Coherent Corp (COHR) 2020 Q2 法說會逐字稿

Good morning and welcome to Coherent's Second Quarter Fiscal Year 2020 Financial Results Conference Call. (Operator Instructions) Please note, this event is being recorded.

I would now like to turn the conference over to introduce Bret DiMarco, Executive Vice President and General Counsel. Please go ahead.

Thank you, Grant, and good afternoon, everyone. Welcome to today's conference call to discuss Coherent's results from its second fiscal quarter ended April 4, 2020. All of us here at Coherent hope that you and your family are staying healthy and safe. On the call with me are Andy Mattes, our President and Chief Executive Officer; and Kevin Palatnik, our Executive Vice President and Chief Financial Officer.

I would like to remind everyone that some information provided during this call may include forward-looking statements, including, without limitation, statements about Coherent's future events, anticipated financial results, business trends, global economic trends and the expected timing and benefit, if any, of such trends. These forward-looking statements may contain such words as project, outlook, future, expects, will, anticipate, believes, intends or referred to as guidance. These forward-looking statements reflect beliefs, estimates and predictions as of today May 27, 2020, and Coherent expressly assumes no obligation to update any such forward-looking statements. These forward-looking statements are only predictions and are subject to substantial risks, uncertainties and assumptions that are difficult to predict and may cause actual results, performance or achievement to materially differ from those expressed or implied by these forward-looking statements. Factors that could cause or contribute to such differences include, but are not limited to, risks associated with the recovery of global and regional economies from the negative effects of COVID-19 and related private and public sector measures; the impact of COVID-19 on our business, global demand, acceptance and adoption of our products; the worldwide demand for flat panel displays and adoption of OLED for mobile displays; the pricing and availability of OLED displays; the demand for and use of our products in commercial application; our ability to generate sufficient cash to fund capital spending or debt repayment; our successful implementation of our customer design wins; our and our customers' exposure to risks associated with worldwide economic conditions; our customers' ability to cancel long-term purchase orders; the ability of our customers to forecast their own end markets; our ability to accurately forecast future periods; continued timely availability of products and materials from our suppliers; our ability to timely ship our products and our customers' ability to accept such shipments; our ability to have our customers qualify our products; worldwide government economic policies, including trade relations between the United States and China; our ability to integrate our acquisition successfully, manage our expanded operations and achieve anticipated synergies; our ability to successfully manage our planned site consolidation projects and other cost reduction programs and to achieve the related anticipated savings and improved operational efficiencies; and other risks identified in the company's filings. For a detailed description of risks and uncertainties, which could impact these forward-looking statements, you should review Coherent's periodic SEC filings, including its most recent Form 10-K, Form 10-Q and Forms 8-K, including the risks identified in today's financial press release.

I will now turn the call over to Andy Mattes, our President and Chief Executive Officer.

Thank you, Bret, and thank you to everyone for welcoming me to Coherent. I'm still measuring my time here in weeks and this marks my eighth week. Joining a company as a CEO during a time when the world is fighting a pandemic, and most of us are under stay-in-place orders, is a truly unique experience and uncharted territory. Getting my arms around our company in a virtual world has made for long days, but it is amazingly productive and effective. I've spoken with most of our top 20 customers, visited many of our sites through virtual tours, connected with Coherent's top 100 managers and has held multiple virtual coffee talks with employees of all levels around the globe. I'm very energized by the customer feedback I received about the quality of our service, the performance of our products and the high degree of collaboration that our customers value when they design process solutions with Coherent.

I must admit I am extremely impressed with the talent, the dedication and, most of all, the level of engagement that our colleagues around the world display in the new normal of working remotely.

As a leadership team, we focused our energy during the last week around the health of our employees, the financial health of our company and the health of our partnership with our customers and suppliers. We established a central nerve center, a COVID Steering Committee, or CSC, under the leadership of our newly appointed COO, Mark Sobey. All executives of the company video-meet multiple times a week to stay on top of the ever-changing situation and safety protocols around the globe to synchronize our actions and responses, to enable a stable supply chain and logistics, discuss inventories of critical parts and to meet desired customer delivery date. For most of April and May, we have maintained manufacturing at approximately 85% to 90% of capacity while adhering to all social distancing rules. The CSC is now shifting its focus towards bringing our employees back to work safely or to incorporate remote working into the new normal of our company and how to accelerate best practice sharing around collaboration, flexibility, inclusion and accountability.

