JPM VECO IC

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North America Equity Research08 January 2010

Veeco InstrumentsInitiation

OverweightVECO, VECO US

Initiating with an Overweight Rating, Demand for LEDEquipment Looks to Remain Strong Throughout C10

Price: $34.51

Price Target: $50.00

Alternative Energy

Christopher Blansett AC

(1-415) [email protected]

J.P. Morgan Securities Inc.

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Veeco Instruments, Inc. (VECO;VECO US)

2008A 2009E 2010E 2011EEPS Reported ($)

Q1 (Mar) 0.11 (0.42)A 0.37 0.58Q2 (Jun) 0.19 (0.34)A 0.45 0.64Q3 (Sep) 0.15 0.12A 0.52 0.65Q4 (Dec) 0.36 0.34 A 0.60 0.37FY 0.81 (0.29) A 1.95 2.24

Revenues FY ($ mn) 443 364 A 620 690EPS figures in the table include stock compensation but exclude amortization of intangible assets and one-time restructuring charges.

Company DataPrice ($) 34.5Date Of Price 07 Jan 1052-week Range ($) 35.55 - 3.22Mkt Cap ($ mn) 1,117.26Fiscal Year End DecShares O/S (mn) 32Price Target ($) 50.00Price Target End Date 31 Dec 10

See page 14 for analyst certification and important disc losures.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 mayhave 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.

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 currentlyexperiencing a significant increase in demand for its MOCVD equipment, which is used in acritical LED manufacturing process. We believe strong demand for high brightness LEDs islikely to drive strong demand for associated MOCVD capital equipment throughout C10. Wealso expect Veecos legacy businesses, data storage and metrology equipment, to improvethroughout the year from relatively low levels as the overall global economy improves.

2010 LED related equipment sales will likely double YoY due to strong highbrightness LED demand that is being driven by LCD backlighting and general lightingapplications. Veeco is experiencing a surge of demand for its MOCVD systems fromboth existing and new LED makers who themselves are having difficulty keeping upwith end demand. We expect LCD backlighting adoption for TVs to continue at anaggressive 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 MOCVDequipment market averaging over $1bn for each of the next two years.

Legacy metrology and data storage businesses are likely to improve throughout theyear as the global economy recovers. Currently, these two business lines are operatingnear their respective break-even levels as they have yet to recover from the recentrecession. As general spending for R&D returns to more normal levels and the HardDisk Drive industry absorbs its existing manufacturing capacity, we believe thesebusiness lines margins and contributed profit are likely to improve significantly.

Solar adds upside potential to estimates as we believe there is significant opportunityfor 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 rampproduction throughout the year, Veeco should see an incremental increase in associatedcomponent 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 C10estimates are $620mn/$1.95. Our $50.00 price target is based on the assumptionthat VECO shares should trade in line with our Alternative Energy C10 groupaverage P/E of 26.0x. VECO currently trades at 17.7x our C10 PF EPS estimate of $1.95.


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Christopher Blansett(1-415) [email protected]

Table of ContentsKey Investment Points .............................................................3 Investment Risks ......................................................................4 Company Description ..............................................................5 Historical Product Sales Review.............................................5 Growing Demand for HB-LEDs Is Driving the Need forMOCVD Equipment...................................................................6 Earnings and Cash Flow Outlook ...........................................7 Revenue and Earnings Should Grow Throughout C10 and Well Into C11; Free CashFlow Generation Should Follow..................................................................................7 Balance Sheet and Cash Flow Statements ........... .......... ........... ........... ........... ...........10 Low Valuation vs. Alt Energy Peers Leads Us to anOverweight Rating..................................................................12


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Key Investment PointsStrong LED demand driving MOCVD equipment ordersVeeco is experiencing strong order growth for its Metal Oxide Chemical VaporDeposition (MOCVD) equipment that is used for one of the most critical steps in theentire LED manufacturing process. High Brightness LEDs (HB-LEDs) are fastbeing adopted into the LCD panel industry for PC and TV applications as well as forgeneral lighting purposes. As a result, the overall LED industry is at full capacity andwe believe LED makers will likely remain fully utilized throughout C10 in order tomeet continued demand growth. Veeco is only one of two major equipment vendorsthat supplies this highly specialized equipment to the LED industry with anapproximate 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 inorder to keep pace. Overall, we expect Veeco's MOCVD revenue to double in C10vs. C09.

