Coherent Corp (COHR) 2003 Q1 法說會逐字稿

Please stand by. We are about to begin. Good day everyone and welcome to the Coherent first quarter earnings results conference call. Today's conference is being recorded. For opening remarks and introductions, I'd like to turn call over to the Chief Financial Officer of Coherent, Miss Helene(Lene) Simonet. Please go ahead. Thank you.

Good afternoon and welcome to our first quarter conference call. As is our custom, first I will speak to the results of the recently completed quarter, and John Ambroseo, our CEO will then speak to operational activities and milestones achieved during the quarter as well as the summary on the state of the company. We will also continue to provide forward-looking financial guidance for the current quarter only. Current market uncertainties make any guidance beyond three months quite difficult, and please remember that the guidance provided is only an estimate and is subject to different risks and uncertainties, such that actual results may differ significantly. Additional information concerning these factors are contained in the company's filing with the SEC. Listeners are encouraged to refer to the risk disclosures described in the company's reports on Forms 10-K, 10-Q, and 8-K as applicable. Copies are also available from the SEC, from the Coherent website or from Coherent Investor Relations.

We reported first quarter revenues of $102m and an after-tax loss of $20.5m or 70 cents per share inclusive of restructuring, impairment, and other charges. Excluding the restructuring and other charges, income from continuing operations of $3m or 10 cents per share sell well within the range of guidance provided during the last conference call and was also ahead of consensus street estimates of 6 cents per diluted share. The restructuring, impairment, and other charges include four different components; An after-tax charge of $8.3m or 28 cents per share related to the previously announced discontinuation of activities in our Telecom Actives Group, an after-tax charge of $2.3m or 8 cents per share against the note receivable we have with the Picometrix, a $2.7m after-tax impairment charge or 9 cents per share related to our Lincoln Californian building, which we recently put up for sale, and a $10.2m charge or 35 cents per share related to our [inaudible] impairments of [our] 5.4 million shares of [inaudible] stocks. To recap, we had earnings of 10 cents from ongoing operations and a loss of 80 cents per share from impairment, restructuring, and other charges, resulting in a GAAP loss of 70 cents per share.

Despite the need for the impairment charges, I am pleased that during these challenging times, the company remained profitable from continuing operations and also generated positive cash flow from operations. Although our book-to-bill ratio was 0.92:1 within our Electro-Optics segments, book-to-bill ratio was 1.03:1. Within our Lambda segments, it was 0.59:1.

Q1 orders of $94.3m represent a 7% increase from the same period a year ago and are consistent with the last quarter orders as we begin to see improvement in many of the end market reserves. Our Electro-Optics segments bookings of $80m are higher than any of the last five quarters. More specifically, Electro-Optics orders increased 10% sequentially and 5% compared to the same period last quarter.

Lambda Physik's orders were impacted by a steady softening in the semiconductor lithography market. Chip makers have been reluctant to place orders for capital equipment due to an increasingly volatile marketplace. In addition, Lambda experienced a delay in industrial orders. Bookings are $14.3m, while up 18% year-over-year, were down 35% sequentially.

Later in the report, John will provide more information on Lambda's business. As a reminder, Lambda Physik will present their specific results in detail, early tomorrow morning. John will also supply you with the appropriate conference call numbers.

Total company sales in Q1 '03 were $102m, up 6% from the same quarter a year ago, and down 2% sequentially when excluding the $2m royalty revenues received by Lambda in Q4 'O2. Our business segment sales were as follows- Electro-Optics -- $77.9m, an increase of $4m or 5.4% from Q1 '02 and a decrease of 3.6% from Q4 '02; Lambda Physik -- $24.1m for the quarter, an increase of $1.4m or 6.3% from Q10 '2 and a decrease of $1.2m or 4.7% from Q4 '02.

Before I provide the Electro-Optics segment sales by significant market applications for the first quarter of fiscal 2003, I want to take a moment to summarize the changes we introduced in our market classifications. Based on your suggestions and also to provide more clarity on the fundamental elements and driving forces underlying our business, we introduced the following price market classifications- Scientific and government programs, microelectronics, material processing, OEM components and instrumentation, and graphic arts and display.

