Veeco Instruments inc (VECO) Q3 2021 Earnings Call Transcript

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Veeco Instruments inc (VECO 0.47%)
Q3 2021 Earnings Call
Nov 2, 2021, 5:00 p.m. ET

Contents:

• Prepared Remarks
• Questions and Answers
• Call Participants

Prepared Remarks:

Operator

Good day, and welcome to the Veeco Instruments Incorporated hosted Q3 2021 earnings call. At this time, I'd like to turn the conference over to Mr. Anthony Bencivenga, Investor Relations. Please go ahead.

Anthony Bencivenga -- Head of IR

Hank 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 is available on the Veeco website. Please note that we have prepared a slide presentation to accompany today's webcast. We encourage you to follow along with the slides on veeco.com. This call is being recorded by Veeco Instruments and is copyrighted material. It cannot be recorded or rebroadcast without Veeco's Express permission. Your participation implies consent to our recording. To the extent this call discusses expectations about market conditions, market acceptance and future sales of the company's products, future disclosures, future earnings expectations or otherwise make statements about the future, such statements are forward-looking and are subject to a number of risks and uncertainties that could cause actual results to differ materially from the statements made, including as a result of the COVID-19 pandemic.

These factors are discussed in the business description, management's discussion and analysis and risk factors sections of the company's reports on Form 10-K and annual report to shareholders and in our subsequent quarterly reports on Form 10-Q, current reports on Form 8-K and press releases. Veeco does not undertake any obligation to update any forward-looking statements, including those made on this call, to reflect future events or circumstances after the date of such statements. During this call, management may address non-GAAP financial measures. Information regarding such non-GAAP financial measures, including reconciliation to GAAP measures of performance, is available on our website. With that, I will turn the call over to our CEO, Bill Miller.

William John Miller -- CEO & Director

Thanks, Anthony. Good afternoon, everyone, and thank you for joining the call. The Veeco United team did an outstanding job this quarter. We posted solid Q3 financial results. We're continuing to invest for growth, and we're making progress toward our long-term financial targets we shared at our Analyst Day on September 9. All our Q3 guided metrics came in at or near the high end of our guidance with revenue of $150 million driven by record semiconductor sales and strong data storage revenue. Our non-GAAP gross margin came in at 43%, and we achieved non-GAAP operating income of $24 million, leading to diluted non-GAAP EPS of $0.40. Our quarterly revenue is up 34% year-on-year. Looking at year-to-date revenue compared to the same period last year, we achieved 37% revenue growth, driven by a 67% increase in semiconductor sales. And we generated $30 million in cash flow from operations, which is the highest quarterly amount generated in almost seven years. We've been transforming the company to take advantage of lasting global megatrends. Part of the transformation includes making fundamental changes such as developing and practicing a set of core values to improve our culture. This afternoon, we published our second sustainability report. Many of our transformational improvements over the last few years are reflected in this report, but it includes so much more. We greatly improved our environmental and social disclosures and continue to make progress in these areas, minimizing our environmental footprint, becoming more inclusive and continuing our commitment to good governance, all aligned with Veeco's core values.

We know these actions will help us improve our operations to better serve our stakeholders while building a more sustainable and transparent company. Now let's turn to an update on our specific market opportunities. Beginning with our semiconductor market. It's been well-publicized that wafer fab equipment spending is expected to be over $80 billion in 2021, and that 2022 is expected to grow further from there. The strength in equipment spending reflects both technological advancement and capacity additions. We addressed this market with three major product lines where our innovation has resulted in solutions that drive better performance for our customers. Enabling better performance allows us to win in targeted applications and expand our served market. In fact, we shared at our Analyst Day that over the long term, we expect our semiconductor market opportunity to grow at a CAGR of approximately 23%, much faster than forecasted long-term WFE growth. The three product lines are laser annealing, which is currently used in production at both advanced and trailing logic nodes, ion beam deposition systems for EUV mask blank production and lithography for advanced packaging. Our laser annealing products are used by device manufacturers in their most critical process steps. Customers choose Veeco's laser annealing solutions because of its superior capability. This enables annealing with the shortest dwell times for improved device performance or currently production tool of record at multiple customers. We expect growth in this product line to come from market expansion in a few ways. In the near term, we'll continue to work with our existing logic customers on their next nodes.

