Veeco Instruments Inc. Stock

Greetings, and welcome to the Veeco Second Quarter 2026 Earnings Call. [Operator Instructions] It is now my pleasure to introduce your host, Alex Delacroix, Head of Investor Relations. Thank you. You may begin.

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. The earnings release and slide presentation to accompany today's webcast is available on the Veeco website. To the extent that this call discusses expectations for future revenues, future earnings, the timing and expected benefits of the proposed transaction with Axcelis, market conditions or otherwise make statements about the future. These forward-looking statements are based on management's current expectations and are subject to the risks and uncertainties that could cause actual results to differ materially from the statements made. These risks are discussed in detail in our Form 10-K, annual report and other SEC filings.

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. Unless otherwise noted, management will address non-GAAP financial results. We encourage you to refer to our reconciliation between GAAP and non-GAAP results, which you can find in our press release and at the end of the earnings presentation.

Please note that we will not be addressing questions related to our pending merger with Axcelis. We urge you to read the joint proxy statement relating to the transaction with Axcelis. With that, I would now like to hand the call over to our CEO, Bill Miller.

Thank you, Alex, and thank you, everyone, for joining us today. We believe the industry is at an important inflection point where AI-driven investments are accelerating demand for enabling semiconductor technologies at an unprecedented pace. Veeco is uniquely positioned at the intersection of the fastest-growing segments of WFE, high-performance computing, advanced packaging and silicon photonics, creating a significant opportunity for accelerated multiyear growth.

Let me review our top 4 key takeaways from the quarter. First, we had strong quarterly performance, exceeding our guidance ranges and Street's expectations. Revenue was $193 million. Non-GAAP operating income was $23 million and non-GAAP diluted EPS was $0.33. Second, order momentum accelerated across all major end markets. During the second quarter, we secured $200 million in advanced packaging orders for wet processing and lithography systems, strengthening our visibility into 2027.

Third, we're focused on executing our growth opportunities through a manufacturing expansion plan to meet customers' requirements. We're making deliberate investments ahead of revenue in the second half of 2026 to meet the demands of 2027. Lastly, Veeco is achieving meaningful commercial validation with our next-generation nanosecond annealing system, hitting major milestones in our evaluation program and securing a follow-on order.

We're excited about the compelling long-term growth runway supported by AI infrastructure and high-performance computing. We remain focused on executing our strategy and delivering sustained value for our shareholders. Before moving on, I'll briefly note that the merger with Axcelis continues to progress as planned with shareholder approval from both companies and all regulatory clearances secured other than China antitrust approval. We continue to target a second half 2026 closing.

Interaction among integration teams remains on schedule and further supports our conviction in the compelling strategic fit and potential long-term value creation of the combination. As we move to the next slide, I'll highlight Veeco's role in our largest market, semiconductor manufacturing and share our served available market opportunity through 2030.

The accelerating investment in AI infrastructure and high-performance computing is driving a fundamental shift in leading-edge enabling technologies. This trend aligns well with Veeco's differentiated portfolio and positions us to benefit from the industry's evolving growth opportunities. I'll begin with advanced packaging, which is rapidly becoming a larger and increasingly important part of our business through our wet processing and lithography portfolio.

The demand remains robust as AI-driven investments accelerate the adoption of heterogeneous integration and increasingly complex 2.5 and 3D architectures. -- building on the strong momentum we experienced in the first quarter, activity among leading customers continues to strengthen and provides us with a unique level of visibility into customer expansion plans. As a result, we have significant backlog for 2027 and our customers' forecasted road maps reinforce our confidence in the long-term growth trajectory of the business. As one example, we are actively engaged with a Tier 1 foundry on a panel processing opportunity, and we're encouraged by the progress.

Looking longer term, we expect advanced packaging to become an increasingly meaningful contributor to Veeco's growth as we gain share in a growing market that we project will approach $1 billion by 2030. To support this growth, we're expanding our manufacturing footprint in-house and with our outsourced partners in Southeast Asia.

In the front-end wafer manufacturing process, we serve both advanced logic and foundry as well as memory customers. In logic and foundry, we have long-standing and trusted customer relationships and remain the production tool of record at all 3 Tier 1 customers for our laser spike annealing system, driving repeat business.

We're also pleased with our progress for our next-generation nanosecond annealing system and recently announced that a Tier 1 customer successfully completed their evaluation and placed a follow-on order for a second system to ship in the second half of 2026. We also announced that the third Tier 1 logic customer received an NSA evaluation tool.

Veeco has now successfully engaged all 3 Tier 1 logic customers with our NSA technology, and we continue working closely with them to support future road maps. Now I'll discuss the memory semiconductor market, which represents a significant long-term growth opportunity as AI-driven compute architecture accelerates demand for DRAM and NAND technologies. These technology transitions are creating new thermal processing and material requirements that align well with Veeco's differentiated annealing capabilities.

The memory industry is at the early stages of adopting laser-based technologies for annealing applications. We continue to make solid progress with leading memory customers, including serving as the production tool of record at a Tier 1 high-bandwidth memory manufacturer that is accelerating their investments in 2026. We're also advancing an LSA evaluation at a second Tier 1 DRAM customer and are excited about the potential for additional follow-on orders in the 2027, '28 time frame.

Customer engagement continues to expand with a third DRAM customer with potential to enter an evaluation agreement over the coming quarters. Furthermore, we're encouraged by strong engagement with several NAND customers who are exploring applications for our LSA and NSA platforms, which are continuing to advance well.

Overall, our annealing platform continues to perform exceptionally well. And in the second quarter, we delivered record revenue across our LSA and NSA product lines. Looking ahead, we project an annealing SAM of approximately $1.3 billion by 2030 as advanced logic and memory devices become increasingly complex and require more precise thermal processing solutions.

Our memory market opportunity continues to advance through our ion beam deposition technology with multiple IBD300 systems under evaluation for advanced DRAM applications, such as bit line metallization. These evaluations continue to progress with high customer engagement. Collectively, these engagements strengthen our position in the memory market and provide additional avenues for future growth.

Lastly, Veeco continues to be a leader in ion beam deposition for EUV mask blanks and is well positioned as the industry advances towards high-NA lithography. We have expanded the use of our ion beam technology for EUV pellicles, which protect defect-free masks and improve productivity as EUV utilization scales.

We continue to win production business at a Tier 1 foundry and engage new customers for EUV pellicles. More broadly, we see an ion beam deposition SAM opportunity of approximately $500 million by 2030, driven by adoption of our IBD300 platform for low-resistance metals and our leadership position in deposition for EUV applications.

On the next slide, I'll discuss our compound semiconductor market and the projected served available market opportunity through 2030. Our outlook remains supported by the secular growth of AI infrastructure and silicon photonics, optical connectivity and power efficiency. We believe these trends are driving a significant inflection in compound semiconductors, where adoption is accelerating across both optical networking and power applications, which continues to create an increasingly attractive opportunity for Veeco.

In silicon photonics, we project a $700 million SAM by 2030 for our role in the manufacturing of indium phosphide lasers. The rapidly evolving landscape of AI data centers is driving demand across our SPECTOR IBD system, WaferStorm and etch for wet processing solutions and Lumina MOCVD platform. We continue to see engagement with these customers as they move toward large-scale deployments. I'll provide greater detail in our role in silicon photonics on the next slide. In the other photonics category, we project $550 million in SAM by 2030. This includes opportunities for red MicroLEDs, low earth orbit satellites and AR/VR applications.

In GaN Power, we project $250 million in SAM by 2030, supported by long-term trends tied to AI data center power efficiency, electrification and high-power density applications. We remain encouraged by our progress with a leading power IDM customer, where our Propel®300 platform continues to advance towards production. Following the previously announced pilot line order, we believe we're well positioned to participate in future capacity expansions.

Veeco is also a critical member in the imec 300-millimeter GaN Power Consortium program to advance power electronics manufacturing alongside other industry leaders.

On the next slide, I'll dive deeper into the role we play in silicon photonics. Within the compound semiconductor market, we continue to benefit from the growing demand tied to AI, particularly through our exposure to silicon photonics and the indium phosphide lasers used for optical connectivity applications. Industry investment remains focused on the hyperscalers need for higher bandwidth and optical connectivity across increasingly large AI data clusters. As bandwidth requirements continue to accelerate, the industry is increasingly focused on overcoming the copper wall, where traditional electrical interconnects become less efficient at supporting higher speed data transmission. At the same time, hyperscalers continue to advance optical networking architectures, including evolution of EML pluggables, silicon photonics pluggables as well as the longer-term solutions of near package and co-packaged optics. Collectively, these trends are driving broader adoption of optical connectivity throughout the AI infrastructure ecosystem. These architectures increasingly rely on indium phosphide laser technologies.

Our portfolio spans multiple steps of the laser manufacturing process, including epitaxy, wet processing and laser facet coating. Given our engagement with our customers, we continue to believe this opportunity represents at least $2 billion over the coming years. Let me briefly touch on each of our products in the laser manufacturing space.

First, the MOCVD epitaxy steps play a crucial role, and we're continuing to penetrate the market with our Lumina MOCVD indium phosphide platform as leading photonics customers expand capacity. As announced in today's press release, a global leader in optical and photonics technologies has selected our Lumina+ MOCVD System, to fabricate indium phosphide lasers in the datacom industry. This system offers the largest batch size in the MOCVD industry, best-in-class throughput and lowest cost per wafer. Lumina+ also has the ability to deposit high-quality epitaxial layers on indium phosphide wafers of any size, bringing much needed scale to the optical transceiver industry.

