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Veeco Instruments Inc. (NASDAQ:VECO)

Q4 2013 Earnings Conference Call

February 19, 2014 5:00 PM ET

Executives

Debra Wasser – SVP, IR & Corporate Communications

John Peeler – CEO

Dave Glass – CFO

Analysts

Patrick Ho – Stifel, Nicolaus & Co

Andrew Hughes – Bank Of America Merrill Lynch

Brandon Heiken – Credit Suisse

Paul Coster – JP Morgan

Stephen Chin – UBS Securities LLC

Mark Heller – CLSA Research, LTD

Brian Lee – Goldman Sachs

Edwin Mok – Needham & Company

Susie Min – Deutsche Bank

David Duley – Steelhead Securities

JoAnne Feeney – ABR Investment Strategy, LLC

Operator

Good day everyone, and welcome to the Veeco Instruments' Q4 Full Year 2013 Earnings Conference Call. Today's conference is being recorded. At this time, I would like to turn conference over to the Senior Vice President of Corporate Communications and Investor Relations, Ms. Debra Wasser. Please go ahead, ma'am.

Debra Wasser

Thank you operator and thank you all for joining today's call. With me today are CEO, John Peeler and our CFO, Dave Glass. Today's earnings release is available on the Veeco website. Please note that we have prepared a slide presentations to accompany webcast and we encourage you 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 our 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 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 and Management's Discussion and Analysis sections of the company's report on Form 10-K and annual reports 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 website.

I'll now turn the call over to John.

John Peeler

Thanks Deb. Veeco's 2013 revenue was $332 million down 36% from 2012 with all of our businesses experiencing down cycles. Fourth quarter revenue was $73 million and within our guidance range. Very weak gross margins and high operating expenses contributed to our poor bottom line performance.

Bookings remained at trough levels down 7% sequentially to $85 million, but we had a positive book-to-bill ratio. A bright spot for Veeco continues to our solid cash performance. We have nearly $550 million of cash in the bank, even after investing $76 million for our new ALD business.

Q4 was a tough finish to a challenging year, but we expect Q1 to be better. I'll turn the call over to Dave for some details on the financials.

Dave Glass

Thanks John. We reported a significantly wider loss in Q4 than in Q3 due to the convergence of lower revenue, weaker margins and a spike in our OPEX spending. Our margins in Q4 were unusually low due to the depressed volumes, continuing weak selling prices and higher cost of goods sold. Which included items such as higher than normal supply chain cost?

Operating expenses spiked higher in Q4. There are two primary reasons for the spike; first we're now carrying about $4 million of additional R&D and administrative cost related to the new ALD business, which was acquired in early October.

In addition to ALD, our fourth quarter OPEX included a few non-recurring items such as a reserve for bad debt expense in Asia, acquisition related legal and accounting fees and special performance and retention bonuses.

OPEX is expected to come back down in Q1 as I'll explain shortly. To recap, for the full year 2013 selling, administrative and research was $149 million excluding the accounting, review cost as well as the Q4 non-recurring items I just mentioned.

This represents a 12% year-over-year decline in spending. Revenue was $73 million was down 26% from the prior quarter but still at the high end of our guidance range. System shipments in MOCVD and data storage were very low, this quarter. Resulting in total revenue for those businesses down 27% and 31% respectively on a sequential basis.

At these low revenue levels, both segments operated below their breakeven points. Reporting adjusted EBIDA losses for the quarter of $16.5 million for LED and Solar and $3.1 million for data storage.

It's important to note that our ALD business is now included in the LED and Solar segment and since it's still pre-revenue, represents a drag on adjusted EBITDA for that segment. In terms of orders, we booked $85 million in the quarter which fell about 7% short of last quarter.

LED and Solar booked $63 million which was down 14%. The weakness in MOCVD bookings continued in Q4 at what we are considering trough levels. While MBE did see some positive tractions with multiple GENxplor orders as well as one production system order.

