Veeco Instruments Inc

NASDAQ:VECO

Earnings Call Transcript 2017-Q4

[Operator]

Good day and welcome to today’s Veeco Instruments Fourth Quarter and Full Year 2017 Earnings Call. As a reminder, today's conference is being recorded. And at this time, I would like to turn the floor over to Mr. Sam Maheshwari. Please go ahead.

[Sam Maheshwari, CFO]

Thank you, and welcome to our fourth quarter and full year 2017 financial results conference call. I’m Sam Maheshwari, and presenting with me on the call today is John Peeler, our CEO. In addition, I’m pleased to introduce our new head of Investor Relations, Anthony Bencivenga. Anthony comes from our finance team and has been at Veeco for seven years. John and I are excited to have Anthony on board in this new capacity. I also want to thank Suzanne Schmidt for providing help during this interim period and wish her all the best.

As first order of business, I’ll turn the call over to Anthony to read our Safe Harbor statement.

[Anthony Bencivenga, IR]

Thanks very much, Sam, and thank you, Suzanne. Good afternoon everyone. 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 express permission. Your participation implies consent to our recording.

To the extent that this call discusses expectations about market conditions, market acceptance, and future sales of the company's products, future disclosures, future earnings expectations, or otherwise makes 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. These factors are discussed in the Business Description and Management's Discussion and Analysis 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'll turn the call over to John Peeler for his opening remarks.

[John Peeler, CEO]

Thank you, Anthony. We completed 2017 with strong fourth quarter results. Bookings grew for the third consecutive quarter to reach $179 million, and revenue increased by 9% sequentially to $143 million. Non-GAAP operating income at $10.5 million, represented the strongest quarter of the year, and non-GAAP earnings per share of $0.19, came in above the high end of our guided range. We executed well in a competitive environment, and we're entering 2018 with positive momentum.

Turning to the year as a whole, 2017 was a truly transformational year for Veeco. We completed the acquisition of Ultratech, which is providing us with a more diversified revenue stream, and the integration is proceeding well with greater synergies than we originally expected. We also completed the manufacturing consolidation in our New Jersey facility, generating good annual savings. And lastly, we delivered nearly 41% non-GAAP gross margins and our healthy bookings demonstrate our leading position in the markets we serve, and give us confidence in our ability to accelerate profitable growth.

We’ll go into detail on each of these end markets, but first let me turn the call over to Sam for a review of the financials.

[Sam Maheshwari, CFO]

Thanks, John. Today I will be discussing our non-GAAP financial performance. You can find a detailed reconciliation between GAAP and non-GAAP results in the press release and on our website. First, let me give you some color on our Q4 bookings, and then I'll provide revenue details.

Q4 bookings of $179 million were up 10% sequentially and represented another solid bookings quarter for us. The markets with most growth in bookings were front-end semi and Advanced Packaging. In Advanced Packaging, MEMS and RF Filter markets, we are beginning to see a recovery as orders more than doubled in Q4. We booked multiple Lithography tools, as well as a multi-tool order for our wet etch PSP tools supporting UBM etch and RDL etching.

In lighting, display and compound semi markets, we received multiple large multi-system orders from customers in China. One such order from Focus Lighting was made public in December. In addition, we received several orders for MOCVD and PSP products to support production of ROY LEDS, laser diodes, and VCSELs. In front-end semi, bookings growth was driven by capacity orders for two LSA systems.

Now moving to Q4 revenue details. Q4 revenue distribution showed a high concentration of lighting display, and compound semi at 58% of revenue. The majority of this revenue was shipments to LED customers in Malaysia, Korea, and Taiwan. Blue LED sales in China represented 13% of total Veeco revenues for Q4. For full year 2017, blue LED sales in China were 18% of total Veeco revenue. Revenue from Advanced Packaging, MEMS and RF filter markets, as well as front-end semi, was 9% each due to softness in orders from those businesses in prior quarters.

Scientific and Industrial made up 24% of total revenues, driven by strength in shipments of ion beam tools to the data storage industry and SPECTOR Systems to the optical coatings market. Geographically, China was 18% of revenue, US was 15% and EMEA was 14% of total revenue. Rest of the world increased to 53%, driven by MOCVD sales into Malaysia, Korea and Taiwan.

