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Veeco Instruments Inc. (NASDAQ:VECO)

Q2 2008 Earnings Call

July 28, 2008 5:00 pm ET

Executives

Debra A. Wasser - Senior Vice President of Corporate Communications and Investor Relations

John R. Peeler - Chief Executive Officer

John F. Rein, Jr. - Chief Financial Officer

Analysts

Bill Ong - American Technology

Timothy Arcuri - Citigroup

Matt Petkun - DA Davidson and Company

Mark Miller - Brean Murray

Brett Hodess - Merrill Lynch

Jed Dorsheimer - Canaccord Adams

Operator

Good day, everyone. And welcome to Veeco Instruments Second Quarter 2008 Results Conference Call.

Today’s call is being recorded. For opening remarks and introductions I would like to turn the conference over to Senior Vice President of Corporate Communications and Investor Relations, Ms. Debra Wasser. Ms. Wasser, please go ahead.

Debra A. Wasser – Senior Vice President of Corporate Communications, Investor Relations

Thanks, operator and thank you all for joining today’s call. Joining me today are John Peeler, our Chief Executive Officer, and Jack Rein, our Chief Financial Officer. Today’s earnings release was distributed at 4:00 p.m. this afternoon and is available on the Veeco Website. Also posted on our website is a PowerPoint overview of our second quarter financial results.

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 taping.

To the extent that this call discusses expectations about market conditions, market acceptance, and future sales of the company’s product, future disclosures, future earnings expectations, or otherwise makes statements about the future. Such statements are forward-looking and are subject to a number of risks and uncertainties that could cause actual results to differ materially from the statements made.

These factors are discussed in the business description and management’s discussion and analysis section 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 after the date of such statements.

During this call management may address non-GAAP financial measures. Information regarding such non-GAAP financial measures, including reconciliations to GAAP measures of performance, is also available on our website.

I would now like to turn the call over to John for opening remarks.

John R. Peeler – Chief Executive Officer

Thanks, Deb. And thank you all for joining us today. I am pleased to report Veeco’s strong second quarter results which were ahead of our guidance for bookings, revenues and earnings. Our second quarter revenue was $114 million up 16% compared to $99 million last year and up 12% sequentially. This was ahead of our guidance of $102 million to $110 million.

Second quarter bookings were 137 million, up 21% from last year, up 25% sequentially and significantly higher than our guidance of $110 million to $118 million.

Veeco’s earnings per share, excluding certain items was $0.16 compared to $0.05 last year and solidly ahead of our guidance of $0.03 to $0.09 per share. Our improved earnings were due to higher revenue from customer pull-ins combined with the benefit of cost cutting and containment activities that we focused on during the past year.

Our LED and solar process equipment business delivered $45 million in revenue, up 61% compared with the prior year and up 7% sequentially. LED and solar represented our largest segment at 39% of total revenue and reported Q2 EBITDA of $8.7 million. Orders were $52 million, up 43% compared to last years second quarter and up 35% sequentially. We forecasted this improvement in orders now that our latest generation MOCVD tools are gaining traction at key LED manufacturers due to their high productivity and excellent yield. We received multiunit orders from five LED manufacturers in Taiwan and China, several of which were first time Veeco customers.

Nearly 20 million of the MOCVD orders booked in the second quarter are scheduled to ship in 2009. Virtually all of these orders are secured by customer deposits and bank guarantees as customers want to solidify their position in our manufacturing slot plan. We are pleased to be building a strong backlog position for next year.

Veeco is beginning to build a meaningful solar process equipment business. Veeco MOCVD and MBE are seeing market pull for 35 Concentrator and Thin Film solar applications from both research institutes and commercial companies. As announced this evening we received a significant multiunit MOCVD order from spectra lab, a leading manufacturing of 35 Concentrator solar cells.