Additionally, we're a market leader with our WaferEtch and WaferStorm wet processing technologies for advanced etching and surface preparation. Lastly, we're a market leader with our SPECTOR ion beam deposition tool for the critical laser facet coating step. From ongoing customer engagements, we believe our IBD technology remains differentiated from traditional approaches as the industry transitions to higher powered lasers, which demand stricter film specifications.

In order to capture this opportunity in silicon photonics, we're executing our product road maps to meet our customers' needs and are spending ahead of revenue. With that, I'll turn the call over to John to review the financial results.

Thank you, Bill. Revenue came in at $193 million, above the midpoint of our guidance in previous quarter. For the second quarter, our semiconductor revenue was $131 million, an increase of 20% from the prior quarter and comprising 68% of revenue. It was largely driven by laser annealing systems to leading edge foundry logic and memory customers and wet processing systems for advanced packaging.

For full year 2026, we expect semiconductor revenue to grow by more than 10% compared to the prior full year. This performance is driven primarily by additional sales to leading memory, foundry logic and EUV customers serving AI and high-performance computing applications. In 2027, building on this momentum, we expect revenue growth to meaningfully accelerate, particularly in advanced packaging.

Compound semiconductor revenue for the second quarter totaled $21 million, a 9% increase from the prior quarter, totaling 11% of revenue. For full year 2026, we expect compound semiconductor revenue to approximately double versus full year 2025.

Growth is primarily driven by our Lumina® MOCVD and SPECTOR IBD systems for silicon photonics. Looking ahead in 2027, we expect revenue growth to accelerate driven by backlog for these tools.

Turning to data storage. Revenue for the second quarter was $22 million, a 117% increase from the prior quarter, representing 11% of revenue. We expect revenue to double year-over-year in 2026. Demand remains robust, supported by customer investments in next-generation storage technologies and capacity expansion initiatives.

We are booked well into 2027 and continue to engage closely with customers on future technology inflections, particularly HAMR-based production road maps. The combination of strong backlog, favorable industry dynamics and deep customer collaboration provides us with confidence in growth in this market as we move into 2027. Lastly, scientific and other quarterly revenue remained flat at $20 million, comprising 10% of revenue.

Turning to quarterly revenue by region. Revenue from the U.S. accounted for 31% of revenue, an increase from the prior quarter, primarily from advanced semiconductor customers. The Asia Pacific region, excluding China, was 36%, a decrease from the previous quarter. Our China portion was 25% of revenue, an increase from the prior quarter. EMEA and the rest of the world accounted for 8% of revenue.

Turning to the second quarter non-GAAP operating results. We had strong performance with our bottom line exceeding our previously provided guidance ranges and Street expectations. Second quarter gross margin came in at 39.5% and operating expenses totaled $53.3 million. Income tax expense was approximately $3 million, resulting in an effective tax rate of approximately 12%. Net income was approximately $22 million and diluted EPS was $0.33 on 67 million shares.

Now moving to the balance sheet and cash flow highlights. We ended the quarter with cash and short-term investments of $429 million, an increase of $46 million. From a working capital perspective, our accounts receivable decreased by $3 million to $148 million. Inventory increased by $10 million to $292 million and accounts payable decreased by $3 million to $57 million. Customer deposits increased by $45 million to $114 million. Cash flow from operations totaled $51 million and CapEx totaled $4 million during the quarter.

Next, I'll turn to our third quarter and full year 2026 non-GAAP outlook. Third quarter revenue is expected to be between $200 million and $220 million. Gross margin is expected to be between 41% and 42%. We expect OpEx between $57 million and $58 million, net income between $23 million and $33 million and diluted EPS between $0.35 and $0.49 on 67 million shares. As discussed earlier, demand across our key markets remains exceptionally strong with many customers providing forecasts that extend well into the future. This increasing visibility is translating into robust order momentum.

And today, a significant portion of our anticipated 2027 revenue is already represented in backlog. To capitalize on these opportunities, we remain intensely focused on executing our manufacturing ramp and investing ahead of expected revenue. During 2027, we plan to more than double capacity in advanced packaging and silicon photonics. These investments include expanding manufacturing capacity through a combination of internal production and strategic outsourcing partnerships, adding and training personnel and expanding our supply chain to support customer demand. While we view these investments as critical to capturing significant long-term growth opportunity, they will have a near-term impact.

On a full year 2026 basis, we expect approximately $10 million of incremental operating expenses and a gross margin impact of roughly 75 basis points associated with these growth initiatives. Given the strength of our order momentum, improved customer visibility and actions we are taking to support future growth, we are updating our full year 2026 non-GAAP outlook.

We now expect full year revenue to be between $780 million and $810 million. Gross margin is expected to be between 40% and 42%. Operating expenses are expected to range from $215 million to $225 million. We expect non-GAAP diluted earnings per share of $1.36 to $1.61 based on approximately 67 million shares.

Overall, we are entering this next phase of growth from a position of strength. The combination of increasing customer visibility, strong order momentum and expanding opportunities tied to AI infrastructure gives us confidence in our long-term outlook. We believe Veeco is uniquely positioned to capitalize on these opportunities, deliver sustainable profitable growth and create substantial value for shareholders. I would now like to turn the call over to the operator for Q&A.

[Operator Instructions] Given the pending merger with Axcelis, Veeco management will be addressing questions related to the traction. [Operator Instructions] Our first question is from Denis Pyatchanin with Needham & Company, LLC.

So it looks like your 2026 annual revenue guidance was lifted by about $25 million, but the non-GAAP EPS outlook was lowered. And from what looks like gross margin mix and higher OpEx. Could we assume that the gross margin impact is from the $200 million order for the advanced packaging? And in terms of the OpEx increase, can you tell us more about what kind of investments you'll be making there?

Yes, sure, Dennis. So the $200 million order in advanced packaging is principally for delivery in 2027. So that's not having an impact on the gross margins for this year and the gross margin going forward for the rest of this year. So what we did highlight in our prepared remarks here is that we are investing ahead of that increased business that we're expecting in advanced packaging as well as increased business in the silicon photonics that we highlighted those orders earlier in the year.

So we're adding cost and we're adding costs to be able to increase our manufacturing capacity that we highlighted in our prepared remarks is more than doubling the capacity. And that's both by increasing our internal manufacturing capability here on the East Coast, where we manufacture some of those products as well as expanding partnerships with contract manufacturers in Southeast Asia. So the one-time setup costs to get the capacity in place and to bring the contract manufacturers on board, the hiring of additional and training of additional employees to meet those customer demands to build the tools, install the tools and the like there. So that's on the one end.

On the other end, we're also increasing our OpEx. We said it's about a $10 million increase over our planned OpEx in the second half of the year to support those activities and about a 75 basis points impact on the full year gross margin. So that's really what the impact was to bringing down the gross margin percentage for the balance of the year compared to what was previously forecasted and increased our operating expenses compared to what was previously forecasted.

That's really helpful. And then for my second question, with the industry in an up cycle, you have both these optical networking orders shipping, the data storage-related revenue coming in and now the advanced packaging systems as well. Could you maybe give us like a recap or an update on when these will begin shipping, like how the revenue ramp profile will look? And if there were any changes from prior expectations for some of these programs?

Yes, Dennis. I would say most of this is really hitting -- really starting to ramp beginning a little bit in the end of the fourth quarter of '26, but hitting in -- starting in Q1 and then probably getting more up to speed in Q2 of '27. So it's really ramping. The majority of it is in '27.

For both -- for all of those for.

Silicon photonics ramp as well as advanced packaging coming online in that time frame.

Great. And one more, if I may. I think you mentioned that customers are providing outputs well into the future. How far would you say on average, they're giving you visibility right now? And has this visibility increased over the last 3 months?

I would say our visibility has been increasing. We have very strong -- much stronger visibility, I would say, than historically we've had into 2027 at this point, midway through 2026. And customers are actually sharing forecasts out beyond '27, kind of some long-range forecasts that they wouldn't normally be sharing.

At this time, we have no further questions, and I would like to turn the call over to Bill Miller for closing remarks.

Thank you. Veeco delivered another strong quarter, exceeding expectations and continuing to build momentum across the business. We remain well positioned to capitalize on AI investments, which are driving strong customer engagement and increased visibility into 2027. At the same time, we continue to make steady progress toward completing our merger with Axcelis, reinforcing our confidence in the significant potential value creation. We remain focused on our execution, and we're excited about the opportunities ahead. Thank you for our shareholders and our Veeco United team for continued support and commitment. Have a great evening.

This concludes today's teleconference. You may disconnect your lines at this time. Thank you for your participation.

Greetings, and welcome to the Veeco First Quarter 2026 Earnings Call. [Operator Instructions] It is now my pleasure to introduce your host, Alex Delacroix, Head of Investor Relations. Thank you. You may begin.

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. The earnings release and slide presentation to accompany today's webcast is available on the Veeco website.

To the extent that this call discusses expectations for future revenues, future earnings, the timing and expected benefits of the proposed transaction with Axcelis, market conditions or otherwise make statements about the future, these forward-looking statements are based on management's current expectations and are subject to the risks and uncertainties that could cause actual results to differ materially from the statements made.

These risks are discussed in detail in our Form 10-K, annual report and other SEC filings. 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.