Backlog at the end of Q4 was up by $35 million from the previous quarter. At $334 million, it gives us a good visibility for the first half of 2018. We expect 2018 to be a year of strong growth for us, with stronger growth in front-end semi and Advanced Packaging, MEMS and RF Filter market. As a result, we expect 2018 to be more diversified than 2017.

Now turning to P&L highlights. Our fourth quarter performance was solid, with revenue near the midpoint of our guidance and non-GAAP gross margin, operating income and EPS all coming in at or above the high end of our guided range. Q4 revenue was $143 million, up 9% sequentially from Q3. On a full year basis, revenue was $485 million. Q4 non-GAAP gross margin was 41.5%, reflecting a favorable product mix and ongoing cost reduction efforts. Full year 2017 non-GAAP gross margin was 40.6%. Q4 non-GAAP OpEx was in line with guidance at $49 million. Q4 non-GAAP taxes were a benefit of $600,000. With the new US tax law, we saw no material impact to 2017 non-GAAP taxes, and we see no significant changes to 2018 taxes, given the amount of NOLs we are carrying. As of year-end, we have approximately $300 million in NOLs. Finally, Q4 non-GAAP EPS was $0.19 based on a diluted share count of 47 million shares.

Now moving to the balance sheet. We ended Q4 with $328 million in cash and short term investments, an increase of $7 million from Q3, driven by cash flow from operations of $19 million. As of year-end, Veeco’s foreign earnings of approximately $140 million, were subject to US repatriation tax. However, with the new law, we were able to utilize foreign tax credits and R&D tax credits to eliminate our US income tax obligation and expect no US cash tax burden in the foreseeable future. As a result, our offshore cash is no longer subject to repatriation tax from the US side. However, it would still be subject to withholding taxes in certain countries.

Inventories were up in the quarter, as we are getting ready for growth in 2018. Long term debt on the balance sheet was recorded at $276 million, representing the carrying value of the $345 million in convertible notes. And finally, we announced the share repurchase program for $100 million on December 11. And in the last few weeks of December, we bought shares for a total amount of $3 million.

Now turning to Q1 guidance. Q1 revenue is expected between $140 million and $165 million. Non-GAAP gross margin is expected between 34% and 36%. Non-GAAP operating expenses are expected between $46 million and $48 million. Non-GAAP operating income is expected between $2 million and $10 million. Non-GAAP tax expense is expected between $1 million and $1.5 million. GAAP loss is expected between $0.50 and $0.32 per diluted share. Non-GAAP EPS is expected between negative $0.04 and positive $0.14 per diluted share.

And now for some additional color beyond Q1. Overall, we are expecting strong growth in 2018 sales over 2017. For gross margin, at this time we see first half gross margin coming in towards the higher end of the previously guided 30% to 35% range. Additionally, we continue to expect second half gross margin to be higher than the first half. With new tax law, we expect non-GAAP annual tax expense to be $4 million, with some quarterly variation around it.

And with that, I’ll turn the call back to John for a business update.

[John Peeler, CEO]

Thanks, Sam. I'd like to begin this portion of the call by reviewing our key end markets, which currently total approximately $1.2 billion in size and encompass the following four areas, Advanced Packaging, MEMS and RF filters, LED lighting, display and compound semi, front-end semi, and Scientific and Industrial. We’re very well positioned to leverage our leading edge technologies, which you can see along the bottom of the slide into all four of these markets. Markets are estimated to grow 50% by 2020, and reach about $1.8 billion. Driving this growth are a multitude of key drivers, including growth of wafer level packaging, artificial intelligence, autonomous vehicles, 3D sensing, micro LEDS, and 5G RF.

Now let me go into more detail on each of our four markets. Businesses serving the Advanced Packaging, MEMS and RF filter market, include the Lithography business we have acquired from Ultratech and our wet etch and clean business we call PSP. We saw a significant pickup in our Advanced Packaging business, driven mainly by demand from top tier OSATs and IDMs for both copper pillar and wafer level packaging applications.

Furthermore, we believe that we will see a strengthening of the fan-out wafer level packaging market as key end have resolved technical issues, coupled with a stronger penetration of these applications into the mid-level smartphone market. As the market leader, we expect to see increasing volumes as capacity is added to address this demand. According to industry reports, wafer level packaging is expected to grow at a compound annual growth rate of 16% from 2017 to 2020.

