Seeking Alpha
We cover over 5K calls/quarter
Profile| Send Message|
( followers)  

Veeco Instruments Inc. (NASDAQ:VECO)

Q1 2014 Earnings Conference Call

May 5, 2014 5:00 PM ET

Executives

Debra A. Wasser – Senior VP-Investor Relations and Communications

John R. Peeler – Chairman and Chief Executive Officer

David D. Glass – Chief Financial Officer and Executive Vice President

Analysts

Krish Sankar – Bank of America/Merrill Lynch

Brandon D. Heiken – Credit Suisse Securities LLC

Mark W. Strouse – JPMorgan Securities LLC

Patrick J. Ho – Stifel, Nicolaus & Co., Inc.

Mark J. Heller – CLSA Research, LTD

Edwin Mok – Needham & Co. LLC

Andrew Huang – Sterne, Agee & Leach, Inc.

Stephen Chin – UBS Securities LLC

Vish B. Shah – Deutsche Bank Securities, Inc.

Mike J. Ritzenthaler – Piper Jaffray & Co.

Jed E. Dorsheimer – Canaccord Genuity, Inc.

Colin W. Rusch – Northland Securities, Inc.

Brian K. Lee – Goldman Sachs & Co.

Andrew P. Uerkwitz – Oppenheimer & Co., Inc.

Operator

Good day, ladies and gentlemen and welcome to the Veeco Instruments' Q1 2014 Earnings Call. Please note today's call is being recorded.

At this time, I turn the conference over to the Senior Vice President of 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 presentation to accompany this webcast. We encourage you follow along with the slides on veeco.com. This call is being recorded by Veeco and is copyrighted material. It cannot be recorded or rebroadcast without Veeco’s expressed permission. Your participation implies consent to our taping.

To the extent that this call discusses expectations about market conditions, market acceptance and future sales of the Company's products, future disclosures, future earnings expectations or otherwise 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 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 events.

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, for opening remarks.

John R. Peeler

Thanks Deb. Good to report that we started off 2014 much better than we ended 2013. Our first quarter revenue was $91 million up 24% sequentially, driven by the growth in our MOCVD business. Orders were $103 million and this was the highest level in nearly two years. MOCVD orders increased 59% to $83 million the highest level since the third quarter of 2011. And for the second quarter in a row we reported a book-to-bill ratio over one. But we used a bit of cash investing in our next generation products and growth businesses. Our balance sheet remains extremely strong with $483 million in cash.

I will now turn the call over to Dave, for some more detail on the financials.

David D. Glass

Thank you, John. Q1 was a significant improvement over the last quarter with higher revenue, better margins and lower OpEx. We reported a significant linear or EBITDA loss of $3 million. On a GAAP basis we reported $19 million of income as a result of reversing the $29 million Synos acquisition related contingency accruals.

As you may remember those accruals were setup in line with potential of booking OLED production orders in the first quarter and then shipping more than $75 million of ALD production systems by the end of the year. Although we still see significant promise for the business as a whole and we could still receive orders and ship product in 2014. We didn’t get the orders within the Q1 timeframe as we’re stipulated by the earnout agreement. As a result it’s now considered very unlikely that will achieve the shipment levels as required for the earnout by the end of the year.

Our margins in Q1 bounce back from the very depressed levels in Q4. To higher volumes of course helped but equally important was a very favorable mix of higher priced product. As well as the absence of some of the non-recurring negative items we spoke about in Q4. In addition, we had a higher number of tool acceptances in Q1 then we did in Q4.

I will discuss our guidance shortly, but going forward we do see margins moving back into low-to-mid-30s for the balance of the year. For operating similarly in Q4 we had a number of non-recurring items that hit us in caused OpEx to spike up. With those items not repeated in Q1, and with a continued focus on lowering our expanding. OpEx, when down to the $41 million level, which was composed of about $20 million in R&D and $21 million of SG&A.

Revenue was $91 million, was driven by double-digit sequential gains in both MOCVD and Data Storage, right about in the middle of our guidance range. MOCVD revenue was up 28% sequentially, while Data Storage was up 20%. Our revenue was well distributed geographically this quarter with Japan and China leading the way and representing about two-thirds of the quarters actively.

Although the LED & Solar segment reported positive EBITDA results of just over $2 million, it was not an up to absorb the losses in the data storage segment for our corporate costs, resulting in the consolidated EBITDA loss of $3 million. I just to remind everyone the LED & Solar segment now also include our ALD business and as result carries all of the ALD pre-revenue costs that were incurring.

In terms of orders, we booked of $103 million in Q1, which exceeded fourth quarter booking by over 20%. LED & Solar booked $87 million, which was up about 37%. MBE bookings were down from Q4, meaning virtually all of the gains in the quarter gain from MOCVD. Data Storage bookings were $15 million, down from $22 million in Q4 and representing a continuation of the anemic trend that business has been seeing for while now.