Data storage bookings were up from a very weak third quarter, but at $22 million still quite weak by historical standards. We finished the year with a total backlog of $143 million. It's worth noting that in Q4, we received a PO for prototype ALD system. This was not included in our reported bookings for the quarter, since the revenue recognition timing on the prototype is still uncertain.

Veeco finished the year with cash and short-term investments of $495 million, which is down only slightly from the start of the year, after adjusting for cash used for acquisitions. The total Q4 payout for Synos was $76 million including the adjusted purchase price and the earn-out tied of the prototype system order.

Although 2013 was a year of declining revenue and losses. We are proud of our ability to respond by rating in cost and keeping a sharp focus on working capital. With positive operating cash generation in the first half and negative cash in the second. We finished a very challenging year of our breakeven on an operating cash flow basis.

Both DSO and inventory turns have improved their 2013. Finishing up in Q4 at 29 Day Sales Outstanding and 3.9 inventory turns respectively. Looking out at our guidance for the first quarter, orders are likely to increase. Revenue was currently forecasted to be in the range of $85 million to $95 million.

In terms of our gross margins, we do see the likelihood of improvements as certain MOCVD deals with better ASP roll out of backlog and the impact of various cost improvements at first gaining traction. For example, a new cost down version of MaxBright will positively benefit our margin starting this quarter.

First quarter gross margins are therefore forecasted to be about 33% to 35%. Absence some of the one-time expenses that impacted us negatively in the fourth quarter. We expect OPEX spending to be back to more normal levels in the $42 million to $43 million range. As we move forward into 2014, with the accounting review now behind us. We expect significantly lower outside advisor and accounting cost, so this lower spend will be largely replaced by new ALD business OPEX which we've taken out.

It should be noted, that R&D has front-end loaded in the first half of 2014 and this is likely to trend down in the second half of the year. As a result, we do expect OPEX to tick down in the second half. This along with the expectation of better margins, should be effective in driving our quarterly breakeven revenue passed down to below $100 million later in 2014.

Although we've given you the major elements of earnings. We are not giving earnings guidance this quarter. The complexity of purchase accounting for the Synos acquisition specifically how we'll account for the likelihood of earn-out payments related to potential orders for Veeco well and ALD, make it challenging to be able to give meaningful GAAP earnings guidance for the quarter.

And of course, since we cannot give the GAAP guidance, we can't give non-GAAP guidance either.

Let's spend a few minutes now talking about our plan for gross margin recovery. Looking back on 2013, our margins averaged about 31% over the course of the year because I just mentioned, in Q1 we do expect to see some improvement, but frankly or likely to be arranged bound in lower to mid-30s until we see higher volumes again and for chamber ASP's after more normal level.

The ongoing incremental cost reduction improvements that we're continually driving. Where MOCVD achieving better margins will require new products to drive growth in lighting and power electronics. Some wins in OLED and adjacent markets for the newly acquired ALD business will also solidify our cap at the 40% plus margin.

Except for the cost reduction improvements which are ongoing, we see most of these factors starting to take shape in the second half of this year but unlikely to be a strong force for margin recovery until 2015. With that, let me turn the call back over to John.

John Peeler

Thanks Dave. The last couple of years have been tough for Veeco. Yet I'm confident, that we'll emerge from this down cycle in a position of strength. Let's look at our growth opportunities in two-key markets. LED lighting and flexible OLEDs.

Nearly every day, we hear or read evidence that LED lighting adopting is accelerating incandescent bulb phase outs has begun in the US and China. Utilities are broadening subsidies for interview efficient lighting including LEDs and LED bulb price just keep dropping. The price of the 60-watt bulb has declined over 50% in the last two years.

Mackenzie [ph] forecast that by 2016 just two years from now LED's will represent nearly half of the world's spending on lighting. Starting to feel like the dipping point for LED lighting adoption is eminent.

Over the last few years, our MOCVD customers substantially improved their FE [ph] yield and this allows them to get more capacity of their install base. Now the yields are higher, yields and productivity gains are slowing and this means that capacity increases have to come from MOCVD tool upgrades and new tool purchases and this is a good thing for us.