And we're making progress with a significant new logic customer. In the longer term, we've engaged memory customers with evaluation systems and demos and expect to penetrate this important market over time. We had another strong revenue quarter in laser annealing, driven by systems to existing logic customers as they build out current nodes. Our next product serving the semiconductor market is our ion beam deposition system for EUV mask blank production. EUV lithography is critical to the progression of Moore's Law. As device geometries in both logic and memories continue to shrink, we expect continued adoption of EUV lithography. We've seen public remarks from Intel, Samsung, TSMC, Hynix and Micron, confirming their commitment to EUV as they seek to advance their product roadmaps. In addition, ASML recently announced plans to double their EUV scanner output from 35 systems in 2020 to approximately 70 systems in 2025. Consequently, we expect demand to grow for our ion beam systems used for EUV mask blank production. In fact, we recently increased our outlook for EUV mask blank systems from two to four systems per year to three to five systems annually on average. Moving to advanced packaging. For a few quarters now, we've expressed increasing confidence in our advanced packaging opportunity. We had a strong equipment shipping quarter for our lithography systems, and we had a repeat multisystem order from a leading OSAT to support production of GPUs and high-performance computing chips. All three of our products serving the semiconductor market are performing well and are expected to continue this momentum for the foreseeable future. As expressed in our Analyst Day, the semiconductor market is our biggest driver of growth over the next three to five years, and we're making progress toward that goal. We serve the compound semiconductor market primarily with two product lines.

Our wet processing equipment for RF power amplifiers and filters and MOCVD equipment for power and photonics applications. Our wet processing equipment has broad appeal, a material lift off and solvent-based applications. In addition to the continued demand for our wet processing equipment across RF filter and amplifier applications, we're seeing demand in photonics applications as well. Our MOCVD systems enable fast charging and other power management solutions as well as micro LEDs. We ship single-wafer systems for power and micro LED applications during the quarter and continue to work toward penetrating these growth markets. Our third market is data storage. In the near term, based on our order activity, we expect data storage revenue to decline. However, our customers continue to invest in their aerial density road maps and increase the heads they produce, both driving more ion beam system demand. With the amount of data stored forecasted to grow at 35% annually, we're confident about the long-term prospects of our data storage business. In summary, led by our traction in the semiconductor market, demonstrated by application wins, backlog position and visibility, we are confident we will grow revenue in 2022. Now for an update on our 2021 priorities. First, regarding our resilience, there are a couple of updates. With safety being a priority for the company and one of our core values, we've decided to delay our COVID-19 return to facilities plan. This keeps our manufacturing employees safer while ensuring continuity of our operations.

Regarding the status of our supply chain, like many of our peers, we're experiencing the effects of global supply chain disruptions, such as longer lead times and cost increases. We've been buying in advance and resourcing components on a more frequent basis each quarter in order to proactively manage the impact to our business. I'd like to thank our supply chain team for minimizing disruptions to our customers. Next, we continue to focus on profitability, and we're on track to meet our long-term financial targets. And from a growth perspective, we're solidly on track to deliver more than 25% revenue growth in 2021. Our investments in evaluation systems and service infrastructure are setting us up for success in 2022 and beyond. By keeping these priorities top of mind, the Veeco United team is committed to making a material difference and building a stronger Veeco. Now I'll hand it over to John.

