Good day, everyone, and welcome to the Veeco Q2 Business Update Conference Call. Today's call is being recorded. For opening remarks, and introductions, I would like to turn the conference over to Senior Vice President of Corporate Communications and Investor Relations, Ms. Debra Wasser. Ms. Wasser, please go ahead.

Thank you, operator and thanks to all of you for joining John Peeler; Dave Glass; and me. Similar to our April call, given our ongoing accounting review, we are unable to provide detailed revenue, earnings or other financials. Dave will start the call with some top level second quarter highlights. He will also give a brief overview of where we are with the accounting review. Please keep in mind when we get to the Q&A session that we are limited in scope to what we can say about the matter, other than what David's reviewing now. John will provide an update on current business conditions and areas of focus for Veeco. If you haven't already done so, please visit our website so you can follow along with the slides. Let me briefly remind you that this call is being recorded by Veeco Instruments and is copyrighted material. It cannot be recorded or rebroadcast without our 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 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 our public filings 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 statement. With that, here is Dave.

Thanks, Deb. My plan today is to share some of our key financial metrics, but as Deb mentioned, I'll ask for everyone's continued understanding in recognizing that with the ongoing accounting review still underway, we'll have to limit our comments and financial disclosures to just those that are unrelated to revenue or any other parts of our financial statements, which may relate to revenue. Having said that, I think the information we can share today around bookings, cash and shipments may be helpful to -- to give you some line of sight on how the business is doing. Veeco's second quarter bookings came in at $85 million, that's up 20% from the first quarter. With MOCVD up 42% to $52 million. Veeco's MBE and Data Storage bookings were both flat at $6 million and $27 million, respectively. John is going to provide a bit more color into the bookings detail in a moment. While shipments were up sequentially, we continued to experience weak overall business conditions. We made only a small backlog adjustment of under $2 million during the quarter. Cash continues to be a bright spot for us. We're maintaining a very strong financial base from which to weather this storm. Cash declined $2.5 million during the quarter to $585 million. And we're executing very well on managed -- on managing cash and working capital. No doubt we're experiencing the most challenging business conditions since 2009, and this downturn has persisted longer than anyone predicted. Business conditions have been weak across all our end markets for well over a year now and pricing pressure in MOCVD has been intense since there's so few deals available. While I can't provide specific gross margin numbers or guidance, it's fair to say that selling prices have been under considerable pressure, as are…

Thanks, Dave. Good to talk to you, all, today. I'm going to provide you with an update on business conditions and what we're seeing in the market. Market trends are still mixed. In MOCVD, utilization rates at many of our key LED customers are 80%, 90% or even 100%. All the reports indicate that LED lighting is ramping. Some customers are optimistic in moving to increase capacity while others are holding out and waiting before committing more capital. And while orders were up 42% sequentially, they're still relatively weak. MOCVD order patterns are likely to remain choppy because of the timing of large, multi-unit deals, and have a significant impact on our quarterly bookings level. In MBE, the production side of the business continues to be slow. On the R&D side of the business, our deal funnel is improving and we booked our first new generation systems for R&D customers this quarter, the GenXplorer[ph] . While we're seeing some customer pull from the research market, it's clear that the U.S. government sequester is having impact on our customers' research funding. And in Data Storage, there's a little capacity buying and customers are making strategic investments for HAMR and other next-generation technologies. It's encouraging that we're starting to see some capital additions -- some capacity additions. Many of Veeco's top customers are reporting strong demand for midpower LEDs for indoor replacement bulbs, and for high-power LEDs for outdoor lighting. And I'm excited to tell you that we had our first multi-unit capacity buy from Korea in 3 years. While I can't tell you the customer's name, it is one of the world's top LED manufacturers. They're adding capacity to support LED growth in tablets and in lighting applications. In another big win for Veeco during the quarter, we booked another multi-unit,…

[Operator Instructions] And we'll go first to Shawn Lockman with Piper Jaffray.