With demand picking up, we are seeing some very positive signs. Top customers in China and Taiwan have over 90% fab utilization and they did not shut down for the Chinese New Year. Some Korean customers are adding capacity by upgrading older systems and buying new tools to keep up with demand.

And many of our customers are doing better financially. It's good to see supply and demand come back in to alignment and I'm encouraged that key customers are talking to us about adding capacity. [audio gap] AHS [ph] reported that Veeco market share exceeded 60% in 2013 and if you look at the last four years in total, we have better than 50% or better in all regions except Japan.

We are proud to be the number one supplier to the majority of LED makers with the biggest install base of tools and the number one supplier to the majority of LED technology leaders. We've achieved this by providing systems that are technically differentiated, provide higher productivity are well suited for mass production and provide the lowest cost to making LEDs.

We are in a great position to capture the next wave of MOCVD growth. Switching to ALD, things are heating up. In their recently Analyst Conference, Samsung predicted that 40% of their smartphones will be flexible by 2018. And at the Consumer Electronic Show, there were reports that some vendors secretly showed flexible and think OLED phones.

While we can't predict the timing of production ramps, we are really excited to receive a purchase order for a prototype of a larger scale ALD system in Q4. The order was for a FAST-ALD system for next generation flexible OLED phones.

Aside from OLED phones, we continue to work on application of our FAST-ALD technology in other new markets and we're very excited about the potential. Our priority for 2014 is to take the steps to transition the company back to profitable growth. We are focused on four areas to improve our performance.

First; developing and launching game changing new products that enable cost-effective LED lighting, flexible OLED encapsulation and other emerging technologies. Second; executing manufacturing cost reduction initiatives and lowering expenses wherever possible.

Third; driving process improvement initiatives to make us more efficient and finally improving product document differentiation, customer value and pricing to spin margin erosion. We expect our performance to improve in Q1, but we are prepared to run at a loss for a couple of quarters. We continue to believe that we have a very bright future.

At this point, we will take questions. operator, please start the Q&A session.

Question-and-Answer Session

Operator

Thank you at this time. (Operator Instructions) And we will go first to Patrick Ho with Stifel, Nicolaus

Patrick Ho – Stifel, Nicolaus & Co

Thank you very much. John, in terms of the pricing pressures that you're still seeing today, have you seen any of that kind of migrate into your leading edge products on particularly for the MaxBright?

John Peeler

So the pricing pressures basically started as, we went through a period of very low order volume where Axtron had a lot of written off inventory and they've been pretty tough for the last year. We think as the market recovers and has our lead times move out and we introduce new products that pricing will get better. They have pricing pressures have been pretty much across the board.

Patrick Ho – Stifel, Nicolaus & Co

Great, maybe this is a follow-up question on the manufacturing cost reductions that you talked about and what you have you done or what are you doing with your supply chain to get some of those cost reductions out? So one; I guess you can convert some of the pricing but also in terms of your next generation products?

John Peeler

Well, we started working – we worked on cost reductions for MaxBright and 465i since we introduced them and what Dave mentioned here that's going to occur this quarter is actually just another round of cost reductions. Actually hitting in the products that ships, so it's not a new announcement but these are things that we worked along for the last, I'd say nine months that are finally coming out the door and ship units.

We will continue to do that, we've got a very efficient manufacturing organization and we will continue to work, to source our materials from the best cost suppliers and run a very efficient operation.

Patrick Ho – Stifel, Nicolaus & Co

Great. Thank you very much.

Operator

We will hear next from Krish Sankar with Bank of America Merrill Lynch.

Andrew Hughes – Bank Of America Merrill Lynch

Good afternoon, guys. This is Andrew Hughes on for Krish. Since you've lot of optimism on recovery in MOCVD purchases this year. You mentioned a few key geographies in China, Korea and Taiwan driving that. Curios if you have inside into where utilization levels might vary on a geographic basis now and where you just might see that headed?

