On the second part of your question, regarding supply chain, there, we have been effectively able to manage the increase in demand there. We have not seen any significant impacts to our supply chain at this point, and at this point it looks pretty solid.

Bill Miller, CEO

I guess, I will just add one other comment there, John. We have resourced a few hundred parts from regions that have been more COVID hit and we have successfully been able to do that. And our supply chain and operations organization has done a pretty amazing job there.

Patrick Ho, Analyst

Great. Thank you very much.

Bill Miller, CEO

Thank you, Patrick.

Operator, Operator

And we will take our next question from Brian Lee with Goldman Sachs.

Brian Lee, Analyst

Hey, guys. Good afternoon. Thanks for taking the questions. Maybe just a quick housekeeping one, I know the revenue in Q4, you said you had some sort of legacy MOCVD for LED that was in there. Can you quantify? Just trying to back out what that would have been and then also what the margin impact was for the quarter.

John Kiernan, CFO

Yeah. Yeah. Brian, it’s about $10 million for the quarter at a very low gross margin.

Brian Lee, Analyst

At very low gross. Okay. Great. That’s helpful. And then in terms of Q1 or the 2021 updated outlook for revenue, are you embedding anything in those numbers for the legacy MOCVD? I guess, one of the reasons I ask is the 40% to 42% gross margin for Q1, I know there’s a bit of mix you mentioned in there. But how should we think about just generally the gross margin cadence moving through the year, because it seems like you guys were 42% to 44% pretty consistently for a couple of quarters before the mix issue in Q4?

John Kiernan, CFO

Sure. We are currently looking at Q1 gross margins in the 40% to 42% range, which reflects the current expected product mix. Additionally, with our efforts to ramp up sales of slow-moving inventory, we have about $5 million that will be included in the program. This will slightly reduce the impact on our gross margin within that range for Q1 2021. The Q1 gross margins will also be affected by the costs associated with supporting our semi-evaluation growth initiatives. As mentioned previously, we're investing in these evaluation tools ahead of revenue. While we’re not providing specific gross margin guidance for 2021, we updated our revenue guidance for the year to be between $520 million and $540 million, indicating 17% growth at the midpoint, along with an expected EPS of $1 to $1.20 on a non-GAAP basis, representing 29% growth at the midpoint. To provide more insight into the gross margins, we have indicated that this increased volume should generally benefit our gross margins, but we will offset those benefits with the necessary investments to support the number of evaluations. Now that we have more clarity, we see significant demand for our technology and are planning for success. Typically, we would manage one to two evaluations in the field at any given time, but in 2021, we expect that number to rise to about 10, many of which will last over a year. Consequently, there will be limited benefits to our 2021 revenue from these increased evaluations. We are supporting these evaluations ahead of revenue, preparing for growth in 2022 and beyond, which will create some pressure on our gross margins in 2021. Although we anticipate fluctuations in gross margins from quarter to quarter, we currently view the Q1 gross margins in the 40% to 42% range as the low point for the year and expect quarterly gross margins to fall between 40% and 44% as we progress.

Brian Lee, Analyst

Okay. So it’s a low point for the year. That’s super helpful. And then maybe just last one for me, nice boost to the revenue outlook here. I am just wondering, can you give us a bit of quantification? I know you mentioned some figures around backlog and things ended the year on a strong note? But where are you seeing some of the pockets of strength here with respect to the new segments that gave you the confidence to raise the revenue outlook? And then maybe just related to that, you had a fairly sort of flattish growth to revenue in 2020, and then in the back half, you kind of picked it up. Similar cadence, we should expect in ‘21, it seems like you are starting out ‘21 with a pretty good range here, so it almost implies maybe a flatter revenue trajectory, you can get to the $520 million or $530 million, if we are thinking about the outlook here?

Bill Miller, CEO

Yeah. Yeah. Let me take the first piece of that and maybe John could answer the second half. What we have been saying is we see growth in 2021 from three areas: laser annealing, 5G RF, and Data Storage. And the Data Storage piece of our businesses on long lead times and when we put out our 10% up to $500 million range that fully baked in the Data Storage piece. So I look at that incremental step up that’s really driven by planned growth or expected growth in the laser annealing and the 5G RF segments. So I think those are the two pieces that drive that incremental growth in the numbers.

