Good day, and welcome to the Veeco Instruments Q2 2014 Earnings Call. Today's conference is being recorded. At this time, I would like to turn the conference over to Senior Vice President of Corporate Communications and Investor Relations, Ms. Debra Wasser. Please go ahead, ma'am.

Thank you, operator, and thank you all for joining today's call. With me today are CEO, John Peeler; and our CFO, Sam Maheshwari. Today's earnings call 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 express 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 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. 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 of performance, is available on our website. I'll now turn the call over to John for opening remarks.

Thanks, Deb. Veeco's results were on track with our expectations. Revenue was $95 million, up 5% from the first quarter, and EBITA was a loss of $7 million. Second quarter orders were up slightly at $104 million. It is also our second consecutive quarter of bookings over $100 million, and our third consecutive quarter with a book-to-bill ratio over 1, and increasing backlog. We generated $2 million of cash in a challenging quarter, and our cash balance remains quite strong, at $485 million. Q2 MOCVD orders were $75 million, down about 10% from the prior quarter. Large orders from a small number of customers are causing orders to bounce around on a quarter-to-quarter basis. But the order trend, over the last 6 quarters, is very strong, including the following factors: the trend line from Q1 of 2013 onward shows a 50% compound annual growth rate; first half MOCVD orders are up nearly 80% from the first half of last year; we expect Q3 orders to be higher than Q2 orders; and finally, we're forecasting second half orders above first half orders. Positive market trends continue, including strong LED demand, very high fab utilization rates and solid customer quoting activity. Customer wins this quarter included large multi-unit deals from Changelight in China, and a top LED manufacturer in Korea. In the case of Changelight, we beat our competitor, the incumbent supplier, by having more productive systems with a lower total cost of ownership. I expect this positive trend to continue. I'll talk more about business conditions and our outlook in a few minutes. But first, let me turn the call over to our new Chief Financial Officer, Sam Maheshwari. Sam joined Veeco in May. His background in semiconductor process equipment and highly relevant roles as a financial leader have helped him to get off to a great start. Sam?

Thanks, John. I'm excited to be a part of Veeco and join you all for today's call. Veeco has done an impressive job managing through an extended downturn, and it’s clear to me that the best is still in front of the company. I look forward to helping strengthen the business and capitalize on the significant growth opportunities ahead. As John mentioned, the second quarter was challenging for Veeco, but we delivered our guidance on all metrics. While revenue was up sequentially to $95 million, our adjusted earnings before interest, taxes and amortization, or adjusted EBITA, was negative $7 million. We lost $0.39 per share on a GAAP basis, and $0.16 per share on a non-GAAP basis, in line with the guidance provided before. Q2 gross margin of 32% was on the high-end of the guidance, but weaker than the prior quarter. You may recall, Q1 gross margin was unusually high due to inclusion of certain high-margin tools in the mix. Q2 gross margin was reflective of the tough pricing environment in MOCVD business. Q2 performance was also impacted by higher operating expenses, as we rolled in some temporary, duplicative spending, tied to our site consolidation activities that I will explain further in a moment. R&D in Q2 was high, due to the spending on next-generation products. Within the $95 million of revenue, LED and solar segment represented $77 million or 81% of sales, and data storage was $18 million or 19% of sales. MOCVD revenue ticked up about 5% sequentially to $67 million. Moving to orders, we booked $104 million in the second quarter, up as compared with the first quarter of 2014. LED & Solar booked in $1 million, representing about 78% of orders, and data storage booked about $23 million, or about 22%. There were some moving…

Thanks, Sam. It's been a while since we've talked about the TV market on an investor call, but the latest generation of ultra-high-definition TVs demand some attention. UHDTVs deliver double the resolution and a wider color spectrum. DigiTimes forecast a 170% growth rate for UHDTV shipments, reaching about 25% of the total TV market by 2017. UHDTVs use twice as many LEDs as traditional LED TVs, and require more stringent chip performance. UHD business is driving up tool utilizations and Tier 1 customers, and having a spillover effect on overall equipment demand. This phenomena is most apparent in Korea, where we see new utilization rates of 85% or better, improved customer financials and meaningful pickup in activity. You can find high-quality, 60-watt equivalent LED bulbs on the shelves of Home Depot, Walmart and Best Buy, priced below $10. And some Chinese manufacturers are trying to break into the U.S. market with bulbs in the $5 range. Another emerging trend is the connect LED light fixtures to intelligent control networks and the Internet of Things, in order to deliver energy savings and/or provide convenience features. I expect many new applications that no one's even thought of yet that will both change the world and drive LED adoption. Overall, we expect the CAGR for the LED lighting to be around 40% on a unit basis. There are still some trends, such as industry consolidation, and some underutilized equipment coming online that would put a damper on the recovery overall. But overall, LED market trends are positive for both back lighting and lighting. Our Tier 1 customers are doing better. They are close to maximum capacity, and reporting improved financials. Some have started to invest in MOCVD equipment, with a few even requesting urgent delivery dates. With first half MOCVD orders up 80%…