Before I talk more about the road ahead of us, let me hand the mic over to Kevin to discuss our Q2 results and guidance.

Thanks, Andy. Today, I'll first summarize fiscal second quarter 2020 financial results, then move to the outlook for fiscal Q3. I'll discuss primarily non-GAAP financial results and ask that you refer to today's press release for a detailed description of our GAAP results as well as a reconciliation between GAAP and non-GAAP financial results. The non-GAAP adjustments relate to stock-based compensation expense, amortization of intangible assets, goodwill and other long-lived asset impairments, restructuring costs, the related tax adjustments and tax adjustments for stock-based compensation. The full text of today's prepared remarks and trended GAAP and non-GAAP supplemental financial information will be posted on the Coherent Investor Relations website. A replay of this webcast will also be made available for approximately 90 days following the call.

Fiscal second quarter 2020 financial results for the company's key operating metrics were total revenue of $293.1 million, non-GAAP gross margin of 36.2%, non-GAAP operating margin of 8%, adjusted EBITDA of 11.9% and non-GAAP EPS of $0.61.

Total revenue for the fiscal second quarter was $293.1 million and came in at the low end of our previously guided range. Sales were negatively affected by the COVID-19 pandemic, primarily in Asia during Q2, and began impacting Europe and North America later in the quarter. We estimate the impact to revenues was approximately between $30 million and $35 million during the quarter.

Our revenue mix by market for Q2 was microelectronics, 42%; materials processing, 29%; OEM components and instrumentation, 22%; and scientific with 7%. Geographically, Asia accounted for 48% of revenues in the fiscal second quarter; the U.S., 25%; Europe, 22%; and rest of the world, 5%. Asia includes 2 territories, and Europe includes 1 territory with revenues greater than 10% of sales. We had 1 customer in South Korea related to large flat panel display manufacturing that contributed more than 10% of our fiscal second quarter revenues.

Revenue from other products and service for the fiscal second quarter was $99 million or approximately 34% of sales. Other product revenue consists of spare parts, related accessories and other consumable products and was approximately 29% of sales. Revenue from services and service agreements was approximately 5% of sales. Total services revenue decreased sequentially by approximately $18 million, primarily resulting from the inability to service our installed base due to shutdowns and travel restrictions in coronavirus impacted areas.

Fiscal second quarter non-GAAP gross profit, excluding stock-based compensation costs, intangibles amortization and restructuring, was approximately $106 million. Non-GAAP gross margin was 36.2% in Q2 and came in slightly below the midpoint of our previously guided range due primarily to higher manufacturing costs related to lower volumes.

Non-GAAP operating expenses decreased sequentially by approximately $9 million from a myriad of items. The significant items were decreases in variable spending, travel-related spending and a benefit to expense related to our deferred compensation plan. This resulted in a non-GAAP operating margin of 8% for the fiscal second quarter and came in at the high end of our previously guided range. Adjusted EBITDA was 11.9% in fiscal Q2.

Turning to the balance sheet. Nonrestricted cash, cash equivalents and short-term investments were approximately $369 million at the end of fiscal Q2, an increase of approximately $19 million compared to the end of last quarter. Given our focus on cash preservation during this period of relative uncertainty of the global economy, we did not repurchase any shares in Q2 pursuant to our current buyback authorization. We also did not make any voluntary payments against our term loan. And at the end of fiscal Q2, the outstanding amount of the term loan in USD was approximately $390 million.

Accounts receivable DSO was 62 days compared to 68 days in the prior quarter. The net inventory balance at the end of fiscal second quarter was approximately $457 million, an increase of $7 million, primarily due to an increase in finished goods as a result of closures in the shipping and receiving departments of some of our customers due to COVID-19.

Now I'll turn to our outlook for our third fiscal quarter of 2020. Let me say at the outset that there is no clarity with what will happen with global demand in the coming weeks and months. This uncertainty makes forecasting our business challenging in the near term. However, our strong balance sheet and cash position provides us significant flexibility in responding to continued coronavirus-related disruptions going forward.

