Greetings and welcome to Veeco’s Fourth Quarter and Full Year 2022 Earnings Call. At this time, all participants are in a listen- only mode. A question-and-answer session will follow the formal presentation. [Operator Instructions] As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Anthony Bencivenga, Head of Investor Relations. Thank you. You may begin.

Thank you and good afternoon, everyone. Joining me on the call today are; Bill Miller, Veeco’s Chief Executive Officer and John Kiernan, our Chief Financial Officer. Today’s earnings release 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 expressed permission. Your participation implies consent to our recording. To the extent that this call discusses, expectations about market conditions, market acceptance and future sale of the company’s products, future disclosures, future earnings expectations or otherwise make statements about the future. Such statements are forward-looking and subject to a number of risks and uncertainties that could cause actual results to differ materially from the statements made, including as a result of the COVID-19 pandemic. These factors are discussed in the Business Description, Management’s Discussion and Analysis and Risk Factors 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 will address non-GAAP financial measures, information regarding such non-GAAP financial measures, including reconciliation to GAAP measures of performance is available on our website. And with that, I will turn the call over to our CEO, Bill Miller.

Thank you, Anthony. Good afternoon, everyone. Thank you for joining our call. I hope you and your families are well. To begin, I'd like to highlight some recent exciting news. On February 1, we announced that Veeco acquired Epiluvac, accelerating Veeco’s entry into the High Growth Silicon Carbide Epitaxy Equipment Market. I'll share more details on this in a few minutes. I'm going to take you through our 2022 and fourth quarter highlights and explain the acquisition. John will provide a financial update and guidance, and then I'll discuss our markets and technologies before taking your questions. As I look back at 2022, I'm proud of the resilience the Veeco united team has exhibited and the accomplishments we made. For starters, as it relates to our growth strategy. We made solid progress advancing our product roadmaps in our semiconductor and compound semiconductor product lines. Several of our customer evaluations were accepted. And we completed our San Jose facility expansion, increasing our much needed semiconductor capacity. We achieved double-digit revenue growth, and we grew non GAAP operating income faster than revenue. An important part of our strategy involves consistently evaluating our product portfolio. As part of this process, we acquired Epiluvac to participate in the Silicon Carbide Epitaxy Market, which we believe will enhance our long term growth prospects. From a governance and corporate responsibility perspective, we appointed a third female director, Dr. Lena Nicolaides to our board, advanced our ESG program by publishing our annual sustainability report, and we invested in our Veeco united leadership team by implementing a leadership training curriculum. And lastly, with strong border activity, our backlog grew, and we strengthened our balance sheet with robust cash flow from operations. We're pleased with our progress in 2022. And we believe we're set up for solid performance in…

Thanks, Bill and good afternoon everyone. Today, I'll be discussing non-GAAP financial data and would encourage you to refer to our reconciliation between GAAP and non-GAAP results, which you can find in our press release or at the end of the earnings presentation. Now breaking down our full year revenue of $646 million by market, our semiconductor revenue was $369 million, which represented 57% of the total and an increase of 50% over the prior year. Our semiconductor growth was driven by strong performance in all product lines led by Laser Annealing. Compound semiconductor revenue was $121 million, up 13% from 2021 and made up 19% of the total. Growth in this market was driven by systems for photonics applications. Data Storage revenue was $88 million and made up 13% of our total revenue. This was a 48% decrease from the prior year. In line with our expectations, as hard disk drive customers slow their pace of capacity additions for magnetic head manufacturing and scientific and other revenue was $68 million, an increases 12% from 2021 and made up 11% of total revenue. And now looking at our full year revenue by region, our Asia Pacific region, excluding China made up 36%, driven by semiconductor customers, the United States made up 31% of total revenue, driven by semiconductor and data storage customers. China made up 19% of total revenue. In the second half of 2022, we experience an accelerated booking rate for trailing notes semiconductor systems in China. Accordingly, we expect China revenue as a percentage of total revenue to increase in the first half of 2023. And finally, EMEA was 14% of total revenue for the year. Now turning to full year 2022 non-GAAP operating results, we achieve gross margin of 42%, which is in line with our annual…

