Good day and welcome to the Veeco Instruments Third Quarter 2017 Earnings Call. Today's conference is being recorded. At this time, I would like to turn the conference over to Ms. Suzanne Schmidt with Investor Relations. 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 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 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 section 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 his opening remarks.

Thank you, Suzanne. We are pleased to report strong results for the third quarter with revenue of $132 million, non-GAAP operating income of $6.8 million and non-GAAP earnings per share of $0.09. Our results were driven by strong sales of MOCVD and PSP [audio gap] compounds in the conductor markets. We are seeing robust demand in China for our MOCVD systems, we are also seeing increased competition. As a result, we are seeing some pricing pressure which will impact our gross margins and Sam will address this in more detail later in the call. That said, backlog improved once again this quarter, and bookings grew by more than 30% sequentially to reach $162 million in Q3. Backlog growth was driven by multiple system orders from LED manufacturers in Asia and Europe. Now, let me turn the call over to Sam for a review of the financials.

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. As John mentioned earlier, we are continuing to see recovery in the MOCVD market which we alluded in our last earnings call. We are pleased with our Q3 bookings performance which came in at $162 million or 32% increase over Q2. The main drivers of the bookings growth was increase in the LED lighting display and compound semi markets where we received multiple system orders from LED manufacturers in China, Korea and Europe for our MOCVD systems in the EPIK, Propel and K475i family. Additionally, we received a large multi-tool order in Taiwan or PSP systems to support a power electronics application. As a result of our strong bookings, our Q3 ending backlog was $299 million which is up by $29 million from the last quarter. Now turning to revenue. Q3 revenue of $132 million was up 15% from last quarter, sales into LED lighting display and compound semi totaled $60 million and contributed 45% of overall revenue driven by the continued shipments of MOCVD and PSP systems to Europe, China and Southeast Asia. Sales into advanced packaging, MEMS and RF contributed 17% of overall revenue driven by Ultratech and PSP system sales in advanced packaging area and continued sales of PSP systems for MEMS applications. Scientific and industrial revenue contributed 25% of overall sales and was supported by shipments of ADE systems for optical coding and data storage application. And lastly front-end semi contributed 13% of our overall revenue driven by the Ultratech laser annealing and ADE [indiscernible] system. Geographically, revenue in China excludes EPIK A68 shipments that were deferred from recognizing revenue. We…

Thanks Sam. The MOCVD market continues to be robust, LED demand remain strong with continued penetration of LEDs and general lighting, growth of fine pitch LED signage and LED backlighting driven primarily by larger TV sizes. Importantly, continuing to win business in China despite increased competition and we feel confident in our ability to maintain our lead as we execute on our technology and product roadmap. During the quarter, we formally released our latest MOCVD system, the EPIK 868, the most productive and cost effective tool in the industry. Based on Veeco's proven TurboDisc technology, the newly developed EPIK 868 offers customers of four reactor platform for the highest productivity and 35% reduction in footprint compared to the competition. Furthermore, the wafer carrier capacity can be increased for even greater throughput per batch. The EPIK 868 has 20% better cost per wafer savings compared to the previous generation of MOCVD systems and was designed to meet the needs of our customers in China demonstrating our long-term commitment to this important region. We are also very pleased to announce the completion of the strategic initiative with Allos Semiconductors to demonstrate 200 millimeter GAN-on-Silicon wafers for blue and green micro LEDs using our propelled single wafer platform, which we believe will help to accelerate the adoption of micro LED production. We are also excited to report that we are seeing continued adoption of our K475i product into red, orange and yellow LEDs and photonics applications. The photonics market which includes VCSELs and lasers for optical communications is growing rapidly and represents an exciting opportunity for Veeco. We were engaged with multiple key customers and have recently achieved sales to a leading photonics company for the development of next generation VCSELs and other lasers. In advanced packaging, we are very well positioned for…

Thank you. [Operator Instructions] We will take our first question from Krish Sankar with Bank of America Merrill Lynch. Please go ahead.

Hi. This is Chirag Odhav on for Krish. Could you give us some update on China and your local competitors in that region, just how you see your market share about a year from now? And I have a follow-up.

