Good day and welcome to the Veeco Instruments Fourth Quarter 2015 Earnings Call. Today's conference is being recorded. At this time, I would like to turn the conference over to Ms. Shanye Hudson. Please go ahead, ma'am.

Thank you, operator, and good afternoon everyone. Joining me on the call today are John Peeler, Veeco's Chairman and CEO, and Sam Maheshwari, our CFO. Today's earnings release is available on the Veeco Web-site. Please note we've 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 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 being 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 Web-site. With that, I'll turn the call over to John for opening remarks.

Thanks, Shanye. We ended 2015 on a positive note delivering solid fourth quarter financial performance. Bookings were $107 million, more than doubling sequentially. Revenue was also $107 million and towards the upper end of our guidance range. Gross margin came in ahead of our expectations at approximately 37%. We put our capital to work repurchasing 469,000 shares of common stock. And we ended the year with a solid cash balance of $385 million. For the calendar year, we also performed well in a challenging business environment. We increased revenue by 21% to $477 million to fortify strong execution in our PSP business. We had targeted growing PSP by about 10% in 2015 and we achieved growth in excess of 20%, significantly exceeding our goals. We increased EBITDA by a factor of 15 year-over-year, demonstrating our ongoing focus on operational execution and expense discipline. Overall, I'm pleased with our performance and remain confident in our ability to execute against our strategic objectives. With that, I'll turn the call over to Sam to discuss our Q4 results in a bit more detail.

Thanks, John, and good afternoon everyone. Today, I will be discussing our non-GAAP financial performance. You can find a detailed reconciliation between GAAP and non-GAAP results in the press release and on our Web-site. The fourth quarter represented a solid finish to 2015 as our revenue, gross margin, adjusted EBITDA and EPS, all met or exceeded the midpoints of our guidance ranges. Our bookings performance recovered off of Q3 levels. However, LED industry conditions remain weak and our visibility remains limited. Turning to the specifics, Q4 revenue was $107 million compared with $141 million in Q3. We have continued to see steady business in the MEMS and RF markets for our PSP products as well as incremental sales for Ion Beam Etch and MBE technologies. For example, in Q4 we took revenue on our MBE system used to produce high-end gallium arsenide RF switches. We also achieved record revenues from our service business driven by solid upgrade sales. Over the past year, we have focused on driving growth in services, which is a key element of our growth strategy. We have introduced a suite of service offerings to address our customers' critical production needs. As guided, gross margins declined sequentially to 36.8%. However, they exceeded the high end of our range. A slightly stronger product mix helped to deliver better than expected gross margin. Operating expenses were $38 million and slightly above our guided range due to variable compensation expense. I would remind you that Q4 OpEx included a $2.5 million reimbursement for certain program related development costs. We are focused on balancing our expenses at R&D investments necessary to support future growth. Non-GAAP EPS was approximately $0.01 per share based on a diluted share count of 41 million shares. Adjusted EBITDA amounted to $4.4 million, benefiting from better than…

Thanks Sam. Before sharing our perspectives on the current business environment, I'd like to highlight a few of our achievements from 2015. A key tenet of our growth strategy is to strengthen our core business and sustain our product leadership. We extended our lead in LED lighting with the EPIK700 MOCVD platform. EPIK follows a trend of successful new product launches and represents Veeco's third MOCVD tool in four years to receive the coveted Compound Semiconductor Industry Innovation Award. Since its introduction in late 2014, EPIK shipments have outpaced the competition 8-to-1. We significantly expanded our footprint in the MEMS and RF markets with the addition of PSP. We grew MEMS and RF revenue by 370% in 2015, with our PSP and Ion Beam Etch process solutions. We also solidified our positions in advanced material research with our Molecular Beam Epitaxy product family. We have emerged in recent years as the supplier of choice for R&D programs and won a majority of these opportunities in 2015, outpacing our nearest competitor 2-to-1 in sales. We've also focused on developing new growth engines for Veeco by extending our core technologies into adjacent markets. In the area of GaN based power electronics, we expanded our engagements with the Propel single wafer MOCVD platform. We are partnering with imec, a well-respected research center, to accelerate the development of next-generation power devices. Today system-level device reliability remains a challenge and it still needs to be proven. Depending on the application, these devices are required to maintain their performance specifications for up to 25 years. Quality and film properties of the epitaxial layers in the device structure play a key role in determining system-level device reliability. The Propel platform delivers the best film uniformity of any tool in the market today and we continue to support…

