Good day and welcome to the Veeco Instruments First Quarter 2018 Earnings Call. Today's conference is being recorded. At this time, I would like to turn the conference over to Anthony Bencivenga, Investor Relations. Please go ahead.

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’ve prepared a slide presentation to accompany today's webcast and 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 recording. 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 Web site. With that, I'll turn the call over to John Peeler for his opening remarks.

Thank you, Anthony. Results were very strong in Q1. We maintained our historically high backlog with a book-to-bill ratio of nearly 1 and all of our P&L metrics came in strong compared to our guidance. Revenue increased by 14% sequentially to $159 million. Non-GAAP operating income was $11 million and non-GAAP earnings per share came in at $0.20. Bookings grew in the advanced packaging, MEMS and RF Filter market as well as the front-end semi market and we're pleased with our progress towards building a more diversified company. We also accomplished an important milestone in our Ultratech integration as we're now live on the common ERP platform. We remain encouraged with our growth prospects which I'll get into later, but for now I'll turn the call over to Sam for a financial update.

Thanks, John, 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. First, let me give you some color on our Q1 bookings and then I'll provide revenue details. We’ve solid bookings of $155 million which were seasonally in line with Q1 norms [ph] and we’re pleased to see orders improve in advanced packaging and front-end semi. In advanced packaging, MEMS, and RF Filter markets, we booked multiple lithography and wet etch systems supporting fan-out wafer level and other advanced packaging applications. Additionally, we booked multiple systems in the MEMS area. In Lighting display and compound semi markets we received a large multi system MOCVD order in China. We continue to win business in China where higher performance is expected by our customers. Separately, consistent with our expectations for growth in compound semi outside of general lighting, we received orders for GaN power as well as photonics applications. In front-end semi, there was a sharp increase in bookings driven by follow-on order for 3-D wafer inspection systems from a large 3-D NAND device manufacturer in Asia and orders relating to STT-MRAM Ion Beam Etch Solution. Advanced Packaging, MEMS and RF was just made up 19% of our booking, lighting display and compound semi made up 34%, front-end semi was 21% and scientific and industrial orders were 26% of our total Q1 booking. This profile is consistent with our expectations of a more diversified company from second half of 2018 onwards. Now moving to revenue. Please note we adopted the new revenue recognition standards ASC 606 on January 1 of this year and recast 2017 financials to reflect this new standard. The recast figures can be found in the…

Thanks, Sam. In computing applications were high performance is critical, advanced packaging is the method manufacturers use to optimize their products. We see this in servers for big data analytics, where speed and lower power utilization are essential. We are also seeing advanced packaging used in applications like advanced driver assisted systems where processing speed is vital for safety, and in graphical processing units used to mine crypto currencies. Regarding the well-publicized delay in adoption of fan-out wafer level packaging by certain mobile device manufacturers, we believe this will end as more mainstream mobile devices incorporate advanced packaging solutions to provide better performance, and this will positively impact the advanced packaging market. In the MEMS and RF Filter markets, we remain optimistic about growth drivers such as the adoption of 5G RF. As mobile data demands continue to increase and drive the need for next generation of wireless communication, each mobile device will require more RF filters and other components manufactured with Veeco Systems. In summary, there are many growth drivers for the advanced packaging MEMS and RF Filter market and Veeco Cell [ph] Systems for multiple applications. Our Q1 revenue in this market more than doubled versus the prior quarter as we saw MEMS device manufacturers add to their etch production capacity and OSATs add capacity for fan-out wafer level packaging and copper pillar applications. Turning to the LED lighting display and compound semiconductor market, our strategy is focused on delivering value through differentiated technology which offers customers a competitive advantage in high-performance applications. Our deep technology coupled with our broad portfolio of products in MOCVD and wet etch and clean, position us to capitalize on the high-value applications such as automotive, mini and micro LEDs, photonics, GaN power and GaN RF devices. We are seeing multiple high-growth opportunities…

Thank you. [Operator Instructions] And we will go first to Edwin Mok with Needham & Company.

Hi, guys. Thanks for taking my question and congrats for a great quarter. So, my first question is on front-end semi and advanced packaging. I remember last quarter you guys had laid out some targets. I think both of those you expect to grow double that -- the business or close to double of the business. Is that still on track? It seems like you guys have a good start for advanced packaging and front-end semi -- low this quarter at least.

Sure. Edwin, this is Sam. Yes, things are looking good for both of those segments. You know we had a pretty good start to the year with good bookings in those segments. And at this time, as I said, we had expected to grow in all four markets, and so we're looking good to achieve what we’ve said in the last quarter's call.