During the second quarter we completed the purchase of Mill Lane Engineering, expanding our product line to include Web coaters for flexible photovoltaic applications. As mentioned in our earnings release Global Solar Energy of Tucson, Arizona, is our current customer for these products. In additional to our activity with global solar we are in conversations with key solar companies focused on flexible photovoltaic technology. And an initial customer feedback is that the melamine web coaters are very well designed and competitive for size, cost of ownership and other critical characteristics.

We are positioning Veeco to be a supplier of complete lines of vacuum processing tools for CIGS and other flexible photovoltaic applications. Veeco’s proprietary line of SIGS thermal sources combined with our unique thin film process knowledge provides a key market advantage. And we believe our timing on entering this market is right as many of the SIGS companies are in the R&D stage and require additional support from an equipment partner to be successfully as they successfully move to production.

We anticipate increased spending in the second half of 2008 in our LED and solar businesses as we invest in R&D for next-generation technology and the expansion of our global service and application support organizations. In data storage process equipment we reported $37 million in the second quarter, up 15% from last year and 52% sequentially. We experience some customer acceleration of due dates of delivery dates where Veeco equipments tied to wafer size change programs and increased capacity requirements. Veeco’s recent rationalization of our data storage business started to show results in the second quarter with a business reporting EBITDA of $5.2 million and gross margin of 40.2%, a strong recovery from the EBITDA loss of $1.5 million and 45.3% gross margins in the first quarter of 2008.

Data storage orders were $52 million in the second quarter, our highest levels sends early 2006 representing an increase in 25% from the prior year and up 27% sequentially. Our data storage customers have shown commitment to their wafer size and technology related programs and lower cost of ownership requirements. Our team has done a great job meeting our customers changing capacities schedules and delivery time lines and driving the business to improve profitability on a lower cost base. We believe the changes made during the past year will enable a better long term performance through industry peak and trough cycles.

Overall, we were quite pleased with the performance of our process equipment business, our teams under leadership of Bob Oats [ph] are executing well and delivering results ahead of plan.

In Metrology, revenues were $33 million down 16% from the $39 million in the second quarter of last year and down 10% sequentially. Metrology bookings were $33 million declining 6% versus the prior year but increasing 9% on a sequential basis. Veeco metrology is our only business with significant exposure to the semiconductor market, which is experiencing extremely low revenue and bookings levels.

Our Optical and Nano-Bio instruments businesses are having a challenging year given the overall macro economic conditions and slow research and scientific spending. Veeco metrology reported an EBITDA loss of $1.3 million in the second quarter primarily due to a low sales volume in our automated AFM business. We are currently forecasting and return to profitability for the second half of 2008 due to some revenue improvements in the instruments business and also as a result of cost cutting and restructuring activities particularly in the automated AFM business.

While the outlook for semiconductor market remains weak, we are seeing some positive signs, such as a doubling of demo activity for our new insight auto AFM for customer applications below 45 Nanometers semiconductor, photo mask applications and for wafer and new applications to data storage. We believe the insight solves key technology challenges for inline 3D metrology applications.

In our Nano-Bio AFM business we’ve launched Harmonics during the second quarter and booked multiple systems. We also booked over 20 Anova systems one of the best product introductions in several years. In Optical, we continue to see positive industry acceptance of our latest generation products and we have also booked a multi million dollar order for HD9800 at a key data storage customer.

Mark Munch joined Veeco in February to run our metrology business and he and his team are focusing on improving marketing creating a new service and technical support organization and ensuring that our R&D efforts are well aligned to our customers’ technology requirements for 2009 and beyond.

Mark and his team were also in the process of implementing gross margin improvement programs which we anticipate will begin to show results in the second half of 2008. I believe that metrology will begin to show positive improvement in the coming quarters.

I will now turn the call over to Jack for some additional financial comments.

