Greetings, and welcome to the Veeco Second Quarter 2023 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] Please note, this conference is being recorded. I will now turn the conference over to our host, Anthony Pappone, 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 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 make 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, management's discussion and analysis and Risk Factors sections of the company's report on Form 10-K and annual report to shareholders, 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 at 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. With that, I will turn the call over to our CEO, Bill Miller.

Thank you, Anthony. Good afternoon, everyone, and thank you for joining our call today. Veeco had another solid quarter with strong top and bottom line results. Today, I'll take you through our second quarter highlights, provide an update on our markets and discuss a few significant growth opportunities in more detail. John will provide a financial update and guidance, and then we'll be happy to take questions. Revenue in Q2 totaled $162 million, toward the high end of our guidance range; while non-GAAP operating income reached $24 million and non-GAAP diluted EPS totaled $0.36, both above the high end of our guidance range. Our semiconductor growth strategy of investing in advanced logic and memory to win new customers and applications continues to gain traction as evidenced by record semiconductor revenue during the quarter. In addition to our solid financial results, we're also excited to share several key business wins. First, we shipped LSA systems and received follow-on orders from a Tier 1 customer for high bandwidth memory, enabling artificial intelligence. Second, we received LSA orders from Tier 1 logic customers for their most advanced nodes. And third, we've made further progress towards shipping evaluation systems for nanosecond annealing, or NSA; and ion beam deposition, or IBD, for advanced node semiconductor applications. I'll now provide more details on our markets and review several opportunities we view as integral to our success. Looking first at our semiconductor market. Laser annealing plays a critical role in chip production. As devices continue to shrink, customers require the most advanced technologies to meet increasingly stringent chip process demands. Growth from our laser annealing platform represents our largest opportunity as we expand to new markets, new applications and introduce our NSA system. We saw broad-based demand for our laser annealing platform during the quarter from both…

Thanks, Bill, and good afternoon, everyone. Today, I will 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 and at the end of the quarterly earnings presentation. Starting with Q2 revenue by market and geography. Revenue totaled $162 million for the quarter, increasing 5% from Q1 and coming in near the high end of our guidance. This was driven by sales to semiconductor customers, which increased 14% sequentially and 9% year-over-year. Our semiconductor business comprised 65% of total revenue as compared to 60% in the prior quarter led by record laser annealing shipments. Compound semiconductor revenue increased slightly quarter-over-quarter and came in at 15% of revenue. The increase was primarily driven by system shipments for photonics applications. Moving along, our data storage business totaled 9% of revenue, a decline from the prior quarter. And scientific and other made up 11% of revenue, in line with Q1. Now turning to quarterly revenue by region. Revenue from our Asia Pacific region, excluding China, increased to 36% of total revenue versus 25% in the prior quarter, resulting from a significant increase in semiconductor system sales. As forecasted, revenue from China decreased compared to Q1, totaling 31% of revenue. This decline was primarily due to lower LSA system shipments. Looking ahead to the second half of the year, we continue to expect a decline in China revenue versus the first half of the year, with full revenue in the range of 30% of total revenue. The United States was 22% of revenue. And finally, EMEA came in at 11% of revenue for the quarter. Switching gears to our non-GAAP quarterly results. Gross margin came in at approximately 43%, a sequential increase from approximately 42%, and above…

Thank you, John. Before concluding our prepared remarks, I'd like to highlight why Veeco is a compelling investment opportunity and is making progress toward our $800 million target model. First, as an innovative manufacturer of key semiconductor process equipment, Veeco is uniquely positioned with differentiated technologies in growth markets driven by the lasting mega trends we frequently discuss, including high-performance computing and AI. Second, our laser annealing product line is well established and our efforts to expand our footprint to new markets, applications and products are gaining traction. Third, we have decades of experience and leadership in ion beam technology, and we're continuing to advance our product road map. Moving beyond EUV mask blanks, we're now introducing ion beam into wafer-level critical films for the semiconductor industry and are planning to gain share from incumbent technologies. And lastly, we have a long-term opportunity to capitalize on demand in the epitaxy equipment market for several power electronics and photonics applications. And with that, we'll be happy to take your questions. Operator, please open the line.

Thank you. And ladies and gentlemen, at this time, we will conduct our question-and-answer session. [Operator Instructions] Our first question comes from Tom O'Malley with Barclays. Please state your question.

Good afternoon and thanks for taking the question and congrats on the good results. My first question is just regarding the AI opportunity. You spent a decent amount of time on the call talking about it, then you've introduced a couple of slides in your deck showing what that opportunity might look like. But mine is more on the financial side. Could you just describe how big in terms of your revenue today is related to HVM? I know that that's a specific -- you've outlined a couple of AI opportunities. But how big today is your HVM exposure? And how big do you think that HVM opportunity can be long term and how big that AI opportunity could be long term?

