Veeco Instruments Inc. (VECO) Q4 2011 Earnings Report, Transcript and Summary

Good day, everyone, and welcome to the Veeco Fourth Quarter and Year End 2011 Earnings Conference Call. As a reminder, today's call is being recorded. For opening remarks and introductions, I would now turn the conference over to Senior Vice President of Corporate Communications and Investor Relations, Ms. Debra Wasser. Please go ahead.

Thank you, operator, and thank you, all, for joining today's call. Joining me today are our CEO, John Peeler; and our CFO, Dave Glass. 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 taping. 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 make 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. These factors are discussed in the Business Description and Management's Discussion and Analysis 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 and performance, is available on our website. I'll now turn the call over to John for opening remarks.

Thanks, Deb, and thank you all for joining our call. Dave's going to start off by reviewing our fourth quarter results, after that, I'll briefly summarize our 2011 performance and provide an update on business conditions and our outlook. And then we'll take your questions. Dave?

Thank you, John. Turning to Slide 6. Veeco's fourth quarter 2011 revenues were $192 million, down 28% sequentially from the third quarter and down 36% from the record $300 million fourth quarter of 2010. Fourth quarter revenue was right about at the midpoint of our guidance range, which was $175 million to $215 million. GAAP net income from continuing operations for the quarter was $23.6 million or $0.61 a share, compared to GAAP net income of $103.4 million or $2.46 per share in the fourth quarter of 2010. Non-GAAP net income was $28.1 million or $0.72 a share for the quarter, compared to $73.5 million or $1.75 a year ago. Adjusted EBITDA was $39 million or 21% of sales in line -- or right in line with our guidance. Veeco took a $2.6 million restructuring charge. It was composed of $1.3 million in asset write-offs and $1.3 million in employee termination and other costs. This reflects quick actions the company took to address the weakening order and revenue outlook. Fourth quarter gross margin was 43.3%, which includes an $800,000 inventory write-off related to a discontinued product line. On a non-GAAP basis, excluding net charge, we achieved a gross margin of 43.7%, which was at the low end of our guidance. Gross margins were negatively impacted by the lower volumes and higher supply chain costs this quarter. Veeco's operating expenses were $48 million, excluding restructuring, impairment charges and amortization. This was down from $50 million last quarter as spending controls were instituted in response of the weakening business outlook. Also bonus and profit-sharing expenses were lower as the company did not meet its bogus targets that were set at the beginning of the year. Turning to Slide 7. You can see that of our reported $192 million in revenue, 83% was contributed by our LED & Solar business and 17% by Data Storage. Weakening external conditions continued to slow the performance of both businesses. Veeco's LED & Solar revenues were $160 million, down significantly from the $258 million peak level we reported a year ago, but squarely in line with our expectations and the guidance we provided at the beginning of the quarter. MOCVD revenue was $150 million, down from $240 million in the fourth quarter of last year. Revenues were down as a result of a general slowdown in MOCVD system purchases particularly in China. While not a new phenomenon, we experienced tool shipment rescheduling by several Chinese customers as they continue to manage through facility readiness and funding issues. LED & Solar adjusted EBITDA was $34 million in the fourth quarter of 2011, compared to $108 million in the fourth quarter of the year before. Data Storage revenues were $32 million, down from $42 million in the fourth quarter of 2010 and $34 million in Q3 2011. Data Storage adjusted EBITDA was $5.2 million in Q4, down from $12.5 million the prior year. Turning to Slide 8. You can see an unusual looking pie chart where Veeco's fourth quarter bookings were actually higher in Data Storage, which is shown in blue, than in LED & Solar, which is shown in yellow. Veeco's total orders of $143 million represented a 51% decline from the $295 million reported in the fourth quarter of 2010, but an 8% increase from the third quarter of 2011. Data Storage orders were $76 million, while LED & Solar fourth quarter orders were $67 million. LED & Solar bookings were at their lowest level we've experienced since the second quarter of 2009. We experienced the continued deterioration in business conditions for MOCVD, which reported only $59 million in orders as customers delay capacity expansions until tool utilization levels increase. Veeco continued to book a mix of both MaxBright and single chamber K465i tools, with China remaining the largest percentage of Q4 orders by region. On a positive note, we have several MOCVD system orders for new emerging applications, such as Power Electronics [ph] and CPV Solar. Conversely, our fourth quarter Data Storage orders were the highest in Veeco's history as we’ve played a key role in helping our hard drive customers rebuild manufacturing capacity, which was lost during the Thailand flooding that occurred back in October. Due to the sensitivity involved, we're not permitted to discuss any details related to these orders, but suffice it to say, that orders were received from customers directly impacted by the flooding, as well as customers that increased capacity to compensate for hard drive shortages. After about $7 million in backlog adjustments for Chinese MOCVD orders, we finished the year with $333 million in backlog, about $205 million of our backlog is from MOCVD. Our fourth quarter book-to-bill ratio was 0.75:1. Lastly, let's turn our attention to the balance sheet on Slide 9. We finished the quarter with cash and short-term investments of $492 million, with Veeco generating strong cash from operations of $57 million. Good working capital control is only partially offset by a decline in deposits. Deposits ended the quarter at $57 million, down from $78 million at the end of the prior quarter as shipments were not matched by new orders. Inventory and accounts receivables were both down in dollar terms, reflecting the slower pace of business and close working capital controls. Before I turn the call back over to John, I'd like to comment on a few housekeeping items for 2012 modeling purposes. Veeco's 2012 CapEx is currently expected to be in the range of $40 million. It's likely that this CapEx will be heavily weighted towards the first half of the year as we finish up the buildout of our new Korea site and continue to invest in our New Jersey R&D facilities. Also for modeling purposes, you can use a tax rate of about 26% for 2012. Our global effective tax rate will be down in 2012 as we -- as this will be the first full year since we set up new operating structures in Asia to support our growing footprint in the region. John will now review additional 2011 highlights and discuss our outlook.