We're also seeing a demand pickup from MEMS, sensors and RF filter manufacturers, and our PSP business had the strongest revenue quarter in almost two years. The combination of Ultratech Lithography and PSP, has increased critical mass and broadened our product offering, and is providing substantial cross selling synergy opportunities in both directions. For the longer term, growth in these markets is underpinned by demand from a wide range of applications, including mobile devices, automotive, big data and 5G infrastructure.

Now turning to the LED lighting, display and compound semi market. We remain in the leadership position in MOCVD. And according to IHS, our market share for GaN LED was 55% in 2017. Additionally, most regions are reporting fab utilizations of over 85%, and we expect the market to remain robust. During the quarter, we received an order for multiple EPIK 868 MOCVD systems from Focus Lighting. And since we introduced the EPIK 868 last September, we've shipped several large orders to Chinese customers, as our platform enables greater productivity and lower cost of ownership. Feedback from customers has been excellent.

Outside of China and general lighting, we're seeing increasing strength in areas such as photonics and RF devices. Just last month, we announced that OSRAM has placed follow orders for our K475i and Propel MOCVD systems. These systems are designed for high volume production of power electronics, laser diodes, RF semiconductor devices, and LEDS. VCSELs is another area within photonics where we're gaining traction. Our PSP systems, in addition to our MOCVD systems, are used in VCSEL manufacturing. And we're very excited about the opportunity to grow meaningfully as the year unfolds.

Growth drivers for us in this market include smartphones, driven by 3D sensing, LiDAR sensors for autonomous vehicles, and high speed data transmission for requirements in data centers. Beyond VCSELs, we're confident in our ability to capture meaningful market share in areas such as micro LEDS, where performance advantages in power efficiencies are needed in applications such as smartphones, TVs and augmented reality devices. We’re also well positioned in compound semi areas such as 5G driven RF devices and power electronics.

Before I turn to the next market segment, I want to reiterate the announcement we made last Thursday. I'm pleased to report that we have settled the patent litigation with AMEC and SGL Carbon, and that we're back into business as usual in our MOCVD business. we're happy with the successful resolution to our dispute, and look forward to continue serving our customers in China, and competing on the merits of our best in class products, technology and customer service.

With that, let's turn to front-end semi. With regard to front-end semi business, we remain the market leader in LSA and captured approximately 40% market share in 2017. We saw demand for equipment in Taiwan and China, and have strong pull from industry leaders for our LSA tools. Our customers are working to integrate our new (mill) tools into their 7 nanometers and 5 nanometer process nodes. We’re also engaged with a large foundry regarding a third evaluation tool and working with numerous other customers in our facility. We remain very optimistic about the prospects for this business going forward and believe that our unique technology architecture has distinct advantages in meeting our customer process requirements.

Beyond laser anneal, we're also seeing strong interest from the photomask industry for our defect-free, blank wafer deposition tool for EUV mask applications. And we're working very closely with them as EUV becomes adopted for high volume manufacturing. In the STT-MRAM market, we have good traction with our ion beam etch system for patterning of MRAM. And we’re the development tool of record at three leading semi device manufacturers who are currently looking to launch STT-MRAM for embedded memory applications next year. And lastly, we're actively working with customers in their fabs as they evaluate our 3D inspection system. Seeing great interest in our 3D inspection tools for 3D NAND, DRAM and logic customers.

Turning to our scientific and industrial market, 2017 was a strong year, with 9% revenue growth. Our optical coating systems ended the year with good momentum and strong annual bookings. Bookings were broad based and tied to optical components for laser, telecom and R&D applications. It was also a good year in data storage as hard disk drive manufacturers continue to fill specific technology capacity requirements with ion beam systems. Finally, we also launched Lancer, a new R&D ion beam etch system to address next generation’s beams and magnetic sensor applications.

In closing, as we look ahead to 2018, we've got clear objectives. First, we will complete the integration of Ultratech. Adding Ultratech to our business has been instrumental in our goal to diversify our business going forward. Second, we plan to launch a number of exciting new products to address the many growth opportunities where we're focused. Stay tuned for announcements as the year unfold. Third, we plan to deliver revenue growth in each of our four target markets. In addition to a healthy backlog and solid bookings trends, ongoing positive dynamics in each of our end markets should lead to solid annual revenue growth across the board. Fourth, we plan to exit 2018 a more diversified company, as Sam previewed earlier on the call. Our two strongest areas for growth, front-end semi and Advanced Packaging, MEMS and RF filters, should result in a more balanced mix of business. And lastly, we’ll grow earnings faster than revenue. With our continued focus on operational excellence, we can generate significant operational leverage and accelerate earnings in the year ahead.

