North America Equity Research

08 January 2010

Initiation

Veeco Instruments
Initiating with an Overweight Rating, Demand for LED Equipment Looks to Remain Strong Throughout C10
We are initiating on Veeco with an Overweight rating and a Dec 31, 2010, price target of $50.00. Veeco is a leading supplier of equipment to the LED industry and is currently experiencing a significant increase in demand for its MOCVD equipment, which is used in a critical LED manufacturing process. We believe strong demand for high brightness LEDs is likely to drive strong demand for associated MOCVD capital equipment throughout C10. We also expect Veecos legacy businesses, data storage and metrology equipment, to improve throughout the year from relatively low levels as the overall global economy improves. 2010 LED related equipment sales will likely double YoY due to strong high brightness LED demand that is being driven by LCD backlighting and general lighting applications. Veeco is experiencing a surge of demand for its MOCVD systems from both existing and new LED makers who themselves are having difficulty keeping up with end demand. We expect LCD backlighting adoption for TVs to continue at an aggressive pace over the next few years, which should require a significant amount of associated LED manufacturing capacity to be built out. This could result in an MOCVD equipment market averaging over $1bn for each of the next two years. Legacy metrology and data storage businesses are likely to improve throughout the year as the global economy recovers. Currently, these two business lines are operating near their respective break-even levels as they have yet to recover from the recent recession. As general spending for R&D returns to more normal levels and the Hard Disk Drive industry absorbs its existing manufacturing capacity, we believe these business lines margins and contributed profit are likely to improve significantly. Solar adds upside potential to estimates as we believe there is significant opportunity for Veeco to see material upside to component orders from CIGS based solar module makers as a number of them are scheduled to begin ramping volume production in C10. Veeco has broad exposure to CIGS based solar modules as it supplies a variety of components used in the thin-film deposition process. As these solar module makers ramp production throughout the year, Veeco should see an incremental increase in associated component demand. Initiating with an Overweight rating and a $50.00 price target by Dec 31, 2010. Our C09 Revenue and PF EPS estimates are $364mn/($0.29) while our C10 estimates are $620mn/$1.95. Our $50.00 price target is based on the assumption that VECO shares should trade in line with our Alternative Energy C10 group average P/E of 26.0x. VECO currently trades at 17.7x our C10 PF EPS estimate of $1.95.
2009E (0.42)A (0.34)A 0.12A 0.34A (0.29)A 364A 2010E 0.37 0.45 0.52 0.60 1.95 620 2011E 0.58 0.64 0.65 0.37 2.24 690

Overweight
VECO, VECO US Price: $34.51 Price Target: $50.00

Alternative Energy Christopher Blansett

AC

(1-415) 315-6708 christopher.r.blansett@jpmchase.com J.P. Morgan Securities Inc.

Price Performance
40 30 $ 20 10 0
Jan-09 Apr-09 Jul-09 Oct-09 Jan-10

YTD Abs 2.1%

1m 57.2%

3m

12m

57.2% 384.9%

Veeco Instruments, Inc. (VECO;VECO US) 2008A EPS Reported ($) Q1 (Mar) 0.11 Q2 (Jun) 0.19 Q3 (Sep) 0.15 Q4 (Dec) 0.36 FY 0.81 Revenues FY ($ mn) 443

EPS figures in the table include stock compensation but exclude amortization of intangible assets and onetime restructuring charges.

Company Data Price ($) Date Of Price 52-week Range ($) Mkt Cap ($ mn) Fiscal Year End Shares O/S (mn) Price Target ($) Price Target End Date

34.51 07 Jan 10 35.55 - 3.22 1,117.26 Dec 32 50.00 31 Dec 10

See page 14 for analyst certification and important disclosures.

J.P. Morgan does and seeks to do business with companies covered in its research reports. As a result, investors should be aware that the firm may have a conflict of interest that could affect the objectivity of this report. Investors should consider this report as only a single factor in making their investment decision.