Having said that, revenue for fiscal Q3 is expected to be in the range of $265 million to $305 million. We expect fiscal Q3 non-GAAP gross margin to be in the range of 30% to 34%. Non-GAAP gross margin excludes intangibles amortization of approximately $2.2 million and stock compensation costs estimated at $1.7 million. Non-GAAP operating margin for fiscal Q3 is expected to be in the range of 1% to 5%. This excludes intangibles amortization estimated at a total of $2.9 million and stock compensation expense of a total of approximately $16.1 million. Other income and expense is estimated to be an expense in the range of $5 million to $6 million. We do not include transaction gains and losses related to future changes in foreign exchange rates in our OI&E outlook. We expect our fiscal Q3 non-GAAP tax rate to be in the range of 17% to 18%. And finally, we're assuming weighted average outstanding shares of approximately 24.2 million for the fiscal third quarter.

I'll now turn the call back to Andy.

Thank you, Kevin. In addition to the financial data, let me give you a little color on the main markets we serve.

Starting with microelectronics, there are 2 distinct dynamics at play here. On the one hand, there's a weakness in smartphones driven by slowing of consumer spending, which is providing headwinds in display, impacting our near-term service revenues as fab utilization slows. And on the other hand, there's strength in the semiconductor business due to telecom, cloud and data center investments, think about our Zoom economy and a shift in business towards laptop.

Specific to display, we are encouraged by recent announcements from multiple laptop manufacturers that they are now including OLED displays as options for their high-end model. We believe this is a trend that is likely to continue, especially as the yields of our Chinese customers improve, and they have the ability to move pricing more in line with LTD over time. We also remain optimistic around the pending upgrade cycle to 5G-enabled mobile devices as the linkage between thin, flexible OLED screens and 5G capabilities seems high driven by the need for larger batteries to occupy more of the device volume as a requirement for powering the shorter-range, higher-frequency antenna.

Moving on to materials processing. Even prior to the recent COVID pandemic, there was a widely reported slowdown in the German automotive and machine tool industry. And overall, the market is seeing further weakness related to the COVID impact on consumer demand. There has been mixed report about an early recovery in China. We remain cautious to see how that plays out. In general, Coherent has less material processing exposure to China than the U.S. and European markets, and our core strength is in more specialized segments of the industry in the nonmetal cutting and welding applications where our strength in CO2 and diode lasers remains a differentiator.

Overall, our instrumentation business remains robust as we are diversified over a range of applications across life science research, clinical diagnostics and therapeutic procedures, both elective and insurance-based. We've been excited by the use of many of our life science customers' high-end instruments in the development of vaccines and immunological advances in the fight against COVID as well as clinical application. We've seen demand at that end of the spectrum for certain customers go to a twofold increase.

Conversely, the same customers sell the same instruments to research labs across the world for non-COVID-related studies, and many of those labs in universities have been closed. For those customers, new system demand has slowed. We are seeing a nice rebound from our therapeutic medical customers now that the COVID-related restrictions to nonurgent medical procedures are being eased across the world. The scientific market segment basically took a time out as universities and labs have been largely closed. We expect this segment to recover as the scientific institutions reopen and pent-up demand from unspent research grants begin to flow.

Defense has been an unaffected area and remains an area of investment for Coherent. We are well positioned across multiple opportunities from laser amplifiers for directed energy applications to specialty lightweight aerospace optics. We have secured key design wins with well-known prime contractors that supply to the armed forces, and we see this as an area of strength going forward for the company.

Our Q2 book-to-bill ratio was significantly above 1, and our backlog exiting the quarter is up from previous quarters. Nobody knows how long COVID-19 will impact the global economy, but between our backlog and our balance sheet, we see Coherent to be in a stable position for quarters to come.

Having said that, we are concentrating our near-term actions on cash generation. While we have not made any final decisions, we are currently analyzing a variety of key steps. And going forward, we will initiate our good-to-great transformation which will encompass some actions that are already in flight as well as incorporate new ones, including applying a strategy to our business that we will only participate in a market segment if we have line of sight to achieve a #1 or #2 position. Otherwise, we will refocus our energy.

Consistent with the strategy, we will not be participating in the kilowatt fiber market price race to the bottom game and therefore, we will complete our move out of the commodity fiber laser market. Instead, we will focus on areas where our technological advantage will get rewarded by the market, for example, microelectronics, bioinstrumentation and medical device manufacturing. Also, we will double down on the OLED market and use our pole position to enable advancement of technologies like micro LED displays, knowing that these are still in the future but will be based on many laser processes set. And finally, we will be simplifying our company from an organizational setup to the number of locations, to the way we run and report our financials. As you can see, we have quite some summer homework ahead of us.