With that, Sam and I would be happy to take your questions.

[Operator]

[Operator Instructions] All right. First from Needham & Company, we have Edwin Mok.

[Edwin Mok, Needham & Company]

Thanks for taking my question. Good job on the cost side. First question I have, on the 1Q guidance I remember there was some talk about revenue recognition of 868 need to be pushed out to next year. What happened there? Is that factored into your guidance, and then I have two follow ups please.

[Sam Maheshwari, CFO]

Sure, Edwin. This is Sam. Yes, as you would remember, we had shipped a few 868 tools in Q3, Q4 timeframe and we are expecting them to be installed and provide the demo capability and then recognize revenues, so we are planning to revenue those tools in Q1 timeframe, so that is part of the guidance here.

[Edwin Mok, Needham & Company]

Okay, great that's helpful. And then second question I have is on the Advanced Packaging, MEMS and RF market. It looks like things are starting to pick up as you guys suggest. I want to understand, is it the near term shrink is more from RF and MEMS and you still would see advanced packaging more back half of ’18, which is I think what you guys said before or is advanced packaging also starting to pick up and how do you see the linearity of that business throughout this year?

[John Peeler, CEO]

So Edwin, we saw both areas pick up, the Advanced Packaging grew substantially, not back to prior peak levels or anything, but we did have substantial growth. And the MEMS and RF area also grew. So I think both sides grew and both of our major businesses in these areas grew in bookings.

[Operator]

And Edwin, did you have anything further?

[Edwin Mok, Needham & Company]

Hey. Sorry about that. There’s something wrong with my phone. So first half gross margin you said is going to be at the high end of the guidance range. Is that mostly due to mix or are you guys doing more work in terms of the margin front? And obviously, with the sentiment, there's - I think there's still ongoing concern about price competition in MOCVD. Do you see that potentially derail your margin outlook?

[Sam Maheshwari, CFO]

Sure, Edwin. I’ll take that question. So in terms of the gross margin coming in towards the higher end of our previously guided range, you would remember we had guided 30% to 35%, and now it's coming in for the first half around 34%, 35% range, closer to 35%. It is driven by a couple of factors. I think one of the first one is we have a little bit better mix. Our other businesses are a little bit stronger than what we previously expected, particularly like John talked about, Advanced Packaging, MEMS, RF and also front-end semi. So some of these other businesses are providing us a little bit better mix.

And then we also completed our manufacturing consolidation related efforts in New Jersey. So that are providing us some good leverage on the cost side. So both of those things are actually combining together to enable us to guide a little bit towards the higher end. And in terms of the overall mix as you look at the entire year, Edwin, what's happening here is that in the first half, we have a little bit higher proportion on mix of low margin China business, which is what is bringing the gross margin down towards say mid 30s. But I expect them to kind of pick up from these numbers in Q3 and then Q4. So overall, we continue to target exiting the year with 40% gross margin or more, so that remains our target and I expect mix to be much more favorable towards gross margin in the second half. So that's how we see the year shaping up as of now. Hopefully that answers your question.

[Edwin Mok, Needham & Company]

Great. That’s all I have. Thank you.

[Operator]

Moving on, we have Vishal Shah with Deutsche Bank.

[Vishal Shah, Deutsche Bank]

Thanks for taking my question. Sam, just under gross margin, now that the settlement is done, what do you expect your China margins to look like? Should we still look into the low 30s or high 20% margin that you are seeing currently or do you see some improvement there?

[Sam Maheshwari, CFO]

Sure. So I think from a gross margin perspective, we do not really disclose gross margin by any region or any specific product line or any specific customer or a group of customers. I would say that the China business for MOCVD would continue to remain below corporate average in terms of our overall gross margin. Pricing, I would say continues to remain competitive. But I think we're going to kind of balance the price and performance curve of that equation going forward. So that’s how we are managing the business. I think our target remains 40% or higher. And in that mix for corporate average, there are some businesses higher than that and some businesses lower than that. And as you are suggesting, some business, if it is extremely low margin, then we may just have to make a different decision on that.

[Vishal Shah, Deutsche Bank]

Okay, that's great. Thank you. And then what - can you just talk about what the settlement does? So can you assume your competitor basically start shipping their systems to the customer the way that they were doing before? And where do you think the market shakes out in terms of just overall market share dynamics between the two of you?