Okay, great.

Yes, just to add -- Edwin, just to add on to that, we talked about the STT-MRAM opportunity and superfast, but we also see more potential for our LSA and melt products, and with EUV taking hold, we’re getting -- we've received additional orders for our LDD Ion Beam Deposition system and we think there's some good potential for growth there also.

Great. Yes, I will ask my next question, okay. So maybe move on to MOCVD power market, I guess, first I want a clarification. You mentioned the photonics market could potentially grow to $1.5 billion and the GaN $0.5 billion. Are those just a device market size or those the MOCVD market? And I’ve a follow-up on that.

Those are device market size. And depending on the stage of adoption, you could translate that into equipment values earlier stage, obviously, much higher percentage equipment per device and then as the market matures a lower percentage, maybe down to 10% or so.

Okay, great. My follow-up question is actually on the photonics. So I don’t think you guys have the propel, which is target to RF or the GaN power device market. And I think on the prepared remarks, you mentioned you’re doing some development on actually both of these markets, right. So for the photonics market do we have to wait until you have a new tool to come out or where do you stand in terms of capture your capability to address that market and for the customer that you mentioned that you sell tools to, what do they use right now? They just use your existing MOCVD or do they already make -- they use specific tools just for that market.

So, first of all, in the photonics market, we're selling Arsenic Phosphide systems currently to address a number of photonics applications as well as Propel systems. So we have a family of products and/or selling current products, but we also have some very exciting new products on the way.

I see. Okay, great. That’s helpful. And then the last question I have for you Sam …

And I might have lost your second question there, Edwin.

Actually you answered my question. I was just wondering what tools you’re selling into that market right now. And then my last question actually for you, Sam, if I take the midpoint guidance, it seems like you guys -- you’re taking up your OpEx by a little bit maybe a million or so. Just how do you kind of think about OpEx trend this second quarter and going to the second half?

Sure. Yes. So, in terms of OpEx for the second half of the year, with continued Ultratech integration and putting Ultratech also on the same ERP system, so we are expecting SG&A to come down as part of natural synergy. However, John mentioned, we're going to be releasing a number of new exciting products in the second half. So what’s going to happen here is that I’m seeing R&D tick up a little bit in the second half, generally associated with releasing new products. So, overall, OpEx is expected to remain in the same range $46 million to $48 million per quarter going forward into 2018.

Okay, great. That’s all I have. I will let the other guys ask. Thank you.

Thanks, Edwin.

And we will go next to Brian Lee with Goldman Sachs.

Hey, guys. Thanks for taking the questions. Maybe first up, I just wanted to clarify on the guidance and the additional color, Sam, on 3Q which is appreciated. If its -- top line is going to be flat with 2Q, gross margins are up off of the lower gross margins that you’re guiding to for Q2. It sounds like Q3 actually will look a lot like Q1 where your gross margins are 150 basis points higher than the mid 30s here that you guided to. So I guess is that the right read for Q3 that you’re trying to provide here? And then secondarily again on sort of the model and the outlook when you’re exiting 2018, Q4 presumably are 40% or higher on gross margins. How much of that is mix driven versus volume? And then if it's a lot to do with mix which it sounds like it is, can you give some color on the geographic and business mix you’re expecting and how that compares to sort of where you’re tracking to right now? Thanks.

Sure. So, in terms of taking your first question in terms of views on Q3, I think Q3 flattish to Q2, but with higher gross margins as I said. And mix should play a big part in there and it should be somewhere between where I’m guiding for Q2 and some between that and 40%, so high 30s in gross margin from Q3 would be a natural thing to think about here from Q3 gross margin. So you can think about it that way. And then, in terms of overall gross margin improvement all the way into Q4, I think you’re right, clearly mix is the biggest portion here. But we are also working on a cost reduction. And volume may play a role, but I think the lion share of the contribution in margin improvement, gross margin improvement is going to be coming from mix essentially. We have a number of new products coming out. We also have a number of products being sold over in U.S., Europe etcetera. So as the mix towards non-China geographies increases and a mix towards products outside of blue LED MOCVD increases, that should naturally help our gross margin performance as we go through into later part of 2018.

Okay. I appreciate that insight. And then just maybe last one quickly for me, I will pass it on. I know, John you alluded a little bit to the micro LED opportunity during your prepared remarks. Can you update us as to what tool platform Veeco specifically have that addresses the opportunity? And then what specific front-end steps you’re in position to compete for future design wins, and then what sort of new tools you may have to rollout in order to address other front-end steps that you're not currently exposed to? Thank you.