Christopher Blansett (1-415) 315-6708 christopher.r.blansett@jpmchase.com

North America Equity Research 08 January 2010

Table of Contents
Key Investment Points .............................................................3 Investment Risks ......................................................................4 Company Description ..............................................................5 Historical Product Sales Review .............................................5 Growing Demand for HB-LEDs Is Driving the Need for MOCVD Equipment...................................................................6 Earnings and Cash Flow Outlook ...........................................7
Revenue and Earnings Should Grow Throughout C10 and Well Into C11; Free Cash Flow Generation Should Follow ..................................................................................7 Balance Sheet and Cash Flow Statements .................................................................10

Low Valuation vs. Alt Energy Peers Leads Us to an Overweight Rating..................................................................12

Christopher Blansett (1-415) 315-6708 christopher.r.blansett@jpmchase.com

North America Equity Research 08 January 2010

Key Investment Points

Veeco Instruments (VECO)
Overweight

Strong LED demand driving MOCVD equipment orders Veeco is experiencing strong order growth for its Metal Oxide Chemical Vapor Deposition (MOCVD) equipment that is used for one of the most critical steps in the entire LED manufacturing process. High Brightness LEDs (HB-LEDs) are fast being adopted into the LCD panel industry for PC and TV applications as well as for general lighting purposes. As a result, the overall LED industry is at full capacity and we believe LED makers will likely remain fully utilized throughout C10 in order to meet continued demand growth. Veeco is only one of two major equipment vendors that supplies this highly specialized equipment to the LED industry with an approximate 30% share in C09. As a result of the fast end market demand growth, we expect orders for Veeco's MOCVD equipment to increase throughout C10 in order to keep pace. Overall, we expect Veeco's MOCVD revenue to double in C10 vs. C09. Legacy metrology and data storage equipment businesses are likely to improve throughout the year Veeco has historically received most of its revenue from its metrology and data storage related equipment sales. Both of these businesses continue to suffer the impacts of the global downturn and are operating slightly above their respective break-even levels. We expect sales related to metrology equipment to improve with the overall global economy since Veecos customer base for this equipment line is extremely diversified across government institutions, R&D houses, and general corporations for internal R&D purposes. As all of these entities ease budget restrictions and start to invest for the future, we believe Veeco will see an increase in related equipment sales. Sales related to data storage applications should improve as the outlook for hard disk drives and the overall PC and electronic storage sector improve and we believe that Veeco's customers are likely to start adding new capacity in C2H10 in order to prepare for the C10 holiday season. Overall, we expect the companys metrology and data storage related revenue to increase 40% in C10 vs. very low levels in C09. Solar related sales provide upside potential to our estimates Veeco also sells components to a number of thin-film solar module makers focusing on CIGS (Copper, Indium, Gallium, Selenide) based technology. The company has diversified exposure to a growing number of CIGS module makers, many of whom are planning on ramping volume production in C10, which could lead to significant upside in revenue from sales of components and equipment for solar applications for Veeco. In addition, Veeco is developing its own CIGS based thin film deposition system that it could then sell to CIGS module makers as an alternative to their internally developed equipment. However, given the long evaluation time frames for such critical equipment, we do not expect a material amount of revenue from this new equipment line to become meaningful until C11 at the earliest. Highly outsourced manufacturing keeps fixed costs low Veeco has already shifted to a highly outsourced manufacturing strategy that, in our view, will enable it to grow its revenue significantly this year without having to build out a significant amount of internal infrastructure. This should allow the company to
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Christopher Blansett (1-415) 315-6708 christopher.r.blansett@jpmchase.com

North America Equity Research 08 January 2010

better deal with volatile equipment cycles and reduce earnings volatility while at the same time, allow Veeco to capture the upside potential of the fast growing MOCVD market as it leverages the capabilities of its manufacturing partners in both the US and Asia.

Investment Risks
Weaker than expected LED demand We believe the primary risk to our Overweight rating on Veeco is related to the end product demand balance for HB-LEDs. In mid-C10, we expect a significant amount of new MOCVD equipment to start to come on line at LED fabs. At that time, we believe end demand for HB-LEDs will need to continue improving so that LED makers need more MOCVD equipment and for orders for Veeco to continue to grow. Inability to meet difficult product shipment timelines Another risk to our investment thesis includes the failure of the company to meet aggressive timelines for MOCVD equipment shipments given the tightness that exists across the LED industry. Problems shipping equipment on time to LED makers could result in reduced earnings potential as well as share loss as customers turn to Veeco's primary competitor in order to bring manufacturing capacity on line within a reasonable time frame. Share loss or margin degradation due to increased competition Given the fast growth rate of the LED MOCVD equipment, other suppliers are likely to try and enter this market. Applied Materials, a leading semiconductor and solar capital equipment maker, has been trying to enter the MOCVD equipment market for quite some time, so far with little success. If Applied or other equipment makers are successfully able to bring to market a competitive system, Veeco could see its margins decline or experience share loss due to the increased level of competition. A slower than expected recovery for Veecos legacy businesses A prolonged downturn in R&D related metrology purchases could cause us to reduce our estimates from existing levels as we are currently assuming a gradual recovery in global R&D spending over the next two years. Veecos addressable markets are highly cyclical Veeco also competes in highly cyclical end markets that can add a significant amount of volatility to earnings. Equipment makers are typically characterized by large swings in revenue and earnings often within a relatively short period of time.