Legacy metrology and data storage equipment businesses are likely to improvethroughout the yearVeeco has historically received most of its revenue from its metrology and datastorage related equipment sales. Both of these businesses continue to suffer theimpacts of the global downturn and are operating slightly above their respectivebreak-even levels. We expect sales related to metrology equipment to improve withthe overall global economy since Veecos customer base for this equipment line isextremely diversified across government institutions, R&D houses, and generalcorporations for internal R&D purposes. As all of these entities ease budgetrestrictions and start to invest for the future, we believe Veeco will see an increase inrelated equipment sales. Sales related to data storage applications should improve asthe outlook for hard disk drives and the overall PC and electronic storage sectorimprove and we believe that Veeco's customers are likely to start adding newcapacity in C2H10 in order to prepare for the C10 holiday season. Overall, we expectthe companys metrology and data storage related revenue to increase 40% in C10vs. very low levels in C09.

Solar related sales provide upside potential to our estimatesVeeco also sells components to a number of thin-film solar module makers focusingon CIGS (Copper, Indium, Gallium, Selenide) based technology. The company hasdiversified exposure to a growing number of CIGS module makers, many of whomare planning on ramping volume production in C10, which could lead to significant

upside in revenue from sales of components and equipment for solar applications forVeeco. In addition, Veeco is developing its own CIGS based thin film depositionsystem that it could then sell to CIGS module makers as an alternative to theirinternally developed equipment. However, given the long evaluation time frames forsuch critical equipment, we do not expect a material amount of revenue from thisnew equipment line to become meaningful until C11 at the earliest.

Highly outsourced manufacturing keeps fixed costs lowVeeco has already shifted to a highly outsourced manufacturing strategy that, in ourview, will enable it to grow its revenue significantly this year without having to buildout a significant amount of internal infrastructure. This should allow the company to

Veeco Instruments(VECO)Overweight


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better deal with volatile equipment cycles and reduce earnings volatility while at thesame 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 USand Asia.

Investment RisksWeaker than expected LED demandWe believe the primary risk to our Overweight rating on Veeco is related to the endproduct demand balance for HB-LEDs. In mid-C10, we expect a significant amountof new MOCVD equipment to start to come on line at LED fabs. At that time, webelieve end demand for HB-LEDs will need to continue improving so that LEDmakers need more MOCVD equipment and for orders for Veeco to continue to grow.

Inability to meet difficult product shipment timelinesAnother risk to our investment thesis includes the failure of the company to meetaggressive timelines for MOCVD equipment shipments given the tightness thatexists across the LED industry. Problems shipping equipment on time to LEDmakers could result in reduced earnings potential as well as share loss as customersturn to Veeco's primary competitor in order to bring manufacturing capacity on linewithin a reasonable time frame.

Share loss or margin degradation due to increased competitionGiven the fast growth rate of the LED MOCVD equipment, other suppliers are likelyto try and enter this market. Applied Materials, a leading semiconductor and solarcapital equipment maker, has been trying to enter the MOCVD equipment market forquite some time, so far with little success. If Applied or other equipment makers aresuccessfully able to bring to market a competitive system, Veeco could see itsmargins decline or experience share loss due to the increased level of competition.

A slower than expected recovery for Veecos legacy businessesA prolonged downturn in R&D related metrology purchases could cause us to reduceour estimates from existing levels as we are currently assuming a gradual recovery inglobal R&D spending over the next two years.

Veecos addressable markets are highly cyclicalVeeco also competes in highly cyclical end markets that can add a significant amountof volatility to earnings. Equipment makers are typically characterized by largeswings in revenue and earnings often within a relatively short period of time.


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Company DescriptionVeeco is a leading provider of Metrology and Process Equipment solutions used bymanufacturers in the HB-LED, solar, data storage, semiconductor, scientific researchand industrial markets. Veecos products are also critical enabling instruments usedin the advancement of scientific research, life sciences and nanotechnology. Veeco'sMetrology tools are used to measure at the nanoscale and the companys ProcessEquipment 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 ReviewHistorically, Veeco has generated the majority of its business from data storage andmetrology related equipment sales. In C06, Veeco generated 81% of its revenuesfrom these two business segments. Today, however, sales for LED and solarequipment sales are far outpacing those of the legacy businesses and look to do so forthe foreseeable future given the very strong recent bookings outlook. In C10, we areestimating that Veeco will generate 61% of its revenue from LED and solar relatedequipment sales and only 39% of its revenue from its legacy business lines. Figures 1and 2 illustrate Veecos historical revenue and bookings by business segment sinceC1Q06.