John Kiernan, CFO

Yeah. And then, Brian, to answer the second part of your question, given the backlog visibility and when shipments are required, our view is that we would see, to your point, lesser of a build in the second half of the year for 2021 in our current view compared to 2020.

Bill Miller, CEO

Sure, I would be happy to help. Our Data Storage segment is nearly sold out for the year, so we won't be driving growth in that area. Recently, we secured a second application in laser annealing, which is contributing to growth, along with 5G for RF filters and RF devices related to wet processing equipment. These have shorter lead times. Therefore, any potential upside from this point would likely come from products with shorter lead times. John, would you like to add anything?

John Kiernan, CFO

I think that’s right, Bill. We are, as we mentioned, looking to add capacity going forward for laser annealing with the announced capacity expansion. We are planning in San Jose in terms of being able to increase the production footprint there, and we are running at fairly high capacity in our wet cleaning product line for 5G as well at this point.

Rick Schafer, Analyst

Thank you, and I want to extend my congratulations to everyone. I have a quick question regarding the backlog. Based on the recent figures, it seems that your backlog indicates substantial growth in the high teens this year, according to your guidance. It appears that demand signals are generally increasing. I'm curious about the potential upside according to your updated guidance today. While I understand you may not be able to provide exact figures, I'm wondering if you're considering the possibility of being sold out for the year. I know Bill mentioned that your Data Storage segment is likely close to being sold out for this year. So, I'm interested to know where that potential upside might come from this year and which segments could still have some capacity available.

Bill Miller, CEO

Let me start and let John fill in some of the details. Our Data Storage is nearly sold out for the year, so we won't be seeing growth in that segment. We have recently secured a second application in laser annealing, which is contributing to growth, along with 5G for RF filters and RF devices for wet processing equipment. Those products have shorter lead times. So if there's any potential for upside, it would likely come from products with shorter lead times. John, do you want to add anything?

John Kiernan, CFO

I think that’s right, Bill. We are, as we mentioned, looking to add capacity going forward for laser annealing with the announced capacity expansion. We are planning in San Jose in terms of being able to increase the production footprint there and we are running at fairly high capacity in our wet cleaning product line for 5G as well at this point.

David Duley, Analyst

Yes. Can you hear me?

Bill Miller, CEO

Yeah.

John Kiernan, CFO

Hi, Dave.

David Duley, Analyst

Okay. Sorry. I had technical difficulties with the call. So thanks for taking my question. I was wondering, could you just take a step back in the LSA business and elaborate as to why customers are perhaps shifting back to laser spiking annealing from the flash technology? What is it at these advanced nodes that is driving that trend, shifting back toward your technology? And as a follow-up to that, could you help us size the market now for LSA?

Bill Miller, CEO

Let me start with a little background. We acquired this technology from Ultratech, which had success at the 28-nanometer node with laser annealing but struggled at the next node. When we took over, we focused on understanding their challenges by listening to our customers and putting significant effort into supporting them. I believe the technology holds substantial value as we move toward smaller nodes like 5, 3, and 2 nanometers. The thermal budget has become a pressing issue, and the ability of our laser's wavelength to uniformly heat various materials on semiconductor surfaces is crucial. Additionally, we can quickly scan wafers, heat them to high temperatures, and cool them down rapidly. With each node transition, our customers are demanding faster processes, going from 200 microseconds to 150 microseconds and then to 100 microseconds. We have a clear roadmap regarding thermal budgets, and we are collaborating closely with our customers to meet these demands. It’s becoming evident that flash technology struggles to heat and cool quickly enough at these advanced nodes. We are also observing that memory customers are facing similar challenges that logic customers encountered a few years back.

David Duley, Analyst

Okay. That’s great. And in terms of, you have mentioned, you have moved your breakouts of your business around. I think it’s the first time in sometimes you talked about advanced packaging order, perhaps, give us a little bit more detail on what you might be seeing in that particular market?

Bill Miller, CEO

We have historically maintained a solid base business in fan-out wafer level packaging and copper pillar bumping, supplying to OSATs and IBMs. In the last earnings call, we noted an increase in our order pipeline, and we are now observing a rise in demand moving forward. Our visibility is getting better as we progress into 2021, and we operate this business with relatively short lead times, which enhances our visibility.