For the total company we build backlog this quarter growing from $143 million at the end of last year to $155 million in Q1. You may remember on our last call, we mentioned that in Q4 we received a PO for prototype ALD system. This was not included in our Q4 bookings note that’s been included yet in Q1. Since the revenue recognition timing on the prototype is uncertain.

Good progress has made however and we hope to move this into backlog in Q2. Veeco’s balance sheet continues to be strong though cash in short-term investments declined as we build working capital. Accounts receivable grew and inventory decline, because of the timing of billing from the quarter. DSOs for the quarter were 50 days and inventory turns were 4.4 times, both within our expected range and quite acceptable.

Turning now to our guidance in the second quarter, we believe orders will be similar to or higher than the first quarter, with continue strength in MOCVD currently expected. Revenue is expected to be similar to Q1 in the $87 million and $97 million range. Margins in Q2 as I mentioned earlier are not likely to be a strong as we saw in the first quarter. We estimate margins in Q2 will be in the 30% to 32% range, due primarily to a weaker product mix. OpEx is expected temporarily kick back up a bit next quarter and includes our annual salary increases in equity compensation.

As well as some duplicate costs will be carrying temporarily as we move forward on cost savings geographic footprint consolidation of one our businesses. We are expecting Q2 OpEx to be in the range of $42 million to $43 million. In the second half of 2014, we have planned to scale back OpEx by a couple of million dollars quarterly, as the impact of cost reduction measures take hold.

For non-GAAP EPS we’re forecasting Q2 to finish with a loss between $0.23 and $0.14 per share. On our earnings call last quarter, we discussed our plans to bring margin back over 40% to the introduction of new products, cost reductions and increase volumes. Although it’s not likely we will get there this year, we do expect to see some improvements in our margins during the second half of 2014, hopefully moving us more solidly into the mid-30s range.

With that, I will turn the call back over to John.

John R. Peele

Thanks, Dave. Let’s now turn to an update on the trends we’re seeing in the LED market and will review of our priorities. For the LED lighting market ongoing LED price reductions, environmental sensitivity and incandescent ball base outs are all driving LED adoption.

IHS now predicts a LED lamp shipment CAGR of nearly 40% through 2020. LED penetration in units is expected to reach 15% to 20% in key geographies like China and U.S. by 2015 and 40% by 2020 and considering that LED bulb prices are substantially above traditional viewing alternatives this unit penetration almost translated into much higher penetration levels in terms of share of wallet.

It’s clear that we will be watching the debt of incandescent lighting just like we watched the debt of phonograph records and CAGR [ph] related. For LED perhaps our customer checks indicate high utilization rates including top Chinese customers and 85% to 95%, Taiwan East players at 80% to 100%, Korean leaders 75% to 90% and then the U.S. and Europe also over 80%.

These utilization rates across the Board are the highest they have been in the very long time. And in addition to the deals that VECO booked in the first quarter, we are currently discussing MOCVD capacity expansion plans with customers in those region, after a long down turn in MOCVD, it appears that the worst is behind us.

LED lighting adoption is accelerating, our customers financial performance has improved and we are forecasting second quarter orders to be similar, or better than our Q1 orders. I do want to argue, some caution on this recovery, because the timing and magnitude of MOCVD deals will be impacted by our customers funding and financial performance, potential industry consolidations and other factors.

It’s safe to assume that our order patterns will not be linearly up into the right. We are focused on bringing our next generation MOCVD platform to market and will provide you with more information when we launch it. We expect that it will generate a good return on our investment, because of its performance and the co-cost of ownership advantage that it will bring to our customers, it will offer customers a very compelling value proposition and it will enable us to return to attractive and sustainable gross margin levels.

We are very encouraged by the interest we are already receiving from our key customers, our switch gears to review where we are with VECO ALD, and you are probably aware, there been some delays in the rollout of flexible OLED mobile products in the market. We don’t receive any production orders in the first quarter from our key display customer, while we are making good progress. Our GEN06 prototype tool has been shift and process development work for flexible OLED encapsulation is underway.

In addition, we launched dedicated teams to pursue two additional ALV opportunities where we think will drive significant revenue growth for VECO. We made a big commitment to this business, and we are suspending significant R&D dollars to drive future growth. And while at this point ALD is a drag to our financial performance I am impressed with and excited about the promos of this technology.

Our priority for 2014 is to take the necessary steps to transition the company back to profitable growth. And we’re focused on four areas to improve our performance. Developing and launching game changing new products that enable cost-effective LED lighting, flexible OLED encapsulation and other emerging technologies. Improving our customers cost of ownership as well as our own gross margins. Driving process improvement initiatives to make us more efficient and lowering our expenses and I’m confident that this approach will enable us to build a great future for Veeco.

Before I turn the call over to the operator for questions, I would like to announce that this will be Dave’s last earnings call. We have been recruiting for a new CFO, since Dave announced his retirement last December and I’m please to tell that we found a great successor and our announcement is eminent. We want to thank Dave for his many contributions to be Veeco and wish him success in his future endeavors.

