Q1 2024 Veeco Instruments Inc Earnings Call

Participants

Anthony Pappone; Investor Relations; Veeco Instruments Inc

Bill Miller; Chief Executive Officer; Veeco Instruments Inc

John Kiernan; Senior Vice President and Chief Financial Officer; Veeco Instruments Inc

Charles Shi; Analyst; Needham & Company LLC

Wayne Zhong; Analyst; Oppenheimer & Co Inc

Gus Richard; Analyst; Northland Securities Inc

David Duley; Analyst; Steelhead Securities LLC

Mark Miller; Analyst; The Benchmark Co LLC

Presentation

Operator

Greetings and welcome to the Veeco Q1 2024 earnings call. (Operator Instructions) As a reminder, this conference is being recorded. It is now my pleasure to introduce Anthony Pappone, Head of Investor Relations. Thank you. You may begin.

Anthony Pappone

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 make statements about the future, these forward-looking statements are based on management's current expectations and are subject to the risks and uncertainties that could cause actual results to differ materially from the statements made.
These risks are discussed in detail in our Form 10-K annual report and other SEC filings. Veeco does not undertake any obligation to update any forward-looking statements, including those made on this call to reflect future events or circumstances after the date of such statements. Unless otherwise noted, management will address non-GAAP financial results we encourage you to refer to our reconciliation between GAAP and non-GAAP results, which you can find in our press release and at the end of the earnings presentation.
With that, I will turn the call over to our CEO, Bill Miller.

Bill Miller

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

John Kiernan

Thanks, Bill. Turning first to our revenue for the quarter. Revenue came in at $174 million, above the midpoint of our guidance range, up 14% from the prior year and flat sequentially, semiconductor revenue increased 29% year over year and 5% sequentially to a record $120 million, comprising 69% of total revenue sales to the semiconductor market continue to be driven by strong demand for our laser annealing systems in the compound semiconductor market revenue increase from the prior quarter to $21 million, totaling 12% of revenue. Revenue from our data storage customers contributed 10%, and lastly, scientific and other made up 9%.
Now turning to quarterly revenue by region, revenue from the Asia Pacific region, excluding China, totaled 42%, an increase from 34% in the prior quarter, driven by semiconductor customers. The percentage of revenue from China totaled 37% during the quarter, in line with the prior quarter, led by sales to mature node semiconductor customers. Revenue from the United States totaled 16%, followed by and we are at 5% of revenue.
Switching gears to our non-GAAP quarterly results, gross margin total of approximately 44% above the high end of our guidance. Operating expenses totaled $48 million in Q1 in line with guidance. Tax expense for the quarter was approximately $4 million, resulting in an effective tax rate of 13%. Lastly, net income came in at approximately $26 million and diluted EPS was $0.45 on 60 million shares.
And moving to the balance sheet and cash flow highlights, we ended the quarter with cash and short-term investments of $297 million, a sequential decline of $9 million. From a working capital perspective, our accounts receivable increased by $4 million to $107 million inventory increased by $5 million to $243 million, while days of inventory declined to 218 days and accounts payable increased by 12 billion to 54 million. Customer deposits included within Contract liabilities on the balance sheet declined by $25 million to $72 million. Cash flow from operations came in at $9 million and CapEx was $6 million.
Now turning to Q2 non-GAAP guidance, Q2 revenue is expected to be between 165 and $185 million with gross margin between 43% and 44%. We expect OpEx between 46 and $48 million, net income between $22 million and $29 million and diluted EPS between 38 and $0.48 on 61 million shares. And now for some additional color beyond Q2, based on our current visibility, we are reiterating our 2024 revenue outlook between $680 million and $740 million. We also continue to target diluted non-GAAP EPS for the full year between $1.60 and $1.90 per share.
With that, I'll now turn the call over to the operator to open up for Q&A.

Question and Answer Session

Operator

(Operator Instructions) Charles Shi, Needham.