John Peeler

Sure, well first of all in China the utilization rates are 80% to 95% some of the customers are virtually at full out production, but beyond just the tier-1s what we are now seeing is the tier-2s are actually at high utilization and even a good number of tier-3. So overall the units in China are at a pretty high utilization.

Taiwan is probably 80% to 85% and Epistar was recently quoted saying that they'll be full soon and Korea is 80% to 90% depending on which customer you're talking to, but so it's really utilization is up across the full major geographies and I don't have information on Japan.

So I can't provide that, but it's up rather across the board.

Andrew Hughes – Bank Of America Merrill Lynch

Great and then as a follow-up. Are you starting to see any activity from competitors in China or is it still primarily Axtron that you're running into, in the marketplace?

John Peeler

It's really Veeco and Axtron competing for all the deals. We have seen Chinese competitors and we've seen them basically make some progress with the tools but they're far behind in terms of performance and they're not really actively being considered in deals that from what we've seen.

Andrew Hughes – Bank Of America Merrill Lynch

Okay, thanks a lot guys.

John Peeler

Okay. Thanks Andrew.

Operator

We will move on to Brandon Heiken with Credit Suisse

Brandon Heiken – Credit Suisse

Thank you for taking the question. I was wondering if you could talk about the cost reductions that you mentioned, that are starting to benefit the March quarter. How does it benefit future quarters and I think in the past you've talked about new tools helping gross margins? Is there anything we should think about in a way that could help later this year or next year?

John Peeler

Well, we haven't announced any new tool, so there is not a lot I can say there, but the cost reductions are something that we've been working on for a quite a while and they are a natural thing to focus on as products get older. So I can't give you a lot of details, but they're certainly a movement in the right decision. Our objective is to get margin back into the 40% plus range.

I think that needs to happen for the industry to be healthy and I think that's more typical capital equipment, process equipment. So that's where we are targeted at.

Brandon Heiken – Credit Suisse

Okay and congratulations on the purchase order for the FAST-ALD prototype. How should we think about progress there in your discussion?

John Peeler

Well, it's a larger system for a next generation product line that has higher volume productions then what's been delivered before, we've been working on it for say three months or more now, so we were making good progress. It's hard to read though, how quickly our customers going to go into volume production and when they'll order more.

So timing for production orders is unclear and we as Dave mentioned, we lost this order out of our bookings and we've also made the comment that bookings would increase in Q1 and that's really regardless of what happens in ALD.

Brandon Heiken – Credit Suisse

Okay.

John Peeler

Thank you Brandon.

Operator

And JP Morgan's, Paul Coster has our next question.

Paul Coster – JP Morgan

Yes, thanks. Mostly my questions have been answered. So little bit boring, but can you just explain on the OPEX from $42 million to $43 million in the first quarter, does that include the amortization expense associated with the acquisition or is that just purely same period expenses?

Dave Glass

No, that does not include the amortization that's basically SG&A and research.

Paul Coster – JP Morgan

Okay, got it and then. How quickly do bookings turn into revenues generally, maybe if you could just a bit more specific across each of the segment since it's relevant?

John Peeler

Well for MOCVD lead times have been fairly short probably in the three month range, there are certainly times when we can turn a product around faster, if we happen to have one but I would say so that's kind of typical at the trough. It's likely to move out, if the order rate picks up. So and more kind of full on market rates are probably about five months.

Data storage, I would say is four months to six months also and MBE is a little slower at actually probably six months to nine months depending on what product gets order.

Paul Coster – JP Morgan

Okay, thank you very much.

John Peeler

Thanks Paul.

Operator

We'll hear next from Stephen Chin with UBS

Stephen Chin – UBS Securities LLC

Thanks. Hi John. Just couple of follow-up questions. maybe the first one on the order guidance. So it sounds like the utilization rates are still very high out in the industry. So is the order recovery scenario that you're thinking one that's potentially has rush orders come in one quarter and then maybe have this digestion quarter or is it more of a scenario or maybe it's even more of a steady quarterly increase as customer add capacity gradually.