Unless otherwise noted, management will address non-GAAP financial results. We encourage you to refer to our reconciliation between GAAP and non-GAAP results, which you can find in our press release and at the end of the earnings presentation. Please note that we will not be addressing questions related to our pending merger with Axcelis. We urge you to read the joint proxy statement relating to the transaction with Axcelis.

With that, I would now like to hand the call over to our CEO, Bill Miller.

Thank you, Alex, and thank you, everyone, for joining us today. Veeco executed well in the first quarter and believe we're strategically positioned to benefit from the evolving semiconductor landscape, driven by artificial intelligence and high-performance computing. Reviewing our first quarter results, revenue was $158 million, non-GAAP operating income was $9 million, and non-GAAP diluted earnings per share was $0.14, all within our guidance ranges.

Now let me take a moment to highlight our top 5 key takeaways for the quarter. First, we're poised to benefit from the significant industry inflection driven by the global build-out of AI infrastructure. Veeco is well positioned across our portfolio with highly differentiated process equipment aligned with high-growth opportunities. Second, order activity that accelerated in the second half of 2025 continued into the first quarter of 2026, and our pipeline of new opportunities continues to expand.

Third, as it pertains to the compound semiconductor market, a stronger-than-expected opportunity has emerged for Veeco to capture multiyear revenue in the production of indium phosphide lasers. This is a result of the broader transition from copper to optics within data centers over the next few years for increased speed and bandwidth to meet the scale-up needs of the AI landscape.

This opportunity for Veeco spans across multiple products, particularly for epitaxy and laser facet coatings, which I will provide more details on later in the call. Fourth, from an operational standpoint, we're expanding our manufacturing footprint and capacity to support increasing customer demand and enable timely deliveries.

Lastly, as a result of accelerated bookings activity and ongoing customer engagements, we've increased visibility with significant orders for delivery well into 2027. Overall, we believe Veeco is well positioned for durable multiyear growth driven by AI infrastructure and high-performance computing, and we remain focused on disciplined execution to deliver long-term value.

Before I move to the next slide, as a brief reminder, we continue to make progress on our proposed merger with Axcelis. The transaction has been approved by shareholders of both companies, and all regulatory approvals have been received other than antitrust approval in China. We remain engaged with the authorities in China and continue to expect the transaction to close in the second half of 2026. Integration planning is progressing well, and we remain excited about the strategic fit and long-term potential for value creation.

Moving to the next slide, I'll discuss Veeco's critical role in the semiconductor manufacturing landscape, which represents the majority of our revenue. Capital spending is being driven by AI investments and is becoming increasingly concentrated at the leading-edge areas where Veeco is differentiated in technology. In logic and foundry, Veeco has a long-standing and trusted position supporting advanced annealing applications across leading nodes.

Our LSA platform continues to be production tool of record at all 3 Tier 1 logic customers, driving repeat business and strong customer engagement, pushing towards more complex device structures with low cost of ownership. At the same time, our next-generation nanosecond annealing platform is progressing through evaluations at Tier 1 logic customers, addressing critical low thermal budget applications such as contact annealing, materials modification and 3D device integration. These evaluations are advancing well, and we're anticipating an additional evaluation tool shipment to a third Tier 1 logic customer in the coming months.

Expanding our penetration within our memory customers within the semiconductor market remains one of our most important strategic priorities. The transition toward AI-centric architectures, high-bandwidth memory and increasingly complex stack devices is driving new thermal and materials requirements, where we believe Veeco's technologies provide a clear advantage.

During the first quarter, we continue to make solid progress with our top Tier 1 memory customers. In addition to serving as the production tool of record at a leading HBM supplier, we're advancing our LSA evaluation system at a second Tier 1 DRAM manufacturer with the potential for initial pilot line and high-volume manufacturing orders in 2027. We're also extending our memory opportunity through Ion Beam Deposition. Multiple IBD300 systems remain under evaluation at leading DRAM customers with activity extending throughout 2026.

The systems enable low-resistance film deposition for advanced DRAM bit line metallization, providing an additional pathway to expand our served available market. Veeco remains a market leader in Ion Beam Deposition for EUV mask blanks, a critical enabling technology as logic and memory customers expand EUV adoption and prepare for high-NA lithography. We also have broadened our exposure to EUV pellicles, which are increasingly required to protect these critical masks as EUV usage scales.

Advanced Packaging, supported by our wet processing and lithography tools continues to be a significant revenue driver from AI-related demand. As we discussed last year, our Advanced Packaging business more than doubled year-over-year, reflecting strong customer adoption and accelerating capacity investments.

During the first quarter, we secured major volume orders for our wet processing systems from leading OSAT customers, supporting high-volume manufacturing of next-generation AI accelerators built on 2.5D Advanced Packaging architectures. These systems are scheduled to ship throughout the remainder of 2026 and into the first half of 2027, providing strong revenue visibility.

To support this growth, we're continuing to expand our manufacturing footprint and production capacity, positioning the business to meet sustained customer demand as Advanced Packaging plays an increasingly critical role in AI infrastructure.

As we turn to the next slide, we outline our forecast served available market within our semiconductor segment through 2030. This outlook continues to be driven by sustained investment in AI and high-performance computing. In annealing, we project the SAM to be $1.3 billion by 2030 as devices continue to shrink and shallower and more precise anneals are required to improve performance. These trends support long-term opportunities for both LSA and next-generation NSA platforms.

Next, in Ion Beam Deposition, our IBD300 platform for low-resistance metals, together with our leadership position in IBD EUV mask blanks as well as the emerging opportunity in pellicles where we're production tool of record at a leading customer, all represent meaningful market opportunity and total a SAM projection of $500 million by 2030. As devices become more power constrained and EUV adoption broadens, the opportunities for our technologies continue to increase.

Finally, in the back-end semiconductor process, our Advanced Packaging business for our wet processing and lithography tools continues to expand rapidly, and the SAM is projected to reach $1 billion by 2030. We continue to demonstrate our ability to support our customers' high-volume manufacturing ramps driven primarily by AI.

Moving to the next slide. I want to spend time discussing our stronger-than-expected momentum in the compound semiconductor market. We're seeing a clear industry inflection point underscored by NVIDIA's recent investments in optical networking leaders. In silicon photonics, the industry is transitioning from copper interconnects to co-packaged optics as AI data centers require higher speeds, greater bandwidth density and improved power efficiency.

Indium phosphide laser manufacturing is a critical component of this shift and a foundational technology for next-generation AI optical infrastructure. As the industry transitions towards future capacity requirements, we believe this represents a growth opportunity of approximately $2 billion over the next several years. Veeco plays a critical role across multiple steps of the indium phosphide laser manufacturing process, and we're seeing rapidly accelerating order demand across several of our product lines.

Beginning with epitaxy, MOCVD is a critical step, and we're seeing increasing orders for our Lumina MOCVD indium phosphide platform as leading photonics customers expand capacity to support AI-driven data center growth. We also support downstream process steps with our WaferEtch and WaferStorm wet processing technologies for advanced etching and surface preparation.

What I would like to highlight for investors is the laser facet coating and epitaxy opportunities are similar sized and significant for the manufacturing of indium phosphide lasers. Our SPECTOR Ion Beam Deposition system designed for the critical laser facet coating step is essential to the process. Veeco is a market leader in Ion Beam Deposition and is differentiated from traditional approaches such as e-beam evaporation, ion-assisted deposition or PVD.

Compared to other approaches, the SPECTOR Ion Beam Deposition tool delivers low loss optical films with tight control of thickness, uniformity and reflectivity. Precision is required for anti-reflective and highly reflective facet coatings on indium phosphide lasers. We have engagements with industry leaders that will drive the growth of our SPECTOR IBD business in 2027 and beyond.

As announced in today's press release, we received over $250 million in orders from multiple customers for our MOCVD, wet processing and Ion Beam Deposition tools to support the manufacturing of indium phosphide lasers with delivery starting in 2026 and significantly accelerating in 2027. A large portion of these orders is for our SPECTOR IBD system from leading suppliers of next-generation 800-gig and 1.6 terabyte optical transceivers for hyperscale customers.

This significant order activity underscores the long-term value of our Ion Beam Deposition technology leadership and our expanding role in this rapidly growing market. We have long-standing partnerships with our customers spanning more than 2 decades, and we are well positioned across our multiple differentiated products to meet their growing needs in silicon photonics.

Our focus remains on supporting customer production ramps, executing early deployments and expanding our footprint to meet customer demand. With that, I'll flip to the next slide to share our projected served available market within the compound semi space. In silicon photonics, specific to the manufacturing of indium phosphide lasers, we project our SAM to be $700 million in 2030. As we discussed on the previous slide, demand is accelerating across several of our products driven by AI data centers.

Our Lumina MOCVD batch platform, WaferStorm and Etch and our SPECTOR Ion Beam Deposition for the laser facet coatings are gaining significant traction. Other photonics driving SAM growth include red MicroLEDs, solar cells for low earth orbit satellites and AR/VR applications. Additionally, a global optoelectronics solution provider accepted and qualified our Lumina plus MOCVD system for high-volume arsenide phosphide production, including for use in MicroLEDs. We expect these other photonics application SAM to total $550 million by 2030.

In GaN Power, we project our SAM to be $250 million by 2030 as we continue to see strong long-term drivers tied to AI data center power efficiency, electrification and high-power density applications. Importantly, at a leading power IDM customer, we have an evaluation for our Propel 300 system in place, and we received a pilot line order for a multi-chamber system, which we previously announced at the end of 2025. This represents an important validation point as customers move from development to early production.