We will have more to share around our good-to-great transformation and on our next call in a few months and especially when we announced our Q4 results and moved into the new fiscal year in October.

And with that, I'll turn the call back to the operator for our Q&A session.

(Operator Instructions) Our first question today will come from Jim Ricchiuti with Needham & Company.

A question I had is just on the reference to the book-to-bill being significantly above 1. I'm wondering if you can tell us if the bookings were up sequentially or if you're just referring to generally strong bookings -- strong book-to-bill versus, obviously, the lower level of revenues that you reported that was expected.

Yes. Jim, it's Kevin. So we stopped talking at any type of detail on bookings a few years back. So when we talk about book-to-bill, it is within the quarter, current view, Q2 billings to bookings in the quarter.

Got it. Fair enough. And Andy, by the way, welcome. I wanted to give you a welcome to Coherent. Can you talk a little about whether you saw bookings activity in the OLED space in China? There's been a lot of speculation, as you know, about new capacity being added there. But I wonder if you could talk to the tone of business in the OLED market in China.

Jim, it's Kevin again. So again, I won't provide a lot of detail here because we just don't isolate it to FPD or microelectronics from a booking standpoint. But we did take orders in quarter for ELA tools as we did last quarter and the prior 2 quarters.

Okay. That's helpful. And then, Kevin, if I may. If I heard you correctly, it sounded like you saw a bigger impact from COVID in the quarter. If I got the numbers correctly, it's -- I think you were talking going in of about $20 million to $25 million. Did you say it was around $30 million to $35 million?

That's correct, yes.

Was that a bigger impact that you saw in China? Or was that just the early impact elsewhere, Europe and the Americas, that contributed to the bigger hit there?

It was larger than we expected, Jim. And I'd say what we failed to recognize was that in some of our scientific and OEM instrumentation areas, universities and research labs really completely closed down. The proximity of people working in the labs and/or at universities, either shipping and receiving, wasn't available or the lab people themselves couldn't receive product because they just weren't there. So I think we did underestimate that a bit.

Got it. And if I may, last question, I'll jump back in the queue. As you begin to deemphasize some product areas, including the kilowatt fiber laser segment, can you give us a feel? I know that business has not necessarily been that meaningful, but can you give us a sense as to what the revenue impact of that would be?

Jim, I don't want to get into that level of detail on the call here. We're still analyzing different pieces of the business to figure out where we want to invest going forward. I think once we have that data, then we can be a little bit more forthcoming. But as we've discussed in the past, the commodity fiber for our business was very small in terms of its contribution.

Our next question will come from Brian Lee with Goldman Sachs.

And welcome, Andy, looking forward to working together.

Likewise.

I guess first question I had was just around the trajectory of revenue recognition. I appreciate the comment, Kevin, that you had another ELA order in the quarter. So that makes 3 in a row where you're having some ELA orders. And you've been saying for a while that the lead times are about 6 months. So I guess 2 questions here. One, have lead times changed at all from that 6-month range you've provided in the past? And then two, assuming that they haven't, it would seem ELA tools from the orders you saw a couple of quarters ago when the cycle kind of started would start to see revenue in Q3 and definitely by Q4. But then the margin guidance seems to be a bit light for having some ELA high-margin tools in there. So I'm just wondering, has anything changed on the sort of lead time shipment trajectory and rev rec timing that we should be aware of here?

Yes. Thanks, Brian, Kevin again. So we have taken orders over the last 4 quarters, actually. And we did say that from a lead time perspective, it's a minimum of 6 months. So as we look into the second half of the year, we have given guidance for next quarter, our June quarter, and it is flat to slightly down. But with COVID and such -- because think of COVID as delaying things for a quarter or so, but we should be right back on that trajectory going forward.

Okay. No, that's helpful. And would you say it's fairly customer-centric with respect to those delays or it is across the board? Because the reason I ask being, you obviously have some customers in your China mix, which are directly situated in Wuhan where this COVID crisis first materialized, and then you had customers in other parts of China where maybe the impact was a little more peripheral or indirect. So are you seeing the level of delays being pretty broad across the board? Or is it more concentrated in the handful of manufacturers that had the direct impact?