John Peeler

Yes, there is probably a mix. There's probably some that, customers have basically waited a lot longer to purchase additional systems then they usually do and if you look back at the customers over the last couple of last year. A lot of them lost money and so they're running very cautiously and they've really held off for I think as long as they can and usually you would have seen them kind of buying more already.

So I think there will be some rush and I think there will also be some more rational gradual, ramp. So hopefully both.

Stephen Chin – UBS Securities LLC

Okay and then maybe a follow-up question on the ALD order in the quarter. Do you have an early sense yet if, potential ALD adoption will be at the GEN III equipment basis or maybe it waits until the later generation equipment is ready.

John Peeler

Yes, it's not clear to us, right now which way that will go. The new order was for a larger tool.

Stephen Chin – UBS Securities LLC

Okay, thanks John.

John Peeler

Okay, thanks Stephen.

Operator

We will hear next from Mark Heller with Credit Line Securities Asia

Mark Heller – CLSA Research, LTD

It's actually CLSA, but thanks. Quick question, just to clarify for Q1 revenue growth is that mostly coming from the MOCVD business, if not data storage or MBE, correct?

Dave Glass

Yes, that's primarily MOCVD.

Mark Heller – CLSA Research, LTD

Okay and then on the ALD business. I think you guys were talking about when you acquired it, I guess for the earn-out to be executed. You were targeting about $75 million in shipments in 2014 is that still a possibility?

John Peeler

It is and it depends on when we get orders and what exactly is ordered as far as how that will play out. There are some threshold for getting orders this quarter and there are shipment based payments.

Mark Heller – CLSA Research, LTD

Okay and one more question, if I can? I'm not sure, there's a company called GT Advanced Technologies, they've been I guess doing some work on HVPE process to target the LED market. I'm just wondering if you're familiar with that technology and what are your thoughts on that?

John Peeler

Yes, we are familiar with it. We think their models are not accurate and that it doesn't work. The growth rates that we've seen and in their models and the material prices are far off from what our customers are actually experiencing. So the economics are far worst, than what's in the model that we've seen published.

There is also a lot of production worthiness issues and you might think back to what happen to the last company that tried to enter this market with HVPE by materials and they were not successful.

Mark Heller – CLSA Research, LTD

Thank you.

John Peeler

Thanks Mark.

Operator

And Canaccord, Jed Dorsheimer has our next question.

Unidentified Analyst

Hi, thanks. It's actually Josh for Jed. Can you just talk about into moving pieces between the underutilization which is probably pretty small obviously, pricing effects and then the effects of Synos on gross margin.

Dave Glass

Dave. I'll start with Synos effect. Actually there is no Synos effect on margin currently because we haven't booked any revenue. So in the revenue guidance that I gave for Q1 that really doesn't include any Synos and I'm sorry what was the second -- the first question.

Unidentified Analyst

Well the effects of underutilization which is probably low and then just pricing pressure.

Dave Glass

Okay, yes. I mean both of those are key drivers in our weak margins. Certainly the margin performance in the fourth quarter those were by far the two biggest drivers.

Unidentified Analyst

Okay and then, you talked a little bit or just help me quantify the amount of cost services, spares, etc. in the LED business and then data business, this quarter?

John Peeler

Well Dave is actually looking for a number. Over the last year, as overall revenues dropped to substantially systems revenues dropped about 45%. The services actually dropped to much smaller amount to services have become a larger piece of the business over the last year and in MOCVD, I don't know if we have a.

Dave Glass

We don't really usually report services by business, what I can give you is for the total company which in the fourth quarter was $28.5 million.

Unidentified Analyst

Okay, that's helpful. I'll pass it on. Thanks.

Operator

We will go next to Brian Lee with Goldman Sachs

Brian Lee – Goldman Sachs

Hi guys, thanks for taking the questions. First off, can you elaborate a bit on the ALD prototype you're shipping to Samsung will it be used for commercial production or do you need to see a follow-on order for a production tool? And also on that same topic, is it lump up and deferred profit, is that related to the ALD tool?