I wondered if you could just give us some commentary on ASPs. Obviously, there's been a lot of pricing pressure and if you could talk a little bit -- do you think that we are starting to see kind of a bottom in those ASPs and that we could eventually see some recovery once orders return, or have we kind of come to sort of a new normal with the current pricing environment?

We sure have seen a lot of pricing pressure, and we do expect prices to go back up as we get a little bit -- as we get some stronger order flow and some stronger growth in the industry. I think it's hard to call the bottom. I sure hope it's the bottom where it is, but hard to tell on that side. But we do target getting prices back up to the point where we can have better margins in the future.

Sure. And if we could -- I mean, can you give us a sense of how you guys think sort of a long-term, sort of normalized MOCVD market might look like from a reactor count kind of number? I mean, its -- for example, are we -- longer-term, are we going to be looking at a 400 reactor annual market, a 250 market, a 600 market? I mean, how are you guys sort of thinking about it as -- once lighting comes back and we kind of go out of this kind of slump we've been in for the last several quarters?

Well, it could -- it could be anywhere in that range you predicted. It's hard to tell and it depends on how fast the market recovers. If the market recovers faster, we're going to see an overall higher need for more reactors over the next 5 years. So it's going to range from 200 and something to 400, and that range would be probably an average, a reasonable range for it.

And we'll go next to Edwin Mok with Needham & Company.

Just quickly on pricing. Can you kind of explain, is that coming from your prime competitor or is it -- are you guys seeing some Asian local supplier that's putting pricing on your products now?

Yes, we're actually not seeing any Asian local competitors in the deals that we've been competing for. So it's really a Veeco and Aixtron dynamic here. And there are no deals that I'm aware of that have been won or seriously competed for by anyone else.

Okay. Great. That's helpful. And then just kind of maybe talk about third quarter or second half outlook. Anything you guys can give, any numbers on revenue, but at least on the booking trends, how do you kind of see your booking trends going to third quarter and second half?

It's hard to tell and the bookings are at a relatively low level. So deals shifting around can affect quarter-to-quarter pretty substantially. We haven't really called an uptick here. We did grow orders versus the last quarter, and we hope that Q3 orders will be stronger than Q2. But we're not expecting any major uptick here. We hope it will get better. But it's really too early to predict when we've got a real recovery in the market.

We'll go next to Brandon Heiken with Crédit Suisse.

I was wondering if you could comment -- you mentioned that you hoped that these third quarter orders will improve but they could be lumpy. What does that mean for next year on an annual basis? Is it -- do we reach a normal range next year or is it really too early to talk about later this year and next year?

I think it's too early to call next year. As long as the orders are very low, single deal shifting quarter-to-quarter has a big impact. So I think we expect continued lumpiness in the business, and we do hope it'll get better. But we're not calling 2014 at this time.

Okay. You mentioned that the quotation -- the time between quotations to order is relatively long now. How long is that time, and what do you think it should be? Or what do you think a normalized rate could be on that if orders strengthen?

Yes, I don't think it was us that mentioned that the time between quotes and orders was long. But it really depends on the dynamic in the industry. Right now, we're in a down cycle. Our competitors have some inventory available. So people -- that makes people feel like they can hold off on purchases and still be able to get equipment fairly quickly if they really need it. And I think that is why we see the trend of -- we've got customers at very high utilization rates and some are ordering more for capacity, but some are still sitting there and saying, "you know what, I'm going to wait and see what happens over the next quarter or so." So I think when people see a real serious need to add capacity, they'll start moving faster. But right now, I think everybody's pretty cautious.

We'll go next to Krish Sankar with Bank of America Merrill Lynch.

I had 2 of them. Number one is, John, a technical question. When you look at the general lighting LED chips between high power and midpower, is it true that the mid-power LED chip is fungible with the backlighting chip capacity?

Yes, I think it is. We see the mid-power chips going into backlighting and but also into indoor replacement bulbs and the higher power chips being better for outdoor lighting or other applications.