And with that, operator, please start the Q&A session.

Question-and-Answer Session

Operator

Absolutely, thank you so much. (Operator Instructions) Our first question will come from Krish Sankar with Bank of American Merrill Lynch.

Krish Sankar – Bank of America/Merrill Lynch

Thanks for taking my question. I have two of them and also, Dave, congrats on your new endeavors. First question, John, is you set out the lay of the land. It looks like customer utilization rates are pretty high and you know, you are pretty – the recovery seems imminent, I would say, but yet the customers seem to be waiting. I am kind of curious what is stopping them from placing orders. And along the same path, what is your lead time today versus three months ago?

John R. Peeler

Well, first of all the customers are still – they are placing orders we’ve had two quarters in a row a book-to-bill over one and we’ve had some real substantial pick up in MOCVD. I think what is different now maybe than the past up turn is that customers are trying to work on their own profitability. So they are really only adding tools at a rate that the market can absorb the capacity for those.

So being more cautious, I would say that our lead times have been extending over the last four, five months, we have had to start managing slot plans and managing who gets which slots and things like that. So lead times are going back out five months or so. And, the market is gradually is picking up is overall what I would say.

Krish Sankar – Bank of America/Merrill Lynch

Got it. And if I just ask a quick follow-up, the last couple of calls you have spoken about a new product and I didn't hear anything about it today. Can you give a status update on how the qualification is progressing and when you expect it to be qualified by the customers? Thank you.

John R. Peeler

Well, I think it’s been pretty widely communicated by people in the analyst community that we have multiple beta of our new product out in the market. Normally our betas take six months or so to complete. And the product is doing exceptionally well, getting really great feedback. We think it’s going to be a great product and when we’ve ready to launch it, we will launch it, but generally we don’t communicate launch states in advance.

Krish Sankar – Bank of America/Merrill Lynch

Okay. Thanks John and congrats Dave.

Operator

Our next question will come from Brandon Heiken with Credit Suisse.

Brandon D. Heiken – Credit Suisse Securities LLC

Hi, thanks for taking my question and congratulations again, David, it’s been great working with you.

David D. Glass

Thanks so much.

Brandon D. Heiken – Credit Suisse Securities LLC

I want to ask about the margins. It looks like the guidance is starting to downtick a little bit in the second quarter. And then did I hear correctly that maybe it should trend toward the mid-30s range in the second half of the year? What is leading to the trajectory and margins for the second quarter and the second half?

David D. Glass

Yes, that’s correct. I guess I would – I characterize the Q1 really as a spike and then margin going back down into that mid-30s range as the more normal that we’ll see for the next couple of quarters.

Brandon D. Heiken – Credit Suisse Securities LLC

Okay.

David D. Glass

In the first quarter, we had some mix of some – as we said mix of some really good of selling prices in there.

Brandon D. Heiken – Credit Suisse Securities LLC

Got it. And so what’s leading to the improvement in the second half?

David D. Glass

Well, the improvements on margins or in general?

Brandon D. Heiken – Credit Suisse Securities LLC

Yes.

David D. Glass

I think getting back to normal, getting back to volumes in place and getting back into that mid-30s range, which is about where we should be.

Brandon D. Heiken – Credit Suisse Securities LLC

Okay.

John R. Peeler

I think there is a combination – just to add to what Dave said. There are some ongoing cost reductions, we are seeing some improvements in pricing and I think those are all things that will help.

Brandon D. Heiken – Credit Suisse Securities LLC

Okay, and what do you think the timeline would maybe for the target of over 40% for gross margin.

David D. Glass

Well on the last call we characterized that as where we hope to be in 2015 and I think that still the case.

Brandon D. Heiken – Credit Suisse Securities LLC

Okay, great, thank you very much.

John R. Peeler

Thanks, Brandon.

Operator

Thank you. Our next question will come from Paul Coster with J.P. Morgan.

Mark W. Strouse – JPMorgan Securities LLC

Yes. Hi this is Mark Strouse on for Paul. So following up on an earlier question about the next-gen MOCVD product, how are you guys managing the transition to ensure that you're eventually when you do launch the next-gen product that you are not stuck with all this inventory of the current generation product?

David D. Glass

Well. First of all our side we manage our inventory pretty carefully aligning our slot plan with committed orders, with inventory purchases. We have a pretty fast cycle time, so we are managing that carefully. So that we don’t end up with excess. And that’s one of the things that’s pushing our lead times and heightening up supply. I guess I would add to that if you look over the last five years at Veeco’s inventory performance write-offs have been a very small percentage of sales over that period and we’ve actually mastered this quite well. So we’re confident that we kind of better walk the line on that.

Mark W. Strouse – JPMorgan Securities LLC

Got it. And then going back to ALD, a couple of questions. Can you just remind us what the competitive landscape is there, and if you have seen any changes since the last time you spoke? And then second, just even in generic terms if there's anything you could provide as far as total revenue for the year from ALD?