Figure 1: Veeco Quarterly Revenue by Business Line C1Q06 to C3Q09

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Figure 2: Veeco Quarterly Bookin gs by Business Line C1Q06 to C3Q09

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Figure 2 clearly illustrates the increase in bookings for LED and Solar relatedequipment. Most of the bookings increase, approximately 85%, is related to LEDapplications. Over the next few quarters, Veeco and its outsourced manufacturingpartners will be operating at full utilization shipping MOCVD equipment for LEDapplications. The company is currently in the process of working with its supplychain 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 theequipment ordered in C3Q09 will not be placed into production until C2Q10 at theearliest. We believe this will cause supply for HB-LEDs to remain tight throughoutC1H10, which is the seasonally weak time of year.

Growing Demand for HB-LEDs Is Drivingthe Need for MOCVD EquipmentWe estimate that the LED industry may need to purchase between 280 and 405 newMOCVD systems in order to meet the demand growth for HB-LEDs in C10. Usingan average $2.5mn ASP per system, this would translate into an equipment marketsize ranging from $700mn to $1.0bn in C10. This would be a significant increasefrom an estimated MOCVD market of approximately $500mn in C09.

The required number of MOCVD systems is primarily determined by the YoY HB-LED unit demand growth and the processing time required for a batch of wafers in agiven MOCVD system. In C09, we estimate that approximately 49.7bn HB-LED'swere produced. In order to meet continued growing demand, we believe an additional11.7bn LEDs (a 23.5% YoY increase) will need to be produced in C10. Based onconversations we have had with MOCVD equipment makers and LED makers, we


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believe most processing times in the LED industry fall within the 10-13 hour rangeper batch of wafers.

We are also assuming a constant 1.1mm 2 die size, a 70% yield rate, and an MOCVDreactor 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 estimateddemand growth of 11.7bn LED units. At 13 hours of average processing time perbatch, we estimate that the LED industry would need 405 new MOCVD systems tomeet the same unit growth goal. Given that reactor sizes are constant, we do notbelieve the specific wafer size used plays a large role in the amount of LED outputper system as the total amount of wafer surface area exposed in each reactor is alsorelatively constant.

Proprietary MOCVD Processing at LED Makers Is Likely to Inhibit RapidShare Shift Amongst Equipment Suppliers

LED makers are typically very secretive about the MOCVD process they employ inproduction, given its critical nature in determining the overall performance of the endproduct. Conversations with LED industry experts lead us to believe that it takes anextended period of time for share to shift amongst the MOCVD equipment suppliersgiven that each company may have a unique MOCVD deposition process. Given thedifferences in reactor design between the leading MOCVD equipment makers, theLED manufacturer would also have to invest a significant amount of time and efforttranslating 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 LEDsupply. As a result, we believe Veeco will hold a relative constant 30% share in theMOCVD equipment category throughout C10. In many instances, LED makerspurchase MOCVD equipment from both leading vendors, Veeco and Aixtron, inorder to ensure they have access to both leading system platforms and to hedgeagainst advances one equipment vendor may make at any given time in order to stayon the leading edge of LED performance.

Earnings and Cash Flow OutlookRevenue and Earnings Should Grow Throughout C10 andWell Into C11; Free Cash Flow Generation Should FollowIn 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 inC10 and PF EPS of $1.95 in EPS due to a significantly improved outlook for its LEDand Solar business line as well as a more modest improvement in legacy metrologyand data storage businesses. We believe that demand growth for LED equipmentmay slow in C11 as the LED industry absorbs a large amount of capacity in C2Q10and will need some time to digest the large wave of equipment that is expected toship 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 C10and C11, helping to offset some of the possible slowdown in LED related equipmentsales next year. In addition, market success by one or more of Veeco's solarcustomers could lead to a material increase in related sales of components, helping tooffset any potential weakness in LED equipment sales.


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Since Veeco is highly outsourced from a manufacturing perspective, we areassuming 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 abovethis level. However, the company has recently added a second outsourcing partner inAsia that could allow the company to put downward pressure on the prices it has topay for contract manufacturing services due to increased competition. This couldallow the company to expand product margins beyond that of historical levels.