John P. Kiernan -- Senior VP & CFO

Thanks, Bill, and good afternoon, everyone. I will be discussing non-GAAP financial results and encourage you to refer to the reconciliation to GAAP results in our press release or at the end of the earnings presentation. Looking at our revenue. Revenue for the quarter was $150 million, representing a 34% year-on-year increase and up 3% sequentially. Semiconductor had a record $76 million, made up 51% of the quarter's revenue, increased 42% sequentially and 127% year-on-year. The investments we've made in evaluation systems, service, product development and manufacturing capacity have enabled success in our semiconductor business. Data storage at $39 million made up 26% of revenue and reflected both capacity and technology additions by our customers. Revenue was up 6% from a year ago and as expected, down 25% sequentially. Compound semiconductor was relatively flat sequentially at $23 million, which represented 15% of revenue, driven by MOCVD and wet processing systems sold for power, RF and photonic applications. And scientific and other came in at $11 million and made up 8% of revenue. A few comments on Q3 revenue by region. Our Asia Pacific region, excluding China, was 40% of the total, with sales of ion beam and laser annealing systems to semiconductor customers as the main contributor. The United States region made up 33% and was driven by ion beam system shift to data storage customers. China made up 18%, primarily from semiconductor systems shipped to a variety of customers.

And finally, EMEA made up 9%. Now turning to our non-GAAP quarterly results. Gross margin came in at 42.6%, which was a percentage point higher than last quarter and toward the top end of our guidance. Operating expenses for the quarter were $39.6 million, flat to last quarter and 26.4% of revenue, which was a reduction from last quarter. Operating income was $24.3 million for the quarter, increased 14% sequentially and 72% from the same quarter last year. Tax expense for the quarter was approximately $500,000 with net income coming in at $20.5 million. Non-GAAP EPS was $0.40 on a diluted share count of 51.7 million shares. Now moving to the balance sheet and cash flow highlights. We ended the quarter with cash and short-term investments of $336 million, a sequential increase of $6 million. From a working capital perspective, our accounts receivable decreased to $87 million. This drove a decrease in DSOs to 52 days from 67 days in the prior quarter. Inventory increased approximately $7 million to $171 million to support increased shipment volume and procuring components earlier to address longer lead times and availability. Days of inventory increased to 173 from 167 in Q2. Accounts payable decreased to $49 million. As a result, DPOs decreased to 51 days from 58 in Q2. We reduced our working capital by $7 million during Q3. This, along with our earnings in the quarter, resulted in $30 million of cash flow from operations. Long-term debt on the balance sheet was recorded at $332 million, representing the carrying value of $389 million in convertible notes. Our capex during the quarter was $22 million. This includes $18 million for the San Jose expansion project and approximately $4 million in other capital spending. Our San Jose facility is coming along well, and we expect to ship our first systems from this location in the coming weeks. Now turning to our guidance. For Q4, revenue is expected to be between $140 million and $160 million, with non-GAAP gross margin between 41% and 43%. We expect Q4 non-GAAP OpEx to be between $41 million and $43 million, an increase from Q3 as we continue to invest for growth. We are on pace, however, for full year OpEx as a percentage of revenue to decline as compared to 2020. GAAP EPS for Q4 is expected between $0.04 and $0.22 per diluted share. Non-GAAP EPS is expected between $0.27 and $0.45 per diluted share. Diluted non-GAAP EPS is based on approximately 52 million share count.

For reference, we've included a table in the backup section of the earnings presentation to provide detail on the effect of the convertible notes on diluted share count. At the midpoint of our Q4 guidance, full year 2021 revenue is expected to be approximately $580 million, with $1.35 in non-GAAP EPS. This raises our full year 2021 guide, once again, with revenue up 28% year-on-year and non-GAAP EPS of more than 50%. Now for an update beyond Q4. In the first quarter of 2022, we will be adopting the accounting standard ASU 2020-06 for convertible debt accounting. Upon adoption, our convertible notes will be accounted wholly as debt. For model purposes, when calculating non-GAAP EPS starting in Q1 2022, quarterly cash interest expense in the amount of $3.2 million should be added back to non-GAAP net income and approximately 15.6 million diluted shares should be added to the weighted average basic shares outstanding to reflect if-converted method of accounting. Replacing the dilution assumed using the current treasury's document of accounting. We provided a table in the backup section of the earnings presentation with details, both the GAAP and non-GAAP effect of the new if-converted method of accounting for our convertible notes. Please note, there is no cash flow impact resulting from this accounting change. Regarding our visibility into Q1 2022 business levels, we see revenue in a similar range to our Q4 guidance. Looking further into 2022, we expect full year revenue to grow compared to 2021 as we continue to gain traction in our semiconductor business, as Bill highlighted earlier. We will also continue to make the necessary investments in people, material and infrastructure to support our growth. And with that, Bill and I will be happy to take your questions.