Charles Shi

Thanks. Good afternoon and congrats on the good results. Steady execution for another quarter or maybe the first question I wanted to dig a little bit into the laser anneal product. You guys put out the press release this morning. You may have addressed this before, but I think top of mind for a good amount of folks is the nanosecond, Neal, does it is that the incremental opportunity on top of what you already have with the laser anneal under the advanced nodes or maybe one replaces another.
Yes. And then maybe a little bit of cannibalization going on there.

Bill Miller

Yes, Charles, let me give a little background. So we've been working, as you know, on future nodes for many years with our most advanced customers in logic and our laser spike anneal is qualified at all leading logic customers for their gate-all-around architectures. Separately, we have NSAR. nanosecond evaluations at two of the three leading logic players and have pull from the third for an evaluation system. So and assays being evaluated for gate all around but also backside power distribution and 3D structures. So as we mentioned in our press release, during the quarter, we received both LSA and NSA. orders for a new customer for their two nanometer gate all around project.
But to get to the crux of your question regarding NSA. potentially cannibalizing LSA. So historically, the contact annealing step for a transistor consisted of multiple in Neal's, followed by an LSA steps as the customers are moving towards gate. All around customers are considering replacing one of the multiple anneal steps with LSA and they're evaluating nanosecond anneal NSA. for our follow-on steps. Although no decisions have not been finalized with our customers, it does appear in Gate All Around that MSA does not cannibalize, let's say, for gate all around. And that being said, NSA opens up unique opportunities for the Company in applications like backside power distributions in three D structure. So I would say largely it does not cannibalize Elestat.

Charles Shi

Got it. Understood. That may be up well. We'll keep asking you this question, but hopefully we get a firm confirmation on this being incremental to our assay opportunities.
Secondly, I wanted to ask about the HCM opportunity. Our sales are specifically. I'm asking about the LSA for HVM going back a couple of quarters. You guys were not so certain where the LSA. was was qualified as a standard D-RAM or versus HB. bet. Based on your prepared remarks you did you did say handle slightly more assertive that that business going into a high-bandwidth memory. Just wanted to confirm, am I over thinking this or this is indeed the case?

Bill Miller

So So Charles, I would say originally, we were qualified in the logic chip in the first level of the high-bandwidth memory. And now we've been qualified with one customer with one customer for the peripheral peripheral logic on the D ram stack D-Ram devices. So we went from having the annealing step on the logic device to having adding the peripheral steps on all of the HBM memory stack.
Does that clarify for you, Charles?

Charles Shi

Yes, definitely. Definitely. It sounds like that's the best, I think, HP, and that's the first one. But the second one, I want to clarify even more you said there's a periphery peripheral, so kit on the on each of the direct stack, but even that part of the standard DRAM manufacturing also that what I'm trying to just trying to think how much of the opportunity is that there is really only limit. The second application I talked about is really only limited to HBMO. that applies to all the standard D-Ram RPGR file or more advanced than that even there.

Bill Miller

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

Charles Shi

Yes. Thanks, Bill. This has been very helpful. I'll hop back to the queue. Thanks.

Bill Miller

Thank you, Charles.

Operator

Rick Schafer, Oppenheimer.

Wayne Zhong

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

Bill Miller

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

Wayne Zhong

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

Bill Miller

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

Wayne Zhong

Got it. Thank you. And maybe one last question, if I may on it's on NSA. Considering this is next-generation and a more advanced technology compared to other, say, how much of an uptick a pricing uplift you expect from? And I say compared to other sales?

Bill Miller

Yes, we do expect a higher price for our ENSA. for the additional capabilities and in value there. And, you know, I would estimate that 10% to 15% higher ASP.s would be our expectation.

Operator

Gus Richard, Northland Capital.

Gus Richard

Yes, thanks for taking the questions. And on your compound semi business. Can you give us a little bit of update on again power and any sort of placements of evaluation tools in that market?