[Operator Instructions] We'll go first to Edwin Mok with Needham & Company. Y. Edwin Mok - Needham & Company, LLC, Research Division: So I have a question on demand. You mentioned there's some pick-up in demand on TV and a high-utilization carrier. I was wondering, have you seen how broadening the demand beyond to just a few large-order large customer? I think last quarter you guys talk about still being pretty concentrated in terms of order. Have you started seeing broadening demand? And is it still very concentrated in China? Or have you started to see them pick up in Taiwan and Korea?

Demand is still fairly concentrated into a relatively small number of customers. It's not the same customers each quarter. But we're -- it is a small group. We had strong demand in China, but we've also seen pick-ups in Korea and some progress in Taiwan. So -- although a lot of the Taiwan expansion is going on through Chinese joint ventures, so we kind of consider that in China. Y. Edwin Mok - Needham & Company, LLC, Research Division: Great. If I can just squeeze a quick follow-up. So on ALD, you mentioned that you still expect customers to have ramp production sometime in 2015. Can you remind us where you are on their qualification? And I think last quarter you guys shipped a tool, right? Should we still expect an -- that you to recognize your order for that tool, so that eventually it becomes revenue sometime in '15?

Yes. We did book that tool in Q3, though, not Q2. But the tool was booked and there will be revenue in probably this year for that tool. We are not counting on any kind of major ALD revenue in our 2014 plan, and we're not really counting on major ALD orders in 2014. But they certainly could be there, probably in the fourth quarter.

[Operator Instructions] We'll go next to Stephen Chin with UBS.

Just a quick follow-up on Q3 orders being up. If you could just elaborate a little bit more on the order recovery, whether it's still a relatively modest recovery, or are you seeing smaller sequential improvements quarter-to-quarter, going forward? And if you could just maybe elaborate a little bit more on whether you see there being a situation where the rush orders are coming in one quarter, and maybe they adjust another quarter?

Well, a couple of things there, related to orders. There's a graph in our package. And when we looked at the graph of the overall kind of bigger picture order trend for the last 6 quarters, basically the compound annual growth rate is 50%. Secondly, we looked at the first half of 2014 versus the first half of 2013, and there's 80% growth in orders there. We were down a little bit in Q2, but it really corresponds to a couple of tools. So that's just statistical deviation. I think we expect both the Q3 orders to be up and Q4, or the second half to be up versus the first half. So we're going to see this bumpiness. Some of the orders are significant, and one order slides a little bit and it means whether you're growing a lot or growing a little. So I think the overall demand trend is -- is quite strong. And when you look at the actual curve over the last couple of years, it's pretty impressive. I think we even maybe surprised ourself at how strong it was.

Just maybe a sort of follow-up to that as well. Just a question on the overall LED industry and capacity utilizations that have been very high -- and I think you said that it was very high in this call as well. What were utilization rates in Q2 versus Q1? Where they a little bit higher in Q2? And...

Yes, I think they were a little bit higher, and it varies by country and by customer. But overall, they're moving up. We're in this situation where, customers -- the industry knows there's new tools coming from Veeco, and new tools coming from AIXTRON. And so, people are going to order things just as they need them, and hold off a little bit. But the trend is good.

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

This is Andrew Hughes on for Krish. Just in terms of the order push-out you had from a customer from Q3 to Q4. Is this something you view as pretty specific to the customer, or any concern that could be indicative of problems elsewhere that could slow down order flow?

Thanks, Andrew. This is Sam. No, this is just one customer and they just recently informed us of funding delays on their part. The order is good. We have received an advance cash deposit already, and we are talking about late Q3, previous shipment plan, to early Q4 type of a shipment plan. So this is just one very specific customer in China. Most of the -- most of the other customers and their demand, we are seeing strong -- strong demand from other customers. And these are a few MaxBright tools, and we were able to reconfigure our slot planned to other customers. But not 100%. As you know, it cost us some money, and it also requires some time to reconfigure the slot planned for other customers. And so with some of these pushouts and back through by some of the things, this is where the guide is. I would say that the guide is a little bit lighter than what we would have expected or what our normal expectation be. But this is where we ended up for the guide for Q3.

