Veeco Instruments Inc. (VECO) Earnings Call Transcript & Summary

Perfect. All right. Welcome back to the Barclays Tech Conference. I'm Tom O'Malley, U.S. semiconductors and semi-cap equipment analyst. Happy to have Bill Miller, CEO; and John Kiernan, CFO of Veeco. Thank you both for being here.

Thank you for being here, Tom.

And as we do every year, we come back and Veeco has a host of new products and wins that we need to discuss. But I think the overarching view that I kind of want to take it, you guys have managed to traverse [indiscernible] in data storage and some large macro challenges, and that's largely on the back of your semi business. Maybe you could start there. Where have you seen success in semi business, maybe give a recap to those who haven't been listening in carefully for the last couple of quarters? And then what are your expectations for growth in the semi business from here now?

Yes. Thanks for the wonderful question, Tom. I would say we're actually really excited about the growth we've actually executed here in '23, probably going to grow about 10% in our semi segment. It's the largest segment of our business. And really, that's on the back of a few things. In the LSA business, we -- this year, we were able to win our first application and chip volume for our third and leading-edge logic player. And we've also now started shipping volume laser annealing equipment to our first DRAM memory maker. And so in an environment where DRAM is down, Veeco has gone from basically 0 market share in memory to now having some business. And so those are 2 major incremental opportunities for us. And then I think further out, we now have shipped evaluation system, our next-generation annealing tool that we're really excited about. And we've also shipped our first 2 Ion Beam Depositions for front-end semi for low-rise metal. So we think the future -- although we did well in '23, I think the future in '24, '25 and beyond is pretty exiting.

Awesome. So you just mentioned one of the questions I was going to ask. So you're ahead of me here is that you had a second shipment on the Ion Beam side. Is that also going to be a memory customer? And can you just talk about why that technology is gaining traction in the market today?

Sure. Yes. We're very excited to announce that we did ship our second Ion Beam Deposition system from [indiscernible] metals. And so what's in the industry, in the semi industry, both in memory? And yes, the 2 first tools are going to memory. There's also huge opportunities in logic as well. And what the industry is seeing is that as lines and spaces continue to shrink, the actual resistance of the material itself really becomes very important and the traditional PVD technology is really running out of gas in terms of its ability to reduce the overall resistance of the metal. And so we've demonstrated the ability to show about a 20% lower resistance. So we share that with customers, they're really excited and see this as a big opportunity for them. And so we're really excited to be successful with that.

Very helpful. And then when you think about the Ion Beam opportunity as a stand-alone sliver of your business, can you talk about what you think that TAM could be for you guys? And then where do you see your growth as well as I think you just mentioned some of the qualities as to why you guys are being successful, but is the market going in a certain direction where it's kind of playing more into your hands?

Yes. I think as lines and spaces continue to shrink or the bit lines or such a critical part of the DRAM memory device, the ability to deposit lower it becomes more important. And so we size that market in the next few years today, it is 0 for us. We sized that at about $250 million incremental opportunity for us in server market.

Okay. So you've got the Ion Beam side, $250 million. Now I always have to recall here, and you guys have updated a couple of times. So let me know if I'm right in these updates. So you guys originally talked about the LSA business. You guys had talked about a $300 million opportunity before with the customers and then a maybe doubling that. Can you talk about, one, where you are with LSA today? And then recently -- and I think as recently as the last quarter, you talked about NSA. What is that opportunity? Point it to the people that don't know. What part of -- why is that different than LSA? It's definitely -- yes.

Okay. So yes, we size that market today, including logic and memory about $500 million today's laser annealing tools. Most of that business today for us is a logic and there's opportunity to grow our market share in LSA and memory. Nanosecond annealing, the tools we're shipping for this quarter are really -- they actually heat and cool the wafer 1,000x faster than our laser annealing. And so that allows only the very top surface of the wafer of the device to be heated and that layers [Technical Difficulty] are unaffected by the energy that you're putting into the surface. And so that opens up opportunities like backside power distribution networks where you want to anneal the back of the wafer but not affect the front of the wafer. Also the material modification where you're building a stack and you want to anneal this top surface, but not the surfaces below it. There's a lot of opportunities that we see full potential in the future.