Tom, I'll take an attempt at your question. Last year, I would say our contributions from AI were very small, maybe negligible. We did some analysis, and with some assumptions, we're estimating that a little bit under right about 10% of our revenue is attributable to AI. Going forward, we're certainly not going to give too much quantitative color on '24, but clearly, it does seem to be a significant driver. And we're having a lot of qualitative discussions, evaluations and the like, and it's a focus area, these areas of nanosecond annealing evaluations and ion beam deposition evaluations, and our expectation is these will end up in AI-type applications or at least a significant portion will be in those applications.

Helpful. And then you guys are raising the profitability for the full year. Obviously, there's the reduction in interest expense. You talked about lower tax in gross margin. Could you just highlight on the gross margin side, you saw a pretty significant step-up. Is that mostly related to mix and the higher semi revenue? Is that just certain wins that you guys have gotten? What's given you the confidence that, that gross margin profile is higher than it was originally?

Yeah. Well, first of all, Tom, the first half of the year results were a bit higher than initially forecasted. So half the year is behind us here where our gross margin came in better. I think as we looked at this particular quarter, the volume was a bit higher than originally forecasted and we did see a bit of a mix impact positively. And then we've been seeing a bit of improvement on logistics cost and controlling operations and service spending. As we look out for the balance of the year now, we're raising our guide for the second half of the year slightly and to come in slightly higher than the first half of the year. Now part of that will get a benefit by expected higher volumes in the second half of the year.

Got you. And if I could just sneak one more in, you guys oftentimes give a little color on the out quarter for what you see by segment for your businesses. Could you just help us out with, in the September quarter, what you guys are seeing? Thank you.

Sure, Tom. So at the midpoint of the guide, we're guiding about $165 million of revenue for Q3. And I would say that we expect semi to be slightly down after a record quarter in Q2, and we're not forecasting another record in Q3 at this point. We see compound semi being flat. We've been talking about for a number of quarters now that we expect our data storage revenue to be up in the second half of the year. So we are expecting that in the third quarter, data storage to be up, could be in the $30 million range for Q3, and we're expecting scientific flat.

Thank you very much, guys..

Thanks, Tom.

[Operator Instructions] Our next question comes from Dave Duley with Steelhead Securities. Please state your question.

Yeah. Thanks for taking my question. I guess the first one is a little bit of a follow-up on the high-bandwidth memory opportunity, or just memory in general. Could you just discuss how big you think the LSA TAM is in the foundry and logic business and perhaps compare that to the memory business? And it's my recollection, at least in the foundry and logic business, that you kind of won one advanced node, then you picked up other nodes or other applications. How do you expect the high bandwidth memory business to unfold over the next year or 2?

Dave, I would say in memory, in general, Veeco has very little exposure to memory. That being said, we just had our first foray in the high bandwidth memory, winning an HVM application for laser annealing. So we've been sizing the logic portion of laser annealing at about $400 million a year. And then with this one success that we have, we've kind of sized it currently with this one success at about $100 million. But I think if you look three to five years out, as we can hopefully win more customers and kind of land and expand in memory, we could see that opportunity growing to be comparable size to logic, so going from $400 million in logic to another $400 million in memory.

Okay. And as far as the epi tool for silicon carbide, I was just wondering if you could just talk about -- you seem like you made a pretty big bet here on that marketplace. How big do you think the epi tool market is? And what do you think your advantages are with this tool? I know you have tons of years of experience in epi in other markets, but I'm just curious what you think about what the advantages are for the silicon carbide market.

Yeah. We're really excited about the acquisition. From talking with customers, they're very excited about the technology that we acquired. The challenge was they were a smaller company and really not bankable. And so I think their technology, plus Veeco's manufacturing, service and sales support, logistics worldwide, really opens up a lot of doors. And we're seeing very strong engagement from customers. Regarding the first half of your question regarding the market size, we're estimating that market to be in the $200 million to $300 million a year at this time and then maybe by 2027 kind of growing to about $0.5 billion in the future.

Okay. Thank you.

Thank you, Dave.

Our next question comes from Mark Miller with Benchmark. Please state your question. Thank you.

Just wondering, I think you mentioned some microLED developments later this year. Can you give a little more color on that?

What we've seen, as we've pretty broadly discussed, is microLED pushing out about a year. And so we're actually, I think, very well positioned. We've developed a new arsenide phosphide product to intercept the microLED market when it happens. We're also selling tools for GaN-on-Silicon for disruptive microLED applications. So Mark, I would say microLED has the potential to be a large opportunity, but it's probably not going to be in a significant volume until 2025 time frame.

Thank you.

Thank you, Mark.

There appears to be no additional questions at this time. I'll hand the floor back to Bill Miller, CEO, for closing remarks.

I want to thank our customers and shareholders along with the Veeco United team for their continued support as we execute our growth strategy. Have a great evening, everyone.

Thank you. And with that, we conclude today's call. All parties may disconnect.