If that is the case that backlighting slows down in Q4, in theory you don't need to add more additional capacity because you can translate that into general lighting midpower, right?

If you're a company that has the designs for both applications and you may be able to move some capacity around. We're not seeing a lot of kind of quick moves of capacity from one application to the other. But I suppose it's possible.

Got it. Then just a quick question. Do you guys have a regional split for the bookings?

A what?

Regional split for your bookings?

Oh, no, we do not. We don't provide that. But last -- this quarter clearly, we had substantial orders in Korea, in China, in Japan and North America would be the top players.

We'll go next to Stephen Chin with UBS.

John, just a follow-up question on the Korean MOCVD order. Would you describe this Korean order as a market share gain? And in general, how would you describe the trend of utilization rates at some of the other customers in Korea?

Well I think in this customers' case, I think they have gained some market share and some new applications for them or new customers for them. And that pushed their utilization to 100%. And they really, basically had to walk away from business or buy more systems. So that's really what's happened there. Other Korean players are at lower utilizations. In general, probably 80% to 90% would be probably more typical. So that would be what you'd see in the other 2 key customers.

Okay. And then maybe just a follow-up question on the higher shipments that you saw in the quarter for MOCVD. Did you have any general estimate of what percent of the shipments are going towards backlighting versus general lighting?

We don't. But I would say, most of the growth is driven by general lighting. And the places where -- the places where there is backlighting growth is really driven by China and people trying to feed the new TV and tablet manufacturers in China. But we don't really have that split because our customers can use the tools either way.

We'll go next to Vishal Shah with Deutsche Bank.

John, wanted to understand what percentage of your bookings would be service, and the second quarter would be comparable to the historical levels or different?

We don't have that split for you, but I can tell you that services grew sequentially from quarter-to-quarter, of course, so did bookings. But we don't have that split. We did win a couple of pretty major service contracts. And so I think we're making good progress on services.

That's great. And then the cash position in the second quarter is pretty impressive despite some of the low levels of bookings and pricing environment being so challenging. I'm wondering how much of the cash balance is a function of working capital improvement and maybe some upfront cash payments from sort of bookings that you're receiving versus the mash of profitability in the business?

This is Dave. We've done a great job managing working capital and that's certainly helped. Deposits that are sitting out there, about $27 million of the balance.

We'll go next to Jed Dorsheimer with Canaccord.

I guess just a -- first, a strategic question. I mean, if I look at the market, you have 2/3 of the market share and you have a fairly decent advantage from a cost of ownership over your competitor and just looking at the bookings, your competitor is booking 20% of the number of tools that you are. I'm curious why you feel the need to match in terms of pricing.

We -- we actually don't match in terms of pricing. The customers are willing to pay a price premium for our product. And frankly, we've walked away from some deals because either the pricing was so bad or the terms and conditions were so bad that we just said, you know what, we're not going to take that business. So...

Okay. Just as a follow-up, in this current market environment, I'm curious, any update on not expenses because that will be related to the P&L. But can you just give some general updates on what you may have done to reduce your cost structure?

Well, we have a cost structure that includes a fair amount of variable cost and not just in manufacturing but in R&D and other groups, and we've rolled that variable cost down, maybe contractors or subcontracted R&D in those areas, as well as we've had some reductions in force. So we've bought our cost down to align with what we see as the longer-term reality of the business and our cost was relatively high. But -- so I would say we have reduced cost in just about all groups across the board. But R&D and SG&A. Dave, do you want to add anything or...

No, I mean, that's a continuing program that's been going on for a number of quarters now but...

We'll go next to Brian Lee with Goldman Sachs.

I just had a couple. I guess, first off, I'm wondering how much current ASPs are down versus the average you saw during most of last year and what your thoughts might be around preventing this from becoming a new normal? Because it seems like customers, which bought subsidized machines a few years ago and are now getting low pricing today, they may well be getting accustomed to this ASP range. Just any thoughts on that would be helpful.