And when you think about additional TAM, your existing LSA business, how big do you think the NSA opportunities be?

So I would say if we blacked out, say, to 2027 time frame, we're sizing the total laser annealing market at $900 million. And we think $600 million will be our traditional laser annealing from 50% logic, 50% memory and an incremental $300 million for the nanosecond annealing, also probably about 50-50 logic and memory.

Help me understand as a non-engineer, I think it's very useful the way you described just the -- a bit [Technical Difficulty] on the labor. But when I think about existing technologies, you're saying 1,000x better, right? The first question we're going to ask is why isn't this cabalistic. Why is this not cutting into your current tool opportunity? Are these playing at different steps? Help me understand why those are both able to sell into the market?

Yes. I think laser annealing will probably be the larger market because as -- back 30 or 50 years ago, people pushed wafers into a set of an oven and looked at a stop watch and then pulled it out, right? So now with past technology that can heat it up for half a second, millisecond kind of time frame. And today, we can heat the wafer up for 150, 200 microseconds. And so that goes through the whole wafer, right? Heating using a nanosecond wavelength laser, which is what we're doing. We can heat the wafer up moving away from the laser very quickly and heat it up only for a very short amount of time and just the amount of energy you put in only stays at the surface. So there really are 2 distinct classes of problems. You're heating through the wafer and then only heating on the surface of wafer.

And when I look at where the opportunities lie for you guys, you mentioned backside power, and I know that you clearly have contraction memory. You used to talk about different step larger customers. There were 10 steps you were in 3 of them and you saw those steps. So I think you've kind of backed away like look like that's the way we originally talked about it, we don't talk about it that way anymore. But how about with the memory side of things? Is there a way to be more granular in the opportunity like ultimately, the team can be about the big size of margin? Is there a way we can get working like wafer starts for foundry? Help me understand a little better how that opportunity plays out.

Yes, yes. So the laser annealing opportunity that we've just recently won, we originally were really only in their highest-performing memory, high-bandwidth memory applications. We've since learned that we now are qualified more broadly for their most advanced applications. That's one application. So right now, we have one customer, one application. There are obviously 3 major memory players. So there's opportunities for us to grow there. But also our customer -- we're working with our customers in product development and trying to qualify other applications. So that's -- it's -- the steps actually are in some way similar to void removal steps. There are some direct annealing steps very similar to logic. Some are a little different. But yes, I think I'm hesitant to go into for naming all these steps because it was really good when we were first starting out, I've got one customer, I've got one application, it's called contact. And then we could walk through with everybody. But now customers are now using accrual for all of these applications. So it's very hard for us to segment how many paths is this application is versus that. So it's a good opportunity.

It's good to have too many steps to name given to, that's good. So when I think about how you scale at a given customer, is it generally the number of machines on a given line increases or normally do you scale win more lines? So I guess the better way to go about it is, is it technology evolution or is it just throughput the scale?

I would say, obviously, the technology that gets us in the door, but we qualified an application step, we're running 15,000 wafers per month or 30 or 60. A lot of that is scale. What's your call.

And then I think the existent theme at this conference this far has been AI. When you look at those 2 opportunities that we just talked about, NSA and Ion Beam Deposition, which will benefit more from the AI side? Because I know in your deck, you look very handy and those in the crowd should spend some time there as well, a very handy graphic showing where we'll play with some GPUs into some HBM. So the next question, which of those do you think is a more levered driver to have?