The scientific and government programs market includes sales primarily to government lots , research centers, and universities. Microelectronics now includes sales to hi-tech manufacturers including semiconductor capital equipment, flat panel display, printed circuit boards, advanced electronic components, and micro-machining. The materials processing market focuses on more conventional manufacturing including marking, engraving, metal cutting, laser processing of plastics, and sales of laser diodes to other laser companies for using their products. OEM components and instrumentation is a collection of several markets. We supply enabling laser components to industries such as medical, bioinstrumentation, thermo-imaging and [inaudible].

We renamed the printing and reprographics through its new name "graphic arts and display," although the category remains virtually unchanged.

I will now read the numbers by by markets, and I'll give you the Q1 '03 numbers as well as Q4 '02. Scientific and government programs 22.6, 22.2; microelectronics 12.4, 13.6; material processing 13.2, 15.6; OEM components and instrumentation 24.3, 23.9; graphic arts and display 5.4, 5.5; that's a total for Electro-Optics for Q1 '03 of 77.9; Q4 '02 80.8. Gross profit of $40.4m or 39.6% was at the higher ends of our guidance of 38-40% and represented a 1.5-point improvement from the prior quarter.

The break-out in gross margin by segment is 41.1% for Electro-Optics, a gain of 1.1 point from Q4, primarily the result of improved productivity and cost containment efforts. Lambda's Q103 gross profit percentage of 35% improved 2.6 points from Q4, and if we were to exclude last quarter's $2m royalty revenue, Lambda's gross margin will have improved 8.4% sequentially. Better inventory management along with improved product mix contributed to the increase in margins at Lambda.

As I mentioned last quarter, gross profit is an important area of focus for the company and John will provide an update on our progress to bring us back to the gross profit levels we enjoyed about six quarters ago. We remain focused on simplifying the supply chains and on rationalizing the overall manufacturing operations. Operating expenses, including intangibles but excluding the impairment and restructuring charges of $36.2m, compared to $37.6m in Q4 '02, reflect the benefits from the domestic wide shutdown during the weeks of Thanksgiving and Christmas.

R&D spending for the quarter of $11.7m was 11.4% of sales and so in the low range of our guidance of 11-13%. It is, however, our intent to continue investing R&D dollars in those areas we see as most promising for the creation of long-term shareholder value.

SG&A spending for the quarter, including amortization of intangibles, but excluding the impairment charges, was 24% of sales, which was at the low-end of our guidance range provided last quarter. We feel the company has done a good job controlling its costs, but it is important to know that Q2 '03 next quarter will only have the benefit of 1 week of shut down rather than 2 weeks. Our balance sheet remains healthy and very strong with $230m in cash, increasing to about $8 per share and a book value of approximately $19 per share. Although cash flow from operations was positive during the quarter, our cash balance decreased $13.9m as a result of our purchase of Molectron in December for $11.5m, and the reduction in long-term and short-term borrowings of $7.7m.

Again, it is worth noting that we met our stated goals of positive cash flow from operations. At the end of Q1 '03, accounts receivable day sales outstanding increased to 71 days from 65 at the end of Q4 '02. Electro-Optics day sales outstanding stands at 70 days, compared to 63 the prior quarter. Lambda's receivable day sales outstanding is 74 days, compared to 69 the prior quarter. If we exclude the last quarter's benefit of $2m royalty revenue, Lambda's day sales outstanding are unchanged from last quarter. Inventory day sales outstanding increased to 83 days in Q1 '03 from 76 at year-end. Electro-Optics days increased to 65, partly as a result of the acquisition of Molectron. Lambda Physik's inventory day sales outstanding increased to 141 days from 129 at year-end, but again, excluding the royalty benefits from Q4 '02 the days are unchanged from Q4 '02.

Capital spending for the quarter was approximately 6% of sales at the low end of our guidance. Capital spending for the remainder of fiscal 2003 is still projected [audio gap] headcount at the end of first quarter, inclusive of Lambda Physik was 2190, unchanged from the previous quarter. The first quarter headcount reductions, part offset by the Molectron acquisition and a temporary headcount increase to support the manufacturing relocations and outsourcing programs.

While we were fortunate to have a sizeable backlog and a diverse customer base, current market conditions still make it very difficult to forecast beyond one quarter.