Okay. Well, we don't actually provide details on where the ASPs are, but I think everyone knows there've been under a lot of pressure. There's been a pretty clear message to the customers that this is a temporary thing and they shouldn't expect this to stay, especially as new tools get introduced. So I think that will be the biggest change is, as new tools come out and we -- that we do expect to get better pricing on those, and I've been told that, that message has been very clear to the customers from Aixtron also.

Okay. And on a gaining compliance, what happens logistically on November 4? Are you guys able to file for an additional extension or are there other proceedings that would have to occur?

Well, Brian, let me first say, we're working very, very diligently to get through with the review before that date. In the event that the date were to be missed though, we would effectively go on to the pink sheets on OTC. But we're working really hard to not be there.

Of course. Fair enough. And then last quick one, if I could just squeeze it in. When you say shipments were up in MOCVD this quarter, is that on a dollar basis, or unit basis or both?

Both.

We'll go next to Craig Irwin with Wedbush.

First question I wanted to ask was about the trajectory of the pricing pressure that you've experienced. Is this deteriorating or improving versus the first quarter? And how do you see this developing so far in the third quarter?

I think it's been bad for quite a while. So -- and -- but it's been bad for a while. I can't say that it's deteriorating. But it's at low levels. We're not sure when we'll get past it, but it's bad for now.

Okay. Understood. My second question was more accounting-related. Has the company maintained its stock-based incentive compensation during the accounting review period?

The company has not made its ordinary grants to the team during the accounting review. We have continued to make grants to new employees for recruiting purposes.

We'll go next to Andrew Huang with Sterne Agee.

I apologize if this was asked already. So the first question is, do you foresee a situation where pricing for existing tools returns to prior levels? Or are you going to have to convince your customers to pay up for a new kind of higher throughput tool in order to get prices higher again?

I think -- I don't think they're going to -- that prices will go back to previous levels. I think there's a natural trend in this type of industry where the prices drop each year, get really premium prices during very large buying periods and then the customers expect you to do better and better, based on your learning curve of how to make that product. In our case, we have always had programs going on to drive the cost of manufacturing the tools down. So that has helped to mitigate the declining prices. But I don't think they're going to go back to where they were. Our goal will be to get back above a 40%, get back to a more normal gross margin and that's what we'd like to see.

Got it. Okay. And then the second question is, I was wondering if you've seen any of your older kind of more established customers take a step back during this downturn and look at their installed tools and say, "it's about time we shutdown some of these older tools. Let's replace them with new, higher throughput tools." And I was wondering if that's kind of an upgrade cycle that could happen.

We have had some upgrades throughout the down cycle, and we've had customers go back to even just middle-aged tools and order some substantial upgrades to those tools. I think it's been a while since we really did anything with a really older tool. But there is an upgrade opportunity in here. And as the customers get larger and more mature, they don't want to be running a lot of different variations of tools. And they -- at least within a fab, they'd like to have all the same tool or maybe 2 types of tools. But they don't want to have a lot of really old stuff. So there is an upgrade opportunity in there, and that's one of the things that drives our services business.

We'll go next to Colin Rusch with Northland Capital Markets.

Can you give us a sense of the nature of the accounting review milestones? And just give a sense of what's been accomplished and how much is left?

Yes, I'm sorry Colin, we really can't comment on the details of the accounting review. But as I mentioned in the comments, we have reached some milestones that are positive.

Okay. Great. And then can you talk about the volume of customers that you're quoting on 1Q, 2Q to 3Q, and the shift in terms of the number of customers that are actually ordering 1Q to 2Q?

I don't -- I think the best thing we can tell you there is the orders, and that in the case of MOCVD, orders they were up 42% and overall orders were 20%. So I think that's a good -- that's your best indication of what's going on there.

But you can't -- you're not able to give me the volume of customers at this point?

No. No.

And we'll go next to Patrick Ho with Stifel Nicholas.

John, maybe a little color in terms of the market share position. You guys have been outperforming on the bookings front versus your competitor. Do you believe that there's still an opportunity to increase your share when 2013 plays out?