Yes. So let me start with micro LEDs. Micro LEDs are a new type of display that use individual three different LEDs for each pixel point. There are consumer electronics companies I would say around the world working on developing different approaches to micro LEDs. And there are different types of transfer technology and different approaches that require different characteristics of the LEDs. So some of the approaches would use tools that we make today for either arsenic phosphide or GaN tools, and we have sold tools into those applications already. And other approaches would use a Propel or a variant of one of the existing platforms due to certain characteristics that people are looking for in the LEDs. So it's early to tell which approach is -- approach or approaches will win and its early to tell on that. But I think our point is we are working closely with the industry leaders. We know the attributes of each approach and we're prepared to deliver the product that meets the needs. And this may be -- we could see a product of micro LED product as early as next year, but it may also take a number of more years before this really hit some high-volume mainstream applications. I think that was the first question. And then you were asking about front-end semi applications, is that correct?

No, John, you answered my question. I was just asking about the front-end steps …

Okay.

… in micro LED, because I know there's -- there seem to be a few process steps as opposed to just the one in traditional blue LEDs, so thank you.

Yes. Yes, absolutely. Thanks, Brian.

[Operator Instructions] And we will go next to Patrick Ho with Stifel.

Thank you very much. John, maybe first off on the MOCVD environment. You had -- you saw some strong Bookings in the second half of '17, that’s leading to revenues in first half '18. Based on some of the commentary in your prepared remarks, are you seeing the second half as kind of the capacity digestion period that may pick up then after we get through the second half of the year, and maybe pick up and accelerate once again as we enter 2019?

Yes to some extent. I think we also had a solid quarter in MOCVD bookings in Q1. The industry bought, we believe, over 400 tools delivered last year K465i equivalents. In 2018, I think we’re going to see more than that delivered this year. And at some point there will be a digestion period and there will be some time needed to use up all the capacity that’s installed. I think the positive thing for us is that we're seeing a lot of new MOCVD applications that whether it's VCSELs or laser diodes or 5G RF, that are emerging that create demand in new areas, with new customers and we think we will be -- we will keep the business in a healthy state for us. So we are kind of expecting and it's always hard to call when these shifts happen, but we're expecting more of a transition to some new markets for our business.

Great. That’s helpful. And maybe as a follow-up question on the front-end semi market that you detailed, I didn’t hear LSA as part of the driver in the first quarter. One, I’m wondering if LSA is starting to pick up and two how you specifically look at that potential market opportunity as it relates to the Chinese semiconductor market, given that there's going to be a lot of new opportunities for 28-nanometers and then eventually below as they start to build out their marketplace? How do you see LSA playing into that potential marketplace?

Sure. So, we didn’t mentioned LSA and let me cover it from two perspectives. First of all, there is the current approved product line that is the market leader and I think it has a lot of potential at 28-nanometer fabs in China. We have a unit in backlog there and we're expecting additional orders. The fab build out has been somewhat slower than we might have expected a while back, but the product is there, it's well positioned and I think it has a bright future. Secondly, we have a new LSA tool called melt and that product is for 7 and 5 nanometer nodes. It is in a valuation at customers now, and we have very strong pull from another customer that's anxious to get a unit. So I think that will add on to the opportunity and give us a new way to grow this business over the long-term and we're quite hopeful of that. So, I think that's -- that will have good potential for us.

Great. Thank you very much.

Thanks, Patrick.

And we will go next to Daniel Baksht with KeyBanc.

Yes, hi. Thanks. Just a couple of quick questions for me. First, on the MOCVD order strength that you saw in Q1, is that strength coming predominantly from China?

There was a -- there was substantial orders from China. There were orders from other regions. We also delivered product to five customers in China, in Q1.

Okay, great. And then, second question, just on your new products that you’re planning to release in the second half, could you provide maybe a little more color in terms of the end market segments that you’re targeting for these products?

Sure. We have new products coming in MOCVD, in lithography, and Ion Beam, in ALD, to name a few. We have a very strong product pipeline. We maintained a high level of R&D during the weaker previous years and have a lot of great things coming.

Okay.

Probably more -- certainly more than any time in the company's history.

Okay. Thanks.

Thanks, Daniel.

At this time, I will hand the call back over to John Peeler for any additional or closing remarks.

All right. Well, thank you for joining us today and we look forward to seeing each of you soon on road trips and other events. Thanks.

Thank you.

That does conclude today’s conference. We thank you for your participation.