And then just a question on competition for you guys. You mentioned AIXTRON -- obviously, it always seems to be Veeco and AIXTRON. Is there any update that you think is worth giving on where you see your Chinese competitors in terms of performance? Or is it still a pretty big gap?

I think it's a pretty big gap. We've seen Chinese competitor evaluation tools in some of our customers. They're not -- we haven't seen them participating in any sort of financial transactions or actual sales. From what we've heard, the performance is still behind the Veeco and AIXTRON tools that were introduced several years ago. So not a lot of new news, but that's what we've heard.

And we'll go next to Mike Ritzenthaler with Piper Jaffray.

I was interested, John, in some of your comments in your outlook on the consolidation, and particularly in the LEDs. I was wondering if you could add some more color on how you think that impacts your business. I would have -- I guess, I would have thought it would have been a positive.

It could be a positive. I mean, there are -- there is -- if we look at this industry 3 or 4 years ago, there were 50 players, so there's really a large number of companies getting into it. We're now starting to see them merge together. We've seen EPISTAR buy FOREPI. And those type of things, I think -- I don't see it as a negative. I do think that it -- in the case of when 2 companies merge, and one of them has a bunch of excess capacity, then it can free up some capacity and slow down tool orders. I don't think that was the case in the EPISTAR/FOREPI consolidation. But we'll see some others where larger companies will buy smaller companies, and maybe get a little more out of the tools than they've been getting. So we just see that as it's one of the natural ways that any unused or partially used tools get used up. And it's if it weren't happening, people would be buying more MOCVD tools. So it's not an unexpected thing, it's just kind of one of the negatives. I think there a lot more positives than negatives, which is why we're seeing this ongoing growth over the last 6 quarters.

Yes, that makes sense. And then on -- sort of the debate of new tools versus working on yield improvements with existing tools. I know you work closely with your customers on that. I guess, how would you characterize the current potential uplift from other technologies, things like that for enhancing yield versus orders here, as we look at the back half of '14?

Well, let me answer that, and then -- I'm not sure I've got the whole answer, but let me tell you a few thoughts and then we can see. Our customers have been working -- some of the key customers are -- have not been making LEDs for 10 years. And over the past 3 or 4 years, they've brought their yield up quite a bit, and that's one of the things that's prolonged this industry downturn, because the customers have been able to either shorten their recipe times or get more yielded shifts and find ways to get basically more out of an MOCVD system. At first, as they get better, those productivity improvements come pretty quickly. But the overall market has gotten much better now. So the pace of productivity and yield improvement has slowed down, quite a bit. And the easy stuff is gone. So I think that's also a positive for the industry, for us, at least, in that it's time to buy new tools that will actually further give you a better yield and a better productivity and customers kind of need to buy new tools or at least more of what they've been buying. But there's not this kind of easy yield improvement to be had.

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

First one I had was on your outlook. John, for better orders in the second half versus the first half, can you provide a few clarification points. Does that view include any ALD orders at all, and does it include any orders for the new MOCVD platform?

Well, it does not include any ALD, other than what we just booked, which is less than $5 million. So it's really focused on being driven by MOCVD. And I can answer the second part once we launch our new product, but I can't really comment on that yet.

Okay, fair enough. I guess, on the new tool platform, can you provide us some historical context? I know you're talking about launching this in the back half of the year, how does that compare from a qualification timeline standpoint to, let's say, the K465 or the MaxBright tool, which were some of your more recent next-gen products before you saw your first PO?

Yes. So it's pretty similar. Maybe it's a little longer if it's a more complex or a larger system overall. But I'd say it's pretty similar. What we normally see is that betas from thorough customers take over 6 months. So I think the qualification time is pretty similar. I can tell you that the beta tests are going well with all of our 3 beta sites. Each of those customers has engaged us in discussions of potential purchases. One of the customers told us it was, by far, the best tool we ever made. So we're pleased with that progress, and I think the timing is good and that we will launch a great tool here.

We'll go next to Paul Coster with JPMorgan. Paul Coster - JP Morgan Chase & Co, Research Division: A couple of housekeeping questions. First, the -- can you just be a little bit more specific about the 10% reduction in OpEx? What is the base we're using there? Is it 2013? Or the 2Q '14 run rate? And related question, is the commitment to get double-digit EBITDA in '15, that gives quite a lot of wiggle room as to when. What are your -- what is your thinking there about achieving that kind of margin?