I would say today, we have -- we're process tool of record in GPUs with today's LSA system to logic as well as any GPUs that are made with EUV, we sell the equipment to make the EUV mask blanks. That's a real process to a record. In HBM, as I just mentioned, we just talked about, we've now won memory customer for their HBM opportunities were process tool record there. What's actually as exciting is we're working very hard in both the GPU and the high-bandwidth memory to position our nanosecond annealing tool and our Ion Beam Deposition System, both of which are under evaluation. And we think this could be really quite an enabling thing for us in the future.

Something that we've talked about a lot over the past year, and you guys have spent time on call talking about. Is this the trade-off in your LSA business from a geography perspective, where you have varying geographic exposures moving up and down throughout here. And I think that, that is something that many companies saw. Could you talk about what you think your run rate normalized geographic exposures in your LSA business? And what happens with China and why it became such a big portion of that mix? Do you think that that's all sort of slip out? Or do you see some of the elevated rate into mix as well.

Let me start and maybe John can fill in some more color here. I would say historically, we spent a lot of time talking about our leading-edge wins because that's where our R&D investment is going. That's where the focus of land and expand in our strategy is. In trailing edge, we treat more opportunistic. So I would say, historically, 2/3 or maybe a little bit more of our business was leading edge and 1/3 was trailing edge. I would say this year, it's probably flat with 2/3 trailing 1/3 leading. And specifically on China, John, maybe you can add some color.

Yes. So -- and a lot of that trailing business did come from applications in China this year. And as a company, we saw about 30% of our revenue comes from China this year. Last year, it was about 20% of the company's revenue. And as Bill mentioned, as we look out further, our expectation with these new technologies that Bill bespoke of, whether it's now nanosecond annealing, whether it's expanding laser and more memory applications, we penetrated one customer so far. We're looking to penetrate another customer there. We would see that 1/3, 2/3 to sort of put back more towards our expectation over a longer period of time to move more towards the leading edge. I would say that as we look at China right now as a percentage of the business and what our visibility is. It's hard to predict next year at this point, will kind of business be up? Will it be down? Will Would be flat, if we look at the whole year next year. I would say where we are right now is that interactions, engagement with customers are still very strong. Customers are still talking about investments in more new capacity and our visibility at least into the first half of next year, we should move in with a reasonable backlog there. I think it's -- once you get past halfway point, it's actually great. For the following year, it's really more difficult.

Yes, it's not a phenomenon that is unique to you've seen it across the market with accelerated China stand. I guess the debate now is how long does that last and the sustainability of that. So I guess the follow-up question is, you talked about what you think is your -- you have no tonics this year. You just gave some comments. I think you've mentioned publicly that you don't believe that any restrictions on equipment is going to impact your business. But could you talk about what you see in the moving regulatory world? And any where are you careful about what tools you continue to choose?

Yes. So I'll start with the laser annealing side. There's not specific licensing into requirements that with these new regulations that just came out in October that achieved any of the regulatory requirements from a technology perspective there. So it's not a type of technology that we would generally have to get a license to in order to [indiscernible] China. Now of course, it is very difficult to predict where regulations and export may go in the future. And so for us, this little -- our engagement is new technology, our engagements with customers at the leading edge, investing in these eval program with the customers all meant for the long term to drive our business more towards the leading edge. And as Bill mentioned earlier, be more opportunistic if there's trailing edge or trailing note business that's available in China or in other places as well, yes, we'll sell our existing equipment there, but we counting on it that we look out into the future.

Helpful. I want to kind of pivot to the data storage side. So it's been remarkable that you've been able to grow your business despite what has been a pretty extreme headwind in the data storage space. I think if you look at end customers talking about early stages of a recovery, but you guys have already talked about and seen some positivity. Can you talk about your expectations for that business? Are you ready to set bottom and you were going to improve from here? Just any comments on trajectory of the bottom?

