On Feb. 12, Veeco Instruments (NASDAQ:VECO) reported results for Q4 and FY 2006. Despite expectations for a weak start to this year, Veeco managers put on their happy faces, predicting a pickup in business later in the year.

Fourth-quarter revenues totaled $123 million, up 9% from the previous year. Net income jumped sharply to $7.6 million, or $0.24 per share, from $2.7 million, or $0.09 per share, the year before. For the full year, revenue reached $441 million, an 8% increase from 2005. Net income for the full year climbed into positive territory, reaching $14.9 million or $0.48 per share.

Unfortunately, Veeco sees a slowdown on the horizon, expecting revenue during the current quarter to fall to between $95 million and $105 million, with earnings per share coming in anywhere between a $0.10 loss and a $0.03 gain. Analysts were expecting $122 million in revenue and $0.24 in earnings per share for the quarter, so this is a considerable shortfall.

Veeco's sales in the just-completed quarter were driven by its LED/wireless customers, as well as strong sales of its scientific research products. Sales to data-storage customers were weak, because these customers -- including Seagate (NYSE:STX) and Hitachi (NYSE:HIT) -- still haven't increased spending significantly, after spending heavily early last year. I'm confident that the data-storage customers will come back at some point, since they have to keep increasing the capacity of their hard drives in order to stay ahead of the NAND flash folks. While their spending is lumpy overall, it has increased by 30% per year over the past few years, as my colleague Jack Uldrich pointed out last year.

Another trend that bodes well for Veeco, in my opinion, is the yield problems that semiconductor manufacturers are having with the transition to the 65 nm node. During KLA-Tencor's (NASDAQ:KLAC) recent quarterly earnings conference call, President and COO John Kispert stated that most manufacturers are struggling with yields of less than 50%, meaning that more than half of the chips produced don't work. Raising yields will require diligent efforts from chip makers to understand the defects that are leading to bad parts, and Veeco's metrology tools can help them do so.

Despite what I see as favorable trends, I'm certainly aware that the semiconductor markets are highly cyclical. Veeco's first-quarter guidance is significantly disappointing, and I'm always a bit leery when management claims that business will pick up a few months down the road. Veeco looks like a risky stock to own, and investors with no taste for volatility should definitely look elsewhere.

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Fool contributor Dan Bloom and his wife own shares in Veeco, Seagate, and KLA-Tencor. If you have a crystal ball, he would appreciate you sharing any insights it might have into Veeco. The Fool has a disclosure policy.