David Duley, Analyst

And just as a follow on to that particular question, is it just one customer or is it a broad base of customers that you are starting to see greater visibility and plans to increase their CapEx for advanced packaging?

Bill Miller, CEO

Yeah. Dave, I would say it’s broad, actually. We are seeing OSATs, IBM foundry, we are seeing some breadth to it that we weren’t seeing the previous year or more.

Mark Miller, Analyst

Thank you for your question and congratulations on your progress. I wanted to discuss the backlog further. You mentioned that Data Storage is expected to be strongest in Q2 and Q3. How would you describe the backlog? Is it front-end loaded, back-end loaded, or evenly distributed throughout the year as it shifts?

John Kiernan, CFO

So, Mark, yeah, we reported that the backlog was $366 million at the end of 2020. We would have more backlog at the beginning part of the year than the ending part of the year. Although, specifically related to the Data Storage, we indicated that customer’s shipment requirements will be a little bit more weighted to Q2 and Q3 going into the year.

Mark Miller, Analyst

And what about the mix in the backlog, is that going to be higher mix than what you have seen recently or is it similar?

John Kiernan, CFO

Yeah. So we would typically, with a longer lead time type of systems, have a greater backlog. So I don’t think proportionately that we see any big shift there in terms of the longer lead items would tend to be a larger percentage of the overall backlog.

Bill Miller, CEO

Just do the math.

John Kiernan, CFO

Yeah, just given the lead times. As Bill just mentioned…

Mark Miller, Analyst

Okay.

John Kiernan, CFO

We have an example in the advanced packing with lithography the lead times would typically be in the three to four month range, and as an example, the Data Storage you could have lead time in a nine month range, as an example.

Gus Richard, Analyst

Yes. Thanks for taking my question. Just a housekeeping question real quick, what was the variance in the service in the quarter?

Bill Miller, CEO

Okay. Yes.

Gus Richard, Analyst

In line with the cost, isn’t it?

John Kiernan, CFO

Yes. We break it out and spares and service to Q4 was about $38 million for the quarter.

Gus Richard, Analyst

Okay. And then is spares and service included in the backlog or no?

John Kiernan, CFO

Yeah. That is part of our reported backlog.

Gus Richard, Analyst

Got it. And then, in terms of the evals, you were talking about having 10 out this year. Of those, how many have you got out and how many are in LSA? How many are in MOCVD and something else?

Bill Miller, CEO

Yeah. I would say, approximately half are in LSA, including some other advanced tools, platforms that won’t be out until the end of ‘21. We have some tools, MOCVD tools for power electronics, as well as micro LED, and then we have a wet processing tool going out shortly. So that’s kind of a flavor for what we have; I’d say, it’s probably laser annealing heavy.

John Kiernan, CFO

We have got about 30% of them out at this point.

Gus Richard, Analyst

Okay. There seems to be a pause in your Data Storage business in Q4 and Q1. Is that just variability as you mentioned earlier, or is there a bit of a digestion period, or any other reason for that pause?

Bill Miller, CEO

Yeah. I wouldn’t describe it as a pause, Gus. I would say it’s the size of the machines, and it is a $6 million or $8 million machine in this quarter versus that quarter can move the numbers around. I wouldn’t say we are picking up any signs of demand change here or backlog change to push out.

Gus Richard, Analyst

Okay. That’s it for me. Thank you so much.

Bill Miller, CEO

Thanks, Gus.

Operator, Operator

And that concludes today’s question-and-answer session. I’d like to turn the call back over to Mr. Bencivenga for any additional or closing remarks.

Bill Miller, CEO

This is Bill Miller by the way. Thanks. Thanks for joining us today on the call. As you may be able to tell, we are very excited about entering ‘21 with our growth. Certainly, I would like to thank our customers and our shareholders along with the Veeco United team for their continued support as we execute our growth strategies. So look forward to updating you all at upcoming conferences. Have a great evening.

Operator, Operator

Once again, that does conclude today’s conference. We do appreciate your participation. You may now disconnect your phone lines.