Thanks, Dave. Moving to Slide 11. Looking back on 2011, it's clear that we executed extremely well and reported some of the best performance in our history. We delivered revenue of $979 million, that was a new record and just shy of the $1 billion target we set at the beginning of the year. Adjusted EBITDA was $296 million and gross margin at 48%. We delivered a record non-GAAP EPS at $5.01 a share. So a great year. We've got a lot to be proud of as a company, delivering strong results in extremely dynamic market conditions. Moving to Slide 12, I'll cover a few of our accomplishments for 2011. We gained market share in top-tier LED customers around the world, and according to IMS Research, MaxBright was the top-selling MOCVD tool for 2011. The LED customer base in China expanded much more rapidly than anyone expected it would, and we moved faster than our competition to support the investment cycle. In Data Storage, we remained well-aligned to our customers and moved quickly to support their rebuilding efforts after the devastating Thailand floods. We trained 360 customer engineers at our new China site last year and numerous customers have already visited our Taiwan Technology Center for processed demonstrations and technology collaboration. We also broke ground on our new Korea development center to further support our customers. Let me move on to business conditions and our outlook. Turning to Slide 14. The short-term dynamics in the LED market remained muted. We expect that MOCVD orders could be depressed for multiple quarters. Our customers are reporting that LED backlighting demand remains weak, and factory utilization levels in Taiwan and Korea are in the 50% to 70% range. From a regional perspective, the widely anticipated pause in China investment is clearly here. And in Taiwan, top customers are planning investments at home and in conjunction with their China joint venture partners, and yet those projects are proceeding at a slow pace. I visited Korea last week to meet with key customers. While they all recognized the enormous potential of the global lighting market, they continued to delay capacity expansions until near-term market conditions improve. Turning to Slide 15. On the brighter side, we continue to see evidence that LED lighting prices are dropping and getting closer to mainstream adoption levels. Samsung and LG both have 40-watt equivalent bulbs on the market at about $12 a unit and have or will soon have 60-watt bulbs equivalent priced in the mid-teens. In China, there's speculation about additional LED incentives, and the government continues to expand its LED streetlight programs. And in Taiwan, there are plans to replace over 250,000 halogen street lights in 2012. And then in Japan and Korea, they also have very aggressive LED lighting programs underway. With LED at less than 5% of the lighting market, the future potential for this market is enormous. Turning to Slide 16. The Tier 1 lighting and chip companies around the world are positioning themselves for growth in the LED market. Philips announced that it will set up an LED lighting plant in China. Epistar formed a strategic alliance with China-based Yan Kong [ph] lighting. Samsung recently reorganized with a goal to accelerate its LED lighting business. And Panasonic announced targets to grow LED over 50% of its lighting revenue by 2016. A recent article in the Itriply Spectrum [ph] commented that there's no longer any debate about which lighting progress -- which lighting product will replace the incandescent bulb. It's going to be the LED. So it's exciting for us to see how lighting companies around the world are positioning themselves to capture a significant share of the market. Turning to Slide 17. We believe that 2012 will be a transition year between the LED TV investment phase over the last 3 years, which helped to fuel a $4 billion LED market, and the much larger LED lighting market, forecasted to be over $13 billion from 2013 to 2015. It's difficult to pinpoint the duration or the depth of the current investment pause, which explains the wide band of MOCVD estimates. Wall Street's low estimate for 2012 demand is 200 tools and the high number is over 500. 2014 -- 2013 forecast have an even wider range, 260 on the low end to over 700 on the high end. We think that the actual numbers will come in well above the low-end forecast and likely below the high-end forecast. But regardless of the forecast, we remain focused on advancing our product and technology lead, deepening our customer service and support, and utilizing a flexible manufacturing strategy to maximize our performance through the investment cycles. We will remain aligned with our customers' lighting roadmaps, and we’ll launch products to improve yield and reduce Epi cost by a factor of 3 by 2015. And that will position us extremely well for the multibillion equipment opportunity with thousands of tools to be sold over the next few years. Turning to Slide 18. We've increased our focus on some new emerging MOCVD technology applications. GaN-on-Silicon technology is currently in development at over a dozen key customers as a way to potentially lower LED manufacturing cost. By using silicon substrates, the industry is hoping to leverage existing semiconductor fabs and wafer level packaging process. We are actively engaged on many of these programs, and for example, today, we announced that Veeco was chosen