Veeco's success in China comes at a price

Veeco Instruments Inc., the fourth largest technology company on Long Island by stock market value, slipped in its push to reach $1 billion in annual sales last year.

The company, with 300 employees at its headquarters in Plainview and 900 globally, sells specialized production equipment that builds light-emitting-diode, or LED, chips, which are used to backlight TVs and cellphones and power street lamps -- rapidly growing markets. Veeco had predicted in February 2011 its sales for the year would rise 7 percent and pierce the $1 billion mark. Sales had risen from $282 million to $931 million from 2009 to 2010.

Veeco could trace much of its success to China, where sales soared to $650 million last year, from $267 million in 2010.

But Veeco reported a sharp fourth-quarter slowdown in sales, and revenue for the year came in at $979 million. The company lowered expectations, estimating 2012 sales at $500 million to $600 million.

Patrick Ho, an equity analyst at the financial services firm Stifel Nicolaus & Co., said too many companies bought LED chip production equipment, and the market became saturated. The situation "was primarily driven by China," Ho said.Veeco's sales drop provides a cautionary tale that doing business with China isn't immune to challenges. "China is still a fast-growing market," said Long Island University economist Panos Mourdoukoutas, but he cautioned against "betting the house on China."

Veeco's Chinese customers, taking advantage of government subsidies that covered 50 percent of the price of Veeco's equipment, overbuilt LED production factories, and orders for its equipment subsequently dried up. Veeco's orders fell 51.5 percent in the fourth quarter, and the company acknowledged in its annual report that "further reduction or elimination of these (Chinese government) incentives may result in a further reduction in future orders."

However, Veeco is "in very sound financial shape" and can weather the downturn, said Aaron Chew, an analyst at the Maxim Group in Manhattan.

The company has $491 million in cash and short-term investments, and $2.7 million in long-term debt.

Veeco's shares have fallen 41 percent in the last year, from $47.64 on March 3, 2011, to $28.01 on Friday, giving the company a stock market value of $1.09 billion. Some analysts think a turnaround may have to wait until 2013 or later.

Veeco said it sold to China because that was where the orders were, and it plans to expand sales in other markets. Analyst Christopher Blansett at JPMorgan Equity Research said the company's Chinese sales allowed it to gain market share on its rival Aixtron, a German firm.

"We've had very good market share in Korea and the U.S. and Europe," chief executive John Peeler said in an interview. "We're going to grow with those other markets, and if China backs off, which it will, that's OK."

President Barack Obama has stressed the need for U.S. companies to crack the market in China -- where the economy grew 9.2 percent last year compared with less than 3 percent in the United States.

On Long Island, the recession compelled companies such as software maker CA Inc., electronics distributor Arrow Electronics, filtration equipment manufacturer Pall Corp., Peconic Bay Winery, and dental products distributor Henry Schein to look east to new markets. Local companies exported about $512 million in products to China in 2011, compared with $332 million in 2007, according to the Trade Partnership, a Washington, D.C., consulting group.

(The partnership's estimates measure products manufactured here. Many of Veeco's best-selling products are manufactured at contractors' sites in the United States and Singapore, so they aren't included in the Island total.)

Veeco was founded on Long Island in 1945 by two scientists who had developed industrial-leak detecting equipment while working on the government's Manhattan Project to develop an atomic bomb.

Beginning in the mid 1990s, the company spent more than $1 billion on about a dozen acquisitions, including companies making equipment used to produce data-storage devices such as computer hard drives. As personal computer purchases soared, the company's stock briefly passed $100 in March 2000.

But Veeco sold equipment to manufacturers of hard drives and semiconductors, and those markets experienced simultaneous downturns. Veeco lost $123.7 million in 2002, with sales falling 33 percent from $449 million to $299 million. That year its stock declined to as low as $9.17.

The following year, Veeco sought to get into a new business, paying $61.5 million in cash for a division of Albuquerque, N.M.-based Emcore Corp. that made predecessor versions of the equipment now used to produce LED products.

Peeler joined Veeco as chief executive in July 2007 from JDS Uniphase Corp., a publicly traded communications equipment firm. In 2008 the company focused on those LED products, as well as equipment for solar panel makers, which became its second-largest line of business after LEDs.

Sales rose more than 200 percent from 2009 to 2010. Veeco posted profits of almost $500 million in 2010 and 2011 after losing money in seven of the eight previous years.

Peeler said he expects LED equipment orders to begin to recover as soon as this spring from markets other than China, as its business remains strong in countries such as Taiwan and Korea, where customers for TV backlighting have included Samsung and LG Electronics.

In dealing with the overcapacity problem, "I think they're going to navigate it better than any other public LED company," Ho said.

And the long-term prospect for LED bulbs remains strong despite the overcapacity problem, industry analysts agree.

"We're shooting to get 50 percent of the market," Peeler said. "That's what we want, and everybody else can fight over the rest."