Looking ahead, as this customer ramps and finalizes long-term capacity plans, there is potential for additional system orders in the second half of 2026 for delivery in 2027. In the next several years, we expect our compound semiconductor served available market opportunity to meaningfully grow as AI, power efficiency and advanced connectivity continue to reshape the industry.

I would now like to hand the call over to John to walk through the financials.

Thank you, Bill. Revenue came in at $158 million, slightly below the midpoint of our guidance and previous quarter. Our semiconductor business reported $109 million, a decline of 1% and comprising 69% of revenue. Revenue in the semiconductor market was largely driven by laser annealing systems for leading foundry, logic and memory customers and wet processing systems for Advanced Packaging.

Compound semiconductor revenue totaled $19 million, a 6% decline from the prior quarter, totaling 12% of revenue. Data storage revenue was $10 million, flat to the prior quarter, representing 6% of revenue. Scientific and other revenue declined 16% to $20 million, comprising 13% of revenue.

Turning to the quarterly revenue by region. Revenue from Asia-Pacific region, excluding China, was 57%, no change from the prior quarter. Sales were driven by leading semiconductor customers in Taiwan for our laser annealing systems and wet processing systems for advanced packaging. The U.S. accounted for 20% of revenue, an increase from the previous quarter, primarily from semiconductor customers. Our China portion was 13% of revenue, a decrease from the previous quarter. EMEA and the rest of the world accounted for 10% of revenue.

Turning to the first quarter non-GAAP results. First quarter gross margin came in at 36% and operating expenses totaled $49 million. Income tax expense was approximately $1 million, resulting in an effective tax rate of approximately 11%. Net income was approximately $9 million and diluted EPS was $0.14 on 62 million shares.

Moving to the balance sheet and cash flow highlights. We ended the quarter with cash and short-term investments of $383 million, a decline of $7 million. From a working capital perspective, our accounts receivable increased by $40 million to $151 million. Inventory increased by $7 million to $282 million and accounts payable increased by $5 million to $60 million. Customer deposits included within contract liabilities on the balance sheet increased $19 million to $69 million. Cash flow from operations totaled $8 million and CapEx totaled $5 million during the quarter.

Next, I'll turn to our second quarter non-GAAP outlook. Second quarter revenue is expected to be between $170 million and $190 million. Gross margin is expected to be between 38% and 40%. We expect OpEx between $52 million and $55 million, net income between $12 million and $21 million and diluted EPS between $0.20 and $0.32 on 64 million shares. Based on our current visibility, we're reiterating our full year 2026 revenue guidance between $740 million and $800 million, with growth accelerating in the second half of the year as well as reiterating our diluted non-GAAP EPS between $1.50 and $1.85.

I'll now provide additional commentary for each of our markets. Beginning with the semiconductor market, in 2026, we expect strong growth from our Tier 1 customers driven by AI and high-performance computing, more than offsetting declines in the mature node China business. Additionally, our advanced packaging wet processing systems are forecasted to contribute to revenue growth as customers increase manufacturing capacity to support AI workloads.

In the compound semiconductor market, we see strong growth in silicon photonics, particularly for indium phosphide laser manufacturing driven by AI data center demand. We are also seeing emerging opportunities for low earth orbit satellites, MicroLEDs, AR/VR applications and GaN Power. We have received significant orders in the first quarter across this market, which is driving meaningful revenue growth into 2027.

In data storage, we secured orders in the second half of 2025 and experienced continued order activity in 2026 for our Ion Beam equipment. We are seeing increase in AI-driven demand for higher capacity HDDs, supporting investments in capacity and new technologies such as HAMR. Customer engagements remain strong with our business fully booked in 2026 and extending into the first half of 2027. As we look ahead, we are seeing continued acceleration across several of our core markets, supported by increased customer engagement, expanding pipelines and strong order visibility. Our focus remains on disciplined execution as we support customer production ramps and deliver against the next phase of growth.

I would now like to turn the call to the operator for Q&A.

[Operator Instructions] As a reminder given the pending merger with Axcelis, the Veeco management will not be addressing questions related to the transaction. [Operator Instructions] Our first question comes from Denis Pyatchanin with Needham & Company.

So maybe we can start with this $250 million order with the orders beginning in 2026. Could you tell us maybe which quarter would you expect this to start Q3 or Q4? And then at what point in 2027 do you think this will kind of hit its revenue quarterly peak?

Denis, I would say we'll start shipping against those $250 million plus of aggregate orders in the third quarter. But I would say probably the most significant ramp will probably start in Q1 '27.

Great. And then for these systems for the Lumina, for the SPECTOR and for the WaferEtch, kind of what are your current lead times? And what do you think your maximum capacity is to meet demand for these systems on an annual basis?

We have plans to increase our SPECTOR IBD capacity about 10x from its kind of base level we're at today and starting to hit that kind of level in early '27. And we're looking at future capacity needs to potentially double that again. And in wet processing, we're looking to add some expansion capacity to our existing facility as well as looking to an outsourced partner contract manufacturer in Southeast Asia for further capacity expansion.

Great. And then my final one is about gross margins. So it looks like we came down a little bit to 36.2% from 37.7%. Is this predominantly due to mix like heavier advanced packaging? Or maybe were there some other variables contributing?

Yes. I think specifically to Q1, one of the factors that contributing is that we had one less system, LSA system to a China customer. We got recently informed by BIS that, that customer would require a license to ship to certain fabs for that customer. So that had about an $8 million impact on the top line for Q1 and also put us outside, as you mentioned, the gross margin guidance range.

Our next question comes from David Duley with Steelhead Securities.

A few other questions on the significant order activity. I was wondering, you kind of addressed it, but it sounds like there are like 3 tools involved in the big order here. And are they equally split? Or could you just kind of talk about the volume of each tool in the $250 million order? And then as far as the ramp-up of this business, is this -- did you take this business from another competitor? And so I'm kind of curious about the competitive dynamics of this. And are you sole sourced? Or are you sharing the business?

Yes, Dave, let me give you some color here because we don't really talk -- haven't really historically talked a lot about the indium phosphide solutions that we have. So if you think about -- there's really 3 pieces that Veeco serves in indium phosphide laser manufacturing. First is the epi step, which I think is pretty well known and discussed. So Veeco and our competitor provide MOCVD equipment to make the business end of the laser, the indium phosphide epitaxy that makes the device.

We also have wet processing, wet etch and wet clean steps as part of the formation of the laser. And then also a part that's probably not as well known by investors is Veeco has an Ion Beam Deposition product called the SPECTOR that deposits the antireflective and highly reflective coatings to create the laser facet coatings in the laser. And as you might guess, having followed the company, Ion Beam Deposition can deposit films much better than PVD or e-beam deposition, et cetera.

And so we can deposit films with much better optical properties, very similar to the fact that we can make better IBD EUV films or better Ion Beam Deposition films for low-resistance metals. So here's another example of kind of ion beam core technology where Veeco sold over 100 tools during the dot-com boom lighting up DWDM fiber and then that business kind of went away for quite a long time. But during that time, Veeco maintained the deep technical relationships with a number of key customers where we are kind of process tool of record in their laser facet coating business.

And so I think it's probably worth noting that when you look at the size of the 3 opportunities in front of us, the epitaxy market and the laser facet coating market opportunities are about the same size. They're pretty significant markets. And I would characterize our laser facet coating opportunity where we have a very strong incumbent position, not everywhere, but in a number of key companies.

Whereas in the epitaxy space, as I think you know, our competitor has a decent, very good incumbent position, but Veeco has, over the past number of years, developed some products to improve our competitiveness. And in that group of $250 million plus of orders, a number -- we did receive a number of MOCVD orders in -- as part of that ramp. So I would say a large portion of that was for the IBD laser facet opportunity, but also includes some very important orders for wet processing because that's a really critical step in the device manufacturing as well as the epitaxy step.

Okay. So the epi step is the one where you've gone head-to-head, I think, with like AIXTRON and...

Correct.

I guess one part of the business here. Would you say you're a second source or a primary source? And I'm sorry to dwell on this, but it mentioned in the press release, I think, multiple customers. Could you just elaborate a little bit more about your positioning?

Yes. So I would say in laser facet coating, we have a very strong incumbent position. I would say in the epitaxy step, we are probably more the second provider there today as a second source. And I would say in the wet processing, we have a strong position there with a number of the leaders there.

Okay. Final question for me, and we'll turn it over to others is, the GaN opportunity, I think you talked about it and you've received an order in the past, I think, from a 300-millimeter GaN customer. How big of a market do you think that, that could be if you're able to penetrate and capture some of the business that I'm assuming all these things are -- all these GaN parts are going into the data center, but maybe I'm wrong, maybe you could just elaborate a little bit about that. And that's it for me.

Yes, Dave, you're right on there. I mean I'd say the adoption of 300-millimeter GaN on silicon is squarely targeted at the AI data centers. I would say we've had, as you know, a tool out with a major IDM for some time. The performance of our tool set is doing quite well. We have a pilot line tool order from the customer, and we're in the process of manufacturing that and would expect to ship that at the end of the year kind of time frame. So yes, it's definitely squarely in the AI data center applications.

Our next question comes from Gus Richard with Northland Capital Markets.

Congratulations on the huge order momentum. To hit the high end of the range for the full year, what are the levers to get there? Is it delivery times?