Christopher Blansett (1-415) 315-6708 christopher.r.blansett@jpmchase.com

North America Equity Research 08 January 2010

Company Description
Veeco is a leading provider of Metrology and Process Equipment solutions used by manufacturers in the HB-LED, solar, data storage, semiconductor, scientific research and industrial markets. Veecos products are also critical enabling instruments used in the advancement of scientific research, life sciences and nanotechnology. Veeco's Metrology tools are used to measure at the nanoscale and the companys Process Equipment tools help create nanoscale devices. Veeco is headquartered in Plainview, New York, and is listed on the Nasdaq stock exchange under the ticker VECO.

Historical Product Sales Review

Historically, Veeco has generated the majority of its business from data storage and metrology related equipment sales. In C06, Veeco generated 81% of its revenues from these two business segments. Today, however, sales for LED and solar equipment sales are far outpacing those of the legacy businesses and look to do so for the foreseeable future given the very strong recent bookings outlook. In C10, we are estimating that Veeco will generate 61% of its revenue from LED and solar related equipment sales and only 39% of its revenue from its legacy business lines. Figures 1 and 2 illustrate Veecos historical revenue and bookings by business segment since C1Q06.
Figure 1: Veeco Quarterly Revenue by Business Line C1Q06 to C3Q09
LED + Solar Revenue $60 Data Storage Revenue Metrology Revenue

$50 Quarterly Revenue ($mn)

$40

$30

$20

$10

$0
C 4Q 06 C 2Q 06 C 1Q 06 C 1Q 07 C 3Q 06 C 2Q 07 C 3Q 07 C 4Q 07 C 1Q 08 C 2Q 08 C 3Q 08 C 4Q 08 C 1Q 09 C 2Q 09 C 3Q 09

Source: Company reports and J.P. Morgan estimates.

Christopher Blansett (1-415) 315-6708 christopher.r.blansett@jpmchase.com

North America Equity Research 08 January 2010

Figure 2: Veeco Quarterly Bookings by Business Line C1Q06 to C3Q09

LED + Solar Bookings $200 $180 $160 Quarterly Bookings ($mn) $140 $120 $100 $80 $60 $40 $20 $0
06 06 06 07 07 07 06 08 07 08 08 08 09 09 2Q C C 1Q 2Q 4Q 3Q 3Q 1Q 2Q 1Q 2Q 3Q 4Q 1Q 4Q C C C C C C C C C C C C C 3Q 09

Data Storage Bookings

Metrology Bookings

Source: Company reports and J.P. Morgan estimates.

Figure 2 clearly illustrates the increase in bookings for LED and Solar related equipment. Most of the bookings increase, approximately 85%, is related to LED applications. Over the next few quarters, Veeco and its outsourced manufacturing partners will be operating at full utilization shipping MOCVD equipment for LED applications. The company is currently in the process of working with its supply chain to increase the number of systems that can be shipped each quarter. Lead times for MOCVD equipment are 4-6 months, which imply that most of the equipment ordered in C3Q09 will not be placed into production until C2Q10 at the earliest. We believe this will cause supply for HB-LEDs to remain tight throughout C1H10, which is the seasonally weak time of year.