[Operator Instructions] We'll go first to Colin Rusch with Opco.

Can you talk a little bit about how you're seeing the cycle times in terms of bookings rolling through the P&L, are you seeing any real changes to that over the recent months?

This is Sam. At this time, for MOCVD, cycle time from bookings to shipment is still around four to six months. So it is still the same, although slightly less than what it was say nine months ago. The customers give us the purchase orders and give us enough time to build it and ship the product. So it has slightly contracted but not a whole lot.

Okay, perfect. And then the auto opportunity, how do you guys think about the potential size of that opportunity with offerings that you have, and are there other areas where you could potentially play in that space?

So the PSP product line has been very successful in MEMS as well as some of our Ion Beam Etch products. So we don't really have a size, but I would say the overall PSP TAM is in the $200 million range, probably growing 10% a year, and I don't have a breakout between automotive and the other segments but the automotive driving MEMS and sensors certainly helps that. We've got great growth last year and I think we're set up for some good growth this year.

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

Maybe first off just, John, on your comments around the MOCVD investment backdrop expected to remain soft through the first half, is that off of level what you're seeing in Q4 bookings wise or does that even revert back to the lows that you saw in 3Q, just maybe if you can help triangulate that to any degree, that'd be helpful?

Look, we don't give bookings guidance and hopefully we won't be going back to the levels we saw in Q3. But it's pretty hard to read right now as far as where bookings might end up. I think we do think that Q2 revenue will probably pick up versus Q1, and even with the somewhat depressed MOCVD bookings, I think one thing to point out is that overall the bookings in each of our other markets have remained pretty healthy. And then secondly, solid-state lighting continues to grow, and I think given a few more quarters that will absorb the excess capacity and will get back to some more normal levels. I think what's hard for us to read is exactly how quickly that happens. We've had a couple of weak quarters and how many more it will be is uncertain.

Okay, that's helpful. Just second question and sort of related to your comments around the bookings in other segments, John. Advanced packaging, you obviously had sort of a breakout Q4 here. So wondering if you could provide some detail on the drivers? I know you mentioned a win on the RF side, the foundry OSAT penetration, but any particular customer, region, application that you can point to which really drove the Q4 breakout, because it looked like you had a pretty steady percentage of bookings mix from that segment throughout most of 2015 until this quarter? And then just lastly related to that, does it change your thinking at all around the 10% annual revenue growth in that segment, which I think you've talked to in the past?

So some of the key areas driving the growth, first of all, we have consistently been strong in RF and MEMS for the last year. What we started to see on top of that is additional bookings related to Fan-out Wafer Level Packaging from a key supplier in Asia. We started to win some new accounts, new OSAT accounts, that we had not been in before and we're still in some trials that we think have a lot of potential in TSV reveal. So clearly a broader customer penetration as well as new applications, and I think the 10% was our goal last year, we beat it quite well and I think we have the potential to beat it again this year.

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

Just to start off, can you give us some color maybe on how capacity utilization rates are in China?

I think for the Tier 1 suppliers in China, it's probably 80% or 85%, up a little bit from the prior quarter or maybe flat. The Tier 2 are still fairly depressed. And then in Taiwan and Korea, we're seeing 80s to mid-80s or even a little higher, up a little bit from the previous quarter, but some of that may be driven by seasonality.

