Do the latest quarterly results from Veeco and Aixtron point to market recovery, asks Compound Semiconductor

Pleasing results from Veeco and Aixtron signal LED lighting markets are finally set to soar.

As MOCVD equipment suppliers, Veeco and Aixtron, report rising orders and revenues, the long-awaited recovery could finally be here.

In his recent quarterly earning call, Veeco chief executive, John Peeler, claimed his highest MOCVD order levels for more than two years. And while Aixtron chief executive, Martin Goetzeler, admitted 'revenues and orders are still at a low level', he categorically stated: "The good news is the adoption of LEDs for general lighting purposes is gaining further momentum."

Without a doubt, the LED market is driving recovery and growth for suppliers of MOCVD equipment. In a recent 'Global Metal Organic Chemical Vapour Deposition Equipment' market report, Technavio lead analyst, Navin Rajendra cited an increasing demand for LEDs in the global LED lighting market as being a key MOCVD market driver.

Other key market drivers included the increasing adoption of mobile devices - especially 4G handsets across Asia - and photovoltaic cells, but as Rajendra tells Compound Semiconductor: "The LED market is going to have a major, major impact."

Not surprisingly, market growth is being driven by Asia-based LED manufacturers. According to Rajendra, in 2013, some 96% of revenue generated by sales of MOCVD equipment came from businesses in the Asia-Pacific, with some 2% coming from the Americas, and the same again from Europe, Middle East and Africa.

"This is completely understandable as most of the assembling and manufacturing takes place here, so it only makes sense to base your chemical deposition processes in close proximity to this," he says. "In 2013 we have 96% here and this will grow to 98% [by 2018], which is significant growth for a well established market."

Take a look at the recent Aixtron and Veeco financial results, and each MOCVD player concurs. For Aixtron, 79% of total revenues in the first three months of this year came from Asia, with 17% coming from Europe and 4%, from the US. At the same time, Veeco's Peeler, in his recent earnings call, claimed his company is seeing increased interest in MOCVD equipment from each major country in Asia.

China lead continues

Of the Asia-Pacific businesses, Rajendra highlights how China-based players still dominate and, again thanks to the nation's large manufacturing base, will do so for the next five to six years. As he points out, the Chinese government has set aside vast amounts of land for future manufacturing processes, and adds: "The government still wants more 'local' companies to set up factories here and are providing a number of subsidies to various manufacturing and assembly units."

For example, in January this year, China-based LED maker, Sanan Optoelectronics, reported receiving a US$3.85 million government subsidy while some industry reports suggest the company received some US$13 million in December 2013.

China business aside, Rajendra also expects MOCVD equipment makers will see more revenues coming from LED manufacturers based in South Korea and Taiwan, and believes companies are steadily working through the major LED surpluses in the market.

"As of 2013, the over-supply of LEDs was still there," he says. "Two quarters later and it's still there... but there will be a significant drop at least by the end of this year."

Indeed, Veeco and Aixtron claim to be seeing similar results. Veeco's Peeler asserts LED lighting adoption is accelerating, noting how his customers' equipment utilisation rates are currently 'the highest they have been for a very long time'. And Aixtron's chief financial officer, Wolfgang Breme, attributes a massive 73% of all revenues in the first quarter of this year, solely to the LED market.

But the equipment makers aren't ready to trumpet rock-solid market pick-up quite yet. Aixtron hasn't yet reported any noticeable increase in investments in LED manufacturing capacity expansions and attributes this quarter's rising revenues to inventory write-downs and restructuring charges included in previous years' figures, as well as lower operating costs. As Aixtron chief executive, Martin Goetzeler, stated in his company's recent earnings call: "We are seeing a slight pick-up in demand for equipment from LED manufacturers, but that pick-up is not strong enough for us to change our [flat revenue] guidance for 2014."

And while Veeco's Peeler claims the company has seen 'some real substantial pick-up in MOCVD' and expects similar, if not higher, orders in the next quarter, he also adds: "I do want to argue some caution on this recovery as the timing and magnitude of MOCVD deals will be impacted by our customers' funding and financial performance, potential industry consolidations and other factors."

Still, both players are in the final stages of testing next generation MOCVD tools - with Aixtron's scheduled to launch in the second half of this year - so confidence is surely returning. And as Rajendra predicts the MOCVD market will grow from nearly US$520 million in 2013 to more than US$1 billion in 2018, each is set to reap the rewards.

As the analyst confirms, Veeco remains the MOCVD market leader, but the prospect of any other business capturing market share from the big two is slim. "Taiyo Nippon Sanso is another vendor, is diversifed across many industries but has only 1% of the world MOCVD market," he says. "So, the the top two have almost 100% market share. I doubt any new entry would have an impact; this would be very minuscule."