Yes. Thanks, Brian. You're right, one of our major customers -- or one of our key customers, CSOT, China Star, is in Wuhan. And as you know, Wuhan shut down for 2 to 3 months. So I'd say it's primarily geography-based, meaning Wuhan, there are a couple of customers there, CSOT, being the larger of a couple of customers. But you'd expect a delay given the shutdown by about a quarter.

Okay. That's great. And then maybe last one, and I'll pass it on. Can you kind of comment on utilization rates you're seeing across your customer base. Obviously, we had a downtick through different parts of calendar Q1 in China because of the COVID crisis, and then you've mentioned in other parts of the world, you're starting to see the impact come in on the back of China. But where are you kind of seeing utilization rates? How quickly are they recovering, particularly in China? And then how should we think about that translating to service revenue here in Q3 and moving through the year? It seems like we haven't seen a sub-$100 million service revenue quarter in a while. So is that kind of the low point? And just wondering how quick that metric could recover as you move through the rest of the year?

Yes. So Brian, I can't get into specific customers and their yields. I mean that's proprietary information to them. I certainly wouldn't want to talk about that on the call. Suffice to say that, just anecdotally, it seems like -- it feels like yields are improving. One of the large Chinese OLED manufacturers has come out and said that they expect to ship 70 million displays this year compared to what was probably 5 million to 10 million last year. I believe that's on the back of improving yields. In terms of service revenue, as I mentioned in our prepared remarks, we did have some service engineers that just couldn't go into China and service equipment, and that impacted us by $18 million, $19 million or thereabouts. Given that China has reopened or, for the most part, reopened, I would expect some rebound in Q3. As we look into Korea, Korea was impacted as well. So we probably won't see a full snapback, but you'll see improvement in Q3.

Our next question will come from Tom O'Malley with Barclays.

Welcome, Andy. Good to have you here. My first question is related to the impairment charge you guys took in the quarter. You said it was related to the industrial lasers in systems business. Could you be a little more specific, it was obviously a larger charge, I think, $400 million plus, to where that was related to in that business?

Sure, Tom. This is Kevin again. With regards to impairment, there's a multi-step process to go through this. I won't drag you through that mud. Suffice to say that when the carrying value of certain business on your books, comparing with it the fair value of that business when fair value is lower, you have to write down or take an impairment. Specific to the businesses, it impacted the ILS segment. And the ILS segment is primarily the industrial side of lasers. So it includes a tools business, a fiber business, diode and fiber components. It's across the board. But again, the key there is, as we evaluated the business, fair value was less than book value, and that's why you take the impairment.

Fair. And then, I guess, kind of a follow-up to that question and a question related to Andy is just you focused really on key areas for cash generation, and you made that point in the prepared remarks. And you made the comment that you would only really participate in the market segment if you could achieve a 1 or 2 position. You commented that the fiber laser business, you're going to walk away from the nonstrategic portions of that business. But can you just talk about the general laser business? And do you think that you can have a 1 or 2 position in that longer term? And if not, what do you think alternatives may be if that's not an area you think you can compete?

Okay. Let me just start out. Kevin has more real-life examples here. But we think we have some very unique positions. And I -- when I talk to customers -- let me just take the medical instrumentation side, for example, a phenomenal market share, we're clearly the market leader, a lot of opportunity, great reputation. This is a perfect example of the type of market that we want to go after. And there are plenty of those opportunities out there. And the task at hand for us is to make sure we focus on the areas where our technological advantage, our capabilities, our ability to customize into very special manufacturing or testing processes for our customers comes to full play. And where we can grow at a very nice margin profile.

And then just one more, and I'll pass it along. If you look at the out-quarter that you guys just guided to, revenue isn't moving that much quarter-over-quarter, it's only down slightly. But to hit on the gross margins, again, you're seeing a step down. You guys mentioned that manufacturing is going to be back 85% to 90% of capacity in the quarter. Is the gross margin step-down just a function of mix? Or is there a moving part within one of the businesses that's dragging that overall number down?

Tom, Kevin, again, there's a couple of contributing factors. Certainly, with revenue coming down ever so slightly, volumes take a hit, and therefore, manufacturing costs go up. In terms of just COVID and, call it, the business continuity plans that we have to put in place, the distancing, the PP&E, et cetera, et cetera, that costs money, and that's worth 50 to 60 bps. Beyond that, again, as volumes come down, we have inventory on hand, and we may have to take some provisions against that inventory because of lower volumes. So all of those contribute to the margin impact sequentially.

