Good Interview with Veeco CEO
BusinessWeek Online
STREET WISE -- "One or Two Quarters From a Bottom"
STREET WISE
Interviewed by Amey Stone
Veeco Instruments (NasdaqNM:VECO) usually gets lumped in with semiconductor equipment stocks. But the truth is that only about 15% of current sales go to semiconductor companies while Veeco does the bulk of its business with the data-storage and fiber-optic industries. Selling into these three different end markets gives Veeco some extra stability in tough times -- and it also provides Chairman and Chief Executive Officer Ed Braun with some insight into just where we are in the downturn in each of those industries.
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Also enhancing his sense of perspective is his 30-plus years in the industry. Braun, 60, has been chairman of Veeco since he led a management buyout in 1990. The company went public in 1994 and, since then, sales have grown by an average of 25% a year while earnings have seen an average annual increase of 29%. Due to weak demand in its end markets, the company recently lowered its guidance for 2001 and 2002, but it still projects 2001 revenues of about $500 million and earnings per share of between $1.80 and $1.95. BusinessWeek Online Associate Editor Amey Stone spoke with Braun recently about the semiconductor industry and the other technology markets he serves. Here are edited excerpts of that conversation:
Q: Veeco is usually lumped in with semiconductor equipment makers. But that's not quite right, is it?
A: Wall Street views us in the semiconductor camp, along with about 75 other public companies. But we actually have a broader, more diverse group of customers. Instead of using our technology just for making chips, we've extended it to data storage and fiber-optic telecom applications. Often those industries seem to be out of sync with each other. It has really helped our investors that we're in diverse markets.
Q: There's a lot of controversy now about the semiconductor market. Some analysts think sales are bottoming and it would be smart to buy now to get in on what should be a rapid recovery. Others say it's too soon to tell. What is your outlook?
A: The semiconductor market had a robust 1999 and 2000. Now it's in consolidation mode. I think it's going to decline through 2001 since we are only two to three quarters into a typical four- to six-quarter cycle.
Q: That sounds pretty bad. Is this the worst downturn you've seen?
A: I've been doing this since the early '70s and every one is the worst. If you look at the book-to-bill ratio, this downturn is a little more severe than previous ones, but it's remarkably similar. The April number, 0.4, is a little lower than previous bottoms, but that to me sort of confirms that we're one or two quarters away from a bottom in orders. The good news now is that we're near the bottom of the order-book problem.
Q: Could you explain a bit -- in layman's terms -- about your products?
A: We make tools for creating and measuring what are called nanostructures. About $300 million of our sales this year is in what we call ``process'' equipment, which deposits and etches materials on an atomic scale. These tools are used to create patterns on silicon for chips, on thin films for the magnetic heads of disk drives, and on glass for components used in optical networks.
The other $200 million in sales this year comes from our ``metrology'' tools. Basically, once you make these components, you need to measure and test them to make sure the process worked.
Q: How are your semiconductor sales doing?
A: Surprisingly enough, they're holding up very well. We have a product that is in demand. We make an atomic-force microscope that's the most advanced one out there, and its sales are increasing. We have a sizable backlog. Although companies in this environment are constantly examining their ability to cancel orders, we haven't had much of that on the semiconductor side.
Q: How about your sales to the fiber-optic industry?
A: There we've had more volatility. While sales are still growing and we have a considerable backlog, our orders are down. That will continue for another two to three quarters. In these markets, it typically takes three or four quarters to hit bottom. We'll have a few more bad booking quarters.
Q: Do you think fiber-optic networks were overbuilt?
A: I don't think so. Like any highway, you have to build it before cars can travel. I don't think the problem is that the networks got built in advance of needs, but rather there was recognition that growth from the demand side -- where the revenues come from -- is going to be more gradual.
Q: What about your third end market, data storage?
A: Data storage had a horrible 1999 and 2000. There our customers are the disk-drive manufacturers, like Seagate, IBM, Fujitsu, among others. Yet as the worldwide demand for storage grows and we have a new wave of communication computing, growth is picking up. I expect 2002 and 2003 to be very strong years. 2001 is improving because of next-generation disk-drive technology that will enable the storage of more data.
Q: Why does it seem like most equipment companies are still holding up pretty well?
A: Because people have a backlog, looking at revenues is deceiving. You really need to look at sequential orders over five or six quarters. For most equipment makers, orders are declining 20% a quarter. They won't go to zero, but could be about 50% off the previous peak. For most companies, the peak was the third or fourth quarter of 2000.
Q: The stocks of many equipment makers have run up since mid-April. Do you think it is early to be a buyer?
A: Investors should do what they do in every downturn. They should pick companies that they think will grow disproportionately in the upturn and start to buy but keep your powder dry.
There are a lot of very good buys, but some of the stocks have responded too rapidly. I don't think the small investor yet understands the absolute decline in the order rate that has to occur at the bottom of the cycle. After these companies work through their order backlog, the low rate of new orders will hit revenues.
I recently looked back at previous cycles to see if the bottom in order rates coincided with the bottom in stock prices. I found that there are some cycles where stocks started to improve in advance of a pick-up in order rates, as they are now. But that was in cases where there was a lot of confidence and good visibility of future sales, which we don't have now. That's why it is a little disturbing. There has been many times where stocks fell one more time so as to coincide with the order bottom. I wouldn't be surprised if there is another bottom.
Q: But you don't sound too worried.
A: Well, I've been here before. One analyst commented to me that the managers of semiconductor equipment companies seem somewhat at peace in the current environment, while managers in the telecom industry are in shock. I think that's true. Six months ago, telecom managers didn't think of themselves as being in a cyclical industry. But they had growth of 300% a year. Anything that grows at that rate is going to be cyclical. On the semiconductor side, most of the senior management has been through many cycles. They expect them and they know how to manage through them.
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