David D. Glass

Well. on the competitive landscape I think what we’ve been seeing is we’re competing with an over technologies that will work in the shorter term to make basically unbreakable phones that we don’t think our viable for the longer term to make truly flexible product. I think the uncertainty in our part is when actually the cut over from one set of the technologies to the other happens. I think as far as 2014 revenue, we’re not expecting 2014 revenue for ALD, we built in our earn out around getting some Q1 orders and being able to ship those and get revenue in the year, but we think that’s pretty unlikely at this point. So our plan has no ALD revenue in 2014.

Mark W. Strouse – JPMorgan Securities LLC

Okay. That’s helpful thank you very much.

David D. Glass

Thanks Mark.

Operator

Thank you. Our next question will come from Patrick Ho with Stifel, Nicolaus.

Patrick J. Ho – Stifel, Nicolaus & Co., Inc.

Thank you very much and best of luck to you, Dave. First of all, John, in terms of the gross margins and the decline that you're going to see in Q2, is that purely a product mix and volume or are there still pressures coming from your competitor in terms of pricing or are you seeing less of that?

John R. Peeler

It is product mix and acceptance predominantly, I think these are orders that we took a while back, so you are not going to see any pricing improvement there, but its product mix in acceptance, volume is about the same. And the fact was that I think Dave was trying to point out was the Q1 had some anomalies that actually put it the other way, we had a lot of acceptance and some special mix things that actually pushed it up. So anyway, it’s going to be down a little bit, into the low 30s.

Patrick J. Ho – Stifel, Nicolaus & Co., Inc.

Okay. And then maybe moving to just going back to your new product and its rollout, I know you don't want to give the timing, but do you see the customers as they are qualifying this potentially delaying some near-term orders of some of your older products as they wait -- final acceptances and qualifications -- with your new product. And that is when you may see orders pick up once again?

John R. Peeler

It’s possible but thinks about it this way, most of the top players in the industry are running at close to a 100% utilization, rates, so the guys who are beta testing our products are very heavily – they are very heavily utilized in their factory. So I do think, they will continue to place orders for other products, as they go through their evaluation. And if they don’t do that then they have to give up some market share and that’s a pretty hard thing for them to do. So not too worried about delays, but there is always some chance of it.

Patrick J. Ho – Stifel, Nicolaus & Co., Inc.

Thank you, very much.

John R. Peeler

Thanks, Patrick.

Operator

Thank you. Our next question comes from Mark Heller with CLSA Investments.

Mark J. Heller – CLSA Research, LTD

Thanks for taking my question. Just on the bookings so including the June quarter book-to-bill would be above 1.0 again so when should we see stronger revenue growth? Is it just timing of when those bookings translate into revenues and maybe that happens in the second half of the year?

John R. Peeler

Yes, I think you’re – general you now add a quarter to the two quarter lags on to bookings and you will see the pick up and given that there have been two in row, you are going to start to see some more of that.

Mark J. Heller – CLSA Research, LTD

And can you provide any color on linearity? Have orders continued to improve through the quarter and are they continuing to improve through the second quarter? And one question on the Q2 orders. Does that include an OLED order or does that -- does the guidance for flat orders exclude OLED?

John R. Peeler

That does not include in OLED order and I don’t think we have enough information or data points that tell whether linearity is really improving or not. There are not that many different customers in the market at this place, if you go back two or three years we had lot of smaller customers participating and basically a lot of different order during the quarter, this numbers have decreased substantially. So it’s pretty lumpy and I don’t think I could comment on linearity improvement but I hope I will be able to but not yet.

Mark J. Heller – CLSA Research, LTD

Thank you.

John R. Peeler

Thanks Mark.

Operator

Thank you. Our next question will come from Edwin Mok with Needham & Company.

Edwin Mok – Needham & Co. LLC

Hi, thanks for taking my question. Good luck with you, Dave. So I also have a question on the bookings. Just want to know, if a customer placed some orders with you right now and they are doing an eval with you, too, and they qualified it, too, can they translate those orders into a new tool, and you help them able to get the new tool based on the bookings that they are placed? And then I think you mentioned there is a pretty big Japanese revenue this quarter. Does that also show up on the bookings side? Is it still very concentrated in Chinese bookings or have you seen bookings in other regions, as well?

John R. Peeler

So on the translation of orders from current products, new products. That something we very much try to avoid and basically we do a build of order, so when the customer orders the current products they are going to really need to take them, so in generally don’t want to translates. All thought I would say one thing that gives us some may be comfort in a product transition is that we don’t expect old – the existing products to just go away.

And for instant similarly when we introduce the MaxBright the K465i continue to sell at quite good levels, because there were people that had qualified it, they liked it they were getting great results and that always makes a transition much easier when you don’t have a total replacement and we don’t. Regarding Japan, so Japan was a strong region in both bookings and revenue in the quarter, so it was a significant place and it was actually number two behind China. So, I think that was a good thing for us.