John Peeler

So the ALD tool that we have, the order is for first-generation product. It is a larger scaled up version of the previous product, so we don't expect any kind of major technical barriers. I can't say whether the customer will ultimately use in production or at production pile at line or not, that's really not up to us, but I think that may determine how the testing and the valuation goes over the next few months.

So that's really more up to them. I think, when they go into production at this size of system. We would certainly expect additional orders and that they not, this really doesn't fit the bill.

Brian Lee – Goldman Sachs

Okay, that's helpful and Dave on the deferred profit line is that related to ALD?

Dave Glass

Yes I know, I'm sorry and that's [indiscernible] I'm glad you asked that because it's something to point out, reporting changes that we've made which we think probably increases transparency here. What we've done is actually what you see now, you see those normal curvature of that line is changed a bit, it's customer deposits and deferred revenue.

So we are now including the $27 million customer deposits on that same line along with deferred revenue. I think you're comparing that to the last quarter.

Brian Lee – Goldman Sachs

Yes, no that's helpful.

Dave Glass

That $34.7 million includes $27 million of deposits.

Brian Lee – Goldman Sachs

Okay, fair enough then if I could just squeeze in a second one real quick. It seems, the pricing pressure maybe subsided a bit and cost reduction are starting to hit here if we look at your Q1 outlook for MOCVD. So just wondering, if you can walk through some of the incremental drivers, you think you need to get the MOCVD margins back in those 40s.

John Peeler

I think margins will improve first of all, as we get our own factory utilization ramped up to higher levels. Secondly, as there is an order of volume that doesn’t cost people to discount so much that there isn't any margin and Axtron gets past it's written off inventory. I think those are key things and then we certainly think product enhancements and new products will play a key role in getting the business back to more normal margins.

Brian Lee – Goldman Sachs

Okay, thanks guys.

John Peeler

Thanks Brian.

Operator

We will move on to Edwin Mok with Needham & Company

Edwin Mok – Needham & Company

Hi, thanks for taking my question, so if I look at this is beyond MOCVD in your data storage in MBE typically a long lead time, right? Do you have the severalty on the orders trend beyond the current quarter and how you kind of think about the yield play out for those market?

John Peeler

Yes. Well for data storage we don't have a lot of visibility past the current quarter. We did have a little better order quarter in Q4 but it was still pretty weak. So visibility is tough there, we are not expecting to have a great year in data storage. We are expecting to make money and to do at least a little better than last year.

So that's where that would stand for MBE, we've introduced a new tool called the GENxplor to the market. We introduced that couple of quarters ago, it's received a really excellent reception by the market and it's focused on the research lab and the university and more focused on the R&D and laboratory market.

It is, it does take time to turn those around but has ticked up there in overall orders also, so we are not planning on great things from those businesses, but we are planning to make money.

Edwin Mok – Needham & Company

Great, actually that's good color and then on the ALD idea [ph] I want to get a little bit that on the same for your competitive position rate. I want to understand what is the customer using right now, is there other competitor that a similar technology that the customer is evaluating or the comp is pretty much set on working with you guys specifically, just trying to understand the competitive position and to how forward other competitors out there.

John Peeler

Yes, I can tell you a little bit of that. The customer is using an older technology solution that with a different deposition approach. We believe ours is the superior film quality and we'll have a lower cost then we'll ultimately provide for much more flexible displays and thinner things. So they can stay with their older approach or they can adopt the newer approach, which they've been testing for well over a year and qualified in many respect.

So we believe they will switch, we don't know if they'll switch right away or if there will be some delay in that process, but the ALD film is a better approach.

Edwin Mok – Needham & Company

Great, thank you.

John Peeler

Okay, thanks Edwin.

Operator

(Operator Instructions) At this time, we will move on Vishal Shah with Deutsche Bank

Susie Min – Deutsche Bank

Hi, this is Susie Min for Vishal Shah. Thanks for taking my question. Wanted to get a little bit more color on your Q1 guidance. If I think about traditionally what services have added in the past as well as kind of where the data storage is, you know it would still imply kind of flat levels on Q4, just wanted to get a little bit more color where you're seeing I guess the turn whether beyond the data storage side services or on the tools?