Sure. The China market is going through a strong investment at this time and there are large investments in new capacity from multiple key LED manufacturers. It has become a more competitive environment as AMEC begins to ship systems and compete with Veeco. As you can see from our backlog, we continue to do well. We recently launched the new EPIK 868, which we think will be a tremendously successful product and we expect to do well in China over the long-term. We don't forecast forward looking market share though.

Okay. Got you. And there has also been a lot of interest in power semiconductors like gallium nitrate, gallium arsenide and some VCSEL-based applications in self-driving cars. [Axon] [ph] has a strong position in this space, I was just hoping you could help us understand your position and how you value the potential market opportunity?

Sure. We do think there is a good opportunity and we have been working hard to develop new products like our Propel product and RK 475i to diversify our offering and to expand in the new markets. I think in GAN power that is a market that is moving forward. We participate and with our Propel series of single wafer reactors and we think there is a really good future for that looking forward.

All right. Great. Thank you.

Thank you. We will now take our next question from Brian Lee with Goldman Sachs. Please go ahead.

Hey, there guys. This is Hank on for Brian. And maybe just a follow-up to that. Do you guys have any exposure to the silicon carbide market opportunity?

We do not play in the silicon carbide are. We have products for GAN power, GAN RF and opto segments for VCSELs and lasers but not silicon carbide.

All right. Thank you. And then maybe switching gears a little bit to Advanced Packaging. Is kind of the quarterly run rate we saw in 3Q, what we should expect moving through 2018 or when do you guys expect that advanced packaging market to recover?

Well, look, I think as we predicted last quarter, the advanced packaging market is in a bit of a pause. There were very strong purchases in 2016 and early 2017 and after that the market has slowed down. We are talking to key customers in multiple regions and activity is picking up. They are telling us that 2018 should be a growth year. So, we do expect to pick up. It's hard to predict exactly which quarter that will be. But, things are looking better as we look out.

Okay. And then, maybe I will squeeze one more, directly on the injunction, does this change anything in the competitive dynamic in China or what do you expect to realize from this?

Well, look, I think first of all, we just received the ruling today. So, we haven't factored it into all of our results. But, it's actually a very -- it's a very powerful thing. It's a reaffirmation of our technology and our patent portfolio, wafer carriers or a consumable required to operate our MOCVD systems and AMECs MOCVD systems, customers need a reliable supply of qualified wafer carriers to run their MOCVD systems. And we have invested a lot of our R&D in this area. And I think it's great to see that it was upheld by the court and I think it will have a lot of impact on the competitive environment.

That's great to hear. Thanks for taking the question.

Thank you, Hank.

Thank you. We will take our next question from Edwin Mok with Needham & Company. Please go ahead.

Hi. Thanks for taking my question. First, actually just a quick follow-up on that -- the last question, does that mean that your competitor can ship to now, are they prevent by the court from shipping or do you still have to go for some legal proceedings before we can't give that point?

The ruling is against SGL. And we believe that SGL was infringing on our patents and providing infringing wafer carriers to AMEC. And they have been stopped from doing that. In hi-tech patent infringements, preliminary injunctions are rarely granted and they are only granted when the legal case is extremely compelling about the infringement and about the damages. So, they are a major source of wafer carriers and that supply will go away.

Okay. Thanks for clarifying that. I have a question on gross margin. Sam, just to clarify, you mentioned this 30% to 35% range is that -- is that the range for 2018 full year, is it for first quarter? And then, I think on the same commentary you talked about your offering, you talked to the offering margins will increase right, partially obviously because of top line growth. But, if I do the math, I mean, full year gross margin is not down much, obviously, it has come down quite a bit, are you -- is everything as your plan or can you give us some color on that?

Sure. Yes. So, first of all, in terms of operating income as a percentage of sales that comment is related to entire fully at 2018 as you compare that to fully at 2017. So, again, to repeat, we expect 2018 operating income as a percentage of sales to be better than the same metric for 2017. Now, coming back to the first part of your question in terms of the gross margin, that I'm highlighting more as a temporary effect, what's happening is that the MOCVD business in China, there the margins have degraded significantly due to the pricing pressure. But, at the same time, it's a proportion in the overall mix of company revenues has also gone up. So, that compresses the gross margin at the company level and that I expected to be temporary, it might last one or two quarters and do not expect it to last for the entire 2018.