Thanks John. Turning now to an update on our markets. We'll start with our semiconductor market, where our strategy is to invest in the leading edge with differentiated solutions. We accomplished this with our Laser Annealing products, which reduce thermal budgets for our advanced node customers. We're expanding our served available market with our Laser Annealing product line as we went additional annealing steps at logic customers current and NEX [ph] nodes in by introducing Laser Annealing to the memory space. Our Ion Beam Deposition systems are another differentiated solution in our semiconductor market. They're used to manufacture EUV Mask Blank and have been the process of choice for many years, as Ion Beam Deposition can deposit a nearly defect-free film. In addition to our strategic initiatives in the semiconductor market, we provide Laser Annealing equipment for trailing edge capacity. And we also provide advanced packaging lithography and Wet Processing Solutions to IBMs, foundries, and OSATs. Our technologies are tightly aligned to the semiconductor market, which is driven by all four of the mega trends that we've defined, high performance computing and artificial Intelligence, Mobility and the Immersive User Experience, Transformation of the Automobile industry and the Cloud. We think our semiconductor business will outpace overall wafer fab equipment spending or WFE in 2023. In fact, we expect our semiconductor revenue to be flat to slightly up in 2023. And this is significantly better than WFE, which is forecasted to be down 20% or more for the year. During the fourth quarter, we had several signs of momentum that support our positive view of the semiconductor market. We had record bookings in the fourth quarter, as well as the full year. In Laser Annealing, order activity and shipping activity for both leading and trailing notes remained elevated. We shipped in…

Thank you. Ladies and gentlemen, at this time, we will be conducting a question and answer session. [Operator Instructions] Our first question comes from the line of Tom O'Malley with Barclays. Please proceed with your question.

Hey, guys. Thanks for taking my question. And to Anthony, congratulations on the new roles [indiscernible]. Thank you for the help over the years. I just had two quick ones. The first one is you put out a -- an 8K in early February and talked about things will return. Could you talk about what has changed since then? Was this always the expectation for Q1 of the year with a stronger second half, or has anything changed since that 8K? And then two on the compound semi side, you're obviously saying it's a weaker year. Is that really -- is just related to some of the web processing, or is there any additional weakness that you've seen there? Thank you.

Sure. So commenting on Q1, you know, our guide for Q1 is for top-line, Tom. $130 million to $150 million, so 140 at the midpoint. And we did you know, consider that and putting out our guided revenue range for the year. So we've guided our revenue range for 2023 at $630 million to $670 million. So relatively flat, you know, compared to 2022. In setting that, you know, guidance, we've taken into consideration, as Bill highlighted in the prepared remarks that we have increased the backlog to $500 million in by the end of 2022. So that's about a $60 million increase from the beginning of the year. So all that taken into consideration in a strong booking quarter in the fourth quarter, we remain -- our guidance range remains where we previously disclosed it. I think you had a second question there as well. Tom, if you don't mind repeating that.

Yes, no. I was going to just pivot that introduction Bill, but I guess the other part of the equation, as you mentioned that China orders were a little stronger in the first half of 2023. Is that increasing backlog directly correlated to those Chinese customers ordering a bit more, or can you just describe where you're seeing the increase in orders that's giving you that better visibility to stepping up? Thank you.

Sure, Tom. So we did see, in the second half of this year, our order rate pickup in China. We were running revenue about 20% of revenue in 2022 coming from customers in China, and that we've seen that now on the order side pickup to about 27% of orders for the year in 2022, having us exited 2022 with a backlog of about 27%. So we're expecting a higher revenue rate in the beginning part of 2023 as those orders are scheduled to ship out.

Thank you.

Thanks, Tom.

Thank you, Tom.

Next question comes from the line of Gus Richard from Northland. Please proceed with your question.

Yes. Thanks for taking the question. Anthony thanks for all your help over these years and best of luck.

Thank you, Gus.

You’re welcome. And then, on the bookings in the fourth quarter, you said as a record. And I'm just wondering if you can kind of get a little bit of color on is that coming from data storage and semis? Just what comprise that strong bookings?

Yes. Just one quick clarification, I think Bill will cover it in a little bit more detail, Gus. It was a record booking only in our semiconductor segment in the fourth quarter and for the year in semiconductor, not the company as a whole.

Yes. Thanks for the clarification, John.

Got it.

Gus, just to give a little more color to that, I would say, Gus, we're in a mixed demand environment. And we are seeing, as John just said, and we said in our prepared remarks, our semi business is strong and we think we're going to be flat to slightly up for 2023. I think we're going to be well beyond WFE, which is forecast to be down 20% or more. As we just said, we had record bookings in the fourth quarter. Our Laser Annealing business was strong. We had order and shipment activity for both leading and trailing nodes during the quarter, and our EUV Mask Blank System business we also had strong orders in Q4. And now the full year 2023 is booked into backlog. Now, the flip side is, there's some areas of the semi space that aren't doing as well. The consumer products such as smartphones and PCs have slowed. And this is driving softness in our Advanced Packaging, lithography and Wet Processing product line. So, we expect the positive momentum in our LSA and EUV Mask Blank products to offset these challenges in semi. If I just want to expand for a second on – on Compound Semi, Compound Semi is setting up to be a challenging year, in the near-term, driven by weakness in 5G RF related to the smartphone weakness. In a longer-term, we do feel better about Compound Semi because these markets we're working in to penetrate such as power, electronics and Micro LED, are growing and have enormous potential for us. And as we just talked about here, we're really excited about entering the silicon carbide Epi market with the Epiluvac acquisition. So you know, this really kind of accelerates our entrance into – into this space. And it does add some served available market for us to the tune of 200 million to 300 million in 2023, growing to 500 million in 2027.