Growing Demand for HB-LEDs Is Driving the Need for MOCVD Equipment
We estimate that the LED industry may need to purchase between 280 and 405 new MOCVD systems in order to meet the demand growth for HB-LEDs in C10. Using an average $2.5mn ASP per system, this would translate into an equipment market size ranging from $700mn to $1.0bn in C10. This would be a significant increase from an estimated MOCVD market of approximately $500mn in C09. The required number of MOCVD systems is primarily determined by the YoY HBLED unit demand growth and the processing time required for a batch of wafers in a given MOCVD system. In C09, we estimate that approximately 49.7bn HB-LED's were produced. In order to meet continued growing demand, we believe an additional 11.7bn LEDs (a 23.5% YoY increase) will need to be produced in C10. Based on conversations we have had with MOCVD equipment makers and LED makers, we

Christopher Blansett (1-415) 315-6708 christopher.r.blansett@jpmchase.com

North America Equity Research 08 January 2010

believe most processing times in the LED industry fall within the 10-13 hour range per batch of wafers. We are also assuming a constant 1.1mm2 die size, a 70% yield rate, and an MOCVD reactor that can hold 45 2 wafers. At 10 hours of average processing time per batch, the LED industry would need 280 new MOCVD systems to meet our estimated demand growth of 11.7bn LED units. At 13 hours of average processing time per batch, we estimate that the LED industry would need 405 new MOCVD systems to meet the same unit growth goal. Given that reactor sizes are constant, we do not believe the specific wafer size used plays a large role in the amount of LED output per system as the total amount of wafer surface area exposed in each reactor is also relatively constant. Proprietary MOCVD Processing at LED Makers Is Likely to Inhibit Rapid Share Shift Amongst Equipment Suppliers LED makers are typically very secretive about the MOCVD process they employ in production, given its critical nature in determining the overall performance of the end product. Conversations with LED industry experts lead us to believe that it takes an extended period of time for share to shift amongst the MOCVD equipment suppliers given that each company may have a unique MOCVD deposition process. Given the differences in reactor design between the leading MOCVD equipment makers, the LED manufacturer would also have to invest a significant amount of time and effort translating their unique process from one vendors system platform to another, something we think they are unwilling to do at this time given the tightness in LED supply. As a result, we believe Veeco will hold a relative constant 30% share in the MOCVD equipment category throughout C10. In many instances, LED makers purchase MOCVD equipment from both leading vendors, Veeco and Aixtron, in order to ensure they have access to both leading system platforms and to hedge against advances one equipment vendor may make at any given time in order to stay on the leading edge of LED performance.

Earnings and Cash Flow Outlook

Revenue and Earnings Should Grow Throughout C10 and Well Into C11; Free Cash Flow Generation Should Follow
In C09, we are expecting Veeco to generate $364mn in revenue and PF EPS of ($0.29). We are also currently forecasting Veeco to generate $620mn in revenue in C10 and PF EPS of $1.95 in EPS due to a significantly improved outlook for its LED and Solar business line as well as a more modest improvement in legacy metrology and data storage businesses. We believe that demand growth for LED equipment may slow in C11 as the LED industry absorbs a large amount of capacity in C2Q10 and will need some time to digest the large wave of equipment that is expected to ship later this year. However, we also expect the legacy equipment businesses of metrology and data storage to continue to improve at a modest pace throughout C10 and C11, helping to offset some of the possible slowdown in LED related equipment sales next year. In addition, market success by one or more of Veeco's solar customers could lead to a material increase in related sales of components, helping to offset any potential weakness in LED equipment sales.

Christopher Blansett (1-415) 315-6708 christopher.r.blansett@jpmchase.com

North America Equity Research 08 January 2010

Since Veeco is highly outsourced from a manufacturing perspective, we are assuming product margins will generally be limited at the 45% level at this time. We believe product ASPs are stable, and unless Veeco can gain a material amount of pricing leverage in its material purchases we do not expect to see GMs rise above this level. However, the company has recently added a second outsourcing partner in Asia that could allow the company to put downward pressure on the prices it has to pay for contract manufacturing services due to increased competition. This could allow the company to expand product margins beyond that of historical levels. From an Operating Expense perspective, we believe the company will be able to grow its revenue significantly over the next few years with only a modest increase in associated Opex. Most of the equipment lines Veeco sells are mature and only require ongoing improvements instead of complete redesigns or upgrades. As a result, we expect R&D spending to only increase at a rate that is 30% of the overall revenue growth of the company. We expect SG&A to only grow at a pace that is 45% of the overall revenue growth rate.