Okay, great. That's very helpful for clarifying. Last question I have, John you mentioned VCSEL, I was wondering, if you guys have started some development with the customer, can you give us some color -- of framework around that. How do you think this would take before this becomes a real revenue opportunity and anyway you can think about the opportunity there long-term, if I look out for few years, how do you think about that potentially become a revenue opportunity for your company?

Sure. Look for quite some time; we have been working to diversify our revenue stream in the MOCVD business and at the company level. Our goal is to continue our leadership in the lighting and backlighting market but at the same time to grow our revenue in other MOCVD opportunities. We are -- last year, we launched the K475i product that has been doing well. We also launched a family of single wafer reactors targeted at applications likely are diodes. And we are growing our business now with revenue related to VCSELs, laser diodes, power electronics and RF devices. So, it is revenue now and I think we expect to continue to broaden our revenue streams.

Do you think that some people or some analysts to project this VCSEL, eventually it could be as big as LED market, right? Who knows what will happen a few years, but where do you think your market position is in VCSEL right now and do you foresee that at some point on the road, that you can't get to this market leading position?

Yes. Look, I don't think it's going to become as big as the LED market and I don't know how you would get to that conclusion. I think we are number two in the market. And we have been introducing products and have a strong product pipeline that I think will allow us to do very well in this business and as always our goal is to become number one.

Okay, great. That's all I have. Thank you. Appreciate it.

Thanks Edward.

Thank you. We will now move on to Vishal Shah with Deutsche Bank. Please go ahead.

Yes. Hi. Thanks for taking my question. John, on the guidance for next year, what are your assumptions for the MOCVD market, do you expect the market to grow as well? And then, I have a follow up. Thank you.

I think the market will grow in 2018 and I think it's a growth year, you can look at the orders we have been receiving and the growth in our book to bill ratio, we expect to move into 2018 with a very strong backlog and the market should grow both in 2017 and 2018. Remember, if you think back half of 2015 was a real trough for MOCVD as well as most of 2016. So, we are coming out of that period. There has been a lot of adoption of LEDs and lighting and other growth. So, we expect a solid growth here.

So, just to clarify, I mean there was some reports out recently that suggested that the MOCVD market this year was somewhere around [indiscernible] is that consistent with how you guys are looking at this year and then what do you think next year looks like. And also on China, is the competition really mostly focused on the Chinese market or you starting to see evidence of similar pressure -- competitive pressure in other markets as well.

Yes. I think, first of all, I think on the last call and we have been moving it up as we went through the year we were talking it about up to 240 to 260 reactors this year, clearly, the market is a lot harder than that. And we are going to be well above that 440 sounds pretty optimistic. I haven't seen that projection. So, that would probably be a little higher than I would pick it. But, look I think there is a lot of business happening. And we do think that 2018 will be a bigger year in the market than 2017. And we think we will do very well in.

Thank you.

Let me go back to your part two and that is, are we seeing competition from Chinese players. Outside of China, I would say we have not seen that and I think from my conversations with people and customers, I think a lot of customers would be very concerned about taking a Chinese tool and bringing that into their fab and risking their IP and their recipes and other things. So, we have not seen that.

Okay, great. Thank you. Just one last question, what percentage of your total MOCVD revenues will be China roughly this year, next year? Thank you.

Yes. So, generally Vishal, the China blue LED market roughly is about half of our lighting display and compound semi market. Generally that has been the trajectory. However, it probably is looking like it would be more than that in the near future just because of a significant market or business activity in that part of that region.

Okay. Thank you.

Thanks Vishal.

Thank you. And we will now take our next question from Paul Coster with JPMorgan.

Thanks for taking the question. A few quick ones, Sam I apologize going back to the same subject. But, the low to mid-35%, mid-30% gross margin, is that related to MOCVDs only, is that correct?