I'll take that one as well, Tom. So what we've seen in the data storage business for us right now is we've had about 2 years where the customers have invested a lot less. So in one sense, yes, our business is up a bit this year, low single digits in terms of growth over 2022, but 2022 is a very muted year in terms of our customers' capital spending. To your question is have we seen bottom yet or have we seen times of recovery? We have not yet seen any meaningful signs of them making increase investments in capacity. So as we look at it today, we don't see a significant change. So as we start to roll into this upcoming year, and typically, we work with a longer lead time and visibility with our customers. We've been in this business with them for [Technical Difficulty] but what we are encouraged about is that customers continue to talk about technology investments or investing in this HAMR technology. And that to the extent that they continue to invest in technology to keep the advantage over solid state drives for these larger format drives, I think that's good for the industry and their business. The other area is that they continue to forecast or talk about that storage into the cloud and these large format drives that they still see a 20% to 25% CAGR going forward there. So I think the investment in new technology growing data stored in these large formats give us opportunities as the market recoveries and as a leader of selling equipment into this market to see recovery, you're not just yet calling that 2024 from our perspective. But one thing I think is really important here. The data storage business and the technology is really important to the company in the company's strategy because as Bill mentioned, our foray into selling Ion Beam Deposition equipment from companies that make the EUV mass plans, and these new tools that we're shipping out evaluation these 300-millimeter ion beam low-resistance metals. This comes from the decades of experience in working with our customers to make the digital magnetic here. So ion beam is important to us as a core technology not just to serve the data storage market.

Helpful. Something that I've been meeting to ask for a while that I haven't got the chance to is, clearly, there's a material change in the storage business community. You guys have always talked about how you're leveraged more heads and more complexity, more passes, right? Is there a change that you point to with HAMR in the complexity of the heads because I know that there is an increased complexity with each of them that would help you or benefit you? And can you contextualize that in the number of form? Or any way to quantify?

We actually -- I think in some of our investor materials, do kind of talk about an increase in the number of steps kind of at a normalized number. It's substantially more. It's a lot more deposition in etch, and that's where our ion beam depth and Ion Beam Etch tools are for. As the heads are more complex, it drives a lot more that's in a lot more passive. I think we have -- I just don't have for [indiscernible].

Yes. I think what we view is, in one sense, they go to HAMR, there's greater aerial density, so they're able to pack more storage on to individual platters there. So you could use same amount of platters today, the one tends to have more storage. So that would be sort of a negative to selling more quickly to the customer. On the flip side of it is, as Bill mentioned, the complexity of this third element in the head of having a laser and the head that sort of heat the element is significantly more complex. So all of the analysis that we've done and marketing teams have done. And again, we're very close. We've been working with these customers for decades is that they kind of offset each other. So on the one sense, yes, there's more steps, there's more complexity in HAMR, but they're more [indiscernible]. So I think for us, it's really viewed as kind of neutral. When is the technology shift to HAMR, so I think for us, the more we continue to grow the amount of [indiscernible], it's probably as important as an element than is it more hammer drives? Is it more non-HAMR drive? I think for that, we view it as pretty neutral.

Helpful. I want to shift the conversation to compound semi. So I think last year, we talked about this as well, and we talked about an area that you wanted to improve in and clearly a transition in the market from more of a photonics year market to one of more compound semi with both silicon hereby GaN, et cetera. Where are you in your process of catching up to the market? And in terms of the current platforms that you have, do you think that you're capable of competing with those? Is it a marketing decision that needs to change or customer subset or is occurring to you? Just help me understand the strategy there and what's going on.

We've spent this year of '23 and end of '22 kind of retooling our product lines. And we made an acquisition of a small silicon carbide epi company at the beginning of this year. We've installed that tool in our facility and in our lab in New Jersey. We're bringing the top we're qualifying it. We're getting to run -- start running customer demos here in the near future. And from our discussions with a number of Tier 1 silicon carbide players, they remain quite interested in the capability of the equipment set. So we feel pretty good about that opportunity. And I went to this party [Technical Difficulty] in the last 2 years. And I would say 2 years ago, it was 99% of the discussion was silicon carbide, 1% GaN-on-Silicon. This even, I would say, it may have been 70% working carbide, 30% GaN-on-Silicon. So a lot of more interest in GaN-on-Silicon. And so what we're doing is we're positioning ourselves at 200-millimeter GaN-on-Silicon, but also we're developing the tool for 300-millimeter GaN-on-Silicon Power. And a lot of Tier 1 power companies that are very interested in GaN-on-Silicon. And so we're working with a number of those leaders and our plan is to put an evaluation system out in 2024 for that. So it takes some time to get all rolling, but we've been pushing the ball for a while as you know.