by Epistar for their GaN-on-Silicon development program. In addition to LED, GaN-based Power Electronics are also in the R&D stage, at about 25 customers. GaN semiconductors provide higher efficiency and higher switching speeds than traditional silicon devices, and many of these customers are planning to expand into production in 2013 for solar, wind and various power applications where efficiency is important. We're gaining market share having recently penetrated Samsung, and as announced today, LG Siltron for GaN-based programs. So GaN-on- Silicon for LED and Power Electronics are exciting opportunities that should hit the R&D to production inflection points over the next couple of years. Being aligned with the industry leaders now, as they work on their product development, will solidify our leadership position in the market. Another focus area for growth in 2012 is our Services business, as seen on Slide 19. Our Services business has been growing rapidly. And with over 400 MOCVD reactors coming off warranty this year, we expect to continue to drive growth of parts, consumables, upgrades and extended warranties. Also in 2012, we started a new business called Veeco Certified Equipment to refurbish and sell data storage equipment with new warrantees and support from Veeco. And that gives our customers additional options for cost-effective and high-quality products. Our total services revenue grew 40% to about $100 million last year, and we expect a similar growth rate in 2012. Turning to Slide 20. With all the focus on the LED market over the last few years, we often don't spend enough time talking about our Data Storage business, which actually generates over 30% of its sales from non-Data Storage customers and our Molecular Beam Epitaxy business, which provides compound semiconductor technology and is part of our LED & Solar segment. These businesses provide Veeco with growth and earning consistency through the peaks and valleys of the MOCVD investment cycles. They've got different customers and capital investment cycles. They give us exposure to hard drive, wireless and optical coding markets plus a broad range through R&D applications, and they have varied or different geographic exposure with less than 10% of their revenues coming from MOCVD's main regions in China, Korea and Taiwan. So together, the Data Storage and MBE businesses have delivered 10% to 30% EBITDA every quarter in 2010 and 2011. And as you can see on the right-hand side of the slide, a 3-year revenue CAGR of 25%. We expect that with nearly $130 million in backlog at the start of this year that these businesses will show similar strong growth in 2012. I'll now take you through our Q1 guidance on Slide 21. Our Q1 revenues are expected to be between $115 million and $140 million, and facility readiness issues and shipment timing uncertainty are already factored into that range. Gross margin should be between 43% and 45%. That's flat versus Q4 despite the decline in volumes as we have some mixed improvements on a quarter-to-quarter basis. Operating spending will be in the range of $46 million to $49 million, driving EBITA to 6% to 13% and non-GAAP EPS of $0.13 to $0.34 a share. This first quarter projection aligns with our prior comments about our variable cost model. With a dialing back of the natural variable components in our cost structure, as well as reducing discretionary cost, we're able to achieve quarterly breakeven EBITA performance and mid-40% gross margins on about $100 million of quarterly revenue. Turning to Slide 22 and our outlook for 2012. While we see no signs of near-term improvement in MOCVD, we are confident that orders will accelerate as top customers make strategic capacity and technology investments to drive the LED lighting wave. Our Data Storage MBE and Services businesses will provide a cushion for Veeco during the LED market transition period in 2012. We are focused on driving future growth and plan to maintain a high level of R&D investment. And we believe that with the work that's been done over the last 3 years to outsource our manufacturing and utilize variable costs where possible, that we can maintain a reasonable level of profitability and cash generation through this temporary pause in the LED market. We're currently targeting annual revenue in the range of $500 million to $600 million, and we'll provide additional color on revenue expectations as the year progresses. In closing, while we have -- while we face the challenging year ahead, we remain excited about Veeco's compelling position, as outlined on Slide 23. The technology we make supports energy efficiency, consumer electronics and network storage, all of which provide large growth opportunities over the next few years. We have market-leading positions and exceptional product momentum in MOCVD, as well as our foundation businesses of Data Storage and MBE. Extensive technology and product development programs will keep us on track with the industry-leading customers and will enable us to continue to grow and gain share. With nearly $500 million in cash and virtually no debt, a very strong financial footing to enable future investments in growth, and we're confident in our ability to execute and continue to win in the market. Although the near-term is challenging, the future is very bright. Thank you for your patience during our remarks. And operator, we'll take questions at this point.