Questions and Answers:

Operator

[Operator Instructions] And we'll take our first question from Tom O'Malley with Barclays.

Thomas James O'Malley -- Barclays Bank PLC -- Research Division-Research Analyst

Hey guys. Good afternoon and congratulations on the really nice results. Bill, I think most earnings calls you do a really good job of walking us through some of the different tools that are in evaluation and give us an update on what shift and what's kind of on the come here. Could you please walk through some of the tools that you still have yet to ship this year? And then talk about any kind of new wins you may have on the tool front? That would be really helpful.

William John Miller -- CEO & Director

Yes, Tom, that's a timely question. We've been telling the street, we plan to ship 10 tools this year. At this point we've shipped nine of those. So of the planned 10, eight are in semi and two are in compound semi. Of the -- in the semi space, the big driver is LSA, where we have five LSA tools shipping, our eval tools out in the field. The most interesting ones are to a third advanced logic customer. We've actually turned that tool over to the customer. They're running qualifications and the news we're hearing is positive, I would say. And then similarly in DRAM, we've shipped two eval systems to a DRAM customer and once again, their tools have been turned over to the customer. They're running quals and the news I would say is positive at this time. That's pretty exciting. And in the compound semiconductor space, we have shipped two evaluation systems; one is our Lumina for red micro LED applications and we recently shipped an eight inch GaN-on-Silicon single-wafer propel tool to a large foundry for power electronics application. I would characterize our progress at this time as pretty positive. I think we are really on track or maybe a little bit ahead of where we kind of laid out our plan this time last year. We're pretty bullish about the progress we're making.

Thomas James O'Malley -- Barclays Bank PLC -- Research Division-Research Analyst

Great.[Indecipherable] My follow-up is just about the upside in the quarter from the semiconductor business, obviously record highs there. Is that a function of timing for that business or are you seeing increased traction in different areas of the business where you're getting new tool orders that you hadn't had. We understand lead times are long, but can you just describe kind of what happened in the quarter and then it also sounds like with some new traction with new customers, that that business is looking like it's going to be really strong in the year. Can you talk about some of the different areas where you're seeing increased order activity in the semi business right now and how that may impact next year? Thank you.

William John Miller -- CEO & Director

Yes, I would say regarding the quarter, John, I would say we did reach record revenues. And really, that's on the back of all three legs of our stool in semiconductor; that was laser annealing, we shipped an EUV tool in the quarter and the tremendous progress we're making in advanced packaging. So I think the step-up there was, I would say, on all three of our submarkets within semi. Is that -- would you agree with that, Jon?

John P. Kiernan -- Senior VP & CFO

Yes. I think that's an accurate statement, Bill.

William John Miller -- CEO & Director

Yes. And so if I kind of look out a little further over the horizon, we're really excited about the growth opportunities for us in semi. This year, our semi revenue through Q3 is up 67% compared to the same year last year. We're forecasting doubling our backlog in semi from the beginning of the year to the end of 2021. And I would say we're experiencing tremendous pull across the board from, as I said, laser annealing with our existing customers. Obviously, I just spoke about the opportunities with new logic and memory customers. EUV mask blank remains strong with both logic and memory customers adopting EUV. We've taken up our annual forecast from two to four systems to three to five systems based on ASML's remarks. And then also in the advanced packaging space, we've been getting increasingly more constructive on this opportunity. And we are seeing, actually, during the quarter, multiple system orders from multiple customers, and that was for OSATS, IDMs and foundries. So it's very much a broad growth in advanced packaging lithography. What we're also seeing is that as customers are buying multiple tools, fleet matching is becoming more important. And our AP 300 is really up to the task compared to the competition. And we believe we're gaining some market share in this growing market.

Thomas James O'Malley -- Barclays Bank PLC -- Research Division-Research Analyst

Great. Congrats again guys.

Operator

We'll take our next question from Patrick Ho with Stifel.