Got it, okay. So then just looking forward to second half of the year where it sounds like you guys are expecting maybe investment pick back up for MOCVDs. So what do you think needs to happen to get there? Is the capacity utilization rate more important or are you guys more tied to China's GDP?

I think we need to see some increase in utilization. I think as we see the ongoing increase in penetration of LED lighting, that will use some of the excess capacity and close the gap between supply and demand and naturally begin to get – drive increased orders. We're not sure exactly when that happens, but it's kind of the underlying economics. Sam, do you want to add to the China side?

Yes. And beyond the utilization, we also would like to see more profitability improvement for our customers so that they have investable capital to buy additional capacity. And in terms of China, things have improved slightly but they are still broadly in the same situation that they have been over the last six months. Credit still is tight. But as John said, at the end of the day, if there is the LED demand, and we believe general lighting would drive the demand, that demand would be satisfied either through a manufacturer in China or in Korea or Taiwan. So the capacity may move but we would like to see utilization pick up, and on top of that profitability improvement for our customers, in order to invest in additional capacity.

We'll take our next question from Mark Miller with Benchmark.

I'm just wondering, if we continue to see LED prices decline, even though it appears to me the decline rate compared to a year ago is somewhat less, at what point and what type tools does it become unprofitable for some of the installed base to remain in production?

I think we're starting to see – we think there is about 2,200 K475i equivalent reactors out there on the market. We think a couple of hundred of them have been shut down, really older generation tools. There's probably 300 or so more that are not really commercially viable anymore. So I think we are starting to see some customers turn off their older reactors and just not use them, and we believe that when they need more capacity, they will buy newer generation equipment. So some of that is already happening, we think that there will be a replacement cycle created in the future as the market recovers and people really want to use better tools that are more cost-effective. It's not going to happen during the depths of the downturn, but I think it is there in the future.

You saw strong growth from advanced packaging applications, especially Fan-out wafer level processing, and you're projecting 60% CAGR type growth. Can you give us a scope or feeling for the opportunity, the specific opportunity or the TAM for Veeco in this market over the next couple of years?

We think the overall TAM in the applications that we are currently addressing is about $200 million and growing at about 10%. Clearly, things like Fan-out processing we'll grow a lot faster, and then there are some other segments that are slow growth. But $200 million growing, and then as we introduce new applications or can win new steps in the market, then our TAM gets bigger, or if we gain acceptance for our TSV reveal approach then our TAM will get bigger there also. So there are a couple of inflections going on there. The other thing that could give us more growth is the move from batch processing to single wafer processing. As our customers move to finer line widths and finer architectures, they tend to eventually get to a point where they don't want to do batch processing anymore, and then they flip to single wafer, and that basically gives us a new opportunity. So I think it's a healthy opportunity and we'll continue to expand.

Finally for me, general lighting is supposed to be the major driver for MOCVD tools, and I'm just wondering, we've heard in terms of commercial industrial retrofit market that that's a $20 billion opportunity and it's still very early in that market. Are you seeing any signs of greater retrofit opportunity, is that starting to pick up or is that still a vast unexplored market?

I think it's pretty early and it's our customer's customer in the end. So we don't have a lot of direct visibility. I'm starting to see the products marketed for industrial retrofits and more fluorescent retrofits and different applications. So, I think there are sections of the market that could come alive pretty quickly, but it's still very early in that cycle.

But you would think the penetration rate is only a couple of percent? That's the numbers we're seeing from some people for that market.

Yes. And the economics are pretty compelling.

We'll take our next question from Paul Coster with JP Morgan.

So it looks to me like you're probably on the running a little bit. What caused you to push out the go/no-go decision on the ALD equipment? And can you sort of give us some sense of what the outcome ultimately will be for shareholders? So it feels like it should be a win-win, either you proceed with the products and you start to get payback on the investment or you shed the OpEx. Can you sort of talk us through that whole process please?

