(Veeco earnings updated for Tuesday premarket trading)

NEW YORK ( TheStreet) -- Veeco Instruments ( VECO - Get Report) provided weaker first-quarter guidance and showed a decline in bookings, yet after a short selloff in Monday's after-hours session, shares of the LED equipment company were trending up.

Veeco also announced that a significant number of tool orders, 12 to 20 orders, would see no revenue recognition in the first quarter. For new systems, though, this is typical accounting policy, and not out of the blue for the Street and investors. Even so, the Veeco guidance was arguably weaker than expected, but the potential sales with the new tool -- which was launched ahead of schedule -- resulted in at least one analyst reiterating his buy on Veeco shares.

The volatile LED sector stock expects earnings in the first quarter to range from $1.02 to $1.39 and for revenue to range between $215 million to $265 million, short of the Street consensus of earnings at $1.45 a share and revenue of $292 million.

Veeco's fourth-quarter 2010 book-to-bill ratio was 0.98 to 1, and quarter-end backlog was $555 million, both down from the third-quarter book-to-bill ratio, which was 1.0 and that quarter's-end backlog of $569 million.

Veeco revenue was at the midpoint of the $285 million to $320 million range for the fourth quarter that it targeted.

For the full year, the Veeco 2011 revenue guidance is in line with the Street, and earnings guidance of EPS "greater than $5" was ahead of the Street consensus of $4.96.

As usual, it is China's outsized role in driving Veeco sales -- and LED stocks more generally -- that is embedded in the first-quarter outlook.

John Peeler, Veeco CEO, said in the earnings release, "Q1 2011 revenues will be lower than Q4 2010 because we are planning to ship 12-20 MOCVD reactors in the new MaxBright 'cluster' format Veeco officially launched the new reactors on Monday, and will not be recording any revenue on these systems in the first quarter. Timing of revenue is also being impacted by the longer order-to-revenue cycle times associated with the high percentage of business currently coming from China, primarily due to customer facility readiness. The average time to convert orders to revenue is currently several months longer in China than in other regions."

Bill Ong, analyst at Merriman Curhan Ford, had said coming into Veeco's earnings that the ramp pace for Chinese manufacturers would be a big issue for Veeco at a time when Korean and Taiwanese customers are slowing down spending. This was a trend that was supposed to impact fourth-quarter earnings, as Chinese facility ramps made up for order delays in Korea and Taiwan. But while Veeco made its fourth-quarter number, the Chinese ramp issue seems to have carried over into the first quarter.

The reaction to Veeco's earnings by Tuesday morning was not in line with the big selloff in shares of LED end-market players Cree ( CREE - Get Report) and SemiLEDs ( LEDS, which dialed back investor expectations related to the Chinese market, and took big hits on recent earnings disappointments.

Veeco's first-quarter outlook was weaker then expected, but. LED peers have sold off by double digits after weak guidance. The bullish Veeco bet is that the zero percent of revenue being recognized by the new reactor orders in the first quarter will be a blip -- and the company's full year, in-line guidance supports this view. Some investors afraid that the second half of 2011 in China may be weak given potential subsidy cuts might be skittish after the Veeco report and consider its full-year guidance a leap of faith.

Jeff Bencik, analyst at Kaufman Brothers, wrote: "VECO noted it expects to ship 12 to 20 MOCVD reactors of the new MaxBright tool which can be purchased in two- or four-unit clusters. On the conservative side, if we assume level ASPs of $2.5 million per tool and 12 tool shipments throughout the year in two-unit clusters, this would amount to $60 million in deferred revenues. Conversely, if we assume 20 tool shipments in the four-unit cluster, this would amount to $200 million in deferred revenues. Importantly, these units were built and shipped in 4Q10 and as such, had the company recognized these revenues, it would have significantly beat our forecasts." The analyst's price target on Veeco is $55.

Mark Miller, analyst at Noble Financial took a less optimistic view of the new tool. "Our concern is the impact of the new tool...Will these tools cannibalize the future market, especially if they cannot make up the difference in price/margins they would get from selling 5 K465i tools instead of one 4 reactor MaxBright?" the analyst asked in an email to TheStreet. Veeco did not discuss pricing of the new MaxBright tool on the conference call. "Instead of a price war, it looks like a throughput war will break out," Miller added.

Noble Financial downgraded Veeco from a buy to a hold, noting that Veeco's primary competitor Aixtron will introduce a similar cluster tool, and there is always the threat that major semiconductor market players, such as an Applied Materials ( AMAT also enter the space.

The Veeco CEO also commented in the earnings, "We currently estimate that the total available market for MOCVD from 2011 through 2015 is greater than 5,000 reactors."

It may be a minor point, but analysts skeptical of LED stocks have long argued that throwing out big numbers for the growth opportunity won't translate into positive stock catalysts because there is too much short-term uncertainty. Providing a general framework for orders between now and 2015 is not the kind of guidance that comforts investors in this space.

Veeco shares weren't experiencing a big rally on earnings, but given the volatility in LED stock trading, being close to flat in pre-market trading on Tuesday would surprise some analysts who cover the stock and have been accustomed to volatile post-earnings swings.

Veeco did continue to hit new records in the fourth quarter. Revenue of $300 million, gross margin of 51%, and net income of $97 million, were all highs.

Veeco bookings in the quarter were $295 million, compared to $278 million in third quarter bookings.

The third quarter revenue ($277 million), gross margin (49%), net income ($96 million) and earnings per share of $1.46 had been the previous records.

Veeco Instruments shares have been stuck in a mid-$40s range for much of January and so far in February -- below their 52-week high above $54 -- while its main competitor Aixtron continues to trade near a 52-week high.

In premarket trading on Tuesday, Aixtron shares were also marginally positive.

Veeco CEO Peeler was optimistic about 2011, even amid the first-quarter weakness and issues related to China timing that could make investors uncomfortable.

"With starting backlog of $555 million, and anticipating strong first-half 2011 bookings. ... We are optimistic about the future and confident that we are well positioned from a technology, product, and operational standpoint to grow our LED & Solar and Data Storage businesses in 2011 and beyond."

With the cracks exposed in the immediate outlook for Cree and its competitors in the lighting market, investors and the Street were expected to be sensitive to any sign of weakness from Veeco Instruments.

With Veeco, it's not a story about short-term pricing weakness among the general lighting market customers, or about the pace of street-lamp adoption in China specifically, which took down Cree. In its core market of LED equipment sales, the Veeco trade is based on the amount of equipment buying taking place in Korea, Taiwan and China -- and, more specifically, any slowdown in Korea and Taiwan being offset by incremental sales in China.

If China orders are delayed at the same time as Taiwan and Korea are declining, and as long as the threat of Chinese subsidy declines loom, any slowdown in the pace of LED equipment plant ramps can cause a negative reaction in Veeco shares.

-- Written by Eric Rosenbaum from New York.

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