Good day, and welcome to the Veeco Instruments Incorporated, Corporate Hosted Q4 and Year-End 2021 Earnings Call. At this time, I would like to turn the conference over to Anthony Bencivenga, Head of Investor Relations. Please go ahead, sir.

Thank you, and good afternoon, everyone. Joining me on the call today are Bill Miller, Veeco's Chief Executive Officer; and John Kiernan, our Chief Financial Officer. Today's earnings release is available on the Veeco website. Please note that we have prepared a slide presentation to accompany today's webcast. We encourage you to follow along with the slides on veeco.com. This call is being recorded by Veeco Instruments and is copyrighted material. It cannot be recorded or rebroadcast without Veeco's expressed permission. Your participation implies consent to our recording. To the extent this call discusses expectations about market conditions, market acceptance and future sales of the Company's products, future disclosures, future earnings expectations or otherwise make 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, including as a result of the COVID-19 pandemic. These factors are discussed in the business description, management's discussion and analysis and Risk Factors sections of the Company's report on Form 10-K and annual report to shareholders and 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 reconciliation to GAAP measures of performance, is available on our website. With that, I will turn the call over to our CEO, Bill Miller.

Thank you, Anthony. Good afternoon, everyone, and thank you for joining the call. I hope you and your families are well. I'm excited to talk to you today about the progress we made in Q4 and over the course of 2021. I'd like to start by thanking the Veeco United team for outstanding execution through the ongoing pandemic and dynamic supply chain environment. To begin today, I'd like to share some exciting news. We recently won a laser annealing application at a new leading edge logic customer. This is a key milestone for us as we execute our growth strategy. More on that in a few minutes. But first, I'll take you through our 2021 and fourth quarter highlights. John will provide a financial update and guidance, and then I'll discuss our markets and technologies before taking your questions. Reflecting on the year, I'm proud of what our Veeco United team has accomplished. I think of 2021 as an inflection point at Veeco, where we completed our transformation, and we're now squarely executing our growth strategy. We continued our focus on innovation with R&D projects supporting laser annealing, ion beam deposition for semiconductor applications, and MOCVD for power electronics and photonics applications. We now have a more robust evaluation program in place with systems installed and performing well at many customer sites. We made great progress on our capacity expansion and shipped first systems from the new San Jose facility, and we enhanced both our service capability and our service offerings, focusing on our customers' needs for system uptime and spare parts availability. Results of our growth strategy were reflected in our P&L with significant revenue growth in 2021 and profitability growing faster than revenue. We had a record year in our semiconductor market, and we had a record year…

Thanks, Bill, and good afternoon, everyone. Today, I will be discussing non-GAAP financial data and would encourage you to refer to our reconciliation between GAAP and non-GAAP results, which you can find in our press release or at the end of the quarterly earnings presentation. Looking at full year 2021, revenue came in at $583 million, a 28% increase from 2020. Breaking down by market, our semiconductor revenue was $247 million, which represented 43% of the total and an increase of 49% over the prior year. On top of that growth in 2021, we expect significant growth in 2022 on strength across the board in laser annealing, EUV mask blank and AP lithography. Compound semiconductor revenue was $107 million, flat from 2020 and made up 18% of the total. However, normalizing for about $20 million of one-time commodity LED sales of slow-moving inventory in 2020, the $107 million in 2021 represents underlying growth in the areas where we currently focus. Furthermore, we expect significant growth in the compound semiconductor market in 2022, which is based on our backlog and visibility of MOCVD and other systems selling primarily into photonics applications and secondarily, GaN Power. Data Storage revenue was $169 million, a 37% increase over the prior year and made up 29% of our total revenue as hard disk drive customers continued adding capacity for their magnetic head manufacturing. And scientific and other revenue was $60 million, an increase of 6% from 2020 and made up 10% of total revenue. And looking at full year revenue by region, the United States made up 38% of the total revenue driven by data storage customers. Our Asia Pacific region, excluding China, made up 35%, driven by semiconductor customers. China made up 18%. And finally, EMEA was 9% of total revenue for the year.…