[Operator Instructions] And we'll now take our first question from Satya Kumar with Crédit Suisse.

I just was wondering, when you're talking about not seeing any signs of recovery, do you mean to imply that the current order levels for MOCVD could go even lower? Or do you think that the current mix of orders you're getting for MOCVD is close to trough-type run rates?

Yes, it's hard to predict. Clearly, Q4 was a weak order quarter, and we're hoping to do better going forward. But I think we'll reserve our calling the trough by looking at the rear-view mirror as opposed to looking forward.

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

If I take the low point of your guidance in your comments, Dave, that CapEx will be front-end loaded this year. Is it reasonable to assume that you could be burning some cash in the very near term?

Yes. The first quarter is traditionally a low cash flow quarter for us. A lot of things like bonus payments, and this year in particular, as I mentioned, a front-loaded CapEx means that the cash flow will be weaker than normal in Q1.

We'll take our next question from Krish Sankar with Bank of America Merrill Lynch.

I had a question in terms of your guidance, if you look at $550 million midpoint, you said Services are going to continue growing this year. So what is the embedded product revenue assuming? And within the deferred, looks like MOCVD might be just a few hundred million dollars than that. And just as a follow-up, what is the service margin should we think about?

So on the services side, our MOCVD business has the lowest percentage penetration of services. Our mature businesses have significantly higher. As these tools come out of warranty, we expect it to ramp in MOCVD and get to be larger and larger. And I think we said we did a $100 million last year and probably we'd see a 40 percent-ish type of growth rate this year. So that should give you an idea of it at the company level. We don't break down services kind of segment-to-segment.

And we'll now take our next question from Chris Blansett with the JP Morgan.

A quick question. I wanted to get an idea of how you came up with the bottoms-up for the revenue for the year. And then in general, with your service revenue growing so quickly, would there be a point in time where you might start breaking it out like other semi equipment companies?

So we came up with our revenue for the year based on the backlog and some conservative bookings assumptions that basically assume that bookings will remain down for another -- for the first half of the year and will not drive a real strong acceleration in the back end of the year, probably some acceleration because I think there are some positive signs out there. But our usual conservative approach to look at, we're pretty confident we can be. We might break out services by segment in the future. This is a new area. We put a lot of focus on it. We're making a lot of progress, but we're not ready to do that yet. And it's just too much detail at this point.

We'll take our next question from Stephen Chin with UBS.