So on the ALD, I think we got to the point where we saw a couple of things from the customers. First of all, strong customer pull because they had an unmet need to put down silicon nitride at very low temperatures. And so we've seen strong customer pull from the customers and we've developed the deposition tools for that market and are generating very good film quality, so the things that our customers have told us they can't get with other approaches. So that has caused us to say, we're going to stay in the game and take this to the next level and that we think there is a big market there with a lot of potential. We are looking to do it with a partner who is already established in that market. But that's what's caused us to keep investing, and I think you are right, ultimately it is a win-win, because we are either going to drive revenue and profit from a whole new application which I think will be a big benefit to us, or we'll say, we're going to get out of this because we can't make it successful.

The other question I've got is if we think long-term here, John, what is this business mix going to look like in maybe three to five years? Is MOCVD going to just be instead of the majority, is it going to be a plurality, is it even going to be a modest proportion of the overall mix given the growth rates you're seeing elsewhere in your M&A strategy?

I think we will have more – our goal is to both keep our MOCVD very successful and lead in the markets we play in and then supplement that with additional revenue from other markets. We will sustain our leadership in lighting. We're the clear leader there. We will keep that. We expect to move into GaN power electronics. We've got the early start there and we're delivering some great results with our Propel product. So I think our MOCVD is going to be a great business. But while we are growing that and entering the power electronics market, we are looking to generate a lot more revenue from other opportunities like advanced packaging, MEMS and RF as well as take really some of the excellent technologies we have and leverage them into the front-end semiconductor market with a partner. So MOCVD should do well but we'd like to have more revenue from other sources to help us through a very lumpy market.

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

Two quick ones. The first one is, in December your competitor Aixtron said that Sanan, [both of] [ph] yours biggest customer, basically decide to [not final from the tools] [ph]. So I'm kind of curious, they cut their orders of almost 47 tools. When do we see that actually get to you guys or is it something that Sanan is still deciding how to expand or are you actually optimistic that you're going to get those tools that were not signed off from Aixtron side? And then I had a follow-up.

First of all, I can't comment on a particular customer, but let me give you a couple of other data points in the market. What's happened over the last year and a half is the EPIK has been launched, it's been very successful, it's been accepted at all the customers who bought it, it's proved to drive big productivity improvements and it's out-shipped our competition 8-to-1. So I think we've established the very clear leadership position in that market, I think we're years ahead of the next competitor, whoever that might be. And as the market recovers, I think we will get the lion's share of the orders. And I think that's pretty clear, what's happened in the market and all of the customers in the market have seen what happened at Sanan. So they have a good perspective on the situation.

Got it. Let me ask it another way then, to touch upon Sam's point, one of the things you guys are looking to see is improving utilization rate and obviously improving profitability of your customers, but if you look at guys like Sanan, their income statement is very good and it looks like they don't have many access to capital issues. They have a pretty healthy utilization rate. Yet they don't seem to be ordering. So I'm kind of curious, what's going to really drive the next leg up in MOCVD, because this is a fourth year in a row we've been talking about a second half recovery, which has never happened, so what has to change this time around given that at least some of your Tier 1 customers appear to be healthy?

The weak TV market has caused an excess supply situation and that oversupply needs to get used up, and it will get used up as LED lighting penetration continues to grow. We're just going to have to get through this supply-demand imbalance perspective and then our customers will buy. Whether it's Sanan or other leaders in the field will buy as they need the product. Right now I don't think, they are not feeling that pressure.

Okay, got you. Just a last housekeeping, how do we think about taxes for the year?

So on the tax perspective, you could model $1 million to $1.5 million a quarter of taxes. At these levels, the percentage modeling for taxes does not really work. We are not paying any tax dollars in the U.S. but in our subsidiaries in international countries, in other countries, we are paying some taxes. So you could just model $1 million to $1.5 million of tax burden a quarter going forward.

We'll take our next question from Vishal Shah with Deutsche Bank.

Can you maybe talk about how you guys are thinking about OpEx breakdown between MOCVD and some of the other emerging technologies such as PSP, and also what kind of breakeven run rate would be given the current spend levels?