Thanks, John. Turning now to our technologies in the markets we serve in the context of the mega trends computing and artificial intelligence, which is driving faster computing in processors and GPUs for large-scale data center deployments and machine learning. The second megatrend is mobility and the immersive user experience. It includes smartphones and communications infrastructure such as 5G. It also includes gaming, AR, VR and a variety of sensing applications. Transformation of the automotive entity includes EV and autonomous driving is another major driver today requiring semiconductor devices in the form of AI processors, logic, memory and power devices. And finally, the cloud represents a seasonally endless source of demand for more powerful and efficient computing, higher-speed communications and higher density hard disk drive storage. Now looking more specifically at our growth markets. In our semiconductor market, the overall backdrop measured by wafer fab equipment spending is extremely healthy. There are several analysts estimating very strong WFE growth in 2022, driven by node transitions as well as capacity additions for current and trailing nodes. While this backdrop is good news for Veeco, remember that we expect to grow our semiconductor revenue faster than WFE growth. We expect to expand our served available market as our laser annealing technology is adopted for additional logic process steps and by additional logic customers. And we've been engaged with a leading memory customer who is evaluating laser annealing for their DRAM manufacturing process. During the quarter, we experienced broad pull for our laser annealing systems from a variety of customers with multiple multi-tool orders to add capacity for advanced nodes as well as trailing node applications. Our efforts delivering and supporting our differentiated laser annealing evaluation systems have recently paid off. I'm excited to announce that we won production tool of record status…

[Operator Instructions] And we will go first to Rick Schafer of Oppenheimer.

This is Wei Mok on the call for Rick. Congrats on the strong quarter and your recent LSA announcements. So on the press release, you mentioned repeat multi-systems. I was wondering if you can expand on this, like how many systems should we think about per year? And when do you expect to start delivering them?

Yes. Thanks for the question. We're really excited that you mentioned that because our laser annealing business is going to be the largest business for us next this year. And yes, we did announce multiple customers with multisystem orders. And so we're going to see nearly 50% growth in laser annealing in '22 over 2021. We're also very excited that we were named production tool of record from a leading-edge logic customer where we had an email system, and that's a huge milestone for the Company. And in our opinion, kind of shows the kind of breakthrough technology that we have in our laser annealing technology.

Great. As for my follow-up, it's on in regards to MOCVD. So looks like you delivered a MOCVD to a customer. And in the past, this tool has been used for LED, but has been repositioned for a lot of emerging applications. So, I was wondering, if you can -- if you're seeing any specific particular applications that sitting more or faster adoption?

We have two evaluation systems in the field. One is at 8-inch gallium nitride power electronics customer. And we have put a number of tools into the field for revenue, and we're starting to gain some momentum in power electronics. Also, we have an evaluation system, our new Lumina product that is capable of a lot of applications such as red micro LED in this application, and that evaluation is going well. But the Lumina platform is also look very capable beyond red micro LED for applications like edge-emitting lasers, VCSELs, specialty red orange LED applications as well. So, both of those product lines are doing fairly well albeit from fairly low levels in 2021. But we're -- it's certainly going to drive incremental growth for our compound semi market in '22, the MOCVD piece.

We'll go to our next question from Tom O'Malley of Barclays.

I just wanted to ask a follow-up there on the MOCVD business. I thought in the prepared remarks, you kind of went out of your way to mention the Photonics opportunity. For a couple of years now, you've been trying to get some more traction in that market. What's changing now? Is it just new tools that are proving better for customers? Or is that market starting to grow again? Because I know in the past, you've mentioned the industry capacity was really full. It's now starting to loosen up a bit as well.

Tom, I would say our Lumina tool was actually fairly a bit late to the market for VCSEL opportunity. But that being said, it's a very capable tool, and we've now qualified it add a number of applications beyond VCSEL. And a few weeks ago, we announced a multi-tool order for our Lumina product. And that customer is using it for qualifying it for a number of applications. So we definitely -- are definitely seeing some traction with the Lumina as well as the Propel for GaN-on-Silicon.

Helpful. And then my follow-up is one for John on the gross margin side. You've seen a really steady progression throughout this entire year and are guiding to a better gross margin number as well. When you look at your long-term model, you're a little more cautious there. Can you talk about why things wouldn't progress at this higher rate? Can you just walk through the puts and takes of what may rationalize margins throughout the year? Or what may keep them here?

Sure. So we did come in, in 2021 and 42% gross margin within our expectations. We talked throughout 2021 about making investments in our service capabilities and also in supporting evaluation systems in the field. And we are undertaking a number of steps to improve gross margin and probably would have done a little bit better than that in 2021, if not for some of the unexpected supply chain challenges and inflationary factors there. That being said, we continue to forecast for 2022, not really significant or any improvement in these inflationary and higher supply chain costs. But we are forecasting at the midpoint of our guide, an improvement to 43% gross margin as we take advantage of higher volumes and take advantage of some of the actions that we've taken to improve gross margin and make a step towards our longer-term gross margin goal of 45%.

We'll move to our next question from Patrick Ho of Stifel.

Thank you very much and congrats on the really nice quarter and the year. Bill, maybe first off, in terms of the advanced packaging litho business, you're seeing obviously strong activity based on the current environment. Do you believe that you're starting to see some of these next-generation processes like heterogeneous integration and some of the more advanced processes that are from next-generation devices? Or are we still at the early stages of that adoption?