From an Operating Expense perspective, we believe the company will be able togrow its revenue significantly over the next few years with only a modest increase inassociated Opex. Most of the equipment lines Veeco sells are mature and onlyrequire ongoing improvements instead of complete redesigns or upgrades. As aresult, we expect R&D spending to only increase at a rate that is 30% of the overallrevenue growth of the company. We expect SG&A to only grow at a pace that is

45% of the overall revenue growth rate.


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Table 1: Veeco Earnings Model, C06A to C11E

C2006A C2007A C2008A C2009E C2010E C2011E

Revenues $441.0 $402.5 $442.8 $363.8 $620.0 $690.0Sequential Change 0.0% 0.0% 0.0% 0.0% 0.0% 0.0%Change vs Year Ago 0.0% 0.0% 0.0% -17.8% 70.4% 11.3%

Cost of Goods $246.9 $240.7 $263.7 $219.4 $347.6 $386.0% of Revenues 56.0% 59.8% 59.5% 60.3% 56.1% 55.9%

Gross Margin $194.1 $161.8 $179.1 $144.4 $272.4 $304.0% of Revenues 44.0% 40.2% 40.5% 39.7% 43.9% 44.1%

R&D $61.9 $61.2 $60.4 $54.6 $62.5 $64.6% of Revenues 14.0% 15.2% 13.6% 15.0% 10.1% 9.4%

SG&A $93.1 $91.0 $92.8 $83.5 $104.1 $109.4% of Revenues 21.1% 22.6% 21.0% 23.0% 16.8% 15.9%

Operating Income $39.1 $9.6 $25.9 $6.3 $105.8 $130.0

% of Revenues 8.9% 2.4% 5.9% 1.7% 17.1% 18.8%

Stock Comp Exp $2.2 $5.7 $10.5 $8.5 $11.0 $12.6Extraordinary Item $0.0 ($22.3) ($97.2) ($16.7) ($7.2) ($7.2)

Other Inc (Exp) ($3.7) ($1.7) $1.1 ($6.5) $0.0 $0.0% of Revenues -0.8% -0.4% 0.2% -1.8% 0.0% 0.0%

Profit Before Taxes $35.4 ($14.3) ($70.1) ($16.9) $98.6 $122.8% of Revenues 8.0% -3.6% -15.8% -4.6% 15.9% 17.8%

Taxes $12.4 $3.7 $1.9 $7.0 $33.8 $46.5Tax Rate 35.0% -25.5% -2.7% -41.8% 34.3% 37.9%

Net Inc, Cont Ops $23.0 $5.0 $25.4 ($7.1) $72.0 $83.5Total Net Income $23.0 ($17.4) ($71.8) ($23.8) $64.8 $76.3

EPS, Cont Ops $0.74 ($0.56) ($2.28) ($0.81) $1.75 $2.05Extraordinary $0.00 ($0.72) ($3.09) ($0.52) ($0.19) ($0.19)GAAP EPS $0.74 $0.16 $0.81 ($0.29) $1.95 $2.24

Stock Comp Exp per Share

$0.07 $0.18 $0.33 $0.25 $0.30 $0.34

PF EPS Ex Stoc k Comp $0.74 $0.16 $0.81 ($0.29) $1.95 $2.24Diluted Shares 31.1 31.1 31.4 33.1 37.0 37.2Source: Company reports and J.P. Morgan estimates.

Our revenue growth outlook for Veecos different lines of businesses is illustrated inFigure 3. We expect the company to see further significant revenue growth in itsLED and solar business line in C4Q09 with growth continuing at a more moderatepace 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 hasalready been shipped to them.

For the metrology and data storage business lines, we are modeling a steadyimprovement over the next few years, with business getting back to more normallevels sometime in C11. We feel our estimates for these business lines areconservative and could lead to upside EPS revisions later this year if the globaleconomy recovers at a faster than expected rate.


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Figure 3: Revenue Outlook by Business Segment

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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 mostof C11, we are modeling Opex to grow on an absolute basis. Given that the companyis highly outsourced from a manufacturing perspective, many of the product lines arerelatively mature, and that the company has been operating with a relatively highlevel of fixed costs vs. its level of revenue for the past year, we think there issignificant Opex leverage the company will enjoy as top line revenue grows.