Edwin Mok – Needham & Co. LLC

Great. That is good color. And then in terms of the ALD tool, I'm just curious what milestone or what you guys need to get to book the tool that you have shipped to a customer? And are we just at a point where we really are waiting -- going for the qualification process and customer decision to transition to the new process, that is preventing you guys from booking and therefore revenuing these tools?

John R. Peeler

So, for the tool that we shipped to the customer that – we’re just waiting to be confident because it’s our first of its generation tool, that it would revenue within 12 months. So, before we book it, that’s really the only milestone we need and I think we’re going to get there quite comfortable. So, that was – what was the other part of the tool is there another ALD tool question in there.

Edwin Mok – Needham & Co. LLC

Yes, the other question is just in terms of when you say being confident you mean just customer completing qualification or is it just waiting for the customer to make the decision to switch to the new process was, I guess, is just the question.

John R. Peeler

Well, the first thing the customer has to do is they have to launch a major new fab expansion. And, so that’s step one and then, they have to have enough confidence in our product to order it into that fab expansion. So, it’s those of the milestone.

Edwin Mok – Needham & Co. LLC

Great, that’s helpful. Thank you.

John R. Peeler

Thanks Edwin.

Operator

Thank you. Our next question will come from Andrew Huang with Sterne Agee.

Andrew Huang – Sterne, Agee & Leach, Inc.

Thanks. I had a follow on to that previous question about Japan. I think you said that after China that was the next strongest geography. Was that for MOCVD or MBE or Data Storage?

John R. Peeler

That was for MOCVD in Q1.

Andrew Huang – Sterne, Agee & Leach, Inc.

Okay, got it. And then the other question I had was when I hear about the new tool, it seems like customers will benefit significantly from the higher throughput. So my question is, is that part of the reason why you think gross margins will increase in the back half of this calendar year or is it still a little early for that?

John R. Peeler

Well, we’re not predicting new tool timing at this point, but the new tool is design so as it is generally the casing in this market and many capital equipment markets that have some major benefits for the customer in ordered to switch that will improve their economics in terms of making an LED which we think will also help to spur over all lighting demand, and what we expect out of that is we are going to give the customers some benefit and we are going to retain some benefit and by doing that we are going to improve our gross margins as we start to ship that tool.

Andrew Huang – Sterne, Agee & Leach, Inc.

If you don't mind, one quick follow on. I think you said 63% of either orders or revenues of MOCVD orders were from China. Can you give us a sense is that kind of new primarily two inch, or four inch, or even six inch at this point?

John R. Peeler

I don’t know where that, where you heard that 63%, because that I don’t think we’ve provided any break down by geography, but in China more and more customers, are moving up in wafer size, more moving to four a lot of customers started at two, but most of them especially the leaders know that they need to move to four economics over the long-term and keep in mind that the Vecco architecture given a tool however its initially configured its very easy to move it from one wafer size to another so it doesn’t matter a whole to us, but China is moving up in wafer size I think overall and I think all companies that are strong kind of know they will have to do that or have done it.

Andrew Huang – Sterne, Agee & Leach, Inc.

Thanks very much.

John R. Peeler

Thanks, Andrew.

Operator

Thank you. And your next question will comes from Stephen Chin with UBS.

Stephen Chin – UBS Securities LLC

Thank you. Hi, John. Just a follow-up question on the guidance for the second-quarter sales. I, too, thought sales would be guided a little bit higher from the strong bookings last quarter in the second-quarter bookings guidance. So is Veeco capacity constrained now and you just don't feel comfortable expanding the number of shipping slots? Or just curious if you had more shipping slots would you have guided say a little bit higher?

John R. Peeler

Its more when the customers are prepared to take the tools, I mean just the shipping slots in Q2 were really determined mostly in Q4, so they were determined a little while back and we are managing our inventory carefully to not end up in any kind of E&O situation.

So there are these increased orders sometimes end up, they may increase in Q1 and end up in Q3 and all it takes is July boundaries, move around a little bit all of those things, also remember Q1 was a little higher than we predicted and that probably took a little bit out of Q2. So it’s just a lumpy business and I wouldn’t read too much into it. I think the overall trend is positive and it’s growing up and I think we are getting back to – we are going to back to healthy level. So that we see that as very positive.

Stephen Chin – UBS Securities LLC

Okay, and then my follow-up question is on the June quarter guidance. So just looking at last quarter, you guided orders to increase. We actually saw orders up significantly. So maybe you could share what happened last quarter and if you get the sense that could happen again this quarter. Is it just a matter of getting comfortable that customers will get deposits for you at the end of the quarter or is it more complicated than that?

John R. Peeler

Deposits are a big part, yet you have to get the deposit for it be in order, if it’s in China and secondly these aren’t huge levels. So one order for a couple of tools moving between one quarter and another quarter, makes big difference and you just don’t want to be in a situation, where – first of all you don’t want to be in a situation, where a customer can put a gun to your head and say, hey, I am not giving you the order here at the end of the quarter unless you give me a bigger discount or whatever.