Yes. So thanks for the question, Gus. I think our opportunity to go to the higher end of the range right now, primarily rest in the semiconductor piece of our business. And I would say in the areas of laser annealing and lithography are probably sort of the drivers there. If I look at the other markets and I look at, like, for example, the data storage market, given our lead times and how we work with our customers on sort of build-to-order, there could be some upside in some service and aftermarket business, but the systems business is pretty much booked out for this year, and we're booking orders into next year.

And in the compound semiconductor market, we're able to get some of this new business into the back half of the year, as Bill mentioned here in answering an earlier question about some tools coming into Q3 and Q4. And we were anticipating that as part of our view for the year already anyway. But the predominant increase in capacity and bringing on and meeting the customers' ship dates principally happen in 2027.

Got it. And sort of the underneath question is the SPECTOR. Does that have a similar 3-quarter lead time as ion beam for HDD?

We'll work to -- on that sort of lead time. We've been in this business for a long period of time. Recent business is a few tools a quarter. And yes, I think the lead times are more in that sort of 9-month lead time there. As we look to ramp up this business here, we'll look to reduce lead and cycle times for that business in order to meet customer shipment requirements. But mainly, we're going to see sort of a step-up in the output for that business starting in Q1 of 2027.

Okay. Got it. Got it. Makes complete sense. And then just in terms of some of the evals that are going on, the Ion Beam bit for the memory market. Do you think you can reach conclusion on those evals in the next quarter or 2? And sort of what are your prospects on getting over the finish line?

Yes. We're -- the feedback from our customers is it's not a matter of if, it's a matter of when. They're impressed with the -- very impressed with the film performance of the IBD, where we're working very closely with them is in areas such as particle performance, automation, reliability. And so they've extended their evals out through the end of 2026, and we're working on a few CIP improvements to the tool to address some of those shortcomings. So I would say it's really -- the customer is really quite excited about the opportunity, but we do have some, I would call it, engineering work left to do to demonstrate the high-volume requirements of front-end semi.

[Operator Instructions] Our next question comes from David Duley with Steelhead Securities.

Could you talk a little bit more about the hard disk drive business? And what -- do you think that, that will -- what sort of second half growth profile should we expect versus the first half? And then you've talked about obviously having the order book is full and manufacturing costs are full for '26. Are you expanding capacity for 2027 at this point? Or it would seem to me like the disk drive guys are going to add a lot of capacity given what they're seeing from the AI data centers, but maybe I'm wrong.

Yes. I would say, Dave, we're looking to double that business in '26 over '25. And I would say the trajectory of it is more second half loaded. I think probably the first system shipment is planned to happen in Q2, none in Q1 and then ramping in Q3 and Q4 just based on lead times. As you know, we kind of do a build-to-order model. We're not a build to forecast model. And that kind of keeps us and the industry healthy, and that does seem to work for everybody.

But what we are seeing, I would characterize year-to-date at this point that both of our major customers are continuing to place orders, not only for front-end equipment at the wafer level, but also the back end, what they call the slider fabs, which clearly means that they're increasing the number of heads that they're producing. So I would guess based on the order activity we're seeing here early in '26 that certainly the first half of 2027 will remain strong. And I would just characterize the commercial activity still remains pretty positive from an order book standpoint. John, I don't know if you'd like to add.

Yes. I think you covered that very well, Bill. I think that really sums up well where we are with 2026 and what visibility we have into 2027 at this time.

And then final one for me is, what would you expect kind of a rough cut of what you expect your semi revenue to grow in '26? And I'm guessing it's probably going to grow higher in '27, but maybe you could elaborate a little bit on some of the puts and takes in growth in both '26 and '27.

Yes. We see mostly sort of positive environment here in 2026 and estimates of a growing WFE environment in '26 and moving into 2027. So pieces of the business attached to AI and high-performance computing expected to grow. And so that's advanced foundry logic with our laser annealing product, high-bandwidth memory for our customer that we've penetrated there and continued strength in Advanced Packaging.

I would say the one headwind for us in the semi business, but is more than offsetting the strength in the pieces of the business I just mentioned is declining business in China for mature node. So we expect that business to have headwind in 2026. We've been foreshadowing this for the last 2 years or so right now that we saw the business falling off in 2025. As a reminder, we have a narrow base of business there in China. It's really highly predominant for our LSA product for 40- and 28-nanometer fabs, and they just don't see that same level of investment in new fabs that we saw a couple of a couple of years ago. So taking all that into consideration, we see sort of our semi business growing this year over last year mid-teens.

I was going to say, since you're taking your Chinese lumps this year, I would guess that your growth rate would probably accelerate next year.

We're looking at a very positive WFE environment, and we have nice attachments to the areas that are expected to drive WFE. So yes, I think as we have this early look at 2027, 2027 looks positive. Bill did sort of mention earlier in the prepared remarks that we are increasing our capacity for Advanced Packaging. We see opportunities for that to continue to grow into 2027. So we're taking -- making some investments to increase capacity there as well.

It's probably also worth mentioning, Dave, that a lot of the WFE estimates that you see include a big -- some pieces of the silicon photonics market. And so you'll see that show up in our compound semi. So when you look at semi alone, really some of the compound semi will probably be categorized as WFE by -- more generally. And so our compound semi business is probably going to grow 50%. So when you take the kind of the mid-teens that John spoke about and the portion that's really significantly growing, we're probably growing much higher than that on a WFE basis.

At this time, we have no further questions. I would now like to turn the call over to Bill Miller for closing remarks.

Thank you. As we look ahead, we believe Veeco is well positioned to meet the evolving needs of our customers as the silicon photonics industry reaches an inflection point driven by AI and high-performance computing. Our technologies across logic, memory, Advanced Packaging, compound semi and data storage are becoming increasingly critical as customers push for greater performance, scale and efficiency.

With strong customer demand, expanding served available markets and disciplined execution, we see meaningful long-term growth and remain focused on delivering sustained value for our shareholders. I'd like to thank our employees for their hard work as well as our customers, partners and shareholders for their continued trust in Veeco. Have a great evening.

Ladies and gentlemen, the conference call of Veeco has now concluded. Thank you for your participation. You may now disconnect your lines.

Greetings, and welcome to the Veeco Fourth Quarter and Full Year 2025 Earnings Call. [Operator Instructions]

It is now my pleasure to introduce your host, Alex Delacroix, Head of Investor Relations. Thank you. You may begin.

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 and slide presentation to accompany today's webcast is available on the Veeco website. To the extent that this call discusses expectations for future revenues, future earnings, the timing and expected benefits of the proposed transaction with Axcelis, market conditions or otherwise make statements about the future. These forward-looking statements are based on management's current expectations and are subject to the risks and uncertainties that could cause actual results to differ materially from the statements made. These risks are discussed in detail in our Form 10-K annual report and other SEC filings. 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.

Unless otherwise noted, management will address non-GAAP financial results. We encourage you to refer to our reconciliation between GAAP and non-GAAP results, which you can find in our press release and at the end of the earnings presentation.

We will not be addressing questions related to our pending merger with Axcelis. Please note that on February 6, 2026, our stockholders voted to approve all proposals related to our pending merger with Axcelis. We urge you to read the joint proxy statement relating to the transactions with Axcelis.

With that, I would now like to hand the call over to our CEO, Bill Miller.

Thank you, Alex, and thank you, everyone, for joining us on our call today. Veeco executed well in 2025 and accomplished important milestones, setting the stage for future value creation. We grew our semiconductor business, experienced rapid expansion in our order activity for compound semiconductor and data storage customers, supporting strong growth in 2026, and continued to invest strategically in next-generation technologies.

Additionally, on October 1, 2025, we announced an all-stock merger agreement with Axcelis Technologies to create a leading semiconductor equipment company.

Our new products are gaining powerful traction, fueled by accelerating demand from AI and high-performance computing. As hyperscalers ramp their next-generation infrastructure, we're seeing clear acceleration in order activity. This momentum drove a meaningful build in backlog at year-end, supporting an increase in revenue for 2026. Later in the call, John will provide additional detail on our backlog.

Revenue for our semiconductor business reached another record in 2025, which was primarily driven by laser annealing and wet processing and ion beam EUV technology. We shipped an LSA evaluation system to our second Tier 1 DRAM customer, showing exciting progress for penetration with our memory customers. A key driver for the semiconductor market came from our advanced packaging business, which we doubled year-over-year. This was driven by wet processing and lithography tool shipments for 3D packaging.

New products for the compound semiconductor market are gaining significant traction and driving market share gains. We received orders for our new Propel 300-millimeter GaN-on-silicon system for GaN power and microLEDs and Lumina plus arsenide phosphide for photonics and solar end markets, which support revenue growth primarily in the second half of 2026.

Additionally, in the data storage market, we see customers expanding capacity, increasing CapEx spend and adopting Heat-Assisted Magnetic Recording, resulting in increased orders in the third and fourth quarter of 2025 for our ion beam and wet processing equipment. This is driving an increase to revenue principally in the second half of 2026.

We continue to invest in strategic opportunities for future growth with our next-generation technologies. We've extended our IBD300 systems evaluations at 2 DRAM memory customers into 2026. Our customers are providing positive feedback with respect to the quality of film performance. We remain excited about the opportunity to introduce ion beam as the fourth deposition technology for the front-end semiconductor space.