Bill Miller

Yes, Gus, we obviously as you know, have been working very hard in focusing our business in power electronics, namely GaN, on silicon and silicon carbide. What we've been seeing is a transition from six inch to eight inch. So what we've seen over the last year and a half or so, but what we're seeing is some customers are looking to leapfrog to 12 inch, particularly some of the Tier one silicon power electronics manufacturers are interested in introducing Wide Bandgap Materials to their standard products. So we actually are planning to ship a 300 millimeter evaluation systems to this customer in the coming quarters. So we're excited about that. Our form factor transition to 300 millimeter.

Gus Richard

Got it. And then on your hard disk drive business, then kind of lagging some of the drive business looks like it's bottoming and starting in turn, are you starting to see more activity there where your spares and service can kind of start to pick up and that market was it just still looking flattish?

Bill Miller

I wouldn't characterize it, Gus, as clearly our customers have been running at very low utilizations. And clearly that's been reading out in our service number in terms of spares and whatnot, I would say when we look at our data storage kind of run rate business kind of weekly and monthly it's been running at very low levels here and maybe we've seen a number of weeks, maybe a month or two of a bit of an uptick, but clearly nowhere near kind of the historical run rate, but maybe going in the right direction.

Gus Richard

Got it. That's helpful. Thanks. And then the last one for me is on in Ion Beam Deposition, a couple quarters ago, you had a customer that was going to utilize it for EUV mask pellicles. And I was wondering if anything ever became of that. It does any interest in an additional system know any color there?

Bill Miller

Yes, we're from there actually, I would say pressuring us pretty hard just to accelerate the shipment of that tool is going to ship here in the coming months and we're prepared to install a new and fully supported at the customer. And assuming we have success, I wouldn't be surprised that we have another follow-on order in a year or so.

Gus Richard

Got it. Okay. That's it for me. Thanks so much.

Bill Miller

Thanks, Gus.

Operator

David Duley, Steelhead Securities.

David Duley

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

Bill Miller

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

David Duley

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

Bill Miller

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

David Duley

Okay. Okay. And then as far as I'm assuming that you're going to grow your HPM business with current customer, would you expect to start to recognize revenue from the other customers? In other words, helping other customers started to know the interest level started to increase where you know things are progressing with these other guys?

Bill Miller

Yes, Dave, we've been doing demos with the other two customers for some time. And we are really pushing to target an evaluation system to that to a second customer by year end or early 25 at the latest. So that's that's an internal goal that we have is to trying to place a second memory e-mail system and just like we did in logic kind of win one customer win one application and then expand more applications and more customers. That's definitely part of the plan.

David Duley

Thank you.

Operator

Mark Miller, The Benchmark Company.

Mark Miller

Congratulations on your orders. Just wondering what is your outlook for data storage this year? When do you feel that the data storage will start feeling a bit of growth for Bay I type applications? Are we're still a year away there?

Bill Miller

Yes.

John Kiernan

So thanks. Thanks for the question. Maybe this is a combination of Bill and myself. I'll start with our outlook for data storage for the year. So for the overall business, including our spare parts and service, we expect our base storage business compared to last year to be flat to up we are [101%] and we have good visibility into our systems and our systems backlog and confirmed ship dates from the customer, et cetera. So pretty I think that's within a pretty tight range there. And I would say the upside to the range is if as discussed on one of the earlier questions on the call here today, the service business unit picks up a bit quicker than when we're when we're forecasting.
And to answer your second question on the impact of AI on the data storage industry, I mean, we've been speaking with our customers and two of our largest customers really do expect the rise of generative AI. to drive healthy long-term exabyte growth, which is really critical for our business and they are projecting growth growth rates on the 20% kind of see a bigger number in the kind of mid to long term, which would definitely be the bit growth rate that would come drive a healthy industry and a healthy equipment INDUSTRY to support it.

Mark Miller

Thank you.

John Kiernan

Thank you, Mark.

Operator

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

Bill Miller

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

Operator

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