Got it. Thank you. Very helpful. And then just on the Epiluvac acquisition, you know, can you basically talk a little bit more about what to purchase? Was it just a chamber? Is it hooked up to a mainframe? Do they have customers? Have they, you know, are they beta, you know, are their schools running in production? And, you know, sort of, what do you guys need to do to get it to high volume?

Yes, that's a lot of questions, Gus. Let me kind of try to lay the land out a little bit more clearly. So we acquired this 11 person Swedish engineering and technology company. They had developed silicon carbide previously for 4-inch and 6-inch. And so this is a new 8-inch single wafer silicon carbide reactor and mainframe, so it's an automated system that can run independently. They have placed one system into the field, and it's currently under installation. And part of our integration plan is we're going to put there the second tool shipment is actually going to ship to our Somerset New Jersey lab, where we're going to facilitate it and use that as a dedicated demonstration tool to sell equipment. So we're planning a sales kick-off meeting here in the next week or so. And the addition of I believe, Veeco sales, worldwide sales footprint, our service footprint and manufacturing operations. We think we have a very good chance to, to be competitive in this silicon carbide Epi market. Most likely, though, given the timing of all this, not much revenue in 2023, but hopefully, some revenue growth, incremental business in 2024.

Got it. Thanks. That's very helpful.

Sure, Gus.

Our next question comes from the line of Dave Duley with Steelhead Securities. Please proceed with your question.

Yeah, thanks for taking my question. Just to kind of follow-up along the lines of Gus’s questions. As far as FICO goes in the, in the Compound Semi business, historically, how much of your revenue in that business comes from power electronics of various types, either standard silicon or gallium or silicon carbide?

Well, we, prior to the acquisition, we don't have any silicon power or silicon carbide power, we had our gain on silicon gallium nitride on silicon equipment for 200. And now some 300 millimeter power applications. John, I don't know, I think we have that number off the top of our head.

Yeah. It’s not been the predominant number driving the compound semiconductor revenue. We were getting more of the compound semiconductor revenue recently, from 5G, related in particularly with our web processing, business there. So that is the largest share recently in the in the compound semi space. And as Bill mentioned, that is a part of the space right now, where we are seeing weakness in the in that market.

Okay. And you mentioned that about trailing nose, I think that's mainly China, but it's probably, it might be throughout Asia, but just out of curiosity, do you see the trailing node business growing faster than your overall semi business, or is it will be in line or I'm just trying to get a gauge on, how that segments performance?

Yeah. We have seen an increase in trailing notes, particularly in Laser Annealing. I would say that, I know John put a particular focus on China, but there's been a decent number of US bookings and shipment at the trailing node as well, I would say, on the leading – leading edge logic, business the activity in the business remain strong. We actually shipped an evaluation system to a very bleeding edge logic type application. And that was shipped in the fourth quarter. And so activity remains strong at the leading edge, as well.

Okay. As far as, could you help us understand maybe what your targets, if you're successful in this silicon carbide CVD business? What would be your market share expectations, or let's say three years from now, what will be your goals as far as market share of the market go of the segment goes, and perhaps you could help us understand what you think you touched on briefly in your prepared remarks. But why do you think the system will be able to take market share from whoever the incumbent is?

We think we've met with a lot of many of the leaders in the annealing customers in the silicon carbide epi-space, and we've also benchmarked our capabilities with the competition. And we think we can stand up pretty well from our cost of ownership. We've certainly had some very good early engagements with customers. But as I said, in Gus's question, this is still early revenue for this company, and we're putting in about a demo tool in our facility. So we won't really know, we won't really know for some time until we start putting, doing real demos and putting competitive films down, and I'm starting to ramp this business and really get fully engaged into this market. So we're not really ready to put down a longer-term target. We do know that it's a $250 million approximately market today. And it's growing. And we think this technology, and this design, along with Veeco’s infrastructure is a very nice match for us.

Thank you.

Thanks, Dave.

Our next question comes from the line of Mark Miller with The Benchmark Company. Please proceed with your question.

Anthony, I certainly enjoyed working with you through the years and wish you the best in your new position.

Great. Thank you, Mark.

You’re welcome. You mentioned the LSA leading eval tool for logic customer, what are the eval? Can you give a status of other evals you have in the field?