Let me address the last question first, Vishal. In terms of our breakeven levels, I talked about good confidence in terms of improving our gross margin. So taking that into view, on an EBITDA perspective, we think we can breakeven around $95 million on a quarterly basis. And on an overall OpEx or operating income level, we can breakeven at just a little bit north of $100 million, so $100 million to $105 million range, from an operating income perspective. So that's for the breakeven figures. In terms of how our R&D investments are distributed across various product lines, we generally do not provide a granular view on that. However, we are investing in ALD as John talked about and we are quite optimistic about that. We are also investing in PSP. We are investing in power electronics. So in general, our R&D investments are fairly evenly distributed around our various businesses. And we do have a product in MOCVD which is already extremely competitive, extremely differential as compared to our competition. So we are going to maintain that lead but at the same time diversify our R&D investments to possibly generate diversified revenues going forward in the out years.

That's helpful. And can you maybe talk about the use of cash for this year, do you plan to continue your buyback program or do you have any sort of areas of M&A that you're looking at?

So in Q4, we spent about $9 million and bought about 0.5 million shares of the Company in Q4. In Q1, we are continuing to buy our shares. So we are executing that program. We believe it is a good investment at this time for our capital to buy back our own shares. But at the same time, we are looking at various M&A opportunities. We have an active program there as well. So it all depends upon the right opportunity at the right time and at the right price. So we are looking at that. And of course, as you know, the first priority for cash is to fund ongoing operating capital needs. We would fund those. We would fund the capital expenditures that are needed for the long-term growth of the business as well. And in terms of overall cash that we need for the Company to run, as I've said in the past, I think we can run the Company somewhere between $150 million to $200 million in overall cash. So anything excess of that is really excess cash that we can deploy either for a buyback or for M&A.

We'll take our next question from Patrick Ho with Stifel Nicolaus.

John, as you look at the PSP business going forward in 2016 and the growing adoption of Fan-out packaging as being one of the key growth drivers, do you also see momentum on the RF side continuing in 2016, or again is the growth driver going to come primarily from these advanced packaging applications that you're winning?

I think it will come from both. We've done very well in the RF area and we've penetrated accounts really all over the world. So I think it will be a combination of both and not really one or the other.

Okay, great. And maybe a question for Sam in terms of, you mentioned the cycles times for MOCVD still being four to six months, what are the general cycle times or lead times you are getting for perhaps on the PSP side of things? Are they closer to the traditional type of semiconductor type of lead times which can be anywhere from three-plus type of months?

So in our PSP business, generally that business allows us less of a backlog in terms of duration. Generally I would say for PSP side, the duration is three to four months. So it is definitely a few months lower than our MOCVD business.

We'll take our next question from Edwin Mok with Needham & Co.

First I have on ALD, you mentioned that is ALD for silicon nitride, are you at a point or you already have demonstrated in certain process within silicon like for spacer or any color you can provide or ALD or are you still under cost developmental stage?

I think I can't take you totally into the details but we have demonstrated the process on customer wafer, and the customers have measured the film quality, film characteristics and those types of things. So it is for advanced memory applications, I can tell you that.

Okay, that's helpful. I think on the call, on the prepared remarks, you mentioned that service revenue was growing for the Company, and I think you guys have last few years despite a challenging industry actually installed [quite a few] [ph] new tools, right. So any way we can kind of think about how big service revenue could be just for the MOCVD installed base that you guys have built over last year and continue to add?

Sure. Generally our service revenue for overall Company, it runs somewhere between 25% to 30%, and in the last one year we have been putting more and more of our tools under service contracts, and so we are getting a little bit more predictability and reliability on the revenue on that side. At the same time, we completed the acquisition of SSEC, or what we call PSP now, and we are bringing service focus to that business also and we are beginning to see some traction there as well. So there also we are able to grow our business. Overall, as a portfolio perspective, I think I would like to see both systems and service grow at the same time and still maintain somewhere around 25% to 30%. But both the businesses grow at the same time. Of course service would be more reliable and predictable. So that's how I would like to see it. Of course, the bookings or the revenues on the systems side can distort this percentage depending upon how strong the tool shipments are or not. But overall, on a secular basis, I'd like to see it between 25% to 30% and growing on both sides.

