8 February 2012

Veeco’s revenue falls 28% in Q4/2011 due to MOCVD down 32%

Epitaxial deposition and process equipment maker Veeco Instruments Inc of Plainview, NY, USA has reported full-year 2011 revenue of a record $979m, just under the $1bn target set at the beginning of the year and up 5% on $931m in 2010. “We gained market share in top-tier LED customers around the world and, according to IMS Research, MaxBright was the top selling MOCVD tool for 2011 [reaching well over 50% market share in Q3],” says CEO John R. Peeler. “The LED customer base in China expanded much more rapidly than anyone expected it would,” he adds. Gross margin was 48% (up from 47.6%) and non-GAAP net income was $206m (up on $203m).

However, fourth-quarter 2011 revenue was just $191.7m. Although this was down 36% on the record $299.8m a year ago due to discontinuation of the CIGS (copper indium gallium diselenide) Solar Systems business at the start of Q3 and divesting the Metrology business to Bruker Corp in October 2010, it was also down 28% on $268m just last quarter.

Of total Q4 revenue, 17% came from Data Storage revenue of $31.6m, down on $34.1m in Q3 (13% of revenue). The other 83% comprised LED & Solar revenue of $160m, down 32% on $234m in Q3 (87% of revenue). This included metal-organic chemical vapor deposition (MOCVD) revenue of $150m, down 32% on $220m in Q3 due to a general slowdown in system purchases, particularly in China. “While not a new phenomenon, we experienced tool shipment rescheduling by several Chinese customers as they continue to manage through facility readiness and funding issues,” says chief financial officer David D. Glass.

On a non-GAAP basis, gross margin was 43.7% (below the 44-45% guidance), negatively impacted by lower volumes and higher supply-chain cost.

Operating expenses were $48m, down from $50m last quarter as spending controls were instituted in response to the weakening business outlook. Also, bonus and profit-sharing expenses were lower as the firm did not meet its bonus targets set at the beginning of year. Veeco also took a $2.6m restructuring charge ($1.3m in asset write-offs and $1.3m in staff termination and other costs).

Adjusted EBITDA (earnings before interest, tax, depreciation and amortization) has fallen from $113.7m a year ago to $39.4m. This included $5.2m for Data Storage (down from $12.5m a year ago) and $34m for LED & Solar (down from $107.6m a year ago). Net income was $28.1m, down from $53.3m last quarter and $73.5m a year ago. Nevertheless, strong cash generated from operations of $57m helped to boost cash and short-term investments from $449m to $492m.  

Order bookings were $143m, down 51% on $295m a year ago but rebounding by 8% from $133m last quarter. Of total bookings, 53% came from Data Storage orders of a record $76m (up 258% on $21m, just 16% of total orders, in Q3). This included orders from key hard-drive customers to expand or rebuild manufacturing capacity lost during the Thailand flooding in October. Unusually, bookings were higher in Data Storage than in LED & Solar. As LED business conditions continued to deteriorate, LED and Solar bookings have fallen from $253m a year ago and by 40% from $112m (84% of total orders) in Q3 to $67m (just 47% of orders), the lowest since second-quarter 2009.

LED & Solar bookings included MOCVD orders down 43% from $103m in Q3 to $59m as customers delay capacity expansions until tool utilization levels increase. Veeco continued to book a mix of both MaxBright and single-chambered K465i MOCVD tools, with China remaining the largest proportion of orders by region (about 80%). Veeco has several MOCVD system orders for emerging applications such as power electronics and CPV solar. In addition, molecular beam epitaxy (MBE) system orders were $8m, down only slightly from $9m last quarter.

After adjusting by about $7m for a Chinese MOCVD order cancellation, total quarter-end order backlog was $333m (including $205m for MOCVD).

For first-quarter 2012, Veeco expects revenue to fall to $115-140m. Despite the decline in volumes, gross margin should be stable at 43-45% due to some mix improvements. Operating spending should be $46-49m, yielding adjusted EBITDA of $7-18m and net income of $5.2-$13.2m.

Customers are reporting that LED backlighting demand remains weak, and factory utilization levels in Taiwan and Korea are just 50-70%. “We don’t see signs of near-term improvement in the LED environment, and the current overcapacity situation could mean that MOCVD orders remain at these depressed levels for multiple quarters,” says Peeler. “With the dialing back of the natural variable components in our cost structure as well as reducing discretionary cost, we’re able to achieve quarterly breakeven EBITA performance and mid-40% gross margins on about $100m of quarterly revenue,” he notes.