So we just try to be careful, these things are – there are significant deals in here, that if they move one way or the other, then it varies around. I think the good news is, is we did over a 100 million for the first time in quite while, and first had a MOCVD bookings order best since 2011. And I think we are going to do it again in Q2. So that’s quite positive as far as where the trends lie.

Stephen Chin – UBS Securities LLC

Okay, thanks. John.

John R. Peeler

Thanks, Stephen.

Operator

Thank you. Our next question comes from Vishal Shah with Deutsche Bank.

Vish B. Shah – Deutsche Bank Securities, Inc.

Yes, thanks for taking my question. John, just I wanted to clarify a couple of things. Did you say you’re book the OLED tools you have it in your backlog in Q2 and it’s not included in your booking guide or it’s flattish or maybe slightly up bookings in Q2.

John R. Peeler

Yes, we didn’t say that, but I think we are pretty much got pretty close to saying it. We didn’t book it inQ1. And I think Dave alluded to, it was like to book in Q2, but it’s not in our guidance. It’s a single chamber tool; it’s not a full size cluster tool. So it’s not a quad-chamber or five-chamber tool.

Vish B. Shah – Deutsche Bank Securities, Inc.

Okay, I appreciate that. That is helpful. And then just wanted to get some more clarification on the bookings, the breadth of bookings from – by customers, are you seeing, you said you mentioned you are seeing a couple of big deals, but is that the trend that you are seeing or expect to see in the next couple of quarters? Are you seeing more customers coming in?

John R. Peeler

We are seeing increased interest and coding activity and kind of the front end of demand from each of the major countries in Asia, I think so it’s really all that the main markets for the tools. So we are seeing that across the board and it’s what you would expect from the utilization rates that are out there.

Vish B. Shah – Deutsche Bank Securities, Inc.

Okay, I appreciate that. And then one last question, you have talked about your breakeven levels in the past. Can you maybe just provide an update on how you think about breakeven now in light of the new pricing environment as well as you would launch the new product?

David D. Glass

Yes, Vishal this is Dave. We are – when we look at the whole of 2014 we expect breakeven level should be probably about where they were for 2013 that’s about $80 million on a cash basis and about a 110 to 115 on an EBITDA basis just look pretty similar for the whole year.

Vish B. Shah – Deutsche Bank Securities, Inc.

Okay thank you.

John R. Peeler

Thanks Vishal.

Operator

Thank you. Next we’ll hear from Mike Ritzenthaler with Piper Jaffray.

Mike J. Ritzenthaler – Piper Jaffray & Co.

Yes, good afternoon. With customers, with MOCVD customers focused more on their own profitability as you had said in your prepared comments, the focus that we've heard about in those channels on improving yield technologies in – and recipes and things like that, how does their discussion of new tools versus yield enhancement effect pricing on tools either in the existing portfolio or on new tools?

John R. Peeler

Well, the customers I mean clearly they’re focused on their own profitability and whether its better use of an existing tool, a better recipe or shorter run time, I mean these are all things that have enabled them to get their capacity up at a rate faster than buying new tools. I think when they look at a new tool they are looking at, this have improved my economics.

And they are expecting to improve their economics and if it doesn’t there are not going to buy it, basically they’ll stay with whatever they have been using and that could improve their yield, could improve gas consumption throughput capital efficiency there is a lot of different variables that it ties to and those are things that they are looking at, which is why we are confident that our new tools will do extremely well for our customers in terms of cost of ownership.

Mike J. Ritzenthaler – Piper Jaffray & Co.

And I guess that kind of led into your comments earlier about pricing being more or less neutral this year. And then – in your prepared comments.

John R. Peeler

We kind of comment as that pricing was starting to get a little better and I think that plus some of the other things we’re doing will help but to move from where we’ve been in the low 30s into 40s it’s going to take some new product.

Mike J. Ritzenthaler – Piper Jaffray & Co.

Sure, okay. Just another quick follow-up on the lowering expenses piece of your priorities. I was wondering if there had been enough work done that you could at least order of magnitude what you are looking at doing. The business already seems pretty lean, I guess. But maybe if you could just help us with the targets of where you are looking?

John R. Peeler

I don’t think were quite ready for to put down a target, maybe Dave can add to what I say in a minute, but I can give you an example of what we’ve done. We have a data storage business that was located in multiple sites. And we’ve launched an initiative to move one of those sites into the main site. And that will put all of our Ion Beam technology into one location it will obviously give us some management efficiencies and overhead efficiencies.

But in the mean time what it actually does is it causes us duplicate experience. So in Q2 we have extra expense as we build up one site to take the product and go through that transition. So that’s a type of example will have some number of quarters with some increased expense Q1, Q2 maybe somewhat into Q3. But in the end we will have a lower expense rate in a more efficient organization from a lot of perspective. So that’s one of the things that were doing and that’s why we can say the second half the expenses are going to be lower than first half.

Mike J. Ritzenthaler – Piper Jaffray & Co.