Dave Glass

Services, we're expecting for 2014 should be about in the same range as though we're seeing this quarter. The growth that we are seeing is primarily coming from systems not necessarily from services.

John Peeler

And it's mostly MOCVD as far as growth goes. MOCVD systems.

Susie Min – Deutsche Bank

Okay, great. That's really helpful and then I know you've mentioned in your prepared remarks that you're hoping to achieve the $100 million breakeven level by the second half of 2014. I just wanted to get a little bit more color on how you can get there, I know you said that you should see some margin improvement, is that just volumes. I know you're talking about OPEX picking down, any additional details would be helpful.

Dave Glass

Well, the margin improvement is going to be largely a factor or function of better volumes and better ASP's than we've seen in the latter half of 2013 here. And then of course, as I said before or as I said in my comment R&D spend in 2014 is pretty much front-end loaded. So what that translates to is probably lower overall OPEX in the second half that plus the better margins is what brings the breakeven cost down.

Susie Min – Deutsche Bank

Okay and I know that the revenue recognition on the ALD side is a little bit uncertain but, my understanding as those gross margins are higher as well. So would any of that sort of factor into the second half of 2014 outlook.

John Peeler

Not necessarily, I think we made those comments independent of ALD because it's hard to predict we would actually recognize the revenue and whether we would get that in the year or not. So I think those comments were independent of ALD.

Susie Min – Deutsche Bank

Okay, thanks very much.

John Peeler

Thanks, Susie.

Operator

We will move on to David Duley with Steelhead Securities.

David Duley – Steelhead Securities

Thanks very much for taking my question. You have a great chart in your presentation about how you plan to improve gross margins from 31% to 40%. But one of the key things here is, your competitor not discounting it our system as much as they have in the past. Are you still seeing the significant discounts, do they still have excess inventory? Can you talk about what you're seeing on that front please?

John Peeler

I think you'd have to ask [indiscernible] they have excess inventory or not, but I guess it's our theory that it eventually will go away and then we will get back to more rational pricing that supports the investments that both companies have to make in terms of R&D and service and support for the customer.

So there has been a lot of price pressure, but we'll have to wait and see what happens.

David Duley – Steelhead Securities

And can you, maybe just give us an idea on the percentage basis what sort of reactor ASP declines you saw last year and do you think ASP is actually increased per reactor in 2014 or 2015?

John Peeler

Yes, I don't think we've historically not provided ASPs to the market and I do think ASP's per reactor will increase.

David Duley – Steelhead Securities

Thank you.

John Peeler

Thanks David.

Operator

And we will hear now from JoAnne Feeney with ABR Investment Strategy.

JoAnne Feeney – ABR Investment Strategy, LLC

Yes, hi John. I have a question about the price initiative I just read. I'm wondering, if it's possible for you to raise prices on the existing tools, there are you know or is that's just the matter of reducing discounts and do those possible price increases have to wait until Axtron's inventory is cleared in and is that why you think the second half is more likely for you to reach that breakeven point than the first half?

John Peeler

First of all, I think it's more reducing discounts than raising prices. So I think that the mechanism there and I think there's potential for both. Remember we don't where the lot of excess inventory on the other side. So I would expect that, as that gets completed that we'll see some more rational pricing, so I think it can happen early.

JoAnne Feeney – ABR Investment Strategy, LLC

Okay and then you've mentioned probable cause over the course of call, the prospects of new tools. Do you – would you care to be more specific or talk about the longer term plans any possibly timing of some new MOCVD film [indiscernible] market?

John Peeler

Yes, our practice is to talk about new products after we've released them. So that's what we'll stay with here.

JoAnne Feeney – ABR Investment Strategy, LLC

Okay. Thanks.

John Peeler

Thanks, JoAnne.

Operator

And everyone I'll turn the conference back to you all for closing remark.

John Peeler

All right. Well thank you for joining us and we will look forward to speaking to you in the coming months. Thanks.

Operator

And that will conclude today's conference. Again thank you all for joining us.

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