I just wanted to see if you could share any color, John, on how to think about the linearity of the 2012 sales? It looks like it could be a little bit more back-end loaded. And just a question on quarterly break-even. Did you think you'll be able to manage the LED segment to be profitable this year on a segment operating margin despite the continued investments in R&D?

So on linearity, it's reasonably -- as we've forecasted, it's a reasonably linear year. And if bookings resume kind of moving up, then the back end will improve. So it's not a hockey stick year by any means, and we're not forecasting breakeven by segment or that level of thing. Our LED business, or MOCVD business, is extremely healthy. We've done really well over the last year in market share. And as you could see today, beyond the LED lighting applications, we're also doing very well in power semiconductors and CPV and new applications. So it's a great business. We're going to invest heavily to make sure that we maintain our technology lead and do very well over the long term.

We'll take our next question from Carter Shoop with KeyBanc.

Can you give us some more color on orders? How they have trended thus far in the quarter? Specifically on the 2 business segments, how they’ve trended this quarter versus the December quarter?

Well, we don't typically give order guidance for Q1. But the color in the fourth quarter, of course, Data Storage was the -- won the day and had a very, very strong fourth quarter.

And we'll take our next question from Edwin Mok with Needham & Company.

So one of the comparatively [ph] kind of updated showerhead product with increased capacity. Do you see that -- does that have any impact on your business? And also a follow-up question just quickly on -- do you still market -- have you guys started to see any activity in used tool market? And do have any plans on getting into that business?

So the MaxBright product continues to be the best product on the market. It has a better cost of ownership and better capital efficiency, better footprint efficiency and continues to be the superior product on the market. So I think that's not new news. And as far as the used equipment market goes, we have not seen a significant used equipment market at this point and so that has not materialized so far.

And we'll go next to Ahmar Zaman with Piper Jaffray.

Looking back at some of your earlier tools shipped in the 2008, 2009 timeframe, I would imagine they're now about 2 generations behind. What are you hearing from those customers about potentially upgrading to the new generation tools? Are they looking at just upgrading their existing tools? Or are they more interested in buying a MaxBright, for example?

So the tools we're shipping today are very superior to what we were shipping at that point and have a large cost of ownership benefit. We see a couple of things. Some customers tend to move those tools to lower-quality or lower-spec-ed parts, and we see some of that. And at the same time, we get some requests for trade-ins, and we have done some trade-ins of older products for newer products, where we can perhaps sell the older product to a different type of customer or in a different region of the world. So clearly, there is some ability to upgrade. And our goal is to keep putting out better and better tools that make it very compelling for the customer to want to replace the older tool with a newer tool that gives them some real economic advantages.

We’ll now go to Mehdi Hosseini with Susquehanna International.

You have $212 million of MOCVD backlog. What is the age of that? In other words, how many quarters would it take for shipment?

Well, we don't detail that. But as we’ve said in past calls, and it's no different with the backlog now, with it mostly being -- or with it heavily weighted on the MOCVD side towards China, it takes longer for those things to roll out of backlog. So a rule of thumb you can use is 9-or-so months is what we're seeing, things roll out of the backlog for MOCVD in China. The other thing that's worth noting is the heavy booking quarter that we had in Data Storage, much of that is actually scheduled for shipment in the second and third quarter, a little further out not in the first quarter, so that's coming a little bit later in the year.

And we'll now go to Patrick McCartney with Lazard Capital Markets.

I'm calling in behalf of Daniel Amir. Looking at current industry utilization rates, what level do they need to be at before you think customers will start ordering more tools again?

So usually the customers are projecting ahead and it's really a customer-by-customer perspective because -- so for instance, in a given region, the region may be at 1 utilization rate and a customer within that region might be significantly higher. What they're looking for is, in 9 months or so out, 6 to 9 to 12 months out, will they be running out of capacity to meet the demand? So they're looking at their demand ramp-up rate, and generally when they see themselves ending up at 80% or 85% a couple of quarters out, then they're going to look at reordering additional tools. So it's really a combination of current utilization and projected future utilization. People don't want to run out of capacity and be unable to fulfill the market.

We'll now go to Olga Levinzon with Barclays Capital.