Okay, thanks John.

John R. Peeler

Okay, thanks Mike.

Operator

Thank you, Mike. Our next question comes from Jed Dorsheimer with Canaccord.

Jed E. Dorsheimer – Canaccord Genuity, Inc.

Hi, thanks. Two questions. I guess the first, John, on the new tool; I guess some of the beta tools that are out there are in cluster form. I'm just curious, is this a new platform? In other words, will this be available in single chamber configuration as well as multi chamber clusters.

John R. Peeler

It is the new platform and I think you will have to wait for the announcement to see kind of the form factor inspects. We are just not ready to put that out there, but it is an entirely newly platform.

Jed E. Dorsheimer – Canaccord Genuity, Inc.

Okay. And then on Synos, the missed targets in terms of the acquisition. I am curious, is that at all tied to Samsung's decision to cancel its OLED TV facility?

John R. Peeler

It is not tied to OLED TVs because the bigger opportunity that or the opportunity that we’re pursuing with Synos and continue to pursue is for really quite couple of mobile devices. And so the TV was secondary we’ve talked about potential future TV applications, but that was not the impact of this.

Jed E. Dorsheimer – Canaccord Genuity, Inc.

Are you at all concerned that you purchased this business from Samsung, and Samsung is starting to push things out in terms of missing the earnout? Or what level of comfort do you have that this business won't go sideways?

John R. Peeler

So when we work to formulate a strategy to bring this business into the company there was a lot of variability the biggest being how quickly will flexible OLED phones be adapted. And then secondly what role would we play how bigger role and things like that. And because of that we structured the earnout in order to take some of our risk out of this thing. And if it went off very quickly they’d get a higher price and if it took longer we get a lower price. So we try to structure to deal around that. I think as we’ve worked on this technology a couple of things have happened

First of all we think it works well and the technology is very good and it has real advantages in terms of deposition rate ability to lay down films that other techniques can’t do economics of material utilization, temperature, little temperature that allows it go into a lot of application. So we have become probably more impressed with the technology over the last six months then when we before we bought it. And the second thing if you think back to last earning call and when we did announce this deal.

We talked about we were going into another adjacent market, opportunity and we actually have decided during the last quarter, that we are actually going to go after two adjacent market opportunities, because we thought the opportunities were compelling and that the technology had some real unique advantages for those. So we could more people on the products to develop more products and we have taken some of those people out of other areas of the company that we are not growing as fast or we are not growing and moved it to ALD.

So we think we bought some really great technology and it will pay off for us, it may take longer to pay off, then we thought at the beginning, but at the same time the value we paid for it, has been dropped off also. Just maybe one another little clarification, we didn’t really buy it from Samsung. Samsung wasn’t an investor and owned a small piece of it, but we bought it from a group of investors.

Jed E. Dorsheimer – Canaccord Genuity, Inc.

Okay, thank you.

John R. Peeler

Thanks, Jed.

Operator

Thank you. Next we will hear from Colin Rusch with Northland Capital Markets.

Colin W. Rusch – Northland Securities, Inc.

Thanks so much. Receivables increased pretty significantly on a percentage basis. It's still within some realm of reasonable levels at 51 days, day sales outstanding. Can you just talk a little bit about if there's any changes in the terms you are providing customers or shipments in the latter part of the quarter?

David D. Glass

Yes, no significant changes, its basically timing within the quarter timing of – within the quarter, you saw the same time inventory went down, that’s the tool related as well.

Colin W. Rusch – Northland Securities, Inc.

Okay. And just as we think about the flow through of some of these orders in the back half, I know we've talked about this a little bit, but the gross margin trajectory as we get back into the latter part of the year, confidence level – has anything changed from where you were a quarter ago when we last spoke on the earnings call?

John R. Peeler

I think we think we believe that we can bring margins up in the second half of the year; I think earlier we were probably in the 31 to 32 kind of like what Q2 is looking at for the full year, as we think we can do it a little better than that at this point. And I think our overall confidence has improved since the last quarter.

Colin W. Rusch – Northland Securities, Inc.

Okay, thanks so much guys.

John R. Peeler

Thanks. Colin.

Operator

Thank you. Our next question will come from Brian Lee with Goldman Sachs.

Brian K. Lee – Goldman Sachs & Co.

Hey, guys thanks for taking the questions and I will echo others' sentiment in congratulating Dave. First question here for Dave, I thought you mentioned last quarter that gross margin improvement in Q1 was going to be driven in part by a lower cost MaxBright platform. And so given the gross margins are coming back down in Q2 also targeted for low-to mid-30s for the back half of the year, was that mix shift only a one-time impact? And how should we think about mix in the impact going forward?

David D. Glass

Yes, we did see the cost reductions that we talked about last quarter, the mix however the favorable selling price mix in Q1 outweighed that but there is a positive effective cost structure, remember last quarter were coming of 21% margin next quarter. Our cost reductions that we’ve put in place we will see for the balance for the year and that’s what helping bring our margin dump into that north of 30% range mid-30s.

