Executive Summary / Key Takeaways

• Veeco Instruments is strategically positioned to capitalize on secular growth trends in the semiconductor industry, particularly those driven by Artificial Intelligence (AI) and High-Performance Computing (HPC), through its differentiated process equipment technologies.
• The company's core investment thesis centers on its leadership in critical process steps like laser annealing, ion beam deposition, and advanced packaging wet processing, which are essential for enabling next-generation device architectures such as Gate-All-Around (GAA) transistors, High-Bandwidth Memory (HBM), and EUV lithography.
• Recent performance highlights include record semiconductor revenue in 2024, outperforming Wafer Fab Equipment (WFE) growth for a fourth consecutive year, and strong Q1 2025 results driven by advanced packaging and leading-edge logic/memory shipments.
• Near-term headwinds, notably the impact of recently enacted tariffs causing shipment delays to China and a projected significant decline in Data Storage revenue in 2025, are expected to temper overall growth despite strength in advanced markets.
• The company's evaluation program for new technologies like nanosecond annealing (NSA) and IBD300 represents significant future Served Available Market (SAM) expansion opportunities, with potential follow-on business valued at $30 million to $60 million per application win at scale.

Setting the Scene: Enabling the Future of Semiconductors

Veeco Instruments Inc. is an innovative manufacturer of process equipment that plays a critical, often foundational, role in the fabrication and packaging of advanced electronic devices. Operating within the dynamic and increasingly complex semiconductor industry, Veeco specializes in technologies such as ion beam, laser annealing, lithography, MOCVD, and single wafer wet processing. These capabilities are vital for customers pushing the boundaries of chip performance, power efficiency, and cost reduction.

The company's journey includes a long history of leadership in ion beam deposition technology, which was instrumental in driving aerial density growth in the hard disk drive market for decades. This core expertise has since been successfully leveraged and expanded into the semiconductor space, notably making Veeco a market leader in ion beam deposition for defect-free EUV mask blank production. More recently, Veeco has strategically sharpened its focus and investment on core technologies enabling critical inflections in advanced logic and memory manufacturing, a strategy that has allowed its semiconductor business to consistently outperform broader WFE growth over the past four years.

The industry landscape Veeco operates within is characterized by rapid technological change and significant cyclicality, yet it is underpinned by powerful secular growth trends. Artificial Intelligence, high-performance computing, the expansion of mobile connectivity (like 5G), and the electrification of the automotive industry are driving unprecedented demand for more sophisticated semiconductor devices. This demand, coupled with increasing technological complexity requiring new materials and process steps, is expected to fuel long-term growth in WFE spending, providing a favorable backdrop for equipment providers like Veeco. Government investments globally are also projected to accelerate spending in next-generation technologies.

Technological Differentiation: Veeco's Moat in Advanced Processes

Veeco's competitive position is significantly shaped by its portfolio of differentiated process technologies, which address specific, high-value challenges in advanced semiconductor manufacturing. At the forefront is their leadership in laser annealing, particularly with the Laser Spike Annealing (LSA) system. The LSA platform is qualified as a production tool of record at leading logic customers for their most advanced nodes, including Gate-All-Around (GAA) architectures, and at a Tier 1 DRAM customer for High-Bandwidth Memory (HBM) production. This technology is critical for precise thermal processing required by shrinking geometries and new transistor designs.

Building on this, Veeco's next-generation Nanosecond Annealing (NSA) system represents a key technological advancement. The NSA system operates with a significantly lower thermal budget and shorter dwell time, enabling shallow anneals with surface-level precision. This capability is potentially ideal for emerging applications like backside power delivery and advanced 3D devices, expanding the addressable market for laser annealing. Evaluations of the NSA system at advanced logic customers are progressing, with strong interest from both logic and memory players, indicating potential for initial high-volume manufacturing orders from logic customers as early as late 2025.

In Ion Beam Deposition (IBD), Veeco leverages its historical expertise to maintain market leadership in IBD EUV systems for defect-free mask blanks, a critical component for the industry's transition to EUV and High-NA EUV lithography. Furthermore, the recently launched IBD300 system targets front-end semiconductor applications requiring deposition of low-resistance metals. As device geometries shrink, achieving low resistivity with critical metals like Tungsten and Ruthenium becomes increasingly challenging for traditional deposition technologies. The IBD300 differentiates itself by achieving superior thin film properties, enabling applications like DRAM bitline scaling and new integration schemes at future logic nodes. Evaluations of the IBD300 at leading memory customers are underway, with potential for additional evaluations at logic customers in 2025 or early 2026.