John F. Rein, Jr. - Chief Financial Officer

Thanks John. As mentioned second quarter 2008 orders improved to $136.5 million up 21.3% from the second quarter of 2007, Veeco’s book to bill ratio was 1.19 to 1 for the quarter. Sales were $114.4 million up $15.6 million or 15.8% for 3 months ended June 30, 2008 versus the second quarter of 2007. This increase is primarily due to the 61% quarter-over-quarter sales growth in LED and solar due to strong end user demand and expanding applications for high brightness LEDs.

In addition, IND experience an increase in demand from key data storage customers who are transitioning to larger wafer sizes due to increase in capacity requirements. Veeco’s backlog at June 30, 2008 was approximately $211 million up $32 million from the March 31, ’08 levels. Second quarter 2008; backlog adjustments totaled a net positive $8.7 million due to the inclusion of the Mill Lane existing backlog.

Overall gross margins were $47.7 million or 41.7% of sales for the quarter flat with the first quarter of 2008. It was sequential improvement data storage and LED and Solar Process Equipment gross margins to 40.2% and 41.4% respectively, due to increased volume and favorable product mix. This is offset by lower metrology gross margin of 43.8% resulting from low volume and challenging pricing associated with the continued downturn in the semiconductor market.

The current quarter margin compared to 42.8% in the second quarter of 2007, while LED and Solar’s gross margins improved by 110 basis points principally as a result of volume, data storage gross margins were down 280 basis points due to the second quarter of ’07 favorable IND contract pricing adjustments and favorable warranty experience during that fiscal period.

Metrology’s gross margin lower than the prior year quarter principally due to volume decreases in nono-AFM from the declined of the semiconductor market. SG&A was $23.9 million or 20.9% of the sales compared to $23.5 million or 23.8% sales in the second quarter of ’07 and $22.6 million or 22.1% in the first quarter of ’08. The increase was primarily due to increase in bonus and profit sharing results of increased earnings partially offset by a reduction in consulting and travel and entertainment spending inline with the company’s initiatives continuing control operating expenses.

R&D expense totaled $15.1 million a decrease of $800,000 from the second quarter of 2007, mainly due to cost reduction associated with data storage exist from a Fremont California R&D site. R&D increased $400,000 sequentially from the first quarter of ’08 primarily due to company’s focus on investment and next generation LED tool development.

Operating expenses, excluding the restructuring and asset impairment charges and amortization, totaled $39.1 million, or 34.1% of sales, compared to $39.4 million, or 39.9% of sales, in the second quarter of 2007. The decline in spending was mainly attributable to the reduction in consulting and travel and entertainment spending resulting from our continued overall cost-reduction initiatives. On a sequential basis operating expenses increased as forecasted $1.7 million from the first quarter ’08 due principally to higher bonus and profit sharing and increased R&D spending of LED and Solar product development.

Amortization expense totaled $2.4 million in the second quarter of ’08 flat when compared to second quarter of ’07, we do expect amortization expense increased to $3.1 million in the third and fourth quarter of ’08 due to Mill Lane acquisition purchase accounting, thereafter it should be in the range of $2.25 million per quarter.

Second quarter GAAP 2008 net income was $4.2 million or $0.13 per share compared to a net loss of $2.6 million or $0.08 loss per share in the second quarter of ’07. EPS excluding amortization expense and utilizing a 35% tax rate for the quarter was $0.16 compared to guidance of $0.03 to $0.09 on a first quarter ’08 EPS of $0.09. GAAP EPS was significantly higher than anticipated due to the higher sales and EBITDA levels and lower than anticipated impact of Mill Lane purchase accounting as well as the favorable impact of lower tax rates.

First six months of ’08 sales totaled $216.8 million a 9.5% increase from 2007, primarily due to a 73% or $36.8 million increase in LED and Solar Process Equipment sales as a result of increase demand primarily due to customers. Orders for the current six months in 2008 improved to $245.8 million up 12.5% from the six months in ’07, our six months book to bill ratio was 1.13 to 1, because six month gap net income was $2.6 million or $0.08 per share compared to a net loss of $2.3 million or $0.07 loss per share in the first six months of ’07.