I would say it's -- what you said is true that we are seeing opportunities in heterogeneous integration. That being said, we're also still seeing business in our more traditional spaces like fan-out wafer-level packaging, copper pillars bumping, high bandwidth memory, et cetera. But yes, heterogeneous integration is an opportunity for us. I think we've been able to take advantage and book a fair amount of business and gain some share from a booking standpoint and revenue standpoint in '22, we're seeing more -- these more multi-tool orders where customers are making fleet purchases where tool matching and the like is very critical. And so, I think that our position as the leader in the marketplace is holding up quite well.

Great. That's helpful. And maybe as my follow-up question for John, in terms of the new San Jose facility. You obviously ramping that up. It seems like things are going well there. You're getting products shipped out of there. But given the strong demand environment, is there any potential for incremental CapEx kind of dollars being put into that facility. So, it expanded a little more quickly, given the strong semiconductor demand environment that we're seeing across the board? Or are you comfortable that this current demand outlook can kind of grow into your current capacity?

Yes. That's a really good question, Patrick. So we had actually accelerated our plan in 2021. And we had previously mentioned that we were a little bit ahead of schedule despite a challenging environment in COVID and getting stuff built. So we're really happy and we did accelerate spending into this year. So on an overall basis, we continue to expect the project to cost about the same and about 3/4 of the spending this year, about 25% of the spending next year, and we're going to accelerate starting the move into the building. As you said that we started manufacturing product already. We shipped systems in Q4. And we still expect to be fully transitioned into the new space by the end of Q3 2022. So things are moving along to plan. And as we previously mentioned that when we do get up and fully running in the new facility, it's going to have about double the manufacturing output as our current San Jose facility.

And we'll go to our next question from Mark Miller of Benchmark.

Congrats on another good quarter. You mentioned the two eval tools for compound semi, also mentioned the DRAM eval tool. Anything on the other tools, any more color on the other evals you've got in the field?

We have a number of evals in the field. As you know, we've talked throughout '21 that we're making a C state change going from one or two evals in the field to closer to 10 at any given time. And very much aligned with the Company's strategy of growing in semi and in compound semi, we have a very high concentration tools in the semi space. And within that, we have a high concentration in laser annealing. And that's with existing customers at their next node. Third, logic customer where we recently just said we want PTOR in the future as well as a tool for DRAM manufacturing in laser annealing. These programs are moving on track, and we're really very, very content and excited of where we are at this point in the game. We also have as you just said, two systems in MOCVD, one for 8-inch gallium nitride power electronics and one specifically for red micro LED.

In terms of the nice generation logic ships, are there going to be more opportunities for laser anneal steps?

I believe there are, Mark, and what we're seeing is as the nodes continue to shrink. The requirements on the thermal budget become more and more stringent, which actually plays to the strength of our laser annealing product. So, we're hopeful. We're very much engaged with those customers on solving their thermal budget challenges as they need these advanced chips.

And we'll move to our next question from Dave Duley of Steelhead Securities.

Yes. I was wondering, could you talk a little bit about the quarterly progression of revenue throughout 2022? Is it -- are we just going to see continued kind of growth in quarterly revenue? Or is the back half stronger than the first half? Or how should we think about that?

So yes, we're expecting at the midpoint of our guide around a 13% to 14% increase in revenue year-on-year. And I would say that from a progression standpoint, we would expect the back half of the year to be higher than the front half of the year. We guided Q1 in the $145 million to $165 million range, so $155 million at the midpoint. So we expect slightly higher revenue in the second half of the year based upon our full year current outlook.

Okay. And at the midpoint, you mentioned growth of 13% to 14%. I'm just curious, recently, I think the calibration of WFE market is in the 15% to 20% range. And I realize you put out these targets some time ago, do you think there's upside to your numbers if the WFE market grows, let's say, 17% or 18%, which I think is kind of consensus now?

Yes. So when we just recently put out that guide in that we're reaffirming in that range and for ease of discussion here and say the midpoint is that the 660 million at the midpoint of our guide here. We're looking at roughly a 35% increase in semi business. So we're expecting with these recent wins that Bill talked about in the laser annealing side and strength in the EUV mask blank and lithography that semi will be up about 35%. Now we're also expecting compound semi to be up a like amount in 2022 as well. So, around the 35% increase there, which is driving the overall increase for the Company and is more than offsetting the decrease that we're expecting in the data storage business this year after a number of years of solid growth, and our expectation is that data storage will be down around 35%. So, really strong on the semi and compound semi side. And we entered the year Dave, with an improved backlog position. So we're entering the year with about $440 million of backlog with the semi backlog more than doubling year-over-year and the PAM semi backlog increasing by about 50%. So, pretty confident where we are in the market there and the expectations for our growth rate in 2022.