Just 2 quick ones. First of all, can you -- given the ramp-up in your cash balance, which is obviously doing a great job there, can you prioritize how you're thinking about what that cash balance will be deployed to? And then just a quick follow-up, any color that you can provide on the mix within your MOCVD revenues or bookings between MaxBright and older-generation MOCVD tools?

Sure. I'll take the one on the cash balance. Actually, our cash priorities have not changed recently. As you know, from following us last year, we had a buyback in place, which we fully utilized as of over the summer. We do not have another buyback approved by the board at this time, and we're still actively in search on the M&A front.

On the MaxBright versus 465i, the product -- the MaxBrights continue to ramp to be -- it's gained extraordinary market acceptance at key customers and done very well. We've got repeat orders and it's become over half of the business. But we'll have a balanced business between MaxBright and the 465i going forward.

And we'll now go to Vishal Shah with Deutsche Bank.

Just wanted to clarify the backlog number that you provided. Can you [indiscernible] about what the backlog composition would be between service and MOCVD equipment, especially around the $200 million non-data goods backlog? And then also, can you talk a little bit about the share buyback that you've done so far of the announced plan that you introduced last quarter?

Okay, well let me start with the latter part of the question. The share buyback is done. We finished it in August. It was a $200 million buyback. And over the course of about 1 year, we finished that up. On the backlog question, if I understood the question right, the question was how much of our backlog is service. It's about -- a little over $40 million of the backlog is related to service bookings.

We'll go to David Duley with Steelhead Securities.

Real quick. Could you take a guess at what you think your market share will end up being in 2011? And if you carry the momentum into 2012, where do you think you end up? And just talk a little bit about AsPs. Is your competitor doing anything unusual that they don't have a cost control? [ph]

So our market shares have been continuing to grow for Veeco over the last couple of years. And according to IMS, an external party, it hit well over 50% in Q3. I don't think we can speculate on Q4 because we'll wait for the numbers to get reported there. But it's -- we've done very well. We've become the market leader in this area, and we expect to continue our momentum. On AsPs, it's -- in market downturns, we all fight for orders harder. There is compression in pricing. You can see that in the gross margins of our business and our competitors, hopefully we’ll keep a sane [ph] level here and move that forward. But nothing crazy happening, but clearly there's near-term gross margin compression, which you can see in the last couple of quarters.

And we'll now go to Andrew Huang with Sterne Agee.

I just had 2 quick questions. First, I think you gave commentary on MOCVD utilization in Korea and Taiwan. Can you give us your thoughts on MOCVD utilization in China? And then secondly, when you look at the 2012 revenue target, can you give us a rough idea of the split between LED and Data Storage?

So in China, it's pretty varied because we have -- on one hand, we have some customers that are mature providers, have been ramping and they've got reasonably high utilizations. They're above 50%. And we've got others that are very low utilizations, but building factories, taking tools and getting started, so it's a little less. It's such a dynamic environment. It's a little less meaningful to quote an overall utilization level. But they -- I'd say they range from small percentages to 60% or 70%. And we're not providing a breakdown in kind of, of our annual guidance by segment. But I think if you look at the numbers we gave you, you can kind of work backwards. And then see on our -- you can kind of tell what it would be --what range it would be.

Yes. And of course, we pointed out that we expect growth in the Data Storage business this year.

Yes.

And we'll go next to Robert Spandau with ThinkEquity.

On the Data Storage-related sales, is there any reason to think that margins would be different for similar sales levels this time around versus in the past?

I think margins will be pretty consistent. Clearly, we've had a pickup in revenue here, but I wouldn't expect any huge change. There is a combination of things going on in the Data Storage business. First of all, there's been a lot of customer merger activity, which has delayed orders in various businesses, and may still be delaying orders. And then on top of that, we had the Thailand floods and a need to rebuild, plus all the dynamics associated with that. So I would be projecting them ahead as similar to what they've been in the past on an aggregate basis.

And we'll go next to Andrew Abrams with Avian Securities.

Just quickly, you mentioned that you thought the mix would be slightly better in first quarter that would be helping the gross margins. Are we talking about MaxBright there as you work your way through the margin improvement on that product? And also you said $7 million in adjustments to orders that includes anything that might have fallen off the 12-month period? Or is that just cancellations?