Earnings per diluted shares excluding certain items for the first six months of ’08 were $0.25 compared to $0.15 in the first six months of ’07. The items excluded from this calculation are amortization expense of $3.2 million and $1.4 million of restructuring charges in the first six months of ’08 and ’07 respectably, and the 2007 gain on extinguishment of debt.

Regarding our balance sheet cash and equivalents totaled $109.6 million at June 30th, we generated a $6.1 million of cash during the second quarter of ’08 exclusive of about $10.9 million used in the acquisition of Mill Lane. Accounts receivable day sales outstanding for the second quarter was 60 days, down from 68 days at March 31 2008 and well below industry averages of 77 days. During the quarter inventory increased by $9.9 million to a $115 million with a turnover of 2.3 times, the dollar increase was mainly in LED and Solar process equipment primarily attributable to Mill Lane acquisition and the delay of several system shipments due to LED customer facilities not being ready.

Capital expenditures were $4 million for the second quarter of ’08, depreciation expense totaled $3.1 million in the second quarter of ’08.

With regard to our guidance for the third quarter of ’08 our revenues should be in the range of $113 to $118 million with earnings per share between $0.12 loss and $0.3 loss on a GAAP basis and earnings per share between $0.10 to $0.15, excluding amortization of $3.1 million and certain charges. These charges include a $3.7 million charge related to the mutually agreed termination of the employment agreement of Veeco’s former CEO, Edward Braun, following the successful completion of the transition to our current CEO John Peeler. Mr. Braun will however remain Veeco’s Chairman. In addition we will incur a $700,000 third quarter charge for facilities and personnel cost reductions in metrology, and a $400,000 charge related to the purposes of accounting adjustments required to write up inventory to fair value in connection with the purchase of the Mill Lane engineering.

For non GAAP EPS we use a 35% tax rate. We expect gross margin to stay in the 41% to 42% range and operating expenses to stay in the 35% range in the third quarter. The forecast of third quarter operating expense dollar increases related to a full quarter of Mill Lane operating expense continued to investment in our MOCVD products, LED, as well as increased accruals from bonus and profit sharing. We expect that Mill Lane’s revenue will be in the range of $2 to $3 million for the third quarter. For the full year 2008 we are currently anticipating the current debt revenues will be in the $450 to $455 million range, we expect gross margin to be in the 42% range and operating spending to be between 35% to 36% of sales.

I’ll now turn the call back over to John.

John R. Peeler - Chief Executive Officer

Thanks Jack. We currently expect third quarter 2008 bookings to be in the range of a $113 to $118 million, while we start the third quarter with a strong pipeline of prospects particularly in our LED and Solar business, we are providing cautious guidance given our very strong bookings level in the second quarter historically slow customer buying patterns during the summer months and the challenging overall economic environment. We are pleased that at the mid point of the year Veeco is achieving results ahead of our original expectations and we remain on track to significantly improve Veeco’s performance on both the top and bottom line in 2008. And as Jack mentioned we currently forecast the 2008 revenues to be between $450 and $455 million which is up 13% over 2007. By business our guidance for LED and Solar revenues is a $165 to $170 million, data storage revenues between a $145 and $150 million and Metrology revenues between a $135 and $140 million.

I had been with Veeco for a little more than a year now and I am proud of the progress the leadership team and our employees have made a multiple flex. To drive Veeco’s growth we’ve focused our resources and efforts on high growth opportunities where we provide compelling technology and benefits to our customers, we’ve also made solid progress in strengthening our sales channel with new leadership, improved account management and additional resources in key regions such as APAC. We’ve taken steps to reduce our manufacturing costs and these efforts have focused on creating the right combination of internal manufacturing and outsourcing strategies, in addition we began significant programs focused on improving our global sourcing and materials and on logistics management.

