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Accounts fiasco sees heads roll at Veeco TurboDisc

Veeco Instruments has postponed its full-year earnings release and launched an investigation after discovering improper accounting at its TurboDisc MOCVD equipment division.

Veeco Instruments has launched an investigation into what it calls "improper accounting" within its TurboDisc division.

The division, which Veeco acquired from Emcore in late 2003, makes MOCVD equipment that is widely used in LED manufacturing.

According to company officials, the improper transactions came to light when Veeco was in the process of switching from the legacy TurboDisc accounting system inherited from Emcore to its company-wide SAP accounting system.

Controller fired
While the investigation is ongoing, Veeco CEO Ed Braun revealed that two senior members of the TurboDisc operation had been fired, including the division's controller.

Although the incident is thought to be limited to Veeco's TurboDisc division, Braun and the Veeco CFO John Rein admitted to being "very disappointed" with the development.

Veeco did not say whether it believed the accounting errors to be willful and therefore fraudulent, but the company did point out that it had hired a forensic accounting team as part of the investigation.

Company officals refused to speculate when asked whether the accounting problem had existed prior to its acquisition of the division from Emcore.

Errant tool pricing
The incorrect entries to the TurboDisc account effectively means that Veeco has been selling MOCVD equipment at a price that is too low to achieve the profit margin that it is aiming for.

Braun said that the incorrect pricing meant that MOCVD equipment was essentially being sold at a discount of $80,000-$100,000 per $1.5 million tool.

To remedy the situation, Veeco will look to increase the amount of revenue it generates per MOCVD tool sale, as well as reducing the bill of materials in each tool that it builds. Braun indicated that the number of employees in the TurboDisc division would now be reduced, and that the next generation of its GaNzilla MOCVD equipment would be introduced in June in a bid to boost margins.

The overall effect on Veeco's bottom line is still to be calculated, and the company has had to postpone the filing of its full-year accounts as a result. It is now battling to submit its finances to the Securities and Exchange Commission before a March deadline.

The company estimates that its last three quarterly financial statements were wrong by around $1.5 million per quarter as a result of the TurboDisc fiasco.

Sales to pick up in 2006
Commenting on the weak market outlook surrounding the company's MOCVD and MBE businesses, Braun said: "We expect sales from our compound semiconductor division to be flat or slightly down in 2005."

While Braun said that sales of epitaxy equipment had bounced back from a very weak third quarter, he admitted that Taiwan and China still have excess MOCVD capacity.

However, Braun expects to see a strong return to form in 2006 and 2007, especially for blue, green and white LED manufacturing.

He identified large-area LCD display backlights and automotive applications as the primary growth drivers of the LED industry now that the rapid recent expansion of the cell phone market is expected to slow.

Braun also believes that the solid-state lighting market will start to take off around 2008: "If you visit Lumileds, they will show you four or five of our machines being installed. They will also show you the floorspace that they have allocated for the next 25 machines," he said.

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