Our next question will come from Mehdi Hosseini with SIG.

This is Lory filling in for Mehdi, and welcome Andy onboard. So the first question is, what do you think about the opportunities in China? And how does that impact the blended gross margin?

Well, if you take China and you go by our segment, needless to say, OLED and everything around it, very, very well positioned. If you take the other end of the spectrum, our materials processing business in China is relatively small. I was highlighting that in my prepared remarks, we're stronger in Europe or in the U.S. when it comes to these type of businesses. Scientific market also strong in China, but the Chinese universities were closed just as the western universities were, so that market didn't literally didn't happen for the last month, and you'll see that bleed into this quarter as universities are just starting to reopen. So most of our China opportunity sits in the microelectronics market, in the semiconductor market.

Great. And where do you see the impact on the margin?

Those are -- that goes back to what we said earlier, we'd like to play in markets where our position gets rewarded. And in those segments where we have a strong representation, we also enjoy the market -- the margin profile.

Great. And then on the OLED opportunity that you mentioned, you guys are doubling down on OLED. And where do you see the future for -- in China versus Korea? And can you also comment on the micro LED.

Yes. Lory, it's Kevin. Rather than geography, let's talk about the application, and in Andy's prepared remarks, he did talk about micro LED. You may be familiar that's a very process-intensive application because you have to pick and place the LEDs to a display substrate. But you use lasers in doing so. We've already sold some development equipment in that space. And as we enjoy our position with ELA tools and OLED, we'd like to enjoy the same position in tools provided to micro LED.

Got you. And the last one from me is the margin, where do you see the margin going forward in the second half?

The best way I can answer that, Lory, is if you go back to years 2016, '17 and '18, with Phase 1 of the OLED ramp. You saw the positive upward pressure, primarily based on that OLED ramp. We've always said that the ELA tools, microelectronics in general, is accretive to overall corporate margins. So as we ship more of those machines, that will put a positive upward pressure on margins.

Our next question will come from Larry Solow with CJS Securities.

Great. Welcome, Andy, as well. Most of my questions have been answered. Maybe just a couple of high-level ones. I'll give you one, Andy. Just -- I know I think when you joined Coherent, just looking at your path, I think you -- one of your focuses has been sort of transforming or sort of repositioning companies for growth. Do you view Coherent as that type of a project? Or is it more of just a fine-tuning of focus?

Well, look, if you take a look at our transformation work, that's what I was trying to express when I called it a good-to-great transformation. Coherent is a really good company. Now having said that, like any company, there are areas in our business where we can do better, where we can double down on operational excellence and execution. And while COVID is going to put a question mark here and there on the top line and how quickly consumers react, everything that's on the cost side is completely under our control. And it's something we can address right here and right now, and we'll be doing that all through the summer months, and we'll update you as soon as we can talk about it. Secondly, midterm, we're doing everything to position the company to a profitable growth trajectory. I wholeheartedly believe that there is no such thing as a great shrinking company. So we're going to make sure that we will be back toward profitable growth as we get out of this pandemic environment.

Okay. Great. How about just a couple of also longer-term questions? I'm not so sure we have great visibility or any change, but -- and with the COVID impacting, but just in terms of the planned trajectory of OLED openings over the next few years, have you seen any change, whether it be subtle or maybe just more material? Is there -- a lot of this has been on the supply side. But if there's less demand, if we go into a slower or even a recessionary environment, and there's less demand for new phones and OLED phones, would -- could that potentially shift out the build-out on the supply side?

Larry, it's Kevin. When it comes to OLED, there's no change in story there. We continue to see the OLED ramp in front of us. In fact, recently, we've gotten data that there's 18 different laptops, at the high end albeit, have OLED screens. So we're seeing OLED progress from mobile into laptops. We expect tablets will be next. So in terms of our wave theory, wave 1 being mobile computing and handsets, wave 2 and 3, if you will, tablets, laptops, automotive, we see that path, no change to it at all. And we're very encouraged by as many laptop manufacturers that have OLED currently.

Right. Okay. And then just another bigger picture question on the -- obviously, materials processing is a bigger piece for you, second biggest piece of your business pie itself, although I realize there's sort of many submarkets there. But -- and like you mentioned in your prepared remarks, sort of it hasn't been great over the last several quarters with the global economy sort of teetering. Obviously, post COVID-19, I assume industrial production will be at a lower level sort of where we were and it's anybody's estimate where that goes, how low it goes and how much it rebounds. But could you guys still improve performance even in a lackluster to down industrial production environment in the next 12 to 18 months?