“While consumer electronics has been the dominant end market for LED technology over the past decade, and for which most MOCVD capacity was installed, these applications are expected to reach saturation in the next few years [with LED penetration into TVs rising from 40% in 2011 to 60-70% in 2012]. Conversely, the LED general lighting market is in its infancy,” notes Peeler. “The widely anticipated pause in China investment is clearly here, and in Taiwan top customers are planting investments at home and in conjunction with their China joint venture partners and yet those projects are proceeding at a slow pace,” he adds. Korea is still ‘quiet’.

“It's difficult to pinpoint the duration or the depth of the current investment pause, which explains the wideband of MOCVD estimates,” Peeler says. “Wall Street’s low estimate for 2012 demand is 200 tools, and the high number is over 500. 2013 forecasts have an even wider range: 260 on the low end to over 700 on the high end. We think that the actual numbers will come in well above the low end forecast and likely below the high end forecast,” he adds.

“We continue to see evidence that LED lighting prices are dropping and getting closer to mainstream adoption levels. Samsung and LG both have 40W-equivalent bulbs on the market at about $12 a unit and have or will soon have 60W-bulb equivalent priced in the mid teens,” continues Peeler.

“In China there is speculation about additional LED incentives [in the government’s 12th 5-year plan] and the government continues to expand its LED street-light programs, and in Taiwan there are plans to replace over 250,000 halogen street lights in 2012, and then in Japan and Korea they also have very aggressive LED lighting programs underway,” says Peeler (e.g. Korea’s ‘20-60’ plan, targeting 60% penetration by 2020). “With LEDs less than 5% of the lighting market, the future potential for this market is enormous... recovery will be driven by LED lighting investments.”

Tier-1 lighting and chip companies are positioning themselves for growth in the LED market. Philips is to set up an LED lighting plant in Chengdu, China. Taiwan’s Epistar has formed a strategic alliance with China-based Yankon Lighting (Asia’s largest CFL bulb maker). Korea’s Samsung EC is merging with Samsung LED to accelerate its LED lighting business. Japan’s Panasonic aims to grow LEDs to over 50% of its lighting revenue by 2016.

“We believe that 2012 will be a transition year between the LED TV investment phase over the last three years, which helped to fuel a $4bn LED market, and the much larger LED lighting market, forecasted to be over $13bn from 2013 to 2015,” says Peeler. “Demand for MOCVD tools will reaccelerate, driving demand for thousands of additional next-generation reactors to make lower-cost, higher-efficiency, brighter LEDs for lighting applications,” he forecasts. “While estimates vary, LEDs are expected to represent more than 25% of the global lighting market by 2015 and the majority of the market by 2020,” he adds.

“We remain focused on driving next-generation product development to secure our MOCVD technology leadership position for the lighting wave,” Peeler says. “With nearly $500m in cash at the end of 2011, virtually no debt and leading market share in all our core technologies, we can invest through this downturn and emerge even stronger when the market returns,” he believes. “We plan to maintain a high level of R&D investment.”

In the meantime during LED market pause, a ‘cushion’ is provided by the collective three-year compound annual growth rate (CAGR) of 25% for Data Storage and MBE revenues. These markets have different customers and capital investment cycles as well as different geographic exposure (with under 10% of their revenues coming from the main MOCVD market regions of China, Korea and Taiwan), providing consistency through the MOCVD investment cycles. With nearly $130m in backlog at the start of this year, these businesses are expected to show similar strong growth in 2012.

In addition, the Services business grew more than 40% to nearly $100m in 2011, and in 2012 over 400 MOCVD reactors are due to come ‘off warranty’ (leading to expected sales of extended warranty plans as well as spare parts, consumables, and upgrades that drive tool performance).

For full-year 2012, Veeco forecasts revenue to fall to $500-600m. Capital expenditure is expected to be just $40m. “It's likely that this CapEx will be heavily weighted toward the first half of the year as we finish up the build-out of our new Korea site and continue to invest in our New Jersey R&D facilities,” says Glass.

“With the work that has been done over the past three years to outsource our manufacturing and utilize variable costs where possible, we will maintain a reasonable level of profitability and generate cash through this temporary pause in the LED market,” Peeler concludes.

See related items:

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

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

See: Veeco Company Profile

Tags: Veeco MOCVD MBE

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