Brian K. Lee – Goldman Sachs & Co.

Sure, I guess I'm just trying to maybe delineate the 1Q to Q2 shift, because it sounds like the cost-reduction impact does push the margin profile higher in the back half of the year. But from 1Q to 2Q it doesn't seem like it is having the requisite impact.

David D. Glass

Yes, there is a lot of things that go on in margins that you got the timing of acceptances, the mix of selling prices, the impact of cost reduction and last quarter you remember we talked about unusual, unfavorable things so there is a lot of things that go on you know each of these can be a couple of present.

Brian K. Lee – Goldman Sachs & Co.

Okay, that is helpful. And I will squeeze a last one in, if I could. With your expected gross margin and OpEx chance moving through the back half of the year, how should we be thinking about cash flow? I would assume it is still going to be negative again in Q2 but any expectations around the back half of the year?

David D. Glass

We do expect that first half we are going to cash negative, we just improving in the second half so.

Brian K. Lee – Goldman Sachs & Co.

Okay thanks a lot of guys.

John R. Peeler

Mostly breakeven for the year. Okay thanks Brian.

Operator

Thank you Brian.

John R. Peeler

We’ll take one more question, operator.

Operator

Absolutely thank you. We here from Andrew Uerkwitz.

Andrew P. Uerkwitz – Oppenheimer & Co., Inc.

That was great. Thanks. I was wondering if you could give us an update on what your MOCVD tool capacity is per quarter right now. I think a while back, you said it was 100 per quarter. I'm just wondering where it is right now.

John R. Peeler

Well, it’s – I hope we’ll really need to focus on this, but it’s pretty flexible with a little bit of notice, it was actually peaked to that around maybe 120, 110 type of capacity and we have the facilities and the capital infrastructure to handle that level again what we have to do is we have to order materials enough to have the flow of materials and that usually takes a little bit of time to ramp.

And in some cases we have to bring on some more temporary worker. So, I cant give you a specific number, but I think any limit patients that we place that are there are going to largely be placed by just getting the material supply coming into the right place. And so that can cost you a quarter, if you get behind the curve, but I don’t think capacity is going to limit anything for us.

Andrew P. Uerkwitz – Oppenheimer & Co., Inc.

Okay. And then just to clarify, can you double check? Because I thought you said maybe two-thirds of your revenue or bookings came from China. Is that correct or no? In your prepared remarks?

John R. Peeler

No.

David D. Glass

No, no two-thirds it was in my script that.

Andrew P. Uerkwitz – Oppenheimer & Co., Inc.

Right.

David D. Glass

Yes, no we said Japan plus China is two-thirds of the activity. Sorry for confusing. Japan and China together that was two-thirds of our bookings, is what we said.

Andrew P. Uerkwitz – Oppenheimer & Co., Inc.

Got it. Okay, thanks for that clarification. I appreciate that.

John R. Peeler

Okay, Thanks Andrew and thank you all for joining us tonight. Take care.

Operator

Thank you and gain. Ladies and gentlemen, this does conclude our conference. We thank you for your participation.

Copyright policy: All transcripts on this site are the copyright of Seeking Alpha. However, we view them as an important resource for bloggers and journalists, and are excited to contribute to the democratization of financial information on the Internet. (Until now investors have had to pay thousands of dollars in subscription fees for transcripts.) So our reproduction policy is as follows: You may quote up to 400 words of any transcript on the condition that you attribute the transcript to Seeking Alpha and either link to the original transcript or to www.SeekingAlpha.com. All other use is prohibited.

THE INFORMATION CONTAINED HERE IS A TEXTUAL REPRESENTATION OF THE APPLICABLE COMPANY'S CONFERENCE CALL, CONFERENCE PRESENTATION OR OTHER AUDIO PRESENTATION, AND WHILE EFFORTS ARE MADE TO PROVIDE AN ACCURATE TRANSCRIPTION, THERE MAY BE MATERIAL ERRORS, OMISSIONS, OR INACCURACIES IN THE REPORTING OF THE SUBSTANCE OF THE AUDIO PRESENTATIONS. IN NO WAY DOES SEEKING ALPHA ASSUME ANY RESPONSIBILITY FOR ANY INVESTMENT OR OTHER DECISIONS MADE BASED UPON THE INFORMATION PROVIDED ON THIS WEB SITE OR IN ANY TRANSCRIPT. USERS ARE ADVISED TO REVIEW THE APPLICABLE COMPANY'S AUDIO PRESENTATION ITSELF AND THE APPLICABLE COMPANY'S SEC FILINGS BEFORE MAKING ANY INVESTMENT OR OTHER DECISIONS.

If you have any additional questions about our online transcripts, please contact us at: transcripts@seekingalpha.com. Thank you!

Source: Veeco Instruments' (VECO)' CEO John Peeler on Q1 2014 Results - Earnings Call Transcript
This Transcript
All Transcripts