J. Ho -- Stifel, Nicolaus & Company, Incorporated -- Research Division-MD of Technology Sector

Thank you very much and Congrats as well on the nice quarter and outlook. Bill, maybe just to follow-up on the advanced packaging comments you just provided. Can you give a little bit of color on whether you're seeing a broadening of applications? Or is it primarily still for, quote, like fan-out applications for mobility? Or are you seeing greater, quote, adoption in areas like heterogeneous integration and other types of processes. Can you just give a little bit of color on that?

William John Miller -- CEO & Director

Absolutely, Patrick. We are clearly seeing a broadening of this market that not only are our -- the typical markets for fan-out wafer level packaging, copper pillar and bumping for mobile, AI and high-performance computing. But what we're seeing is more focus in the heterogeneous integration opportunities. And it seems -- that seems to be driving it. So I would clearly say it's a broadening of the opportunity as opposed to very mobile focus a few years ago.

J. Ho -- Stifel, Nicolaus & Company, Incorporated -- Research Division-MD of Technology Sector

Great. That's helpful. And maybe as my follow-up question, you guys did a really good job, both in terms of the revenue line as well as on the margin front, given the supply constraints that are existing in the industry today. Can you just give a little qualitative color on some of the measures you took that allowed you to avoid some of the missteps that other companies have come across?

John P. Kiernan -- Senior VP & CFO

Sure, Patrick. This is John. And thanks for the question. So certainly, we're not immune to the challenges that are well documented and people are experiencing in supply chain constraints. And I would say that Q3 was more challenging than Q2. But we've been successful mitigating these challenges and have met or exceeded our revenue targets by doing a few things. First of all, working closely with our suppliers to monitor upstream risks. I would say that making selected buys ahead of demand, and you see that to some extent in increased inventory. And when a supply chain issue has been identified, we moved quickly to execute alternative supply. So I would say, Patrick, despite the supply chain constraints, we're really happy and expect revenue to grow to approximately $580 million this year, a 28% increase year-on-year and have been able to meet our customers' important requirements.

J. Ho -- Stifel, Nicolaus & Company, Incorporated -- Research Division-MD of Technology Sector

Great. Thank you very much.

William John Miller -- CEO & Director

Thanks Patrick.

John P. Kiernan -- Senior VP & CFO

Thanks Patrick.

Operator

We'll hear next from David Duley with Steelhead.

David Duley -- Steelhead Securities LLC -- Managing Principal

Yes, thanks for taking my question. Just a couple. As far as the advanced packaging lithography market, I think I've asked this question in the past, could you take a gander at what you think the size of that market is going to be in this year or next year? I imagine next year is going to show fairly significant growth. So that's really what I'm trying to dig at.

William John Miller -- CEO & Director

Sure. Yes, I would say, we've been, I would say, we're historically sizing this market at, say, $100 million this year. We expect that to grow in excess of 20% plus in 2022. And I would think our market share is going to increase from kind of mid-40s to maybe over 60%.

David Duley -- Steelhead Securities LLC -- Managing Principal

And who owns the -- go ahead, I'm sorry.

William John Miller -- CEO & Director

This is just a combination of market expansion and some decent share gain.

David Duley -- Steelhead Securities LLC -- Managing Principal

Excellent. As far as the balance of the market, if you own 40% to 60% share, who do you -- who's #2 in the marketplace at this point?

William John Miller -- CEO & Director

At this point, I would say the primary competitor for us is Canon. And we also see competition from [SME]. Those are probably the primary competitors.

David Duley -- Steelhead Securities LLC -- Managing Principal

Okay. And you mentioned that your semi business, I think, is going to have a CAGR of 23% over the next few years. Could you just help us understand the three segments that you mentioned, how would we handicap the three versus that growth rate? What's going to be the fastest-growing of the 3?

William John Miller -- CEO & Director

From a market sizing standpoint?

David Duley -- Steelhead Securities LLC -- Managing Principal

For you.

William John Miller -- CEO & Director

I would -- I'm sorry, say that again?

David Duley -- Steelhead Securities LLC -- Managing Principal

Yes. I think you mentioned that your semi business is going to grow 23% over the next few years. And you have three segments. I'm just kind of trying to handicap the three segments?