Thanks, Paul. This is Sam. In terms of the cost reduction, we are saying 10% OpEx reduction from the Q2 run rate, so to say. So we expect, when all the cost reductions are completed, let's say it will take us 3 to 6 months. So by the time we exit 2014, say Q1 '15 and onward, we believe OpEx in the range of around $38 million to $39 million, somewhere in that range, that's our target for OpEx reduction. In terms of EBITDA percentage and breakeven levels, again, this is EBITDA, different than EBITA, which Veeco has used in the past. As you know, we are working on cost reductions, and at the same time, the pricing environment has improved. And with the pick-up in business volume, the EBITDA percentage can actually indeed vary. So what -- our thought here is that the current levels of revenue that we are in, we ought to be able to generate double-digit EBITDA percentages. And as the volume picks up, of course, that would pick-up on the operating leverage and we would be able to produce much higher EBITDA percentages. Paul Coster - JP Morgan Chase & Co, Research Division: So my follow-up question relates to this notion that gross margins can expand pretty significantly, on current revenue levels. It's sort of a little bit counterintuitive, and I see how volume might yield margin expansion, and also how pricing -- how can you increase prices from 1 year to next? I'm not quite sure how that works. So if you can just sort of walk us through how the margin expansion there might play out? That would be helpful, please.

Yes, so the tools that are flowing through the P&L now, these tools were booked a few quarters ago, and at that time, the business conditions were challenging. For sure, we are seeing better pricing environment and the margins that we are booking on the tools -- that we are booking currently, they are higher. So that is one element that would help support improvement in the gross margins, when the tools that we are currently booking would go through the P&L. The second is, of course, the new product. The new product is much more productive and has good feel for the customer, but we hope to share that between customer and Veeco. And that should also help improve our gross margin as we go forward. Paul Coster - JP Morgan Chase & Co, Research Division: And one last question for me. The introductions in the MOCVD machine was sort of contingent upon -- or at least based on prior conversation, the -- sort of clearing out of old inventory and the gray market of MOCVD machines. So I assume that -- you basically think that the market will be pretty cleaned up by the time you introduce that new product?

Well, let me see. First of all, we have never had excess inventory or any of that on our side. I think, maybe, AIXTRON had that issue. As far as the gray market, there's not a lot of product moving around or -- already. I mean, there are some where a larger company will buy a smaller company. And I think we'll see some of that to go on for some more time. But we just don't see a lot of gray market inventory. Once in a while, somebody buys a couple of tools from somebody or somebody gets out of the business, but we haven't seen a lot of that. So thanks Paul. I want to go back to -- I think it was Brian Lee's question, because maybe I didn't answer it quite as well as I could have, and that was, did the second half orders include Red Bull? And I think -- we have told everybody we would launch Red Bull in the second half. And just to be clear, as soon as we launch it, we'll take orders. So I think, obviously, these -- our second half orders up would include the new product that's coming out. So maybe I wasn't quite so clear, but hopefully that helps. We'll take the next question, operator.

We'll go next to Jed Dorsheimer with Canaccord.

I guess, maybe away from the MOCVD and just on to the data storage. Is this the new level of activity in that business, or should we expect further declines in the Data Storage business?

Well we've -- the business has been fairly low for the last year or so or more. And we don't expect further declines. We think if that -- we're at the lower side of that it would get. What we did make the decision to do this year is that, at this size where we've seen it, we do expect it to bounce back and give us some growth in the future. But at this size, it makes sense for us to run it as a single-site business, which is why we chose to consolidate our satellite sites in Fort Collins, Colorado and Camarillo, California into Plainview, to get the efficiencies, the cost efficiencies and the resource-sharing efficiencies that we get there. So we're not expecting it to decline further, but I think we are creating a more cost-effective business. And I would add one more thing. We've named this business the Data Storage business, and that's become a little bit of a misnomer at this point, because about 40% of the business is coming from non-data storage customers related to ion beam technologies for optical coatings and other things. And many of the growth opportunities for this business come from outside of the data storage industry, whether it's STT magnetic RAM or EUV mask blanks. Both of those areas are, we think, pretty compelling. I think as -- aside from the data storage customers bouncing back at some point, there's also some good opportunities for our ion beam technology in other areas.

That's helpful. And then, just on the ALD, I know previously, I think there was commentary of $80 million in that business. I'm assuming that, that's off the table. I think that was supposed to flow into 2015. So just given the nature of that business, any update in terms of expectations? Are we -- I think you had mentioned one order in sort of Q4 time frame, but how should we think about that for 2015 time frame?