Additionally, our customers are evaluating our next-generation nanosecond annealing systems, which are progressing well, and we expect to expand the evaluation program to another customer in 2026.

Let me take a moment to briefly update you on the progress of our proposed merger with Axcelis. We're pleased that shareholders of both companies approved the merger at their respective special meetings held on February 6. In addition, we've secured regulatory approvals in several key jurisdictions and remain actively engaged with the relevant authorities in China as we work toward the final clearance needed to close. Based on our continued progress, we anticipate completing the transaction in the second half of 2026.

Furthermore, our integration work with Axcelis continues to reflect our strategic alignment and confidence in the merger. We believe the combination will increase R&D scale, enable a broader complementary product platform, realize several growth synergies and ultimately drive sustainable returns for all our stakeholders.

Switching gears to financial highlights for the quarter and full year. Our fourth quarter revenue came in at $165 million, and our EPS came in at $0.24, both at the midpoint of guidance. Our semiconductor business accounted for 67% of revenue.

The full year top line was $664 million, and our EPS was $1.33, with our semiconductor business hitting a record year, accounting for 72% of total revenue. This performance demonstrates we're well aligned with ongoing investments in advanced semiconductor technologies and customers' road maps.

Next, I'll review Veeco's critical role in the semiconductor manufacturing space, where the majority of our revenue is generated and we continue to grow year-over-year. Veeco has historically had a strong position with foundry and logic customers for annealing applications, and the foundation has provided a high level of trust and repeat business across advanced nodes. At the same time, expanding our presence into memory is one of the most important strategic priorities. The transition to AI-driven architectures, high-bandwidth memory scaling and 3D structures are driving new thermal processing and material requirements where Veeco has clear technical advantages.

For our LSA tool, we're production tool of record at all 3 Tier 1 logic customers, demonstrating our strong competitive position. Our next-generation NSA system has 2 evaluations at Tier 1 logic customers, and we're planning to ship an evaluation system to the third Tier 1 logic customer in 2026. These evaluations for our customers' low thermal budget applications such as contact annealing, 3D device stacking and material modifications are progressing well. We're expecting sign off of 2 evaluations during 2026 with the potential for pilot line orders to shortly follow.

On the memory side, we continue to make meaningful progress penetrating the space and are expanding our footprint with Tier 1 DRAM manufacturers. In addition to being the production tool of record at a leading HBM DRAM customer, we recently shipped an LSA evaluation system to a second DRAM manufacturer, an important milestone that reflects growing confidence in our laser annealing capabilities for memory applications.

We also had 2 IBD300 systems under evaluation at leading DRAM customers with evaluations extended into 2026. Our IBD300 system enables deposition of low-resistance films that are critical for advanced DRAM structures such as bitline. This provides Veeco with another opportunity to expand our SAM with the next-generation memory nodes.

Further penetrating the memory space represents a significant long-term growth opportunity as DRAM requirements become increasingly complex with the transition to HBM, stacked architectures and low-resistance metallization designs. Our recent wins and evaluation activity represents early but significant steps toward establishing meaningful long-term growth in the DRAM market as this segment accelerates within the industry.

Veeco is also the market leader for IBD EUV systems for the deposition of defect-free mask blanks. Leading logic and memory device makers continue to expand adoption of EUV and future adoption of high-NA EUV lithography, which our IBD technology is a key enabler. We're also expanding our business to include EUV pellicles, which are increasingly being used to protect the mask from particles. We're confident our product road map is well aligned with the industry and our customers' needs.

Lastly, in advanced packaging, we've doubled our business from $75 million in 2024 to $150 million in 2025, driven by AI-related demand. We've won multiple orders for advanced wet processing and lithography systems from leading foundries, and we continue to see strong demand driven by heterogeneous integration and 3D packaging.

Looking ahead, we forecast semiconductor market growth at the leading edge, driven by AI and high-performance computing. We expect our semiconductor served available market to continue to expand, driven by new nodes and AI-related demand, including investment in gate-all-around, high-bandwidth memory and 3D packaging.

In annealing, we project our SAM to be $1.3 billion by 2029 as devices continue to shrink and shallower and more precise anneals are required to improve performance. In 2026, we see our logic, foundry and memory customers all increasing capacity for our annealing tools.

Next, our IBD300 platform for low-resistance metals together with our ion beam deposition systems for EUV mask blanks and pellicles represent a total SAM opportunity projected to reach $500 million by 2029. The need for low-resistance metals deposited in a uniform manner is required for better device performance and to minimize power consumption.

Lastly, in the back-end semiconductor process, our advanced packaging business for our wet processing and lithography tools continues to expand and the SAM is projected to reach $650 million by 2029. Throughout the year, we've demonstrated the ability to respond successfully in meeting our customers' extreme high-volume manufacturing ramp of advanced packaging for AI.

Based on the strong relationships we've developed with Tier 1 foundry and memory customers, we're invited to engage with their R&D teams and becoming a critical partner in their future road maps. We continue to focus the organization on our key growth areas and remain excited about successfully positioning our business to align with industry advancements and meeting our customers' growing needs.

I'll now hand the call over to John to walk through the financials and provide an outlook for 2026.

Thank you, Bill. To begin with revenue for the year, revenue came in at $664 million, declining 7% from the prior year. Our semiconductor business delivered $477 million in revenue, up 2% year-over-year and comprising 72% of revenue. Revenue in the semiconductor market was driven largely by laser annealing, ion beam technology and our advanced packaging wet processing and lithography products.

As disclosed in January, 2 LSA tool shipments to customers in China were under customs review. These matters have since been resolved, and we recognized $15 million of revenue related to these systems in the fourth quarter of 2025.

Compound semiconductor revenue totaled $60 million, a decline from the prior year, representing 9% of revenue.

Data storage revenue totaled $39 million, declining from the prior year and comprising 6% of revenue.

Lastly, scientific and other revenue was $89 million, increasing from the prior year, making up 13% of revenue.

Turning to revenue by region. The Asia Pacific region was 50% of revenue, led by shipments to leading Taiwanese semiconductor customers for multiple vehicle products. Our China portion was 27% of revenue with a decrease from the prior year in laser annealing systems. The U.S. accounted for 15% of revenue. And lastly, EMEA was 8% of revenue. Our order backlog ended the year at $555 million, a significant increase of $145 million from the prior year. This 35% growth in backlog reflects the strong acceleration in orders in the second half of 2025. This positions us well for revenue growth in 2026, principally in the second half. I will provide additional market segment commentary in the guidance section.

Moving to our full year 2025 non-GAAP operating results. Gross margin came in at 41%. Operating expenses totaled $188 million. Operating income was $84 million and net income was $80 million, with tax expense of $10 million, yielding an effective tax rate of 11%. Diluted EPS was $1.33 for the year on approximately 61 million shares.

I'll now provide selected GAAP full year data. Amortization expense was $3 million. Our equity compensation expense was $37 million; depreciation, $17 million; and net interest income was $4 million.

Turning to Q4 revenue by market and geography. Revenue came in at $165 million, flat from the prior quarter and at the midpoint of our guidance. Semiconductor revenue declined slightly, comprising 67% of revenue. In the compound semiconductor market, revenue increased from the prior quarter to $20 million, totaling 12% of revenue. Data storage revenue remained flat at $10 million, comprising 6% of revenue. Similarly, scientific and other revenue remained flat at $24 million, making up 15% of revenue during the quarter.

Looking at revenue by region, the percentage of revenue from Asia Pacific increased to 54% due to an increase in semiconductor sales, mainly in Taiwan. Revenue from China was 23%, U.S. 18% and EMEA was 5%.

Now moving to our quarterly non-GAAP operating results. Gross margin totaled 38% at the midpoint of our guidance. Operating expenses totaled $49 million, also in line with our guidance. Income tax expense was approximately $1 million, resulting in an effective tax rate of 4%. Net income came in at $15 million, and diluted EPS was $0.24 on 62 million shares.

On the next slide, I will discuss our balance sheet and cash flow highlights. We ended the quarter with cash and short-term investments of $390 million, a sequential increase of $21 million. From a working capital perspective, our accounts receivable decreased by $6 million to $111 million. Inventory increased by $12 million to $275 million and accounts payable increased by $12 million to $55 million. Customer deposits included within contract liabilities on the balance sheet increased by $14 million to $50 million. Cash flow from operations increased from the prior quarter to $25 million, bringing our total for the year to $69 million. And CapEx totaled $3 million during the quarter and $16 million for the year.

I would now like to provide a non-GAAP outlook for Q1 and fiscal year 2026. Q1 revenue is forecasted between $150 million and $170 million. We expect gross margin between 37% and 38%, OpEx between $48 million and $50 million, net income between $9 million and $15 million and diluted EPS between $0.14 and $0.24 on 62 million shares.

The momentum of orders secured in the back half of 2025 will contribute to meaningful revenue growth, primarily in the second half of 2026, supporting a strong full year outlook.

Full year 2026 revenue is forecasted between $740 million and $800 million. We expect gross margin between 41% and 43%, OpEx between $205 million and $220 million, net income between $94 million and $115 million and diluted EPS between $1.50 and $1.85 on 63 million shares.

Let me provide commentary for each of our market segments. Beginning with the semiconductor market, we expect strong growth from our Tier 1 customers driven by AI and high-performance computing, more than offsetting declines in mature node China business. We are seeing accelerating demand for our LSA tools at advanced nodes, along with growth in wet processing applications for advanced packaging as customers scale capacity driven by AI and HBM.