It is largely correct. But, I would also suggest that at this time, we've also talked about the Advanced Packaging Market going through a pause. So that does have an impact on the overall company's gross margin. And we are expecting that business to come back into 2018. But, so far, looks like there are some indications that it maybe beginning to come back, but not solidly yet. So, what's happening here in the near term is that we have gross margin pressure due to low activity in Ultratech and at the same time pricing pressure in the blue LED China MOCVD market. And then, once we are beyond the near term future so to say, I expect that the proportion of business from China MOCVD as a overall company's mix should improve meaning, it should go down, so that should lift gross margins. And also additional exposure to the new MOCVD market that John talked about particularly VCSELs and RF and Red LEDs and other areas where we are also looking at gaining greater exposure. So, that should also help our overall gross margin.

Got it. Thank you. And I think I heard John say that you had a power PSP, power application success in Taiwan, can you just be a bit more specific with this [indiscernible] based technology that it's being applied to?

Yes. I think this was -- that was actually in our script related to PSP and one of the things that's been good with PSP, we sell into LEDs, we sell PSP products into LEDs, we sell into the power electronics markets, in addition to MOCVD, we sell PSP there. So, we are able to kind of sell both product lines in a number of markets. This was not a silicon carbide opportunity.

Was not silicon carbide, okay, got it. Thank you. It's helpful. And then, I think that maybe the last question I got is, as we think about your revenue mix year out from now, how do you think it would be relative to today, do you think MOCVD will have diminished as a percentage or increased for instance, some sense of a shift would be helpful.

Sure. Look, I think a year from now, our Ultratech business will be seeing some strong growth over the current mix that's what I would expect as the AP market comes back and as we get some traction in the LSA and super fast business. I think, secondly, our PSP business which is done reasonably well this year has been weak in advanced packaging also because of the market condition. So, I expect that to come back and we will get some growth there. our new front-end semi products and I&B Mitch will be gaining more revenue. So, I think some of our non-MOCVD businesses should show some substantial revenue growth. And then, we will see how long the MOCVD ramp lasts and clearly it's going to last for a while. But, I think we have got other good sources of growth. So, and we do see MOCVD having some substantial growth.

All right. Thank you very much.

Thanks Paul.

Thank you. We will now take our next question from Patrick Ho with Stifel, Nicolaus.

Thanks you very much. John maybe first of, in terms of the advanced packaging and maybe specifically on the lithography buys that you are projecting for 2018. Based on some of your comments, is it correct for me to assume that you believe it still will be primarily focused towards one potential customer versus broadening out of -- the fan-out applications that are potentially drivers for additional advanced package litho sales.

We definitely see a broadening out as we talked to customers and talk to other key people about their expansion plans in OSATs and other IDM. So, I think there will be a broader customer base next year. And that will be beneficial and probably provide a little less lumpiness.

Okay. That's helpful. Maybe going back to the MOCVD side of things in terms of the competitive environment in China, how that's evolving, you did mention you saw a broad mix of different system sales from EPIK, so I believe you [Technical Difficulty]. Given the technology advantage or EPIK tools have. Are these new Chinese systems from a price perspective targeting all of your products or towards some of your older products. How does that shape out from a competitive perspective?

The Chinese competition is really targeting the main stream LED lighting applications and targeting our EPIK products. So, that's where the intense competition comes and that's where we launched the new EPIK 868.

Great. Thank you.

Okay.

Thank you. Our next question comes from Mark Miller with Benchmark Company. Please go ahead.

Again getting back to the competition in China, it certainly appears pricing is a competitive issue. Do they have any other advantages with respect to tool operation throughput reliability up time yield, is it primarily through our pricing they are getting their foot into it?

Look it's still very early in the market. And if we go back a few years, we had a -- maybe a similar situation where we had a competitor launching a new product and we were launching a product. And we both did some heavy discounting and fighting for market share. And what happened in that case is, the competitive product although it looked very good at the beginning over time it failed to deliver and it had poor performance in terms of up time and a number of other factors. So, it's really much too early in the market to make conclusions on all of these factors. So, their product does look a lot like our product and our customers have told us that they copied our product in some cases. So, it's a little too early to tell in this situation. But, look we have a great track record of introducing products having them perform well, having them either take or sustain the leadership position and we just launched a new product. So, I think we have a lot of the experience in this type of situation.