Christopher Blansett (1-415) 315-6708 christopher.r.blansett@jpmchase.com

North America Equity Research 08 January 2010

Table 1: Veeco Earnings Model, C06A to C11E

Revenues Sequential Change Change vs Year Ago Cost of Goods % of Revenues Gross Margin % of Revenues R&D % of Revenues SG&A % of Revenues Operating Income % of Revenues Stock Comp Exp Extraordinary Item Other Inc (Exp) % of Revenues Profit Before Taxes % of Revenues Taxes Tax Rate Net Inc, Cont Ops Total Net Income EPS, Cont Ops Extraordinary GAAP EPS Stock Comp Exp per Share PF EPS Ex Stock Comp Diluted Shares C2006A $441.0 0.0% 0.0% $246.9 56.0% $194.1 44.0% $61.9 14.0% $93.1 21.1% $39.1 8.9% $2.2 $0.0 ($3.7) -0.8% $35.4 8.0% $12.4 35.0% $23.0 $23.0 $0.74 $0.00 $0.74 $0.07 $0.74 31.1 C2007A $402.5 0.0% 0.0% $240.7 59.8% $161.8 40.2% $61.2 15.2% $91.0 22.6% $9.6 2.4% $5.7 ($22.3) ($1.7) -0.4% ($14.3) -3.6% $3.7 -25.5% $5.0 ($17.4) ($0.56) ($0.72) $0.16 $0.18 $0.16 31.1 C2008A $442.8 0.0% 0.0% $263.7 59.5% $179.1 40.5% $60.4 13.6% $92.8 21.0% $25.9 5.9% $10.5 ($97.2) $1.1 0.2% ($70.1) -15.8% $1.9 -2.7% $25.4 ($71.8) ($2.28) ($3.09) $0.81 $0.33 $0.81 31.4 C2009E $363.8 0.0% -17.8% $219.4 60.3% $144.4 39.7% $54.6 15.0% $83.5 23.0% $6.3 1.7% $8.5 ($16.7) ($6.5) -1.8% ($16.9) -4.6% $7.0 -41.8% ($7.1) ($23.8) ($0.81) ($0.52) ($0.29) $0.25 ($0.29) 33.1 C2010E $620.0 0.0% 70.4% $347.6 56.1% $272.4 43.9% $62.5 10.1% $104.1 16.8% $105.8 17.1% $11.0 ($7.2) $0.0 0.0% $98.6 15.9% $33.8 34.3% $72.0 $64.8 $1.75 ($0.19) $1.95 $0.30 $1.95 37.0 C2011E $690.0 0.0% 11.3% $386.0 55.9% $304.0 44.1% $64.6 9.4% $109.4 15.9% $130.0 18.8% $12.6 ($7.2) $0.0 0.0% $122.8 17.8% $46.5 37.9% $83.5 $76.3 $2.05 ($0.19) $2.24 $0.34 $2.24 37.2

Source: Company reports and J.P. Morgan estimates.

Our revenue growth outlook for Veecos different lines of businesses is illustrated in Figure 3. We expect the company to see further significant revenue growth in its LED and solar business line in C4Q09 with growth continuing at a more moderate pace for the following quarters as we believe the company will likely be constrained in the number of systems it can ship as its LED customers digest equipment that has already been shipped to them. For the metrology and data storage business lines, we are modeling a steady improvement over the next few years, with business getting back to more normal levels sometime in C11. We feel our estimates for these business lines are conservative and could lead to upside EPS revisions later this year if the global economy recovers at a faster than expected rate.

Christopher Blansett (1-415) 315-6708 christopher.r.blansett@jpmchase.com

North America Equity Research 08 January 2010

Figure 3: Revenue Outlook by Business Segment

Total Revenue Metrology Revenue $210 $180 Quarterly Revenue $150 $120 $90 $60 $30 $0
0 C 6 1Q 07 C 2Q 0 C 7 3Q 0 C 7 4Q 07 C 1Q 0 C 8 2Q 0 C 8 3Q 0 C 8 4Q 0 C 8 1Q 0 C 9 2Q 09 C 3Q C 09 4Q 0 C 9E 1Q 1 C 0E 2Q 1 C 0E 3Q 1 C 0E 4Q 1 C 0E 1Q 11 C E 2Q 11 C E 3Q 1 C 1E 4Q 11 E 06 06 1Q 2Q 3Q C C C C 4Q 06

LED + Solar Revenue Total Bookings

Data Storage Revenue

JPM Forward Estimates

Source: Company reports and J.P. Morgan estimates.