This goes back to our good-to-great transformation. We do see room for improvement, especially on the ILS side of the house when it comes to our margin, when it comes to our factory loading. And the more we apply an "invent one and reuse often" type of philosophy for our systems and our tools, in the way that we approach a market and our customers, that will automatically have a positive impact on the margin profile that we will be generating.

Our next question will come from Mark Miller with The Benchmark Company.

Let me extend my welcome also. I just had a question about supply chain. Were you impacted by any supply chain issues because of the virus?

Mark, it's Kevin. From the supply chain, very, very minimal impact. We worked with all of our top 10 suppliers around the world, made sure that either we bought ahead or they had enough supply on hand to certainly supply us through Q2, Q3 and beyond. So we're in good shape there.

You mentioned 5G as becoming an opportunity for you, I assume that's because of the higher density silicon will require smaller microvias and then possible transition to new type of laser. Is that starting to pick up steam? Or is that 5G playing in another way?

Sorry, Mark, Kevin again. Not only in the microvias, right, to put more content on the boards, but it also has to do with the antenna itself. The antenna is a little bit more bulky and requires more power. And so the systems need more battery, if you will. And because OLED is so much more thinner than LCD, you can pack more battery in because of its thinness. So there's a couple of things contributing to 5G in terms of benefits to the company. In terms of what we're seeing, we are seeing a little bit of a pickup, but it's still more in front of us than behind us.

Okay. I might have missed this. Did you say the cash flow from operations was $19 million or that was just increasing cash? I was just wondering which cash from operations was it.

Yes, cash -- the increase in cash was the $19 million. Cash from ops was $47 million.

$47 million for cash ops. Okay.

Thank you, Mark.

(Operator Instructions) Our next question will come from Nik Todorov with Longbow Research.

Regarding the guide, Kevin, can you bridge the guide sequentially? How much of a COVID impact are you baking into your assumptions? And is it fair to assume that the biggest hit sequentially potentially could -- will come from the scientific and government programs due to university closure and materials processing?

Yes. Nick, so from a revenue standpoint, again, a small decrease quarter-on-quarter. And yes, there is some expectation that labs will open up, universities will open up. The question there is timing, right? So it will happen in the June quarter. Some are reluctant to open up to date. So that impacts revenue. On the gross margin side, certainly, with lesser volumes, that drives unit cost up. But in terms of COVID and its impact, I mentioned earlier that when you look at safe distancing, physical distancing of people, split shifts, multiple shifts, all the things necessary to protect our employees, that's costing us between 50 and 60 bps in margin.

Okay. And from a top line perspective, is the COVID impact similar in size relative to the March quarter, roughly about $30 million that you're baking in, or less?

I would expect that it's probably in the $30 million to $35 million range or slightly less.

Okay. Okay. Got it. Switching gears to FPD. So in the last cycle, you had 1 large player. And if you look at the trajectory of shipments, it was a really smooth and then a year pickup in orders and shipments. So now that this cycle is reflecting multiple players, potentially up to 8 or 9, can you share your view now that you have several orders and a decent backlog under your belt? How should we think about linearity of Linebeam deliveries over the next, call it, 12 to 24 months? Should investors expect a similar trajectory of the last cycle or things could be a little bit more lumpy?

Yes, Nick, Kevin again. In terms of the #1 customer back in the '16, '17, '18 time frame, not only did they place really large orders on us, but they were multiyear orders. So we could work with that customer and really plan out the shipments over time. As you mentioned, there's many more customers in the Phase 2, obviously, China-related. We do our best to help them plan to receive equipment. But I don't expect the same ramp that we saw in '16, '17, '18. I can't go into too much further detail than that. We've never shared that before. But suffice to say, don't think it will be as dramatic as it was in years past.

Okay. Got it. And then in the materials processing side, you said there's different reports coming regarding China recovery. I think March and April were relatively strong. But are you saying that you're seeing potentially May orders kind of stabilizing or the recovery momentum slowing down? What is the -- what are the signs that give you a pause about the recovery in China in materials processing?

Yes, Nick, Kevin again. Frankly, we're a bit more cautious than some of our peers when it comes to China. There were some indicators here and there that things have stabilized a bit. But then as you may have seen, there were some flare-ups in various provinces related to COVID. So we are much more cautious than some of our peers related to China.