Effectively creating leverage across the Veeco will help us to create a more scalable and profitable business. We’ve streamlined our business, our business to reduce operating expenses by reducing sites, eliminating unnecessary expenses and carefully controlling expense growth. We’ve improved our process in execution and multiple fronts including improvements in processes for quality and customer satisfaction and financial predictability just to name a few and we’ve focused on strengthening our management team at the executive level with Mark Munch and Bill Tomeo at the regional management level and in marketing, manufacturing and other key curious. Our seniors make a significant amount of progress in building the leadership that can take Veeco to the next level of growth and profitability.

I want to thank Veeco’s employees for their hard work and focus this past year to deliver progress on many fronts and as I said since joining Veeco we have a strong and talented team, deep and differentiated technology and lots of exciting market opportunities. But let me be clear that we understand that there is still a lot more work to be done to create a better more profitable higher growth Veeco for our shareholders and our employees. Although we made great progress on each of the five categories I just described with substantial work left to do in each area. This includes executing on our growth strategies, building a more integrated and cost-effective manufacturing organization, simplifying and unifying our processes to create a more scalable business and continuing to strengthen our leadership and technology team.

I want to thank you for your patience during our prepared remarks. Operator, I would like to now start the question-and-answer session.

Question-and-Answer Session

Operator

Thank you. (Operator Instructions). And, we will take our first question from Bill Ong with American Technology.

Bill Ong

Yeah, good afternoon gentlemen. Congratulations nice second quarter.

John R. Peeler

Thanks, Bill.

Bill Ong

Can you just give some inside on data storage spending just giving the re-pricing environment that they are facing what do you think the spending pattern is going to be for the rest of this year and do you have sense of spending is going to be in ’09, whether its going be flattish up or down?

John R. Peeler

So, first of all on the spending we’ve seen some pull in, if you remember we had a somewhat second half backend loaded year projected, we came into 2008 with solid backlog, we’ve seen some of those orders accelerated into the first half and had a tremendous quarter this last quarter. Really focused on conversion to eight inch wafers and some technology. So, combination capacity and technology but more on the capacity side we are not projecting the same level of orders as we go into the second half but were projecting a solid year as you could see by our guidance range there. Next year we are not anticipating a lot of growth in the data storage but we have a great product portfolio. We’ve focused it on the right areas this year. So, we expect to do well next year.

Bill Ong

So to follow, what percentage of the industry has converted over the 8-inch?

John R. Peeler

It’s still very early in the process of converting to 8-inch. So, we expect the 8-inch conversion to continue through next year and even beyond that in some customers. So, this is an early in the process.

Bill Ong

Great. And, then my last question is on the Mill Lane Engineering. Can you talk about gross margin in that tool, is it in the corporate gross margin range in the 40% change? And also right now it’s geared towards six applications. Any plans of extending it to other types of compound semis, like CAD or other materials?

John F. Rein, Jr.

I will answer that question, Bill. On the gross margin, initially they are slightly below the process equipment levels but we expect them to be at the standard levels of our process equipment margins as we proceed through the balance of the year. Right now our focus is on zigs and that’s really the area of concentration.

John R. Peeler

On the solar side we are focused on flexible applications. It is a Web coater product and we are working on zigs. We are certainly looking at other opportunities but we are focused on zigs.

Bill Ong

Thank you very much, nice job, gentlemen.

John R. Peeler

Thanks.

Operator

And, will move on Timothy Arcuri with Citi.

Timothy Arcuri

Hi, guys, a couple things. John, I guess I’m just kind of looking at the guidance for each of the divisions, it looks like the guidance for all the divisions has gone up, the guidance for the metrology division, obviously was cut and I’m wondering, is that you’re eliminating your product or is it just, or is that primarily in the back of the weak semiconductor environment?

John R. Peeler

It’s, the metrology change really comes from two areas. It’s predominantly based on the weak semiconductor market and the ramp up, the slower than expected ramp up of our auto AFM product but it’s also based on overall slow spending in the scientific community. We are seeing slower, smaller research budgets and that sort of thing. So that’s really number one but pressure on scientific spending.