[John Peeler, CEO]

So, we first of all agreed not to disclose the settlement terms. So I’ll have to be cautious around that. SGL will be able to provide wafer carriers to the market for both Veeco and AMEC. We will compete with our technology and our service and our products. If you remember, we launched a new product for the market, specifically for the China market last year. We’ve been winning orders, and we think we can compete and have a healthy business there and win in the marketplace. Clearly we're not going to go back to where we were where we were the only player in town. There’s going to be a two company competitive in the market and we'll battle it out. Our approach historically has been to innovate and work to deliver better products that have a better cost of ownership, and ultimately lower our customer's cost. So I think it's more back to a normal state.

[Vishal Shah, Deutsche Bank]

That's great. One last question. I know you mentioned in the past that this competitive risk is only mostly focused on China. Are you still seeing most of the other markets outside of China being really just your strong product offering, or do you think that some of the competitive risk is also spreading into other regions as well?

[John Peeler, CEO]

We haven't seen any traction in any other region. So we continue to work there and do a great job for our customers.

[Vishal Shah, Deutsche Bank]

Thank you, John. Thank you, Sam.

[Operator]

Moving on. From Stifel Nicolaus, we have Patrick Ho.

[Patrick Ho, Stifel Nicolaus]

Thank you very much. John, can you give a little more color on your outlook for the overall MOCVD environment? You talked about the fab utilization rate at 85% and higher. Is that only for the top tier guys? Or do you see those utilization rates, I guess more broadly among the different tiers? And do you see a sustainable - which will help drive more MOCVD demand as 2018 progresses?

[John Peeler, CEO]

So the utilization rates are in the upper 80s in China and they're in the upper 70s for the tier two in China, which is quite high. Taiwan's in the 80s. Korea might be low 80s or a little lower. But overall, these are high rates. Everybody is running their equipment kind of at pretty much full capacity. Clearly their tools being added, but we expect a solid year in the marketplace this year. I think we had some 400 plus reactors in 2017. We think the market will grow over that number, maybe even significantly over that number in 2018. So we're looking for a solid growth year here in the market and for Veeco. And we're also looking at the emerging technologies which have a lot of promise, whether it's VCSELs or photonics, red, orange, yellow, laser diodes, 5G RF. There are more and more applications that are starting to come out that I think we think gives the market good growth prospects over the longer term.

[Patrick Ho, Stifel Nicolaus]

Great. That’s helpful. And my follow up question in terms of some of the Advanced Packaging and the MEMS and RF growth you talk about in your prepared remarks, you did kind of briefly mention some of the cross synergy opportunities with PSP. Was that the key driver to the growth in the December quarter? Or was that still more the market starting to turn around and we haven't really yet seen I guess some of those cross synergy opportunities you talk about in the past?

[John Peeler, CEO]

Sure. I would say it’s more the markets. The cross selling potential has become very clear to us. And if we think back, Ultratech had a stronger position in Advanced Packaging and a stronger position in OSATs and in Taiwan. Whereas Veeco had a considerably stronger position in the MEMS and RF area. So we're seeing opportunities to help get the Ultratech Lithography tools in in MEMS and RF applications, and those will pan out this year, we believe. And similarly, Ultratech sales people have helped our PSP penetrate new accounts in Taiwan in OSATs and in other places. But those, they take a while. They - you can start working on the deals, but most of the real growth in bookings in Q4 was really from market improvements and that sort of thing. So - but there's some of both. I think it's great to see that the synergies on the selling side are going to be bigger than we anticipated.

[Patrick Ho, Stifel Nicolaus]

Great thank you very much.

[Operator]

We'll move on to Daniel Baksht with KeyBanc Capital Markets.

[Daniel Baksht, KeyBanc Capital Markets]

Yes, thanks. Question on the MOCVD business. Have you guys received additional EPIK 868 orders in China other than Focus Lighting? And if not, is that part of the reason why you think second half margins are looking better than first half? And then separately, separate question, really demo see the business. Are the orders outside of China tied more to the EPIK 700 or EPIK 868 at this point?

[John Peeler, CEO]

We have seen additional EPIK orders in China beyond Focus Lighting. And so we're winning at multiple customers. Outside of China, they are tied more to the EPIK 700 than the EPIKs 868. And that's due to the - where - how we design the product to target the needs of the customers and kind of how they want to approach the business.