Thank you for that color. That really helps. Now just final thing for me is I think you just mentioned the hard disk drive business is going to be down 30% or 35% this year. And I guess you said also that it probably grows in 2023. Could you take a guess at which quarter we see the inflection point? Is the inflection point in this calendar year where things stop going down and they start going up? Or when should we see that transition to quarterly growth in the business?

Yes. I would say, Dave, at this point, given our lead times, we feel pretty comfortable with our 2022 guide. And the activity that we're working on now is probably right just to the back half of the '22, but most likely earlier in '23. But certainly, we're seeing increased activity, and that would probably start reading out in early '23.

[Operator Instructions] We will go now to Gus Richard of Northland.

Congratulations and thanks for taking my question. I was hoping you could give us a scorecard on the 10 evals you had set up for last year. How many of those have you won at this point? How many are still open?

Gus, I would say right now, we have seven in the field and three have been signed off. And of those four are in laser annealing in advanced logic and DRAM. Two are in -- and by the way, they're progressing well. We're supporting them and we're now turning some of those evals that are open into business. So that's a positive. In the MOCVD area, we have tool for GaN-on-Silicon power electronics at 8-inch foundry. That tool has been turned over to the customer. They've actually run wafers and have first -- first results are positive, still early -- just turned it over to the eval, but the fact that they were able to get positive results in a very short period of time is certainly a positive step. And the other MOCVD tool we have under evaluation is for red microLED. That's our Lumina product line, and that's progressing well as well. We also have on wet processing tool evaluation underway. And that's really targeted at the RF filter market. And that's been in the field for some time and is progressing as well. So I would say, Gus, that at this time, our evals are progressing better than we originally thought or planned.

Okay. And so of the evals you talked about in the beginning of last year, you've got three down and there's still seven to go.

Right, it's probably worth noting, though, that the one tool that we just announced, we won a third logic step there were PTOR and they still are keeping the evaluation open to -- and we're continuing to work with them on other challenging material challenges in annealing. So it's open, but it's a profitable open.

I would add to that, Gus, so that we've had a few readouts signed off. We expect a few more evals to be signed off in '22. But we also expect this program of refreshing with new technologies and new evals. So I think at any point in time, think about a program around 10 evals, just plus or minus when tools get shipped and signed off. But I think for us to continue to drive growth in semi and compound semi, the eval program will be a very, very important element for us.

Right. And you teed up my next question. I think the one tool that is probably going to go out this quarter is the ion beam depth tool for the semiconductor application and not EUV mask lengths. And I was wondering, is that tool still going to ship in Q1? And do you have other customers lined up for that tool for applications?

Yes, we have a few -- we're actually engaged with as you might guess, all of the leading DRAM and logic customers at this time, we're running a lot of demos. We have a few customers where they're running those down the line, if you will, and processing them as full loop wafers. And we're making progress there. It's maybe a little bit slower because it's such a new and novel deposition technique compared to PVD, CVD or ALD. But the interest and engagement from the customers remains very high.

Got it. And then is that ion beam tool price like in hard disk drive tool? Or is it priced like an EUV mask tool?

I'd say it's probably somewhere in between.

Yes. I think, Gus, depending upon the configuration, how many chambers and configuration and so on and yes. I mean we would -- I would say we would target gross margins for that product and selling price that would allow for gross margins at or above the Company's average gross margin.

Got it. And then in terms of the GaN-on-Silicon, I know you're working with somebody at 8-inch, you work in on, you shipped GaN-on-Silicon at 12. Are you working with anybody at this time on additional tools at 12-inch or any other GaN-on-Silicon for RF anywhere else?

We've recently sold a 300-millimeter tool, and that's for a disruptive approach to microLED, where the customer is taking a 12-inch wafer and putting the blue, the green and the red pixels on one wafer at the same time. And so, they have a number of 200-millimeter tools, and they're now looking -- they've now bought a 300-millimeter tool. I guess I failed to mention a little earlier. We have also sold GaN-on-Silicon tools at 8-inch to a few other customers as well for their 8-inch applications. And it seems that the industry is looking to make a transition from 6-inch to 8-inch per gallon silicon. And that's really where we're kind of targeting that wafer size transition. And we have a number of tools in the field, but it's not a whole lot of follow-on repeat business, if you will. Yes.

Okay. And just for clarification, just I care for some odd reason, are those power RF GaN-on-Silicon.

Both.

And with no other questions in the queue, I will now turn the call back over to the speakers for any closing comments.

Thank you, operator, and thanks for joining the call today. We're excited entering 2022, and I want to thank our customers and shareholders along with the Veeco United team for their continued support as we execute our growth strategy. I do look forward to updating you all at the upcoming conferences and have a great evening.

And that does conclude today's call. Thank you for your participation. You may now disconnect.