Yes. No, I think that's something else that's gone on while you tried to push the ball forward is that you've seen at least in the last quarter, a small reset total market on silicon carbide. Are you seeing that in conversations with your customers? Are people reducing capacity? Or is it really just a lift in the radar in terms of we're going to continue to see this market kind of grow?

Our conversations are more of it's a blip on the radar, and their conversations with us are tool that the right tool set for us for the future. And those type of conversations aren't as impacted but current necessity. So we haven't seen people not losing interest because maybe the market is momentarily saturated.

Got it. I want to move on to the gross margins, and this is more. So you've really seen a great increase from '23 from the low to mid-40s. You noted the last earnings call that you will continue to make progress towards to go '25. Do you think there's an opportunity to reach this target model by the end of calendar year '24. I mean you've got a lot of different moving pieces of the business. And again, you're not guiding '24 yet, but a lot of what you've seen this year in terms of headwinds have been external to the business, and those should be rolling off. So tell me what percentages then -- kind of frame for me how much you think you can get just from having those?

Yes. So yes. I mean we're really happy with the fact that we're able to increase our gross margin this year over our initial estimates at the beginning of year as you mentioned, we guided in 41% to 42% gross margin. And this year, we've now updated our guidance, and we believe that will come into the full year 43%, but that's been increasing as the year progress there. Gross margin is an area that we're really focused on and we're constantly got a number of programs in place around gross margins. So what we saw this year is that really internally focused on getting more efficiencies out of our various processes and manufacturing both to reduce the time to build tools, reduce the time on installing tools and things of that nature to take advantage as volumes are going up, we're not increasing our cost there. So that's been favorable for us. I think the other thing is we've seen less of an inflationary factor this year than we thought at the beginning of the year and particularly on the material side. So that's been the material price increases have been less on original expectation. It's an area that many of us are headwinds over the last couple of years was in the area of freight logistics costs that just increased so dramatically. We've seen that pull back of this year. So all this focus and we're able to gain some improvement this year. As we look into next year, same areas of focus. It is a focus of us to continue to make progress towards this 45% gross margin target that we have as we bring volumes up because the other area and that we saw in the last quarter in particular, where we saw a nice bump up in the margin, we did have a pretty sizable revenue increase in Q3, and we saw the impact of volumes there. So if we can get the volumes focus on the things that we're focusing on. We see the opportunity to continue to make progress towards that 45% gross margin goal.

Very helpful. I want to -- we have about a minute left here. I want to open it up to the audience in case anyone had any questions. All right. I guess I'll conclude with just as you look into '24, traditionally, throughout the year and how the year will shape up. But within the semi business, you guys seem excited about NSA. You seem excited about ion beam. Is there anything that you would want to voice the investors you don't think it's appreciated enough about what you think will happen with your business into the next year?

I think we've been excited about the last couple of years. We've been able to grow our semi business quicker than WFE, right? And obviously, as Tom mentioned at the beginning here, WFE was really challenging with this year. So our focus is continue to try to outperform WFE by opening up these new market opportunities for us. So we're excited about our annealing product line. We're excited about penetrating or DRAM customers and memory customers as we move forward, and we're going to continue to try harder growing our semi business quicker than WFE.

very helpful. Thank you, both, for being here. Thank you. Have a great rest of the week, and thanks once again.

All right. Thank you, Tom.

Thank you. Appreciate it.