Timothy Arcuri

Because, you cut about $20 million out of that number and it seems like maybe that’s the result of you out right eliminating product lines. Is that not the right reason?

John R. Peeler

That’s not the right reason at all. We had planned for a lot of second half ramp up. We are seeing the semi-conductor market basically stay down longer than we expected and the ramp is going to be slower, plus the spending in Universities and research institutions.

Timothy Arcuri

Okay. And, then two more for me. I guess can you give us an idea if in the future you were to somehow jettison the auto AFM product what would that do to the model? If I look at the EBITDA or profitability of that division what would it look like if you did not have the auto AFM business?

John R. Peeler

Yeah, I don’t think we want to work on projecting missing pieces of the business.

Timothy Arcuri

Okay.

John R. Peeler

We have a good product there and we think it will do well in the long-term.

Timothy Arcuri

Okay. And then lastly, did you or can you at all give us some idea of how big the Spectra lab order was?

John R. Peeler

We are not going to release.

Debra A. Wasser

The executive press release said multi units.

John R. Peeler

It was multi units but we are not at liberty to put out the dollars.

Timothy Arcuri

Okay. And, it was included in the June bookings number?

John R. Peeler

Yes.

Timothy Arcuri

Okay. Thanks.

Operator

(Operator Instructions). And will move to Matt Petkun with DA Davidson and Company.

Matt Petkun

Hi, good afternoon. Can you guys provide a little bit more in the way of specifics for your operating expense expectations for next quarter? And then John, if you could sort of characterize where you think we are from that perspective, especially relative to do, and you haven’t given this level of granularity but OPEX relative to the data storage business and, obviously it’s profitable at these levels but these levels may not stick around forever after your wafer transition. So, I’m just kind of wondering where you think we are in the cost reduction phase of your ramp up here at Veeco?

John F. Rein, Jr.

I’ll comment on that a couple of things there. Number one, we expect operating spending to go up $1.5 million to $2 million and a million one of that is really related to the acquisition of Mill Lane which was acquired late in the second quarter so we didn’t have a full impact of that spending in our second quarter numbers. So that’s $1.5 million of it. The balance is predominantly focused on R&D spending, increased R&D spending in the high growth areas of LED and solar. Those are the areas of the principal spending. There are also some increases associated with greater profitability in bonus and profit sharing.

Matt Petkun

Okay. Thanks, Jack. And then --

John R. Peeler

On the data storage a couple of things. First of all, you know, as we mentioned a few minutes ago we do expect the 8-inch transition to go on for a long time. This is not a quick move. So, I think we have a solid period ahead of us. Secondly, we are continuing to focus on operational improvements in the company, in data storage as well as in our other businesses and that really includes a number of things. Outsourcing certain products, we’ve had good success with outsourcing the right things in keeping the right things in-source. Driving a global supply chain initiative. We think we can bring down our cost of materials significantly. We are getting some, some good initial traction in those areas. Change in the way we do global logistics to reduce our COGS. And things like that. So, there is a lot of focus on it, we made good progress so far over the last year. But there is a lot more to do. So, we will continue to stay very focused on driving down our COGS so that we are more competitive in down cycles. And at the same time we are very careful with where we grow expenses. So, that although we have some very good growth in some of our businesses we are making sure that expense growth is aligned with the high growth areas of the business, that it relates to really the areas that are going to propel us forward. So, that combination we expect to provide an improved business model as we go forward. I won’t say it will be every quarter because there will be seasonality but when we are here a year from now I think you will see some other benefits from those things.

Matt Petkun

Okay, great. And then, finally, obviously the semiconductor market is weak but do you have a new product in the incite 3D AFM, the auto AFM, can you provide an update in terms of your expectations for that product for this year and any initial customer feedback you’ve had?