William John Miller -- CEO & Director

Yes. And kind of in that 20% to 25% kind of range. I would say the largest growth when I look at our CAGRs from 20% to 25%, I would say our laser annealing [SAM] is going to grow pretty significantly. Our existing semi products are going to grow. We have lift up grow a little less than 20%. Our litho SAM over that full period of time, we're forecasting at about 10%. And the one big impact is we announced activity in the ion beam deposition tool for low resistivity metals. And today, obviously, we don't have any business there at all. But if we are successful, that would add an additional $250 million of SAM in '24 and '25. So that's a big chunk, but that's really out further in time.

David Duley -- Steelhead Securities LLC -- Managing Principal

Okay. And then final question from me is you've been pretty clear about the data storage market being down sequentially, and I'm guessing it's down in 2022. Do you have a handle now about how much it's going to be down? And if you don't, I understand. But if you could take a stab at also when you think the inflection point is? When do you think that business grows again sequentially?

William John Miller -- CEO & Director

Dave, I would say, as you know, our data storage customers have been adding capacity over the last three years. And we have a lot of order visibility this time last year. And we've actually hit all of our revenue objectives in data storage as planned for this year. What we're seeing from an order standpoint over the last three quarters, we expect customers to slow that pace of capacity addition in 2022. So we believe revenue for data storage will be lower in '22 than '21. I think it's important to note, though, that on a longer-term basis, we really see data proliferation driving this industry. Data storage is forecasted to grow at 35% per year. Head shipments are expected to grow at 8% to 10%. The complexity of these heads is continuing to grow at 8% to 10%. So long-term, we feel pretty good about the long-term prospects. But Dave, I want to make a pretty important point here that at the Veeco level, I can tell you that even with significantly lower data storage revenue, we're seeing strong demand in order activity in the semiconductor market with laser annealing, advanced packaging litho and EUV mask blanks that we're confident in revenue growth in 2022.

David Duley -- Steelhead Securities LLC -- Managing Principal

Excellent. Thank you very much.

William John Miller -- CEO & Director

Thanks Dave.

Operator

Thank you. We'll take our next question from Rick Schafer with Oppenheimer.

Unidentified Participant

Hi Good afternoon. This is [Lee Mark] on the call for Rick. I wanted to echo all, congrats on the results. My first question is on LSA. So I was wondering if you can remind us the number of customers and the number of [Indecipherable] you have. I believe you announced a PTOR customer at your Analyst Day. How does PTOR actually translate and convert into a billing step win and what needs to happen for that to occur?

William John Miller -- CEO & Director

So today, we have -- the business we have leading edge logic, and we have trailing edge customers. I would say, John, to say about 2/3 is leading in.

John P. Kiernan -- Senior VP & CFO

Yes.

William John Miller -- CEO & Director

So if I'm just kind of focusing in on the leading edge logic, we have two customers today. And we have one application step with one customer and three application steps with the second customer. And what we announced is that we've won process tool of record at their next advancing node. So what that means then, as a node rolls out for an application step with a customer at their next node. That would be about a $25 million to $35 million opportunity over 1.5 to 2.5 year period. That's about how we size that.

Unidentified Participant

So if I'm just kind of focusing in on the leading edge logic, we have two customers today. And we have one application step with one customer and three application steps with the second customer. And what we announced is that we've won process tool of record at their next advancing node. So what that means then, as a node rolls out for an application step with a customer at their next node. That would be about a $25 million to $35 million opportunity over 1.5 to 2.5 year period. That's about how we size that.

William John Miller -- CEO & Director

We have capacity to support both. So we expect during next year to turn these eval tools into revenue. And so that number would decrease. But at the same time, we have a plan to ship some of our newer products out into the field as eval. So I would think from an ongoing business standpoint, we are building a business plan to meet our revenue growth plus ship new eval systems and keep the evals in the field at about 10 at a time. As we kind of move forward, we'll be in this mode for, I would guess, the coming years as we continue to grow.