Figure 4 illustrates our current expectation of Opex as a percentage of revenue. Although we expect Opex to decline relative to revenue throughout C10 and for most of C11, we are modeling Opex to grow on an absolute basis. Given that the company is highly outsourced from a manufacturing perspective, many of the product lines are relatively mature, and that the company has been operating with a relatively high level of fixed costs vs. its level of revenue for the past year, we think there is significant Opex leverage the company will enjoy as top line revenue grows.
Figure 4: Veeco Opex Trends as a Percentage of Quarterly Revenue
R&D 50%
JPM Forward Estimates

SG&A

Op-Ex

Percentage of Quarterly Revenue

40%

30%

20%

10%

0%
0 C 6 3Q 06 C 4Q 0 C 6 1Q 07 C 2Q 0 C 7 3Q 07 C 4Q 0 C 7 1Q 0 C 8 2Q 08 C 3Q 0 C 8 4Q 0 C 8 1Q 09 C 2Q 0 C 9 3Q 09 C 4Q 0 C 9E 1Q 10 E C 2Q 10 E C 3Q 1 C 0E 4Q 1 C 0E 1Q 1 C 1E 2Q 11 E C 3Q 1 C 1E 4Q 11 E 1Q C 06 C 2Q

Source: Company reports and J.P. Morgan estimates.

Balance Sheet and Cash Flow Statements

Veeco recently completed a secondary share issuance in C4Q09 that added $130mn to the balance sheet. The purpose of the offering is to pay off debt and fund working capital requirements as the company sees a significant production ramp ahead. We expect the company to pay down $50mn of its long term debt in C1Q10 and the remaining $50mn sometime in C11. At this time, we do not expect the company will need to raise any additional funds as the recent share offering provides the company
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North America Equity Research 08 January 2010

with a strong balance sheet to work from. Although working capital requirements are expected to increase significantly due to a significant ramp in production in C10 , we still expect the company to remain FCF positive for the year.
Table 2: VECO Annual Balance Sheet
C2008A Assets Cash Short Term Investments Accounts Receivable Inventories Other Current Assets Total Current Assets Net PP&E Long Term Investments Goodwill Other Assets Total Assets Liabilities & Shareholders' Equity Short-term debt Accounts payable Deferred profit Accrued expenses and other Total current liabilities Long Term Debt Other Long Term Liabilities Shareholders' Equity Total Liabilities & Equity
Source: Company reports and J.P. Morgan estimates.

C2009E $214 $0 $85 $94 $10 $403 $56 $0 $59 $32 $550 $0 $34 $2 $74 $110 $100 $7 $333 $550

C2010E $189 $0 $111 $121 $10 $431 $43 $0 $59 $32 $565 $0 $42 $2 $74 $118 $50 $7 $390 $565

C2011E $230 $0 $104 $120 $10 $464 $36 $0 $59 $32 $592 $0 $42 $2 $74 $118 $0 $7 $467 $592

$104 $0 $60 $95 $9 $267 $64 $0 $39 $59 $430 $0 $30 $1 $67 $98 $98 $7 $226 $430

Veeco is highly outsourced from a manufacturing perspective and as a result has very low capex requirements. This has moderated the companys cash burn in a difficult C09 to only $10mn. As revenues rebound from very low levels, Veeco's low capital spending requirements should translate into significant Free Cash Flow power as the company relies on its manufacturing partners to meet growing demand and, in our view, will not need to build out any material internal production capacity. As a result, we expect Veeco to generate $25mn in FCF in C10 and $91mn in C11.

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North America Equity Research 08 January 2010

Table 3: VECO Annual Cash Flow Statement

F2008A Cash Flows from Operating Activities: Net Income (Loss) Depreciation and Amortization Loss on Disposal of Prop, Equip and Patents Other Operating activities Changes in operating assets and liabilities Accounts and Interest Receivable Inventories Accounts Payable Accrued Expenses Prepaid Expenses and Other Assets Net cash provided by (used in) operating activities Cash Flows from Investing Activities: Capital Expenditures (net of retirements) Other investing activities Net cash provided by (used in) investing activities Cash Flows from Financing Activities: Net Proceeds from Issuance of Common Stock Other Financing Activities Net cash provided by (used in) financing activities Effect of exchange rate changes on cash Net increase (decrease) in cash and cash equivalents Cash and cash equivalents at beginning of period Cash and cash equivalents at end of period Free Cash Flow FCF/Shr
Source: Company reports and J.P. Morgan estimates.