John R. Peeler

The customer feedback is very good. The product is easier to use. It works down to lower geometry so it fits the geometries that people are thinking about now. It’s got a road map to 22-nanometers. And its cost of ownership is better. You know, just on about every dimension it’s a much better product than what we’ve had before. It’s just a time when people are postponing expenses and really not moving to buy a lot. So, a great product at a bad time.

Matt Petkun

Okay, great. Thank you so much.

John R. Peeler

Thanks.

Operator

And, we will take Mark Miller with Brean Murray.

Mark Miller

Congratulations on a solid quarter in difficult times. Just wanted to talk about the LED solar area. You told us you had 35% sequential growth and I was just wondering, was this from both areas, was one a lot stronger than another, whether it’s LED or solar both grew substaintially?

John R. Peeler

We don’t really split but there is growth in both areas so it is we are doing well we got our new LED to our K465, we have received acceptances from the customers in the field and we have seen good momentum behind that. So, it’s solid at the same time we are selling the MBE systems and really selling on both fronts.

Mark Miller

You already are doing business it’s really you and one of your competitor what has dominated the market, I am just wondering if you can comment on two things. One would be any share gain you have seen over the last quarter or two, and also new entrance coming into the business any concerns about new entrants especially larger firms?

John R. Peeler

So on the share gain side, your [Akron] released its newer generation product a little ahead of us. They achieved some very strong orders encountered in Q4 and Q1 when our system really wasn’t fully qualified at a number of suppliers. We have since then qualified and so we think we are doing well, I think it’s early to talk about share gain one way or the other in the most recent quarter. On the other hand our product is getting great feedback and so it’s doing well in the market and we think it has real compelling advantages in terms of throughput and productivity and overall benefit to the customer. So, we think it’s going to do well, you know, on the new entrants it’s a big market. It’s an exciting market; we expect that other companies may chose to come into it. We are not seeing a significant impact from any other companies and we think there are lot of barriers to entry both in terms of the technology is difficult, the knowledge that we built up over many years in working in this market. It’s very significant and it’s not an easy market to get into and we have a lot of install base. And the install base is a competitive advantage because of a lot of it released fair amount that can be upgraded. So, we haven’t seen any impact.

Mark Miller

Not even from implied? Implied starting to make inroads?

John R. Peeler

Haven’t seen it.

Mark Miller

Great.

Operator

(Operator Instructions). We move to Brett Hodess with Merrill Lynch.

Brett Hodess

Good afternoon, I apologize because my cell phone cut out for a minute at the beginning of the Q&A and so if this has been asked; I apologize, but you know given the size of the backlog now John, I understand you know $20 million of the Solar LED surface for next year, but given the size of the backlog now, are you starting to see, you know, this quarter do you have some plans or you are starting to see some more pressure for pulling from customers on these products to begin?

John R. Peeler

We've seen pull ins certainly on the data storage side and as you know, the last year was particularly tough year, there was a lot of postponement of capacity buying, but the 8-inch program and some other programs were very valuable to the customers. So, we have seen pull ins in those areas and in LED and solar, you know, we are doing well to maintain our lead times and give the customers what they need. But if you remember in that area, we hit 2008, where the size of the backlog there. So, this is a business that people plan out ahead of their purchases and tend to think ahead, which is actually a good thing.

Brett Hodess

Okay, so that’s what even with the increased orders and all the revenue outlook which is good isn’t growing a whole lot because of customers really have it sort of planned out overtime.

John R. Peeler

Yeah that’s right. Yeah and you know we are also Brett we are taken the economic environments are pretty tough out there and a little hard to predict so we want to make sure that we do what we said we do.

Brett Hodess

Great and thanks and quick follow on, if you look at these LED Solar business between the MOCVD and MBE tool are their fairly good synergies between those product lines as you ramp up or they too pretty the spare product lines at this stage of the game?