In the compound semiconductor market, we see growth in 2026 weighted in the second half. We received several orders in 2025 for our new Propel 300-millimeter GaN-on-silicon system for GaN power and microLED applications as well as orders for our new Lumina plus arsenide phosphide system supporting photonics and solar end markets. These new product wins are driving revenue in the second half of 2026.

We are also seeing continued engagement from customers and are taking orders for deliveries into 2027. In the data storage market, we secured orders in the second half of 2025 for our ion beam and wet processing equipment. As we move into 2026, customers are signaling broader HAMR adoption, increasing CapEx investments and expanding capacity. These trends by our customers are driving momentum for our business as we are fully booked in 2026 and have multiple orders extending into 2027.

Before I hand the call over to the operator for Q&A, I want to reinforce that AI is a critical driver of Veeco's growth in semi, compound-semi and data storage markets, and we have a strong portfolio of enabling technologies that are increasingly critical to serve leading customers.

From a semiconductor market perspective, analysts are projecting the industry to grow to over $1 trillion in the near term with AI accounting for more than half of sales. We are confident that Veeco is well positioned to create long-term value in an increasingly AI-driven semiconductor market.

We are also excited about the pending Axcelis merger, which we feel will enable us to better accelerate our investments in next-generation technologies and offer an even better product portfolio to our customers.

I would now like to turn the call over to the operator to open up for Q&A.

[Operator Instructions] As a reminder, given the pending merger with Axcelis, Veeco management will not be addressing questions related to the merger. [Operator Instructions] And the first question comes from the line of Dave Duley with Steelhead Securities.

I was wondering for the outlook for 2026, if you could give us an idea of what you expect your semi business to grow and your hard disk drive business to grow. Actually, just all 3 segments, to your best of your abilities, would be awesome.

Yes, I'll take that, Dave, and thanks for the question. So yes, so we've given a guide of $740 million to $780 million of revenue for next year.

$800 million.

$800 million, excuse me. Thank you, Bill. $740 million to $800 million next year. So if you pick the midpoint of the guide at $770 million, that's up 16%. And we do expect growth in the semiconductor piece of the business, the compound semiconductor and the data storage piece. The one area of the market that we expect to be down would be the scientific and other after a strong year in 2025, and we had some large quantum computing orders that we don't see at this point continuing into 2026. So we're going to see that business, call it, about $60 million at the midpoint of our guide, down by about 33%.

But let me come back to the semiconductor market first. It is our largest market. We expect growth around 15% at the midpoint of our guide, so about $550 million revenue year in 2026 for the semiconductor piece of the business and fairly in line with the range of estimates for WFE growth between 10% and 20% for next year.

On the compound semiconductor side, as Bill mentioned in the prepared remarks, we're really making traction with some of our new products and particularly for the GaN-on-silicon 300-millimeter for both GaN power and microLED and our new large batch size arsenide phosphide tool for solar and other applications. And we expect that business to be up about 1/3 next year to about $80 million.

And then the data storage, we started signaling the data storage that customers were increasing the order activity in Q3. We expected that activity to continue in Q4. It has. And we're expecting that business to double to about $80 million in 2026.

And we mentioned in our prepared remarks as well that we're fully booked for system orders for 2026 at this point in time and even started booking orders into the beginning of 2027.

And along that last point in the hard disk drive business, if you're fully booked this year and it's spilling over into next year, I would imagine your customers' CapEx is obviously going up. I would think this would be a multiyear increase in business in that sector. Maybe you could just help us understand what you think.

Yes. We're definitely seeing with the adoption of HAMR, the capital intensity is going up. Certainly, their CapEx is increasing. And we're seeing the first round of orders that we'll be shipping in '26 are really for the front-end fabs. And now we're starting to see some orders not only continuing in the front end, but also the back-end fabs that we call the slider fabs for shipment in '27.

So it does seem that the amount of heads that are being shipped is increasing because the slider fab is really just a function of the number of heads shipping. So that's a very positive sign actually. So I think it's -- there's clearly legs into '27 and potentially beyond.

Great. Final question for me is on the Propel. I was just wondering, that's the GaN-on-silicon tool, I believe. What do you think the opportunity for revenue production is in '26 and '27? And I would imagine the outlook there might be increasing just given that there seems to be a lot of momentum to adopt GaN in the data centers.

Yes. What we -- as you know, Dave, we've had an evaluation system at a leading power IDM for some time. And that's going very well. We're in a very solid position there. And we -- I think on our last call announced that we actually received a pilot line order -- received a pilot line order for a -- excuse me, a pilot line order for shipment in 2026. And so that's going to drive incremental business in probably approaching $15 million range. And I would expect there's a possibility if they stick with their plans of continuing to ramp in '27, we might receive orders in the second half of '26 to be shipped in '27 for that. So that's the power opportunity.

We also have a tool in backlog for 300-millimeter Propel GaN-on-silicon for a microLED application. And we're actually doing demos with a few different customers for microLEDs as well as other GaN power opportunities.

The next question comes from the line of Denis Pyatchanin with Needham.

I have a question about the gross margins. So it seems like we've taken a little bit of a dip here in Q4 and then in Q1, I think in Q4 was because of some evaluation systems. And I think you're still guiding a little bit below where you were trending before that. Maybe can you tell us about gross margins in Q1 and how you see them progressing through the rest of the year, given that you guided, I think, 41% to -- was it 43% for 2026?

Sure, Denis. Thanks for the question, and I'll be happy to. So yes, we're guiding Q1 at a similar level to Q4. And we had highlighted coming into Q4 that we saw a change in our product mix. And that product mix moved a little bit more to advanced packaging as a bigger percentage of the overall business with a lower gross margin profile and also some impact from anticipated signoffs from evaluation systems.

And I would say that for Q1, we're seeing a similar revenue profile and similar margin drivers there for Q1. As we look into the year, we do see gross margin accelerating and accelerating, particularly in the second half of the year next year.

And that's driven by a couple of factors. One, that we're seeing business from our new products and the gross margins on those new products are higher than the most recent averages. Increase in the data storage business will help towards gross margin improvement and significantly higher volumes in the second half of the year next year will also benefit the gross margin profile. And I would say, as we exit the second half of the year or we're in the second half of the year in 2026, we would expect to see gross margins at our 45% gross margin target.

That's some great detail. So just following up on that, is there currently any sort of tariff headwind that's factored into the guide? And could you quantify it if possible?

Yes. So we started to see the impact principally in the second half of last year, and it was running about 100 basis points of gross margin headwind to pre-tariff regime. And we are baking in slightly higher tariff regime in our forecast in 2026 compared to 2025.

Thank you. We -- at this time, we have no further questions. I'd like to turn the call back over to Bill Miller for closing remarks.

Thank you. As we look ahead to 2026 and beyond, we remain confident in our ability to build momentum. We continue to be excited about the pending merger with Axcelis, which we believe together will enhance our ability to bring needed solutions to the rapidly evolving semiconductor industry and better serve our customers and shareholders. We look forward to keeping you updated on our progress.

I would like to take a moment to thank our customers and shareholders for the continued support as well as recognizing our employees for their dedication. Have a great evening.

Thank you. This concludes today's conference. You may disconnect your lines at this time, and we thank you for participating.

Greetings, and welcome to the Veeco Q3 2025 Earnings Call. [Operator Instructions] As a reminder, this conference is being recorded.

It is now my pleasure to introduce your host, Alex Delacroix, Head of Investor Relations. Thank you. You may begin.

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 and slide presentation to accompany today's webcast is available on Veeco's website.

To the extent that this call discusses expectations for future revenues, future earnings, the timing and expected benefits of the proposed transaction with Axcelis, market conditions or otherwise make statements about the future. These forward-looking statements are based on management's current expectations and are subject to the risks and uncertainties that could cause actual results to differ materially from the statements made. These risks are discussed in detail in our Form 10-K annual report and other SEC filings.

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. Unless otherwise noted, management will address non-GAAP financial results. We encourage you to refer to our reconciliation between GAAP and non-GAAP results, which you can find in our press release and at the end of the earnings presentation.

Given the pending merger with Axcelis, we will not be addressing questions related to the transaction. Please note that today's call is neither an offering of securities nor solicitation of a proxy vote in connection with our previously announced transaction with Axcelis. We urge you to read the joint proxy statement relating to the transaction with Axcelis once it becomes available.

With that, I would now like to hand the call over to our CEO, Bill Miller.

Thank you, Alex. Good afternoon, and thanks for joining us. We entered the quarter focused on execution, and I'm pleased to report that Veeco continues to perform well.

Third quarter revenue was $166 million, exceeding the midpoint of our prior guidance of $160 million, and non-GAAP operating income was $23 million. Non-GAAP diluted earnings per share was $0.36, above the prior guidance midpoint of $0.28, reflecting continued operational discipline and strong execution across the business. This performance underscores the sustained investment in leading-edge semiconductor technologies, particularly in AI and high-performance computing. These trends are driving healthy demand, especially in gate-all-around, high-bandwidth memory and advanced packaging, where Veeco's differentiated equipment enables customers to advance their most complex technology road maps.

On October 1, we announced that we entered into a definitive agreement to combine with Axcelis Technologies in an all-stock transaction to create a leading semiconductor equipment company serving complementary, diversified and expanding end markets. The completion of the merger is subject to, among other things, the approval of our stockholders and various regulatory approvals, which we are focusing on securing. We are hopeful that we will successfully bring this transaction to completion and strongly believe these 2 companies are optimal together and will drive sustainable value creation for all our stakeholders.