[Daniel Baksht, KeyBanc Capital Markets]

Okay, that's helpful. And then separately, on slide eight, it shows front-end revenue more than doubling in 2018. Just wanted to kind of understand why I think consensus for some CapEx is showing above mid-single digit growth here. And is that - and secondly, is that kind of - is that based on a pro-forma outlook, including Ultratech?

[John Peeler, CEO]

Yes, and it's really new products in emerging applications. I mean we have the LSA business. We do expect the traditional LSA business to grow. We have had tools out in the market for melt. We would expect to get some revenue from those tools this year, and those are new. There was none before. Moving on, we have the STT-MRAM product, the ion beam etch. We’re expecting a significant uptick in orders and revenue for that product during the year. We had maybe one tool revenue last year. There's a possibility for our business for EUV mask blanks. And that's not really in the plan, but it's possible. And then finally, they're super-fast. The super-fast inspection for product has been doing very well. It’s been gaining momentum at customers and we're seeing a substantial pickup in activity and orders for that product. So these are all products, other than the LSA, where revenue was quite small in the prior year and they're all gaining acceptance and ramping.

[Daniel Baksht, KeyBanc Capital Markets]

Great. That's very helpful. Thanks.

[John Peeler, CEO]

And maybe just to add on to that. This was one of the reasons that Veeco acquired Ultratech was Veeco had some products in the frontend, but really lacks critical mass, had 0some very compelling technologies around ion beam etch, which we've applied to STT-RAM. But now we're seeing new emerging opportunities for that technology. But we have these technologies and really lack critical mass. And by putting Veeco and Ultratech together, it really improved our critical mass on both sides and improved our account coverage across the world. And the similar thing happened in Advanced Packaging, MEMS and RF. Both companies had some weak spots, either geographically or in accounts. And as we brought them together, we created a lot stronger business. So I think the front-end is panning out very nicely.

[Operator]

All right. Moving on. From Benchmark, we have Mark Millar. And Mark, your line is open. Your phone may be on mute. We’re unable to hear you. Right. And hearing no response, we will go ahead and move on. [Operator instructions]. We'll go to David Duley with Steelhead Securities.

[David Duley, Steelhead Securities]

Thanks for taking my question. I was wondering, as you see the old Ultratech business ramp back up to traditional levels of revenue, is there any reason to think the structural profitability of that business has changed from prior to when you bought it?

[Sam Maheshwari, CFO]

Sure. So I would say that the Ultratech business is beginning to recover compared to the last one or two quarters. We had good bookings on the Ultratech business line. I think there is more ramp up on Ultratech business effected or needed to get it back to where it was previously. In terms of the overall profitability of the Ultratech business, we're doing very well in terms of tracking towards achieving the synergies that we have highlighted. So I would like to remind that we had about $15 million in OpEx cost reductions. That is looking good.

We are in the middle of putting up ERP - new ERP systems for them. So that is going on very well. We’re also working on bringing down some costs on the material side with supplier discounts and activities like those. And then the third area John already mentioned, that was through cross selling. So all these three things combined, it is definitely true that we are improving the profitability or profit potential of Ultratech. I think we need to see the bookings or the order momentum pick up some more and then will begin to flow in a lot more robust way. Hopefully that answers your question, David.

[David Duley, Steelhead Securities]

Yes. Thank you. And given I guess the - I think you mentioned your MOCVD market share. Did you say it was 50%? And what was it the previous year? Do you I guess determine that there’s some business in the market that is just too low of margin to address?

[John Peeler, CEO]

Yes. I think we had mentioned that IHS had - the blue GaN market share was 55%. And previously it was probably 75 or so. But remember, previously we were coming off a period where Veeco was the kind of remaining supplier in the market after Extron bailed out and that sort of thing. So we've kind of gone through a transition there. There is business that's too low margin for us to take and we're passing on that and focusing on business where our products really have strength and add value, and the customer value is what we bring to the table. We’re not out there to win every deal at every cost. It’s just not worth it.

[David Duley, Steelhead Securities]

Good. And as far as the outlook in fan-out and I guess Advanced Packaging and lithography business, I think there was a bit of a pause in that market last calendar year. And I think it’s generally expected there should be strong growth this calendar year and next year. I'm kind of wondering, from you guys’ perspective, if you could just give us a little bit more flavor on, do you see the spending broadening out from just the one big customer that’s been there the last couple years? And if so, how many customers do you think will ramp actual production volumes in fan-out in calendar ’18?