John P. Kiernan -- Senior VP & CFO

And we'll also be bringing on new capacity as we bring our San Jose new facility online. We mentioned that we expect to ship tools from that facility in the upcoming weeks and be fully transitioned into that new facility by Q3 of 2022. And this would effectively double the amount of output from our facility compared to our current facility there as well in support of requirements coming from the semiconductor industry.

Unidentified Participant

Thanks guys.

Operator

[Operator Instructions] We'll hear next from Mark Miller with Benchmark Company.

Mark S. Miller -- The Benchmark Company, LLC -- The Benchmark Company, LLC

I'd like to also congratulate you on your results. As you've been mentioning, the data storage has been very strong. There's now some cyclical slowing. But as the industry translates to HAMR and EMR heads, are there new process -- new processes coming in, which will require increased usage for your tools, whether it's at your deposition?

William John Miller -- CEO & Director

Yes, Mark. That's a very true statement. I would say that that's really driving a lot of the complexity of the heads as they advance and then moving from shingled magnetic recording to energy-assisted recording, that will continue. And a lot of that buying has not yet happened actually. So we remain positive on the data storage market for the long-term, and we're just expecting a down period in '22, frankly, just given our bookings activity and our lead time.

Mark S. Miller -- The Benchmark Company, LLC -- The Benchmark Company, LLC

Would these new process steps require upgrades to existing equipment, whether it's at your deposition?

William John Miller -- CEO & Director

Yes. We're working closely with our customers to meet their process requirements. And yes, we are introducing some new technologies that hopefully can be upgradable.

Mark S. Miller -- The Benchmark Company, LLC -- The Benchmark Company, LLC

Lastly, any COVID, you didn't mention any COVID impacts. How you're managing through that? Was that of any cost addition that was significant during the quarter?

William John Miller -- CEO & Director

Well, John spoke about supply chain challenges. I would say, from a factory labor standpoint, I think the company has performed very well. And I wouldn't say we've had any significant misses year-to-date, either from a supply chain or from a Veeco labor standpoint.

Mark S. Miller -- The Benchmark Company, LLC -- The Benchmark Company, LLC

Thank you.

John P. Kiernan -- Senior VP & CFO

Yes. I would add that we have seen some inflationary on material costs. I think the area that's impacting cost is increased logistic cost. I would say that for the third quarter, Mark, and what we're forecasting for the fourth quarter, that combination had about a one point impact on our gross margin.

Mark S. Miller -- The Benchmark Company, LLC -- The Benchmark Company, LLC

Thank you.

John P. Kiernan -- Senior VP & CFO

Thanks Mark.

Operator

We'll take our next question from Gus Richard with Northland.

Auguste Philip Richard -- Northland Capital Markets -- Research Division-MD & Senior Research Analyst

Yes.[Indecipherable]And I'll offer my congratulations as well. Just you made a comment about you're winning in packaging because you had better matching. Could you flush that out a little bit?

William John Miller -- CEO & Director

Our -- yes, our architecture is much simpler than our competitors. And it's a very robust rugged design. As I think you know, many applications require GH and I line as opposed to some competitors are only I line. That's one area we're differentiating. And then on fleet matching, we just have tighter specs, and I believe that's largely due to optical design.

Auguste Philip Richard -- Northland Capital Markets -- Research Division-MD & Senior Research Analyst

Are you talking about overlay and resolution, are you competing against the scanner? Is that test going on?

William John Miller -- CEO & Director

This is our legacy AP 300 product applications. Typically, we're seeing a lot of them that we're winning at, say, two micron and up.

Auguste Philip Richard -- Northland Capital Markets -- Research Division-MD & Senior Research Analyst

Got it. Okay. I understand. And then just have you shipped the ion beam deposition system for eval in semi?

William John Miller -- CEO & Director

No, we have not just yet. We're in the midst of demos with customers and expecting to ship that hopefully this quarter, and if not, early in Q1.

Auguste Philip Richard -- Northland Capital Markets -- Research Division-MD & Senior Research Analyst

Got it. And then on the compound semi, I think you've mentioned power, RF and photonics. Now I was just wondering if you could give a little bit of color on the MOCVD side, how much of your business these days is photonics and how much of it is power? And how much of it is RF?