We expect to see many growth synergies from the transaction that will be integral in driving success for the combined company. First, expansion of our served available market, which combined was over $5 billion on a pro forma 2024 basis. Second, we believe the transaction will enable a broader and complementary product portfolio and provide better solutions and services for the combined company's customers.

A few items include adjacent technology steps with Axcelis' ion implantation and our laser annealing, likely providing significant opportunities to enhance device performance and yield. Accelerated development of ion beam deposition technologies, likely enabling greater market share gain from traditional deposition technologies. Third, we believe the transaction will provide expansion of the combined company's channel reach and regional leverage. Together, this will allow us to penetrate Tier 1 foundry, logic, memory and IDM customers more effectively. Fourth, the combination will increase R&D scale and enhance capabilities, which we believe will accelerate benefits to the combined company's collective customers. And lastly, with over $900 million in combined cash, we expect the combined company to benefit from a strong operating profile and the financial foundation to drive returns to shareholders.

Now I'll turn to our critical role in the semi manufacturing process and provide updates on our evaluation programs for the quarter. We are the production tool of record for laser spike annealing for all leading logic customers and one Tier 1 DRAM customer. We expect to grow our penetration in leading DRAM by shipping an LSA evaluation system to a second Tier 1 DRAM customer in the fourth quarter of this year.

Additionally, our next-generation nanosecond annealing system expands our capabilities to the nanosecond regime, and our systems are being evaluated at 2 advanced logic customers for advanced low thermal budget applications. These evaluations are progressing well, and we plan to ship additional NSA evaluation systems during 2026 to Tier 1 customers.

We're also the market leader for IBD EUV systems for the deposition of defect-free films. Our product road map is well aligned as the industry adopts next-generation high-NA EUV lithography, and we're expanding our EUV-related business to EUV pellicles, which are increasingly being used to improve the productivity of EUV steps. Our IBD EUV system is used to form the high transparency membrane used in pellicles.

Demand tied to AI and high-performance compute remains strong and is pulling innovation forward. Our next-generation IBD300 system is being evaluated by 2 DRAM customers. This technology differentiates itself from incumbent technologies through its ability to achieve superior thin film properties with lower resistance, which is essential for device scaling, performance and power consumption.

Additionally, advanced packaging for wet processing and lithography continues to grow from AI-related demand. Our wet processing system orders increased quarter-over-quarter, and we see continued order activity in our lithography system. Last month, we announced multiple orders for our advanced packaging wet processing and lithography systems from a leading foundry, supporting critical end markets through AI, automotive, aerospace, defense and communications. Across our portfolio, we continue to focus on performance and yield advantages that matter most to our customers in advanced nodes.

As we look ahead, we believe our portfolio enables technologies for key inflections supporting innovation in gate-all-around, high-bandwidth memory, EUV lithography and advanced packaging. These growth areas create significant opportunities in our served available markets. In annealing, we project our SAM to be approximately $1.3 billion by 2029 as devices continue to shrink and shallower anneals are required to improve performance and adapt to changing structures.

For our ion beam deposition technology in semi, we project our SAM to be approximately $500 million in 2029 as the market expands to adopt EUV and high-NA lithography. This growth is also driven by the need for lower resistance metals deposition in a uniform manner required for improved device performance and power consumption. Lastly, in advanced packaging, we project SAM growth to be approximately $650 million by 2029, with growth mainly driven by wet processing systems supporting AI and high-performance computing.

As we look across the business, we continue to invest in programs that position us for the next leg of growth and focus our R&D to advance the industry.

I'll now turn the call over to John to walk through the financials for the quarter and provide our outlook for Q4 2025.

Thank you, Bill. Revenue came in at $166 million, above the midpoint of our guidance, in line with the previous quarter. Our semiconductor business reported $118 million, a decline of 5% quarter-over-quarter and 71% of total revenue. Our performance was driven by LSA, IBD EUV for mask blanks and our advanced packaging wet processing systems. In the compound semiconductor market, revenue was $11 million, down from the prior quarter, totaling 7% of revenue. Data storage revenue was $10 million, totaling 6% of revenue. And scientific and other revenue increased to $27 million, totaling 16% of revenue, driven by an increase in optical deposition systems.

Turning to the quarterly revenue by region. Revenue from the Asia Pacific region, excluding China, was 49%, a decrease from 59% in the prior quarter. Sales were driven by customers in Taiwan for LSA, IBD EUV masks and advanced packaging. Revenue from China customers was 28%, an increase from 17% in Q2. Sales were driven primarily by LSA and optical deposition systems. The United States came in at 16% and EMEA was 7%.

Switching gears to our non-GAAP quarterly results. Gross margin totaled approximately 42% at the top end of our guidance. Gross margin was favorably impacted by higher volume and improved product mix. Operating expenses totaled approximately $46 million, which came in favorably below our previously guided range. Income tax expense was approximately $3 million, resulting in an effective tax rate of approximately 12%. Net income came in at approximately $22 million, and diluted EPS was $0.36 on 61 million shares.

Now moving to the balance sheet and cash flow highlights. We ended the quarter with cash and short-term investments of $369 million, a sequential increase of $14 million. From a working capital perspective, our accounts receivable increased by $10 million to $116 million. Inventory increased by $4 million to $263 million, and accounts payable decreased by $6 million to $44 million. Customer deposits included within contract liabilities on the balance sheet remained relatively flat at $36 million. Cash flow from operations totaled $16 million and CapEx totaled $3 million during the quarter.

Now turning to our Q4 outlook. Q4 revenue is expected between $155 million and $175 million. Gross margin for Q4 is expected to range between 37% and 39%, representing a decline from prior periods. This anticipated reduction is primarily driven by a shift in product mix with several discounted evaluation tool acceptances and a greater proportion of revenue from advanced packaging systems. We expect OpEx of approximately $48 million, net income between $10 million and $19 million and diluted EPS between $0.16 and $0.32 on approximately 62 million shares.

I'll now provide additional commentary for each of our markets. In the semiconductor market, we see growth for 2025 compared to 2024, driven by demand in gate-all-around and advanced packaging. Additionally, we see continued momentum for our products into 2026 driven by leading-edge investments for AI and high-performance computing. In the compound semiconductor market, we have revenue growth opportunities in GaN Power, photonics and solar for 2026 after experiencing a down year in 2025.

We are excited about the recent order activity and the acceptance of our new propelled 300-millimeter GaN and Lumina plus arsenic phosphide platforms, which are tailwinds for next year. After an extensive successful evaluation period, today, we announced that we received an order for our Propel 300-millimeter GaN-on-Silicon MOCVD system from a leading power IDM for AI data centers. This order cements our position as a leader in 300-millimeter GaN technology, which is at an important inflection point transitioning from 200-millimeter wafer sizes.

Additional recent announcements in this market include an order for multiple Lumina indium phosphide MOCVD tools for data center optical communication solutions. We also received the first multi-tool order for our recently released new Lumina+ platform for low earth orbit space-grade solar cells. These orders support the revenue growth projected for the compound semiconductor market in 2026 with shipments principally in the second half.

In the data storage market, system revenue declined in 2025 compared to 2024 as customers did not add new system capacity. However, our service revenue has increased, reflecting higher customer utilization, and we are excited to announce we recently received orders for our ion beam and wet processing equipment. We expect these orders to drive data storage revenue growth in 2026, principally in the second half. We continue to see strong demand in the scientific and other market for our research-driven applications. This segment is expected to deliver growth in 2025, supported by ongoing investment in advanced scientific innovation.

With that, I'll now turn the call over to the operator to open up Q&A.

[Operator Instructions] As a reminder, given the pending merger with Axcelis, Veeco management will not be addressing questions related to the transaction. We have a question from David Duley of Steelhead Securities.

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.

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.

And is there a specific reason now why GaN is being adopted in the data centers?

I think the efficiency of power conversion in the data center is a real limiting issue in the data center. And so any material that can be adopted to convert electricity more efficiently is pretty desirous.

Okay. 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.

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.

Okay. 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?

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.

The next question we have is from Denis Pyatchanin of Needham & Co.

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?

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.

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

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.

Got it. 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?

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.

The next question we have is from Mark Miller of Benchmark.

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

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 tools in DRAM, Mark, but there's definitely pull in logic and potential for evals there in the future.

Okay. So 2 evals with DRAM manufacturers with the IBD tools.

Yes.

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?

You want to take it, 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.

Just one more question, if you permit me. Your data storage orders you received this quarter for IBD and wet processing, is that from one customer or from multiple customers?

It was from multiple customers.

At this time, we have no further questions. And I would like to turn the call back over to Bill Miller for closing remarks.

Thank you. Our results this quarter reflect strong execution and steady momentum across our business. We believe the pending merger with Axcelis represents the next phase of that progress. It will broaden our technology portfolio, expand our market reach and create multiple opportunities for revenue growth through cross-selling, integrated solutions and accelerated innovation. We're confident in the path ahead, and we'll continue to update you as the process moves forward.

Overall, we're delighted with the response from our stakeholders across the board and are even more energized to deliver on the compelling merits of this strategic combination. Thank you to our employees for their hard work and dedication to Veeco, and thank you to our customers and partners for their continued trust in Veeco. Have a great evening.

This concludes today's conference. Thank you for joining us. You may now disconnect your lines.