F2009E -$23.8 $21.6 $0.0 $10.6 -$39.3 -$4.1 $19.5 -$1.2 $14.9 -$1.1 -$2.8 -$7.0 -$11.9 -$18.9 $130.1 $2.3 $132.4 $0.0 $110.6 $103.8 $214.4 -$9.8 -$0.32

F2010E $64.8 $24.0 $0.0 $0.0 -$52.7 $0.0 $0.0 $0.0 $0.0 $0.0 $36.1 -$11.5 $0.0 -$11.5 $2.0 -$50.0 -$50.0 $0.0 -$25.4 $214.4 $191.0 $24.6 $0.78

F2011E $76.3 $25.8 $0.0 $0.0 $7.4 $0.0 $0.0 $0.0 $0.0 $0.0 $109.5 -$19.0 $0.0 -$19.0 $2.0 -$50.0 -$50.0 $0.0 $40.5 $191.0 $233.5 $90.5 $2.87

-$71.1 $25.1 $0.0 $82.9 $20.1 $6.2 -$7.9 -$10.2 -$0.8 $44.3 -$12.8 -$10.9 -$23.7 $0.7 -$33.7 -$33.0 -$0.9 -$13.3 $117.1 $103.8 $31.5 $1.02

Low Valuation vs. Alt Energy Peers Leads Us to an Overweight Rating

We are initiating on VECO with EPS estimates for C10 and C11 that are significantly higher than consensus estimates as we do not believe the Street fully understands the potential magnitude of the level of demand for increased LED manufacturing capacity. We think LCD backlighting will drive most of the LED demand growth in C10 and will be joined by general lighting in C11 as the two primary LED demand growth drivers. The combination of these two applications could cause LED unit sales to grow at a 20-30% CAGR over the next few years. This rapid demand growth by the end markets would need a corresponding increase in manufacturing capacity over the same time period, benefiting equipment suppliers such as Veeco, in our view. As a result we believe Veecos earnings will grow at a faster rate than our coverage universe and VECO shares will outperform our coverage universe over the next 12 months. Thus, we are initiating with an Overweight rating. We believe the company's backlog will continue to grow as will the absolute level of equipment bookings. In addition, we believe the level of order intake currently far exceeds that of the companys ability to meet such demand, which should provide a more stable revenue and earnings outlook throughout C10 than most of the companies in our coverage universe.

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North America Equity Research 08 January 2010

VECO currently trades at 17.7x our C10 PF EPS estimate of $1.95 vs. our alternative energy group average of 26.0x. We are setting our December 31, 2010, price target at $50.00, which places Veecos C10 P/E on par with our coverage universe group average. We think VECO should trade at or above our coverage universe average at this time given that we believe the stock reflects a lower level of risk than most companies in our Alternative Energy universe that are exposed to changing and generally declining levels of government based subsidization and a difficult financing environment for the purchase of their products.
Table 4: Alternative Energy Comparison Group
Company Applied Materials Ascent Solar Tech Cree Energy Conv Dev Evergreen Solar First Solar MEMC SunPower Veeco Instruments Alternative Energy Group Avg Ticker AMAT ASTI CREE ENER ESLR FSLR WFR SPWR.A VECO JPM Rating OW N OW N OW N UW N OW Share Price $14.01 $5.70 $58.47 $12.41 $1.78 $140.48 $14.55 $25.85 $34.51 Market Cap ($mn) $18,881 $119 $5,261 $525 $365 $12,066 $3,253 $2,490 $1,117 C08A 26.5x NM NM 9.9x NM 33.1x 4.4x 17.5x 42.8x 18.3x P/E C09E NM NM 73.5x NM NM 19.2x NM 50.5x NM 47.7x C10E 26.1x 34.5x 37.0x NM NM 22.3x 11.8x 24.3x 17.7x 26.0x 2008A 12.0x NM 39.3x 6.4x NM 23.5x 2.5x 7.1x 42.7x 15.1x EV / EBITDA 2009E 43.3x NM 29.8x 39.8x 151.8x 14.5x 32.2x 9.8x 39.3x 45.9x 2010E 12.1x 4.1x 19.2x 15.4x 9.6x 14.0x 5.0x 6.4x 8.5x 10.7x

Source: Company reports and J.P. Morgan estimates. J.P. Morgan ratings: OW = Overweight; N = Neutral; UW = Underweight. Prices as of 1/7/10 close.