Yes. We just put that one in for semi logic. And I would say that's just being installed now. During the last year, we've actually been very successful signing off our evaluation systems that we had previously placed. And we've had some follow on volume orders for some of them, and we're working with our customers to see that volume, those volume orders continue into the future. We have a pretty strong slate of evaluation systems we're planning to put into the field this year. And I would say, it really those evaluation tools largely aligned with our strategy to grow in semi and compound semi, where we've been making the investment. So we have a next generation Laser Annealing system that we've been working with customers for some time. And we're planning to put one maybe two of those eval systems out into the field. And as well as two of this – low -- 300 millimeter low resistance Ion Beam Deposition systems into the field for both logic and memory type applications, as well as a few others. So I would think we'll probably exit the year of 2023, with kind of refilling and ending up with six to seven evaluations in process as we exit 2023.

Okay. Your tax rate for 2023 asset valuation allowance reversal, what should we estimate 19% or so?

Yeah, I think high teens would be appropriate but non-GAAP and slightly lower for GAAP.

Okay. Thank you.

Thank you, Mark.

Thank you, Mark.

Our next question comes from the line of Rick Schafer with Oppenheimer. Please proceed with your question.

Hi. This is Wei Mok on the line for Rick. I'd like to echo my congrats to Anthony on the new role and to welcome to new Anthony to the IRR role. My first question is on the backlog.

Thank you.

Yes. My first question is on the backlog 500 million. It seems like it's led by semiconductors. But I was wondering if you can break this out even further, what's the split between semiconductors and compound semiconductors and data storage? And as part of that answer, I was wondering if you could give us any color on the data storage for 2023?

Sure. so I think as we look at the backlog, not surprising given the bookings rate in that the semiconductors been more than 50% of our business recently. More than half of the backlog is in Semiconductor. If I look at the next larger piece of the backlog, about 20% of our backlog or so comes from data storage. And then, the rest of the backlog is split evenly between Compound Semi and Scientific and Other.

Great, thank you. As for my second question on gross margin is at 42% for fourth quarter, you guided it to a similar range, you guys exceeded your guidance for fourth quarter and you guided to a similar range in first quarter. So I was wondering what led to that upside and what are some of the puts and takes to gross margins?

Yeah. So good question there, fourth quarter gross margin did come in at 42%, which was better than what we expected at the beginning of the quarter, when we guided and we had a more favorable product mix. And then, we also saw for the first time, in a while here, lower logistics costs. And we've done some cost controls. And we had manufacturing and service costs come in more favorable as well. So for the full year 2022, we ended up coming in at 42% gross margin, which was in line with our guide for the year. As we look at gross margin for the full year 2023, we do expect that range of gross margin in 2023 to be similar to the full year 2022, gross margin. But, as you noted for Q1 2023, we're guiding gross margin at 40%, midpoint, and that's lower than the expected average for the rest of 2023, due to a less favorable mix and lower volume. And we do expect improvement in the remaining quarters of 2023.

Great, thank you. If I can sneak one last one in there on Epiluvac. It seems like this technology is complementary to MOCVD. So I was wondering if part of your strategy, is there any potential revenue synergies you could think of between the two equipment between that, silicon carbide epi and MOCVD? Thank you.

Yes, we were actually integrating the Epiluvac acquisition into the into our MOCVD product line. And we certainly would look there may be opportunities, because many power companies are looking or investing in not only silicon carbide, but also gallium nitride. So there could be some sales synergies and also common architectures that we could head towards to mix and match different chambers on the same front end, if you will.

Okay, great. Thank you.

Thank you, Wei Mok.

[Operator Instructions] Our next question is a follow-up question from the line of Gus Richard with Northland. Please proceed with your question.

Yes. Thanks for indulging me once again. In terms of Ion Beam Deposition etch, are you guys, sort of, booked out through the year, given the lead time for that equipment?

In the data storage space, specifically, Gus?

No, I mean, both EUV mask blanks and data storage.

Yes. We're in a very strong booking position there. I would think, yes, we are we are booked out in data storage and the EUV mask blanks, and there may be one or two tools that may come into the year, slip out of the year. But as a general statement, we're -- our backlog is very strong in Ion Beam right now.

Yes, I get it. And then, you mentioned that you're going to put out some demo tools for Ion Beam Deposition in semi. And I know you've been working on it for a while. Are those tools going to go first half, second half, sort of, how do you expect these evals to go?

Yes. I would -- the first one we're getting fairly close on. And, if anything, believe it or not, is maybe gated by customer facilities. And so, we're really, maybe we have a chance for the first half, but I would conservatively put it in the second half. But we're working with them to try to find space for them to put this machine. The machines ready to go.

Got it. All right. Well, small brains, small gains. Thanks so much.

Yes. Thank you, Gus.

There are no further questions in the queue. I'd like to hand the call back to management for closing remarks.

Thank you, operator, and to all joining us on today's call. I also want to thank our customers and shareholders, along with the Veeco united team, for their continued support as we execute on your behalf. Have a great evening. Thank you.

Ladies and gentlemen, this does conclude today's teleconference. Thank you for your participation. You may disconnect your lines at this time, and have a wonderful day.