Yes, so the first question, MaxBright is certainly part of the story for the better mix. Another part of the story is that MBE margins in Q4 were a little bit weak. So we should see a better margin for that business in Q1. And what's the second question?

Order cancellations.

Yes, the $7 million. That was a cancellation of a customer in China.

And we'll go next to Mark Heller with CLSA.

I was wondering if you could comment on capital intensity in the LED manufacturing industry. Is it or is not occurring due to the yield improvement wafer side transition, the move to larger MOCVD sizes for maybe the same or lower pricing?

Mark, give us a little more color on what you're looking for.

I guess I'm just looking for your thoughts on capital intensity compression within the LED market.

Well, what we've seen is, in the early stages of the market, the capital intensity tends be much higher. And people are buying tools at a much faster rate than they do a little later in the market stage. So I think clearly in markets where you have that kind of maturity starting, you'll start to see that capital intensity shift down. There are clearly moves to -- we're building better tools. We're improving yield. Customers in more mature markets are moving up the larger wafer sizes, and all of those provide some improvements in cost. They reduce cost, then they allow more good LEDs to be put out per dollar of tools. So that's a natural progression. And it's actually, in this case, it's critical for that to happen for lightning to take hold. You can't really drive lighting with 60-watt light bulbs that cost $25. And so the costs are coming down. The customers' costs are coming down, and I think that's a good thing. I went into Home Depot yesterday, and we've got $40 bulbs -- we've got 40-watt bulbs for $12. So the prices are getting much more reasonable. We expect that, that will continue and that will drive the growth.

And we'll go next to Jed Dorsheimer with Canaccord.

I wanted to just dissect the guidance in a little bit more granularity, if you don't mind, John. If I look at the Services business, I think you mentioned that it grew by 40% to $100 million, and you expect a similar growth rate in '12. So assuming $140 million for the services, and if we look at HDD or Data Storage, which you expect to, I think you mentioned, grow in '12 off of the $150 million. And then we look at the comments in terms of -- I think you mentioned from a macro perspective that the low end of Street estimates are $200 million and the market will be well above that but under the -- excuse me, 200 tools and under the 500. So taking the midpoint -- I mean, just wondering how you get above the high-end of your guidance there? So if there was to be a shortfall, where do you see that coming from? I assume it's on the LED, but I just want to go through that because that would imply less than 200 tools, unless you're assuming that you're going to lose market share?

Yes. So first of all, a couple of things. On the Services side, that's overlapping with the other segments. So you got to be careful not to count that as something separate. The Services side is embedded in our Data Storage and our MOCVD and MBE business. So you got to kind of account that as – you got to kind of take that off. The reason that we put out there is it's a floor of growth in every business for us, especially in MOCVD where we have a lot of tools coming off of warranty and will get more and more significant there. So the -- there's a range where I don't think you'll get if you build the services into those other businesses and you take a 50% market share on the -- and a $200-plus million foundational business, which would be our Data Storage business plus our MBE, I think you're not going to get below 200 tools. There's just -- there's no way we believe that's going to happen, and that's not what we're seeing from our customers. And that's just not what we think will happen.

And we'll go next Aaron Chew with Maxim Group.

I'm wondering is it possible you can offer any further level of detail on the orders, either on the country-by-country basis, even if it's just very generally, and maybe, more importantly, on new customers versus old?

We probably...

And I'm sorry, how that comps to the first 3 quarters of the year.

Yes. Dave, you want to?

Yes, I mean the color that we've given in the past is our orders have been -- particularly in MOCVD, heavily weighted towards China. About 80% of our orders in MOCVD are coming from China. And then as John mentioned, in the other businesses, they tend to be outside the traditional areas of Taiwan, Korea and China. So you can think of them geographically as dispersed outside of those areas, primarily North America, Southeast Asia and Europe.

I think just to add to that, the China business includes business from Taiwan JVs into China, so there's a little bit of a less clear boundary between Taiwan and China as far as orders go. And then secondly, as far as new customers, I think we put out a number of press releases here related to GaN or GaN-on-Silicon for LED and GaN power electronics. So I think those are important new customers. All right. Well, I think that was that last question. And we thank you for joining us today. And we expect to do very well here in the future. Thanks.

Ladies and gentlemen, this does conclude today's conference call. Thank you for your participation.