Well, we have -- we closed last year, in 2012 at over 60% market share on bookings or revenue. And I think we've been holding pretty well to that trend. I think we've done better in some cases. So I wouldn't necessarily call an increase. We like to kind of report market share in the rearview mirror once we've done it. So we generally don't project ahead. But I think we're doing really well on market share.

Okay. Great. And then maybe a follow-up question from me in terms of the excess capacity that's still out there, particularly in China. How do you see that environment? And how do you see that playing out probably over the next 6 to 9 months? Are you still getting quotes for new systems or does that still need to play itself out in terms of the excess capacity there?

So in China, the larger customers are running at relatively high utilization rates, 80-plus percent for the top guys, some of them over 90%. And so I think they're doing pretty well. On the other hand, there are some smaller customers that are still struggling to get started and there is some excess capacity there. What we haven't seen is a large used tool market. We haven't seen any significant numbers of tools moving around from province to province or that sort of thing. Although we've heard that there were some offers made. So I think, overall, eventually this capacity will be used up and the big guys are going to keep either buying more new used -- new tools or perhaps taking over some of the small companies and probably a combination of both of those things.

We'll go next to Mehdi Hosseini with SIG.

John, could you elaborate on the trends in wafer size, the migration to a larger wafer? And how do you see that impacting your business?

Well, the -- China is largely 2-inch and 4-inch, a whole lot of 2-inch and some 4-inch. Korea and Taiwan are -- you get into more 4-inch and 6-inch. There is a trend of people over time moving up to larger wafer sizes. It doesn't matter a whole lot to us. They do get some better efficiency or yield due to the edge effects on the larger wafers. But they also have some challenges -- excuse me, have some challenges related to being able to do a process that provides lack of too much bowing and other things on the larger wafers. So there's a trend to move up. It doesn't have any massive effect on us. It does give our customers some better levels of yield. And the good thing about the Veeco product is, our product works for 2-inch, 4-inch or 6-inch without any modifications. So a customer knows when they buy it, that they have the flexibility to change over time, and they don't have to go pay for a big change to the equipment. So I think -- that's an advantage for us.

Could you elaborate, either quantitatively or qualitatively, how much of a business this migration could provide for you either through retrofit or outright new MOCVD to purchase?

It doesn't require that with our tools. They can buy new wafer carriers. I'm not sure I'm answering your question, but if a customer is using 2-inch -- using our tools as a 2-inch, and they want to move to 4-inch, they buy new wafer carriers. It's not a retrofit. It's a easy change.

But that wafer carrier will cost the customer a lot less than purchasing a new MOCVD tool system, right?

Right.

Okay. So that's my point. I'm just wondering to what extent the migration to larger wafer is preventing you to see the kind of a booking growth that we would have seen at current utilization rates.

Well, because the migration to larger wafers only gets them a little bit of additional throughput, these reactors run either a smaller number of larger wafers or a larger number of smaller wafers. So the customer does not see -- it's not a single wafer reactor and the customer does not see a huge change in going up in wafer size. The wafer carriers are consumables, they wear out and they buy new ones. So it's kind of a natural trend in the industry that we expected and we expect to continue. All right. We'll take one more question.

We'll go next to Srini Sundararajan with Summit research.

Just had one question on your adjacent markets. What are the sizes of your adjacent markets that you are attempting to break into?

It really -- I don't really have a solid answer for you on that. But I can tell you the EUV market, for instance, could turn into a $50 million or $100 million market for us. The Power Electronics market, a few years out could become a 100-plus million dollar market. The MEMS market in the applications that we're selling into today, it's a smaller market. It's maybe $50 million or so. But we do see new opportunities to go in there. And the MBE R&D market's probably $20 million, $30 million level. So they kind of range from, I'm going to say $20 million to over $100 million, would give you a sense of them. Thank you. Well, thank you, all, for joining us today, and we appreciate staying connected. We'll talk to you soon. Take care.

Thank you. That does conclude our conference. You may now disconnect.