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Christopher Blansett (1-415) 315-6708 christopher.r.blansett@jpmchase.com

North America Equity Research 08 January 2010

Analyst Certification: The research analyst(s) denoted by an AC on the cover of this report certifies (or, where multiple research analysts are primarily responsible for this report, the research analyst denoted by an AC on the cover or within the document individually certifies, with respect to each security or issuer that the research analyst covers in this research) that: (1) all of the views expressed in this report accurately reflect his or her personal views about any and all of the subject securities or issuers; and (2) no part of any of the research analysts compensation was, is, or will be directly or indirectly related to the specific recommendations or views expressed by the research analyst(s) in this report.

Important Disclosures
Market Maker: JPMSI makes a market in the stock of Veeco Instruments. Lead or Co-manager: JPMSI or its affiliates acted as lead or co-manager in a public offering of equity and/or debt securities for Veeco Instruments within the past 12 months. Client of the Firm: Veeco Instruments is or was in the past 12 months a client of JPMSI; during the past 12 months, JPMSI provided to the company investment banking services. Investment Banking (past 12 months): JPMSI or its affiliates received in the past 12 months compensation for investment banking services from Veeco Instruments. Investment Banking (next 3 months): JPMSI or its affiliates expect to receive, or intend to seek, compensation for investment banking services in the next three months from Veeco Instruments.

Veeco Instruments (VECO) Price Chart

65

Date

Rating Share Price ($)

16.39

Price Target ($)

-

52

19-Dec-07 N

39 Price($) 26

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0 Oct 06 Jan 07 Apr 07 Jul 07 Oct 07 Jan 08 Apr 08 Jul 08 Oct 08 Jan 09 Apr 09 Jul 09 Oct 09 Jan 10

Source: Bloomberg and J.P. Morgan; price data adjusted for stock splits and dividends. Initiated coverage Dec 19, 2007. Break in coverage Jul 24, 2008 - Jan 07, 2010. This chart shows J.P. Morgan's continuing coverage of this stock; the current analyst may or may not have covered it over the entire period. J.P. Morgan ratings: OW = Overweight, N = Neutral, UW = Underweight.

Explanation of Equity Research Ratings and Analyst(s) Coverage Universe: J.P. Morgan uses the following rating system: Overweight [Over the next six to twelve months, we expect this stock will outperform the average total return of the stocks in the analysts (or the analysts teams) coverage universe.] Neutral [Over the next six to twelve months, we expect this stock will perform in line with the average total return of the stocks in the analysts (or the analysts teams) coverage universe.] Underweight [Over the next six to twelve months, we expect this stock will underperform the average total return of the stocks in the analysts (or the analysts teams) coverage universe.] The analyst or analysts teams coverage universe is the sector and/or country shown on the cover of each publication. See below for the specific stocks in the certifying analyst(s) coverage universe.

Coverage Universe: Christopher Blansett: Applied Materials, Inc. (AMAT), Ascent Solar Technologies (ASTI), Cree (CREE), Energy Conversion Devices, Inc. (ENER), Evergreen Solar (ESLR), First Solar, Inc. (FSLR), MEMC Electronic Materials Inc. (WFR), SunPower (SPWRA)

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Christopher Blansett (1-415) 315-6708 christopher.r.blansett@jpmchase.com

North America Equity Research 08 January 2010

J.P. Morgan Equity Research Ratings Distribution, as of December 31, 2009 Overweight (buy) 42% 58% 41% 78% Neutral (hold) 44% 57% 49% 73% Underweight (sell) 14% 42% 10% 57%

JPM Global Equity Research Coverage IB clients* JPMSI Equity Research Coverage IB clients*

*Percentage of investment banking clients in each rating category. For purposes only of NASD/NYSE ratings distribution rules, our Overweight rating falls into a buy rating category; our Neutral rating falls into a hold rating category; and our Underweight rating falls into a sell rating category.

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Christopher Blansett (1-415) 315-6708 christopher.r.blansett@jpmchase.com

North America Equity Research 08 January 2010

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