In terms of the expected growth in the MOCVD market. Are you seeing an increasing replacement of older tools, are this because [indiscernible] is significantly expanding their capacity, I just wondering what are the drivers you expect in that market?

It's a little hard to read on replacement. Traditionally, tools after they get seven or 10 years old they start to become less reliable and sometimes people replace them at that point. On the other hand, as what's happened over the last few years, these tools that we are shipping now are much more productive than things that were shipped 10 years ago. And so, frankly anything that were shipped kind of before 2009 is pretty much obsolete from just a plain economics basis. In this case, we know customers have been turning off older tools before 2009. It's not clear exactly what's happening now but more than anything the market is adding capacity because it can't make enough LEDs. Question is, do they also start turning off old systems going forward. And I think we will see that and we will see more and more of that over the next few years.

Your estimate for the tools -- these older tools 300 is that in the ballpark?

It's -- well, of course, they are lower capacity than the reactors of today, most of the reactors were shipping today are twice the capacity of reactors, we shipped before 2015. And it's actually more than that. And we know that some have already been turned off. A lot of times, the way this happens is customers with older reactors that haven't invested recently kind of fade away. And they go out of business or shrink and become insignificant because they don't have the scale to compete. So, it's not always a replacement, it may just be somebody goes out of business and the newer products pick-up the real market supply.

Thank you.

Thanks Mark.

[Operator Instructions] We will hear now from Daniel Baksht with KeyBanc Capital Markets.

Yes. Thanks very much. Wondering if you could comment on how you are allocating R&D expenses now between your different segments, now that you have Ultratech under one roof for whole quarter and you recently launched, are you more focused on say your MOCVD programs or advanced packaging or front-end semi businesses any kind of color would be great. Thanks.

Let's see. So, look we are making significant investments in each of these areas and MOCVD, we see a quiet a new -- quiet a number of emerging market opportunities that we have been investing in for some time. In Ultratech, we have been focused on improving the effectiveness of our R&D spending. We are spending certainly substantial amounts in lithography, but also spending in front-end semi because we see some great opportunities there. And we are investing in line with what we see as the market opportunity, so it does move around. But, we are also very focused on getting more out of our R&D and getting more products to market. So, I think we are going to have a very good year over the next year in new product introductions.

All right. And then, you mentioned pricing pressure in MOCVD, is that limited to China or are you also seeing that outside of China as well?

It's all limited in China, Daniel.

Okay. And then, just on customer concentration, did you have any customer that represent more than 10% of sales n the quarter.

I don't think so. I don't think so.

Okay. That's all I have. Thanks.

We announced that in 10K but not to 10Q.

Okay. Thanks.

Thank you, Daniel.

Thanks.

Thank you. We will take our final question from Tom Diffely with DA Davidson.

Yes. Good afternoon. So, you talked a lot about some increasing competitive pressures in China. Have you seen increases in competitive pressures on the lithography side as well, it sounds like there are several players in that space now?

We have done well, very well over the last period in lithography there. We've had a market share of 70% to 80%. And when you are at that kind of market share there are always people coming and trying to get into some niche here or there. So, there is always competitive pressure. But, we have been very focused on moving our product forward addressing the new needs of our customers and really having the best cost of ownership and the best performing platform in terms of doing what the customer needs to do without costing too much and with a very high reliability. So, I think we are in a really good place there.

Okay. So, the margins still sufficient that once the best packaging comes back, it's a nice added to the overall blend.

Yes.

Okay, great. Thanks for your time.

Thank you, Tom.

Thank you. That concludes the question-and-answer session for today. I would now like to turn the conference back over to Mr. Peeler, Chairman and CEO for any additional or closing remarks.

Thank you for joining us tonight. And we look forward to seeing you in the near future. Thanks.

Thank you.

Thank you. That does conclude today's conference. Thank you all for your participation and you may now disconnect.