I think we also see an opportunity to grow our revenue per reactor of installed base, especially in the MOCVD area, and are very focused on basically increasing our share of the services for the installed base. So there is an opportunity there for us.

Is it fair to say that on your guidance, which revenue is quite low, is it fair to say that service is about 30% for that, at least for that one particular quarter?

We typically, Edwin, do not provide the details between systems or service or by product line over there. So I would respectively decline to answer that question. Sorry, Edwin.

All right, I'll squeeze one more in [indiscernible]. So given the lower revenue level and got a still pretty challenging space in the MOCVD side at least, any thought about the cost structure of the Company? Is this OpEx of $38 million to $40 million still at a right range that we should think about longer-term for the Company or you believe in investing in future?

So if you remember, Edwin, in 2014 we had a significant cost reduction and we are benefiting from that cost reduction. But at the same time, we have started a number of new engineering programs and technologies say one to two years ago, and at this time many of those programs and product development initiatives, they are beyond the mid-stage of their development cycle. So it would seem not prudent to cut them at this time, otherwise it would impact the long-term growth prospects of the Company. So at high $30 millions or even close to $40 million of OpEx on a non-GAAP basis on the quarterly figures seems to be sized correctly. However, I would say that you can expect us to keep investing at that rate for a few more quarters. If the business remains low for an extended period of time, then we would have to go ahead and reduce our OpEx. But at this time, overall balance in terms of the growth prospects versus the operating investment for the near-term, we are committed to keep investing them, subject to other view towards the later part of the year. Okay, we'll take one more question.

We'll take that final question from David Duley with Steelhead.

Just I guess a clarification on as far as 2015 goes, how big do you think the MOCVD market was, and can you take a stab at what you think the overall market will do in 2016?

So, in 2015, we look at the market in terms of K475i reactor and the market in 2015 was somewhere between 225 to 250 tools. At this time, we do not have a specific view on 2016. The current industry conditions are weak. So we need to see after the summer how the bookings and how the overall market conditions are. As far as if you're trying to use that to size the revenue for Veeco, I would like to say that if you look at our backlog as we begin 2016, I said in my prepared remarks, about $186 million, which is $100 million lower than what we began in 2015 which was about $287 million. So those are some of the data points that I can share with you at this time.

And your market share in 2015 was I guess you said 8-to-1 where you were out-shipping the other guy. Just help me understand what you think the actual market share was.

I think the outside firms have put our market share in the mid-75% approximate range. I think when we looked at EPIK shipments and really the mid-power lighting market, I think we counted 8-to-1 versus the competition. So those are kind of two data points.

Okay. And then final question from me, very helpful with the information regarding the $200 million TAM for your PSP business, I've heard it asked a couple of different ways but I think what we're kind of trying to understand is how much of that TAM would you guess is associated with the Fan-out wafer, Fan-out opportunity, and did you have any Fan-out revenue in 2015?

It's hard to kind of peg it exactly like that because it's changing pretty quickly as we win new applications, and we do have advanced packaging revenue for 2015 and that continues to grow. But I can't give you a segment and I can tell you it's changing pretty quickly because I think as we get better penetrated and win more applications, it could change pretty quickly for the upside.

Ladies and gentlemen, that does conclude today's question-and-answer session. At this time, I'd like to turn the call back over to management for any closing remarks.

Thanks, Tom. We'd like to thank you all for joining us on this call today. As a reminder, please visit our Web-site for a replay of this broadcast, it should be available later this evening, and also a copy of the presentation material. Thank you.

Ladies and gentlemen, this does conclude today's conference. We appreciate your participation.