Figure 4: Veeco Opex Trends as a Percentage of Quarterly Revenue

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Balance Sheet and Cash Flow StatementsVeeco recently completed a secondary share issuance in C4Q09 that added $130mnto the balance sheet. The purpose of the offering is to pay off debt and fund workingcapital requirements as the company sees a significant production ramp ahead. Weexpect the company to pay down $50mn of its long term debt in C1Q10 and theremaining $50mn sometime in C11. At this time, we do not expect the company willneed to raise any additional funds as the recent share offering provides the company


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with a strong balance sheet to work from. Although working capital requirements areexpected 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 C2009E C2010E C2011E AssetsCash $104 $214 $189 $230Short Term Investments $0 $0 $0 $0Accounts Receivable $60 $85 $111 $104Inventories $95 $94 $121 $120Other Current Assets $9 $10 $10 $10Total Current Assets $267 $403 $431 $464Net PP&E $64 $56 $43 $36Long Term Investments $0 $0 $0 $0Goodwill $39 $59 $59 $59Other Assets $59 $32 $32 $32Total Asset s $430 $550 $565 $592Liabilities & Shareholders' EquityShort-term debt $0 $0 $0 $0Accounts payable $30 $34 $42 $42Deferred profit $1 $2 $2 $2Accrued expenses and other $67 $74 $74 $74Total current liabili ties $98 $110 $118 $118Long Term Debt $98 $100 $50 $0Other Long Term Liabilities $7 $7 $7 $7Shareholders' Equity $226 $333 $390 $467Total Liabil ities & Equity $430 $550 $565 $592Source: Company reports and J.P. Morgan estimates.

Veeco is highly outsourced from a manufacturing perspective and as a result has verylow capex requirements. This has moderated the companys cash burn in a difficultC09 to only $10mn. As revenues rebound from very low levels, Veeco's low capitalspending requirements should translate into significant Free Cash Flow power as thecompany relies on its manufacturing partners to meet growing demand and, in ourview, 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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Table 3: VECO Annual Cash Flow Statement

F2008A F2009E F2010E F2011E

Cash Flows from Operating Activities:Net Income (Loss) -$71.1 -$23.8 $64.8 $76.3Depreciation and Amortization $25.1 $21.6 $24.0 $25.8Loss on Disposal of Prop, Equip and Patents $0.0 $0.0 $0.0 $0.0Other Operating activities $82.9 $10.6 $0.0 $0.0Changes in operating assets and liabilities -$39.3 -$52.7 $7.4

Accounts and Interest Receivable $20.1 -$4.1 $0.0 $0.0Inventories $6.2 $19.5 $0.0 $0.0Accounts Payable -$7.9 -$1.2 $0.0 $0.0Accrued Expenses -$10.2 $14.9 $0.0 $0.0Prepaid Expenses and Other Assets -$0.8 -$1.1 $0.0 $0.0

Net cash prov ided by (used in) operating activ ities $44.3 -$2.8 $36.1 $109.Cash Flows from Investing Activities:Capital Expenditures (net of retirements) -$12.8 -$7.0 -$11.5 -$19.0Other investing activities -$10.9 -$11.9 $0.0 $0.0Net cash prov ided by (used in) inves ting activ ities -$23.7 -$18.9 -$11.5 -$19Cash Flows from Financing Activities:Net Proceeds from Issuance of Common Stock $0.7 $130.1 $2.0 $2.0Other Financing Activities -$33.7 $2.3 -$50.0 -$50.0Net cash prov ided by (used in) financ ing activi ties -$33.0 $132.4 -$50.0 -$50Effect of exchange rate changes on cash -$0.9 $0.0 $0.0 $0.0Net increase (decrease) in cash and cash equivalents -$13.3 $110.6 -$25.4 $40.5Cash and cash equivalents at beginning of period $117.1 $103.8 $214.4 $191.0Cash and cash equivalents at end of period $103.8 $214.4 $191.0 $233.5

Free Cash Flow $31.5 -$9.8 $24.6 $90.5FCF/Shr $1.02 -$0.32 $0.78 $2.87Source: Company reports and J.P. Morgan estimates.

Low Valuation vs. Alt Energy Peers LeadsUs to an Overweight RatingWe are initiating on VECO with EPS estimates for C10 and C11 that aresignificantly higher than consensus estimates as we do not believe the Street fullyunderstands the potential magnitude of the level of demand for increased LEDmanufacturing capacity. We think LCD backlighting will drive most of the LEDdemand growth in C10 and will be joined by general lighting in C11 as the twoprimary LED demand growth drivers. The combination of these two applicationscould cause LED unit sales to grow at a 20-30% CAGR over the next few years. Thisrapid demand growth by the end markets would need a corresponding increase inmanufacturing capacity over the same time period, benefiting equipment supplierssuch as Veeco, in our view.

