26 October 2011

Veeco's Q3 growth suppressed by slowdown in TV demand and China push-outs

For third-quarter 2011, epitaxial deposition and process equipment maker Veeco Instruments Inc of Plainview, NY, USA has reported revenue of $268m, up 1% on $264.8m last quarter but down 3% on $277.1m a year ago for continuing operations (reflecting discontinuation of the CIGS Solar Systems business at the start of Q3, and excluding the Metrology business, sold to Bruker Corp of Billerica, MA, USA in October 2010).

Of total revenue, 13% came from Data Storage revenue of $34.1m, down 25% on $45.7m last quarter but roughly level with $34.5m a year ago. The other 87% comprised LED & Solar revenue of $234m, up 7% on $219.1m last quarter but down 4% on $242.6m a year ago. This included metal-organic chemical vapor deposition (MOCVD) revenue of $220m, up on $206m last quarter.

“Veeco has continued to execute within the challenging overall business environment, particularly in China, where customer facility readiness and credit tightening remain significant issues,” says CEO John R. Peeler. Since opening in May, the number of engineers trained at Veeco’s China Training Center is now more than 200 and should be over 300 by the end of 2011. “Veeco’s new MaxBright MOCVD system represented nearly half of the quarter’s MOCVD revenue, including broad-scale customer acceptance at tier-one LED manufacturers,” he adds.

Gross margin was 46.6%, down on 49.6% a year ago and 51.1% last quarter due to a high concentration in the revenue mix of MaxBright MOCVD systems (for which first shipments carry higher costs). “We’ll begin to see cost improvement early next year,” notes executive VP & chief financial officer David D. Glass. Non-GAAP net income was $53.3m, down from $63.4m last quarter and $65.4m a year ago, but at the high end of the guidance range of $41.3–57.7m.

During the third quarter, Veeco purchased $154m in stock at an average price of $38.63 per share, completing a $200m board-authorized share buy-back program initiated in August 2010. The firm also used $31m of cash in contractual settlements for closure of the CIGS Solar Systems business. With working capital changes roughly offsetting the positive cash flow generated from operating income, during the quarter Veeco’s cash and short-term investments hence fell overall from $633m to $449m.  

“Veeco’s third quarter orders were impacted by weak near-term LED industry demand [particularly from the TV sector], low MOCVD equipment utilization rates in Asia [50-70%], and decreased business activity in China [due to credit tightening and funding availability],” says Peeler. “In addition, negative global macro-economic data points caused customers to slow or cut their capacity expansion plans.”

In particular, by application sector, of Veeco’s MOCVD system shipments in Q1-Q3/2011 of more than 280 (versus more than 330 for full-year 2010), 54% were for lighting (up from just 28%) and just 11% were for backlighting (down from 43%).

Third-quarter bookings were $133m, down 57% on the record $311m last quarter and down 52% on $278.2m a year ago. Of total bookings, 16% came from Data Storage orders of $21m, down 44% on $37.5m last quarter and down 39% on $35m a year ago. Of the other 84%, LED & Solar orders were $112m, down 59% on the record $273.3m last quarter and down 54% on $243.2m a year ago. This includes MBE (molecular beam epitaxy) orders of $9m (down on a strong $24m last quarter) and MOCVD orders of $103m, down on $250m last quarter. After recording backlog adjustments of $34m during the quarter (due mainly to several MOCVD customers who cancelled or pushed out the dates for tools on order), total order backlog has fallen from $558.2m to $389m (about $303m of which is for MOCVD).

After factoring in facility readiness issues and shipment timing uncertainty, for fourth-quarter 2011 Veeco expects revenue to fall to $175-215m. Due to the lower volume and continued impact of first MaxBright systems, gross margin should fall further to 44-45%. Net income is expected to fall to $21.1-33.6m. Operating spending should be $49-51m. For full-year 2011, Veeco expects revenue of $963-1003m, with gross margin of 48-49% and net income of $199.2-211.6m. Operating spending should be $193-195m.

“Despite the difficult overall environment, we are proud that the company expects to deliver $1bn in 2011 revenue, at the high end of guidance,” says Peeler. “This speaks to our technology leadership position, close connectivity to our global customers and ability to execute in a challenging environment,” he adds.

“Our current expectation is [MOCVD] orders will remain depressed for a few quarters,” notes Peeler. “While there are many data points indicating that LED lighting is accelerating, weak backlighting demand continues to cause low factory utilization rates… global macro-economic concerns will likely have a dampening effect on our business heading into 2012,” he adds. “With our variable cost model, combined with plans to decrease spending levels to reflect the challenging business environment, we are confident we will remain profitable and expect to deliver double-digit EBITA performance next year.” Reductions of about 100 temporary workers and contract manufacturing staff have already occurred.

“While we do not know how long this slowdown will last, LED pricing declines will continue to stimulate demand for solid-state lighting on a global basis,” believes Peeler. “We expect wide-spread adoption of LED lighting, led first by the commercial, municipal and industrial sectors, which make up 75% of the lighting market, followed by residential users as economic benefits of using LED-based products become more apparent,” he adds.

“Despite some level of cyclicality which is to be expected [with 2012 to be a down year, following two very strong years], there is an enormous multi-year growth opportunity for MOCVD, aligning with our overall expectation of 5000+ reactors from 2011 to 2015,” continues Peeler, who adds that industry data points suggest that the downturn could be very short lived. “With the industry’s most productive MOCVD platforms, Veeco’s market position is the best it has ever been. We believe the company can continue to gain share as LED lighting hits an inflection point in 2012 and 2013,” he concludes.

See related items:

Veeco’s Q2 yields record orders as MaxBright comprises 40% of MOCVD orders

Veeco’s revenue drops 15% in Q1 due to ‘lumpy’ order patterns

Veeco reports record quarterly revenue of $300m in Q4

Veeco grows a further 25% in Q3; on track for $1bn in 2010

Veeco’s record Q2 driven by LED & Solar revenues growing 66% from Q1

See: Veeco Company Profile

Tags: Veeco MOCVD MBE

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