William John Miller -- CEO & Director

Sure. Let me try to take that apart a little bit. I would say, Gus, our MOCVD business is really operating at historically low revenues today post exit of their commoditized LED business. We did a lot of work restructuring the business and pivoting toward new markets and new opportunities. And as you know, we go after the gallium nitride applications with our propel single-wafer reactor, and that can be used for both power electronics, RF devices as well as disruptive silicon-based micro LED applications. And we have a second product for arsenide phosphide called Lumina for applications in photonics, such as indium phosphide lasers, VCSELs as well as red micro LEDS. I would say we are starting to gain tractions in MOCVD. I would say in the near term, we expect to see revenue growth in early stage micro LED next year. And from a number of opportunities, including AR/VR as well as other photonics applications. Also, as I mentioned, we did see the 8-inch GaN-on-Silicon power market with multiple customers and placed an eval for 8-inch power electronics at a large foundry. We also, as I mentioned, placed an eval tool for red micro LED. So to answer your question, I would say, this year, we did have a fair amount of power electronics business with a single-wafer reactor at 8-inch. But I would say we're not seeing most of the production today is on six inch. So I would say we're in a bit of a seeding waiting game for that market to develop. So as I look forward, I would say, our business is largely more predominantly going to be in micro LED applications, whether that's disruptive or traditional red micro LED going forward. So I don't know if John, if you have any more color you want to add.

John P. Kiernan -- Senior VP & CFO

No, that's a good summary, Bill, as the market transitions, which we believe is 8-inch for the GaN power, that we're well positioned with what we seeded so far this year and with the evaluation that we've sent to a leading foundry.

William John Miller -- CEO & Director

I just want to make sure, so we're exceeding like planting, not seeding [Indecipherable].

Auguste Philip Richard -- Northland Capital Markets -- Research Division-MD & Senior Research Analyst

Right, right. No, I get it. And then just -- this probably isn't a fair question, but any color on who is ahead the arsenide phosphide on gallium nitride or the micro LED on silicon, the red on silicon, which program looks like it's advancing more quickly.

William John Miller -- CEO & Director

I would say, Gus, that we're actually -- it looks like, at this time, it looks like both are proceeding. We are seeing activity in the traditional -- the traditional approach of red, green and blue pixels for a luxury TV type markets. It looks like that's starting to happen. And we're seeing AR/VR applications with nontraditional kind of GaN-on-Silicon type solution. So right now, I would say it's fairly hard to handicap where we are. But I would say it looks like they're both moving forward.

Auguste Philip Richard -- Northland Capital Markets -- Research Division-MD & Senior Research Analyst

And I'll -- my last question. So it sounds like it's more application-specific in terms of which [Indecipherable] is going to be used.

William John Miller -- CEO & Director

Today, I would say that seems to be the case. I'd love to see kind of how it all plays out overall.

Auguste Philip Richard -- Northland Capital Markets -- Research Division-MD & Senior Research Analyst

Okay. [Indecipherable]. Really appreciated. Thanks so much.

William John Miller -- CEO & Director

Thanks Gus.

Operator

And that does conclude today's question-and-answer session. I would like to turn the conference back over to management for any additional or closing remarks.

William John Miller -- CEO & Director

Thank you, operator, and thanks for joining our call today. I'd like to thank our customers and our Veeco United team for their continued support. And to our shareholders, we look forward to seeing you at upcoming conferences and NDRs as we close out 2021 and execute toward our growth in 2022. Have a great evening.

Operator

[Operator Closing Remarks]

Duration: 48 minutes

Call participants:

Anthony Bencivenga -- Head of IR

William John Miller -- CEO & Director

John P. Kiernan -- Senior VP & CFO

Thomas James O'Malley -- Barclays Bank PLC -- Research Division-Research Analyst

J. Ho -- Stifel, Nicolaus & Company, Incorporated -- Research Division-MD of Technology Sector

David Duley -- Steelhead Securities LLC -- Managing Principal

Unidentified Participant

Mark S. Miller -- The Benchmark Company, LLC -- The Benchmark Company, LLC

Auguste Philip Richard -- Northland Capital Markets -- Research Division-MD & Senior Research Analyst

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