As a result we believe Veecos earnings will grow at a faster rate than our coverageuniverse and VECO shares will outperform our coverage universe over the next 12months. Thus, we are initiating with an Overweight rating. We believe the company'sbacklog will continue to grow as will the absolute level of equipment bookings. Inaddition, we believe the level of order intake currently far exceeds that of thecompanys ability to meet such demand, which should provide a more stable revenueand earnings outlook throughout C10 than most of the companies in our coverageuniverse.


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VECO currently trades at 17.7x our C10 PF EPS estimate of $1.95 vs. our alternativeenergy 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 groupaverage. We think VECO should trade at or above our coverage universe average atthis time given that we believe the stock reflects a lower level of risk than mostcompanies in our Alternative Energy universe that are exposed to changing andgenerally declining levels of government based subsidization and a difficultfinancing environment for the purchase of their products.

Table 4: Alternative Energy Comparison Group

JPM Share Market P / E EV / EBITDACompany Ticker Rating Price Cap ($mn) C08A C09E C10E 2008A 2009E 2

Applied Materials AMAT OW $14.01 $18,881 26.5x NM 26.1x 12.0x 43.3x 12.1xAscent Solar Tech ASTI N $5.70 $119 NM NM 34.5x NM NM 4.1xCree CREE OW $58.47 $5,261 NM 73.5x 37.0x 39.3x 29.8x 19.2xEnergy Conv Dev ENER N $12.41 $525 9.9x NM NM 6.4x 39.8x 15.4x

Evergreen Solar ESLR OW $1.78 $365 NM NM NM NM 151.8x 9.6xFirst Solar FSLR N $140.48 $12,066 33.1x 19.2x 22.3x 23.5x 14.5x 14.0xMEMC WFR UW $14.55 $3,253 4.4x NM 11.8x 2.5x 32.2x 5.0xSunPower SPWR.A N $25.85 $2,490 17.5x 50.5x 24.3x 7.1x 9.8x 6.4x

Veeco Instru ments VECO OW $34.51 $1,117 42.8x NM 17.7x 42.7x 39.3x 8.5x

Alternative Energy Group Avg 18.3x 47.7x 26.0x 15.1x 45.9Source: 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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Analyst Certification:The research analyst(s) denoted by an AC on the cover of this report certifies (or, where multiple research analysts are primarilyresponsible for this report, the research analyst denoted by an AC on the cover or within the document individually certifies, withrespect to each security or issuer that the research analyst covers in this research) that: (1) all of the views expressed in this reportaccurately reflect his or her personal views about any and all of the subject securities or issuers; and (2) no part of any of the researchanalysts compensation was, is, or will be directly or indirectly related to the specific recommendations or views expressed by theresearch 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.

0

13

26

39

52

65

Price($)

Oct06

Jan07

Apr07

Jul07

Oct07

Jan08

Apr08

Jul08

Oct08

Jan09

Apr09

Jul09

Oct09

Jan10

Veeco Instruments (VECO) Price Chart

N

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'scontinuing 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.

Date Rating Share Price($)

Price Target($)

19-Dec-07 N 16.39 -

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 theaverage total return of the stocks in the analysts (or the analysts teams) coverage universe.] Neutral [Over the next six to twelvemonths, 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 sectorand/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 ElectronicMaterials Inc. (WFR), SunPower (SPWRA)


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J.P. Morgan Equity Research Ratings Distribution, as of December 31, 2009

Overweight(buy)

Neutral(hold)

Underweight(sell)

JPM Global Equity Research Coverage 42% 44% 14%IB clients* 58% 57% 42%

JPMSI Equity Research Coverage 41% 49% 10%IB clients* 78% 73% 57%

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

Valuation and Risks: Please see the most recent company-specific research report for an analysis of valuation methodology and risks onany securities recommended herein. Research is available at http://www.morganmarkets.com , or you can contact the analyst named onthe front of this note or your J.P. Morgan representative.

Analysts Compensation: The equity research analysts responsible for the preparation of this report receive compensation based upon

various factors, including the quality and accuracy of research, client feedback, competitive factors, and overall firm revenues, whichinclude revenues from, among other business units, Institutional Equities and Investment Banking.

Other Disclosures

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