Veeco Instruments Inc. Q3 FY2025 earnings call

• Third quarter revenue of $166 million exceeded prior guidance midpoint of $160 million, non-GAAP operating income $23 million, non-GAAP diluted earnings per share $0.36 above prior guidance midpoint. • Focused on execution, sustained investment in leading-edge semiconductor technologies like AI and high-performance computing. • Entered definitive agreement to combine with Axcelis Technologies, completion subject to stockholder approval and regulatory approvals. • Key roles in semi manufacturing process: production tool of record for laser spike annealing for leading logic and Tier 1 DRAM customers; next-generation nanosecond annealing system being evaluated by advanced logic customers; market leader for IBD EUV systems; next-generation IBD300 system evaluated by DRAM customers; advanced packaging for wet processing and lithography growing from AI-related demand with increased wet processing system orders and order activity in lithography systems. • Portfolio aligned with industry adoption of next-generation high-NA EUV lithography, expanding EUV-related business to EUV pellicles. • Projected SAMs: ~$1.3 billion for annealing by 2029, ~$500 million for ion beam deposition technology in semi by 2029, ~$650 million for advanced packaging by 2029.

Third quarter revenue was $166 million. Semiconductor business reported $118 million (71% of total revenue), down 5% quarter-over-quarter. Compound semiconductor market revenue was $11 million (7% of revenue), down from prior quarter. Data storage revenue was $10 million (6% of revenue). Scientific and other revenue increased to $27 million (16% of revenue), driven by increase in optical deposition systems. Non-GAAP operating income was $23 million, non-GAAP diluted earnings per share was $0.36.

• Q4 revenue expected between $155 million and $175 million. • Q4 gross margin expected to range between 37% and 39%. • OpEx expected to be approximately $48 million. • Net income between $10 million and $19 million, diluted EPS between $0.16 and $0.32 on approximately 62 million shares. • Semiconductor market sees growth in 2025 and 2026 driven by demand in gate-all-around and advanced packaging. • Compound semiconductor market has revenue growth opportunities in 2026 after down year in 2025 with recent orders. • Data storage revenue expected to grow in 2026, principally in second half. • Scientific and other market expected to deliver growth in 2025 supported by ongoing investment in advanced scientific innovation.

• Completion of merger with Axcelis subject to approval of stockholders and various regulatory approvals, which are uncertainties.

Q: My first question is on some of the 300-millimeter GaN order activity that you've seen. Is there all of a sudden new adoption in these end markets that you're referring to? I think in the press release, you talked about auto, industrial and data center. I was just wondering if you might be able to address why GaN is being adopted in these particular segments at this point.

A: Yes. We've had an evaluation with this leading power IDM for over a year, and we've -- it's been successful, and we just received a follow-on multi-chamber order for a pilot line tool, likely for data center applications. And they're going to pilot production in '26, and their plan is to ramp to HBM in '27. 300 millimeters, sorry.

Q: And then, John, if you could just address the gross margin guidance. I think you mentioned increased evaluation activity as to why the gross margins would be down. But maybe just elaborate on that a little bit for me.

A: Sure, Dave. I'd be happy to. So yes, we just ended this quarter with gross margin in Q3 around 42% on the high end of our guided range. But we have guided for Q3 a less favorable -- excuse me, for Q4, a less favorable gross margin in 37% to 39% range, which is lower than we have been experiencing. And we did indicate in our prepared remarks a driver being product mix there. And within the product mix, 2 items to highlight. One, is, as you mentioned here, Dave, we're expecting some eval sign-offs this quarter at favorable pricing. Now for clarity, those are not eval related to our NSA at leading logic or eval for our IBD300 for the low-resistance metal. This is more a recurring sort of LSA type of eval and as well as an eval that we have out for in compound semiconductor for micro LED. So that's the one area. The second area is that we have in our semiconductor business, in our Q4 revenue guide, increased amount of business in advanced packaging for -- an application where the gross margins for those tools aren't as high as the company average.

Q: And then just final question from me is you went through the segments in pretty good detail. But I was just wondering if you could elaborate a little bit more on what you would expect the trajectory of your advanced packaging business to be in 2026. I think it doubled this year. I don't imagine it's going to do that again. But what early indications do you have of growth there?

A: Yes. The business has doubled, Dave, and it was not easy, and I have to give kudos to our operations team in the business for ramping -- doubling the business in pretty short order there. We are actually running the business to a road map. And so we're working with, as you might imagine, industry leaders and helping them with their wet processing challenges, whether they're moving to Under Bump Metal etch, trying to solve some problems there, photoresist removal and hybrid bonding. So we feel that we've got a number of projects and programs and demo activity to sustain our position. I think it's a bit early for us to comment on the direction of advanced packaging for '26 specifically, really because the business runs on a shorter backlog and shorter lead time. So that full year visibility, we just don't have it for that segment.

Q: I think you've previously mentioned an uptick in HDD customer utilization. How are the ordering patterns near term? Is there only visible demand right now for the second half of '26?

A: Denis, our lead time, this is a build-to-order business, and our lead times are approaching a year, maybe a little bit less, but in that range. And so our first orders we received in Q3 for ion beam and wet processing equipment, and we're negotiating orders in the fourth quarter. So just based on the timing of the receipt of the orders kind of dictates that those would be shipped in the second half of next year.

Q: Great. And on the strength in scientific, could you tell us more about that? Was that driven predominantly by Chinese customers this quarter?

A: There was some content for Chinese customers this quarter. Some of the strength in that segment this quarter also were for optical deposition tools or general industrial applications there, and there was China content with that.

Q: And my last one is about NSA, maybe a little bit more high level. So I think you mentioned that it's being tested with logic customers. Do you see NSA adoption as being possible for memory customers as well?

A: Yes, they're actually interested in adopting it, particularly because of our NSA can anneal only very thin layer. So it's very conducive to material modification and 3D stacking, which is happening in memory applications. But yes, the evals are going quite well, moving along with the 2 that we have. We have strong pull from the third logic customers. And as I just said, memory customers are interested. Our plan would be to ship multiple nanosecond annealing tools in 2026 to a mix of logic and memory or memory.

Q: Can you give us a little update on the thin metal films with IBD evals?

A: Yes. Yes, we're making good progress in introducing the fourth deposition technology to front-end semi. It remains an exciting opportunity. Our customers are very much engaged, and we're working together to improve or work on bringing the maturity of the product up for high-volume manufacturing as well as working with our customer to integrate the ion beam deposition technology into their existing production processes. So there's clearly still pull. We have 2 evals with DRAM manufacturers with the IBD tools.

Q: In terms of your backlog, the visibility you have, margins are going to be down. You talked about why. But going out in the future, does the backlog look like the margins will improve when you start shipping out of it in the future?

A: You want to take it, John? John: Yes. So Mark, yes, so we just said that we expect the gross margin in Q4 to be down for mix reasons. As we look out into the future, past Q4, our expectation is that we could see margin improvement in '26 over 2025 gross margin improvement. As was mentioned on the call in our prepared remarks, we're getting good visibility. We're starting to get good visibility for data storage with orders starting to come in, in Q3 and more orders being negotiated in Q4 for shipment in the second half of next year as well as orders that we've been receiving for our new products in -- for our MOCVD, which goes into the compound semiconductor market bucket. And again, on a build-to-order type of production there, and we see that in the second half of next year.

Q: Your data storage orders you received this quarter for IBD and wet processing, is that from one customer or from multiple customers?

A: It was from multiple customers.