John R. Peeler

You know they are pretty different technologies and MOCVD technology systems are really used for tend to be higher volume production applications. The MBE systems are used in both early R&D of many technologies; you can make many different things with the MBE systems in smaller quantity. So they find their use in R&D applications, which gets us in to a lot of emerging areas and we found that to be very useful, but you know there is no real direct synergies other than one gets in the market early and they both do sell in the solar. So it has given us some good exposure to the breadth of solar customers across different technologies from 35 Solar cells to thin film segs. So, but you know that would be the type of synergies you would see.

Brett Hodess

Okay, so main marketing in the sales synergies versus cost synergies that’s great thank you.

John R. Peeler

That’s right yeah.

Operator

And we move on to Jed Dorsheimer with Canaccord Adams.

Jed Dorsheimer

Hi, thanks for taking my question. I may have missed this. Did you give a breakdown in the LED in the Solar sector in terms of geography?

John R. Peeler

No, we don’t provide that level of granularity.

Jed Dorsheimer

Can you provide I guess, so, can you provide any additional color in terms of where the bookings are coming from, in terms of where the increase in bookings whether or not that’s coming from Europe, US, or Asia?

John R. Peeler

So, you know, LED bookings are you know, very strong across Asia whether it’s Taiwan, China places like that. And solar tends to be focused both in the Europe and the US would be kind of early slowly movers there.

Jed Dorsheimer

Great thanks and as a follow up, were most of the sales in the LED division K465 are also is there component of GaNzilla in there.

John R. Peeler

Mostly 465s.

Jed Dorsheimer

In the configuration on the majority of those how are the plotters being set up is it typically 2 inch or you are starting to see 4 inch?

John R. Peeler

You know, we are starting to see some 4 inch applications.

Jed Dorsheimer

Al right, great, I’ll pass it on -- did you mention the number of units for the Spectra labs?

John R. Peeler

No, we didn’t, but it was multiple systems.

Jed Dorsheimer

Alright, thank you.

John R. Peeler

Thanks.

Operator

We do have a follow Timothy Arcuri with Citi.

Timothy Arcuri

Hi John, can you give some idea on relative to the bookings guidance what segments do you think will decline the most. So, if you kind of get a little more granular relative to the 136 you just did?

John R. Peeler

Well, I don’t think I can give it to you by segment. But in calendar Q3, we have historically seen some sluggishness in areas of just slowing down in bookings due to seasonality. So, we have tried to allow for that. And we have also not predicted that we would blow it away in data storage like we did in Q2. So, I think it’s a combination of data storage dropping off a little bit and as it usually does here as well as some general kind of summer slow down.

Timothy Arcuri

So the mix would probably look, the kind of bookings mix would look a little more like it did in March?

John R. Peeler

I am not sure I could off the top of my head.

Timothy Arcuri

So kind of flat metrology, storage would go back to about 40, and solar and LED would go back to about 40 as well. So, the fall off would be mostly in storage and LED solar?

John R. Peeler

It’s hard to tell, Tim. We are not quite that good at predicting the future yet. So, I don’t think we want to get too specific here. But data storage I would expect to fall off.

Timothy Arcuri

And last thing, I know that there’s still a pretty big COGS off shoring initiative. How much more do you think that can help the margins from here?

John R. Peeler

No, we don’t have, we are not prepared to quantify it yet in terms of percentage. But the off shoring of COGS like with global purchasing initiatives expects to go on for another year or more here. So, we are starting to see some good benefits and we expect to keep driving those. So, it’s not a short-term thing, it’s something that we expect to continue to drive really from an operational excellence point of view. And you know there should be some good savings left there that would make us more profitable especially in a trust.

Timothy Arcuri

Okay, thanks.

Operator

It appears we have no further questions in our queue at this time. I will turn the call back over to you, Mr. Peeler for any additional or closing remarks.

John R. Peeler

Okay. Well, I want to thank you all for joining us today. It was clearly a great quarter for us and we’ve executed well. So, thank you, and we’ll conclude the call at this point.

Operator

That does conclude today’s conference call. We do thank everyone for their participation.

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Source: Veeco Instruments Inc Q2 2008 Earnings Call Transcript

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