I mean, we're still thinking that we can get some substantive revenue in 2015 for the ALD business. The technology we have is very unique. It has big benefits and I think it will drive 2015 growth. Whether we get orders in Q4 or Q1, I think there is a good growth opportunity for us here next year.

We'll go next to Andrew Huang with Sterne Agee. Andrew Huang - Sterne Agee & Leach Inc., Research Division: I guess the first is, can you give us a sense of how many beta customers you have that are testing the Red Bull system?

We have 3 beta customers. Andrew Huang - Sterne Agee & Leach Inc., Research Division: Okay. And I mean, not as a follow-on, but can you give any clarification as to, like, what countries they're in? Or are they concentrated in one? Are they kind of split around the globe?

They are in 3 different countries and they're all absolutely world-class customers. So that's about probably as far as I could go. But they're top industry players in -- all with slightly different characteristics. Andrew Huang - Sterne Agee & Leach Inc., Research Division: Got it. Okay. And I guess the other question I had is, I know your tools are configurable like -- by 2- and 4- and 6-inch, but do you get a -- or do you have any kind of a sense of like what -- at what size most of your tools are going out at? Is it like 4-inch, or is it 6-inch, or 2-inch?

It varies and it varies by country and it's changing with time. In general, and first of all, it's very -- one of the advantages of our tools is it's very easy for the customer to buy them at 1 -- at 4-inch and then move to 6-inch later, or to move-up and change. And that's actually an advantage of our platform. Historically, China has been -- had a lot of 2-inch, a lot of leading customers are moving up to 4-inch. And in some places, we have customers that are 6-inch. So I can't really give you a breakdown. It's pretty easy for the customers to change after they buy. But in general, the industry is moving up. I mean that's -- I don't think people are -- people will stop buying tools at 2-inch in the not very distant future.

And we'll go next to Andrew Abrams with JG Capital.

Just a little -- a question on price pressure. You have kind of indicated that the pricing pressure has eased a bit as you've taken more recent orders. Is it a function of both of you guys kind of being more benign? Or is it the fact that AIXTRON is running through their inventory and doesn't need to discount, as much as they were before? Or is it coming from the demand side?

I think the demand side helps it, first of all, as orders come up. And then secondly, we've realized that -- or not realized, but we're -- we basically, our products have an inherent advantage in productivity and uniformity and cost of ownership for the customer. The customers know that. And we've just had to stand more firm to not sell product at places where we previously would have sold. Because this industry doesn't work at those prices for the long-term.

And when the new products come out, yours and AIXTRON's, I'm assuming, are going to be fairly close to each other when they come out, or timing wise, when they come out. Is it going to be a pricing issue again or do you think that there's enough of a difference between the 2 tools that you can still command kind of the premium pricing or the better pricing that you're getting now?

Yes, we expect to command the premium pricing. I think our product is a superior product. And the TurboDisc technology is an inherently cleaner technology, which gives our customers many advantages in running really large-scale factories.

And just last, on the ALD. Are you seeing customers that -- are most of the customers that you're talking to or the customers that you're talking to, totally focused on the flexible side? Or are you also talking to customers who are thinking about using a scaled-up system on production of TVs or notebooks or whatever other type of display?

So we started out focused on flexible display encapsulation, but we've also moved on to talk to customers for TV production, OLED lighting production and other applications. And the reason for that is our FAST-ALD technology, first of all, it can be scaled up to a very large substrate sizes. So it works well and that gives it a lot of the economies. It has very good material utilization so it can go into applications that you just couldn't do with other ALD approaches, and it can operate at a very low temperature. So it can work over top of substrates that are not tolerant of high temperatures. So we are talking to customers in many applications and actively working on several.

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

I was just wondering what you think the competitive environment is going to be, with respect to some of these eval tools. I mean, are you competing head-to-head with your customers? When you talk about these 3 eval customers, is AIXTRON also giving the tools to those same customers? Or are they different? And is your -- in your understanding of the inventory situation, has AIXTRON improved at all? Or how do you think the inventory levels are in the field?

Yes. We are in some common customers with AIXTRON, but I believe we're in more customers. And I can't tell you about their inventory situation, and frankly, lasted a lot longer than I expected it would. And there just seemed to be a whole lot of it there. I think it's about gone, but all I have is a little piece of information from the marketplace, as opposed to real info.

That concludes today's question-and-answer session. At this time, I'd like to turn the conference back over to Mr. John Peeler, for any additional or closing remarks.

Thank you for joining us. And we'll look forward to seeing you in the coming months. Thanks.

Thank you.

That does conclude our conference. Thank you for your participation.