[John Peeler, CEO]

We do see the business ramping out. I think we took a pause. We had some - there were some companies that were planning to use fan-out and kind of moved to Flip Chip for a while, and moved away from it. But longer term, there is a need or fan-out wafer level packaging and variants of that to meet the performance characteristics that people want to meet in smartphones and other new emerging devices. So we see this market moving to other customers. We see other customers working on it or buying some tools. And we think that will make a more healthy market that's not quite so lumpy as what is here now. We’re looking at a 16% CAGR on wafer level packaging for the next number of years, and that will require extra capacity to meet that. So I think this will be a better market.

[David Duley, Steelhead Securities]

So any sort of guesses to how many customers might actually put production capacity in place next year from what you can see?

[John Peeler, CEO]

I don't have a number, but it's more than a handful and we’ll do something with it. And there are some large customers really working hard on new approaches.

[Sam Maheshwari, CFO]

Yes. David, we are working with all the key OSAT providers. Of course we have very good relationships with them. So there are a number of them. And then also the large handset makers, not just one handset maker. And of course we will work in the supply chain. So all potential is definitely there and we work with those customers. These different customers are at different stages. Hard to say exactly how many will come in within 2018, but we are obviously working with many of them.

[David Duley, Steelhead Securities]

Excellent. Thank you.

[Operator]

[Operator instructions]. Next we'll move back to Mark Miller with Benchmark.

[Mark Miller, Benchmark Company]

Just had a question. Have you - hi. Just had a question about the VCSEL opportunity. Have you sold reactors to VCSEL manufacturers or are they in tester? What’s your status with that?

[John Peeler, CEO]

We have sold reactors to VCSEL manufacturers. And beyond that, we've also sold PSP products. So we’re selling two different product lines into VCSEL manufacturers and I think that's proven to work well for us. On the PSP business, one of the interesting things is almost wherever we sell a MOCVD system, that customer is - likely has a need for our PSP products. They may not be buying them from us now, but we’ve penetrated more and more. So those products actually go well together, not necessarily one for one, but they're a good combination.

[Operator instructions]. Next we'll move back to Mark Miller with Benchmark.

[Mark Miller, Benchmark Company]

Can you estimate that in terms of, at least in the foreseeable future, what percent of your MOCVD reactor sales will go to China versus outside of China? Will it be 50-50 or more heavily weighted towards China?

[Sam Maheshwari, CFO]

So Mark, Sam here. Look, the MOCVD market, I guess you are - I assume you are talking regarding the blue GaN or blue LED market. 2017 has been a good year where there has been capacity expansion in China, as well as outside of China, particularly Korea, Taiwan and Malaysia. And in 2018, as John mentioned, utilization levels are good. So expect to see growth in various countries. How much it pivots towards China or a different country is a little bit less clear in terms of timeline. And we would not know until we have the orders. But suffice it to say, we expect China to grow and then rest of the world should grow as well.

[John Peeler, CEO]

Yes. I think outside of the blue GaN, we'll see sales grow faster outside of China, and we’ll grow with those businesses in - outside of China.

[Mark Miller, Benchmark Company]

Can you estimate that in terms of, at least in the foreseeable future, what percent of your Just the final question. You’re optimistic about wafer level fan-out. Now, it's well known that Apple has recently cut back on suppliers for the iPhone 10, and I believe several chips in the iPhone 10 are using wafer level fan-out. But they are expecting these same suppliers maybe for a six month hiatus and then things really pick up in the second half of this year. Any impact you think from Apple's recent sourcing decisions on the wafer level?

[John Peeler, CEO]

No. I pretty that’s much - we’ve had pretty good visibility into where things were going there. So that's not a surprise to us. And our goal has to be serve a broader based area of the Advanced Packaging market and really try to win in more customers. So that's - we're very focused on that.

[Mark Miller, Benchmark Company]

Thank you.

[Operator]

And ladies and gentlemen, that does conclude today's presentation. I'd like to turn the conference back over to John Peeler, CEO for any closing remarks.

[John Peeler, CEO]

Well, thank you for joining us today or tonight, and we will we will look forward to seeing you in the field and on the next call. Thanks.

[Sam Maheshwari, CFO]

Thank you.

[Operator]

Once again, ladies gentlemen, that does include today's earnings call. We appreciate you joining us and you may now disconnect.