These technological differentiators are central to Veeco's strategy to expand its Served Available Market (SAM). The company projects the annealing SAM to grow from approximately $800 million to around $1.3 billion, driven by increased laser annealing intensity in logic (GAA, backside power) and memory (HBM, 3D). The SAM for front-end semi IBD applications is forecast to grow to approximately $350 million, while the IBD EUV mask blank SAM is expected to exceed $120 million as EUV adoption increases. The evaluation program, with potential follow-on business of $30 million to $60 million per application win at 100,000 wafer starts per month, is a critical mechanism for converting these technological advantages into revenue growth and capturing these SAM expansion opportunities.

Competitive Positioning: Niche Leadership in a Giant's World

Veeco operates within a competitive landscape dominated by much larger, more diversified players like Applied Materials (AMAT), Lam Research (LRCX), ASML Holding (ASML), and KLA Corporation (KLAC). While these companies offer broad portfolios spanning multiple process steps, Veeco has carved out leadership positions in specific, high-value niches. Veeco is the market leader in laser annealing and in ion beam deposition for EUV mask blanks, leveraging deep technological expertise in these areas.

Compared to larger competitors, Veeco's financial profile reflects its more specialized focus. While companies like AMAT and LRCX exhibit higher revenue growth rates (e.g., AMAT's 5-year CAGR ~15%, LRCX's ~13% vs. VECO's ~10% in 2024) and generally higher profitability margins (AMAT's TTM Gross Margin ~47%, LRCX's ~47% vs. VECO's TTM ~41.6%), Veeco's strength lies in the performance and differentiation of its technology within its specific market segments. For instance, the quantifiable benefits of its NSA system for low thermal budget applications or the IBD300's ability to achieve lower resistivity films provide a competitive edge in addressing emerging customer needs that incumbent technologies may struggle with.

Veeco's strategy is not to compete head-to-head across the entire WFE market but to identify and invest in critical process steps where its core technologies can offer superior performance or enable new applications. The company's evaluation program is a key part of this strategy, allowing it to work closely with Tier 1 customers to integrate new technologies and secure production tool of record status. This approach, while potentially leading to customer concentration risk, allows Veeco to focus its R&D investments (which, as a percentage of revenue, are lower than some larger peers but targeted at specific opportunities) on areas with the highest potential return and SAM expansion. The recent Intel (INTC) EPIC supplier award for anneal technology underscores Veeco's validated position as a top supplier in a critical semiconductor process, providing a strong endorsement in the competitive landscape.

Recent Performance and Financial Health

Veeco delivered solid financial results in recent periods, demonstrating the traction of its strategic focus despite market fluctuations. In the first quarter of 2025, the company reported revenue of $167.3 million, exceeding the midpoint of its guidance. While this represented a 4% decrease year-over-year and an 8% sequential decline, the underlying performance of the Semiconductor segment remained strong, growing 3% year-over-year and 10% sequentially to $123.8 million, comprising 74% of total revenue. This growth was primarily driven by increased shipments in Advanced Packaging (wet processing, lithography) and leading-edge laser annealing for GAA and HBM.

Full year 2024 saw Veeco achieve revenue of $717 million, an 8% increase from 2023, led by robust 13% growth in the Semiconductor business, which reached a record $467 million. This performance marked the fourth consecutive year of the Semiconductor business outperforming WFE growth. Non-GAAP operating income for 2024 grew 6% to $116 million.

However, GAAP net income for 2024 included a $28 million impairment charge related to the silicon carbide business, partially offset by a $21 million gain from a change in contingent consideration estimate.

Profitability in Q1 2025 saw a decrease in gross profit year-over-year, primarily attributed to lower sales volume and an unfavorable product mix. Gross margin for the quarter was 41%, compared to 43% in Q1 2024. Operating expenses remained relatively stable year-over-year in Q1 2025, with a decrease in R&D personnel costs offsetting other areas. The effective tax rate in Q1 2025 was 20.3%, significantly higher than the 3.9% in Q1 2024, which benefited from a discrete tax windfall related to share-based compensation.

Veeco maintains a healthy liquidity position. As of March 31, 2025, cash, cash equivalents, restricted cash, and short-term investments totaled $353.5 million, an increase from $344.5 million at the end of 2024. Net cash provided by operating activities was $20 million in Q1 2025. The company's debt structure includes convertible senior notes, with $25 million of 2027 notes and $230 million of 2029 notes outstanding after the settlement of the 2025 notes in January 2025 through the issuance of 1.1 million shares. Veeco also has access to a $225 million revolving credit facility, which was increased in August 2024, with no amounts outstanding as of March 31, 2025. This liquidity provides flexibility for strategic investments and navigating market uncertainties.