Okay. And last question for me. I think a couple of quarters ago, you announced a new Tier 1 automotive win -- a design win, and in Berlin, it was related to EV battery welding. Can you give us any update if you've seen orders potentially start increasing from that customers? And can you comment overall on the environment for EV in both Germany and China and how you see that outlook over the next 6 to 12 months?

Look, when you -- it's Andy. When you look at the welding of special materials, that's where our technology, especially our arm laser, has a very unique advantage in the market. We can do that with little to no spatter, which, needless to say, around the whole electro-vehicle market, is a very important element. So we're seeing a lot of interest, and we're seeing many proof of concepts out there with customers, as we speak. And we would expect that to continue to grow as time progresses.

Our next question will come from Joe Wittine with Edgewater Research.

Andy, you just partially answered this question here, but I wanted to ask on the exit from kilowatt fiber. Does that strictly include the HighLight for cutting? Does it also include any welding applications? It sounds like it doesn't include the HighLight arm. And then also within that, does the exit of that market include any components that you -- upstream components that you sell into other parts of the kilowatt scale supply chain such as the diodes and the Nufern, et cetera?

Now let's start your -- take your question from the back. So no, diodes and Nufern and all of that good stuff is definitely a key element of our portfolio, and we'll continue to do so. And we also -- we're going to be looking at ways to enhance that business. When it comes to welding, as I just said, if you think about welding of material other than metal, that's where our unique advantage lies, whether it's in aluminum, special aluminum, copper, you name it, and we'll be looking for those type of applications. And that also fits to our strategy that we want to play where our technological advantage is going to get rewarded. And we're -- if you exclude the specialty market like, for instance, stents or so, we're basically not participating in the run-of-the-mill cutting metal market that's truly just a race to the bottom.

Okay. And then maybe on goodwill. Kevin, so was it more than Rofin that was written off? Or could you give us any more details on what are the pieces, parts within that? I know you did a couple of smaller deals since Rofin. I think there was a 3D printing deal and maybe something else.

Yes. Joe, we may want to take this off-line because it's pretty detailed. But there's the goodwill impairment, and then there's the intangibles and some other assets, real property, machinery and equipment, leases, right-of-use assets, et cetera. From a goodwill standpoint, the majority of that was related to legacy Rofin, but then beyond that, some of the assets were broader than that across the full ILS segment.

Okay. Great. And then finally, apologies if I missed this, but any help in modeling SG&A given the moving pieces in the first and second quarters will be great, especially -- as far out as you're willing to go, Kevin.

Yes. I think you'll see relatively flat from Q2 numbers going forward.

So no resumption in travel or other variable spend or some resumption there and then offset by other cuts?

I think that's a good way to look at it, yes.

Our last question today will come from Jim Ricchiuti with Needham & Company.

Just a follow-up on the medical business where you indicated you're still seeing strength, if I heard you correctly. But we're also hearing, and I'm sure you guys are as well, just with COVID, there's been a lot of delays and pushouts of things like elective surgery. And I'm just wondering as you hear about that, even in dental applications, are you seeing that reflected at all yet in any of your medical-related bookings?

So first of all, it's amazing what was all considered elective. The one thing that absolutely floored me is that kidney stone treatments were considered elective. If you'd ever had to go through one of those, you would beg to differ on that assessment. But -- so what we've seen is really a tale of 2 cities here. Anything on the research side, anything that's in the flow cytometry space that's even remotely affiliated with the search for COVID and vaccines and anything you can do, huge demand. And we had some customers that calls, they literally told us every day counts and make sure you can get systems to us, et cetera, et cetera. The flip side, like you said, for example, dental, while we talk with the customers and everybody sees a bright future on that one, needless to say, nobody was putting in orders in the last week as, short of emergency procedures, all the dental offices in the country were closed. So it's -- we see this cloud to be soon in the rearview mirror as the country is starting to open up again, but it clearly impacted orders and revenue for Q2. And it did so for the first 8 weeks of this quarter.

This will conclude our question-and-answer session. I would like to turn the conference back over to Andy Mattes for any closing remarks.

Well, thank you all for being with us today. We appreciate your questions and your interest in our company, and we're looking forward to talking to you at the end of the next quarter. Thanks again, and stay safe.

The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.