Outlook, Guidance, and Market Dynamics

Veeco's outlook for the near term is shaped by a mix of strong underlying demand in advanced markets and specific headwinds. For the second quarter of 2025, the company guided revenue between $135 million and $165 million. This guidance range is wider than usual, primarily reflecting increased risk associated with China customers. The midpoint of the guidance assumes approximately $15 million in shipments to China customers will be delayed due to recently enacted tariffs. Gross margin for Q2 2025 is expected to be between 40% and 42%, including an approximate 100 basis points impact from lower volumes and tariff-related costs.

Looking beyond Q2, management is not providing specific quantitative guidance for the second half of 2025 due to ongoing macro uncertainty and potential changes in global trade policies. However, they anticipate that second half 2025 business activity could be at a similar level to the first half, assuming no new tariff developments.

The qualitative outlook for 2025 highlights significant shifts by market segment. In the Semiconductor market, despite expected headwinds from the mature node business in China (where revenue is anticipated to decline after two strong years as customers digest capacity), Veeco sees opportunity for overall growth. This growth is expected to be driven by robust investment in leading-edge areas tied to AI and HPC, with Gate-All-Around and Advanced Packaging revenue projected to approximately double in 2025 compared to 2024. This includes continued strong demand for wet processing and a recovery in advanced packaging lithography.

Conversely, the Data Storage market is expected to face a significant downturn in 2025. Management forecasts an approximate $60 million to $70 million reduction in revenue as customers, despite improving utilization rates, are not planning new system capacity investments. The Compound Semiconductor market presents potential for revenue growth beginning in late 2025 into 2026, driven by opportunities in GaN Power (particularly 300mm GaN on silicon), solar, and photonics, although the silicon carbide market faces delays due to slower EV adoption. The Scientific segment is also expected to see potential growth in 2025, supported by strength in research areas like quantum computing.

Risks and Challenges

While Veeco is strategically positioned for long-term growth, several risks and challenges could impact its performance. The most prominent near-term risk stems from changes in U.S. and foreign trade policies, particularly the imposition of tariffs. These tariffs are directly causing some customers in China to delay shipments, impacting near-term revenue and introducing uncertainty into forecasting. Tariffs also increase Veeco's costs for imported materials and indirectly through domestic suppliers, negatively affecting gross margins. The current tariff landscape could also favor competitors with foreign manufacturing operations.

Another significant headwind is the expected decline in revenue from the China market in 2025, independent of tariff impacts, as customers moderate engagement after a period of strong capacity build-out. The projected substantial reduction in Data Storage revenue in 2025 also represents a material challenge to overall top-line performance.

Veeco operates in cyclical industries, and fluctuations in global chip demand and production capacity can lead to volatility in its business. The company also has a concentrated customer base, making it susceptible to changes in spending plans by a few key customers. Long and unpredictable sales cycles, customer order cancellations or modifications, and reliance on a limited number of suppliers (some of whom are sole sources) are inherent operational risks. Furthermore, the success of Veeco's SAM expansion strategy hinges on the successful execution of its R&D and evaluation programs and the eventual adoption of new technologies by Tier 1 customers, which involves inherent technical and timing risks.

Conclusion

Veeco Instruments is navigating a complex market environment, balancing significant near-term headwinds with compelling long-term growth opportunities. The core investment thesis is firmly rooted in Veeco's differentiated process equipment technologies that are increasingly critical for enabling the most advanced semiconductor devices driven by AI and High-Performance Computing. The company's leadership in laser annealing, ion beam deposition, and advanced packaging wet processing positions it favorably to capitalize on key industry inflections like GAA, HBM, EUV, and 3D packaging.

While the expected decline in Data Storage revenue and the uncertainty introduced by tariffs and moderating China demand present challenges for 2025, the projected doubling of revenue from AI-related GAA and Advanced Packaging applications underscores the strength of Veeco's strategic focus. The ongoing evaluation programs for next-generation technologies like NSA and IBD300 represent substantial future SAM expansion potential, providing a clear runway for growth beyond the current cycle. Investors should monitor the progress of these evaluations, the resolution or impact of tariff policies, and the continued ramp of advanced node and packaging technologies as key indicators of Veeco's ability to translate its technological leadership into sustained financial performance and shareholder value.