We anticipate that Q2 '03 revenues will be more or less consistent with Q1 '03 levels. We expect gross profit rate in the range of 39-41% of revenue. R&D should run in the range of 11-12% of revenue, and SG&A expenses including intangibles will likely fall in the range of 25-26% of revenue. And we anticipate other income and expense as a [safe able] amount between 0-1% of sale. The annual affect of tax rate is expected to be approximately 33%.

To summarize we are still in a very uncertain market with limited visibility, but we are focused on sustaining profitability. We continue to produce innovative, cost effective, quality products and solutions, which is how Coherent became the leader in the market we serve. With many opportunities in front of us, our goal is to continuously improve our already strong financial condition. I am now pleased to turn you over to John Ambroseo, our CEO.

Thank you Helene. Good afternoon everyone and welcome to our first quarter conference call. I am pleased to report that Coherent posted another solid operating performance in our first fiscal quarter of 2003.

We delivered on our fundamental goals of remaining profitable from ongoing operations, exclusive of impairment and restructuring charges, remaining cash flow positive on an operating basis, and continuing to maintain our level of investment in research and development.

We are also particularly pleased by the improvement in gross profit, which was at the high end of our previous guidance. During Q1, we added to our technological and product depth through the acquisition of Molectron Detector Incorporated or MDI.

MDI is a test and measurement company based in Portland Oregon. They have a very respected product line of power and energy meters. MDI's focus has been on the commercial/OEM markets and their product portfolio is most complementary to Coherent's existing line. The opportunities to enhance both Coherent's top line revenue and reduce our cost of goods sold, are some of the rationale behind this acquisition. We welcome the MDI employees to the Coherent family.

Last quarter, we announced the first in a series of initiatives designed to improve our operational excellence. Our goal in 2003 is to lay the groundwork to achieve a double-digit return on assets by the end of fiscal 2005. I'll provide a progress report momentarily that will address the operating results over the past quarter. Innovation is the lifeblood of Coherent. We have maintained our dollar spending of research and development during the first fiscal quarter, despite the fragile global economic environment.

Coherent spend $11.7m or 11.4% of our revenues on R&D during Q1 of '03. Our programs are tracking with market roadmaps and we continue to emphasize performance, ease of use, and reliability as the cornerstones of our product portfolio. For those of you in the immediate area, I encourage you to stop by our booth of Photonics West (ph) in San Diego and view a series of new solid state diode and CO2 products; as well as the newest member of the Coherent family, Coherent Molectron.

As I mentioned last quarter, innovation alone will not ensure our future success. Supply chain management is a key initiative at Coherent. To refresh everyone's memory, we have two significant projects underway. We are outsourcing all our printed circuit board assemblies. During Q1, we shipped our first products with circuit boards produced by our contract manufacturer. We had no adverse impacts to our customers' deliveries or revenues due to this transfer. We are slightly ahead of schedule due to additional resources being applied to the project with no impact on the budget.

The second project is the consolidation of all CO2 laser manufacturing at our site in Bloomfield, Connecticut. The first line has been [brought] in Bloomfield and we have successfully lit our first lasers. We are on budget and schedule with this program. Upon completion, the projected cost savings in each area are significant and should be fully realized in the fourth fiscal quarter results. As mentioned last quarter, the expected cumulative impact is a reduction of 2-3% points of current [cobs]for the Electro-Optics business segment. Both moves are designed to improve gross margins from their current levels.

Moving on to the quarter, as previously mentioned, Coherent remained profitable on an operating basis for the quarter, excluding restructuring and impairment charges. While the Photonics space continues to be aggressive, Coherent's quality, reliability and superior customer service have allowed us to maintain pricing.

Our market data suggests we gained share in the first quarter. I am now going to provide a breakdown for the Electro-Optics business segment. Bookings in our scientific and government programs business have remained relatively steady in Q1, down 7.8% from the prior year period and up 3.2% sequentially. We anticipate a small bubble in new waters as budgets for U.S. government agencies are allocated in the near future. Volume shipments of Chameleon began in Q1 with good results. To remind everyone, Chameleon is a broadly tunable, ultra fast laser and has an ideal workforce for multi-photon excitation or MTE microscopy, as well as other bioinstrumentation applications.

In the OEM component and instrumentation business, bookings were flat with the same period last year. Bookings increased from 16.2% from Q4 '02 -- excuse me. The instrumentation side of our business is now on a roll.

We are seeing a robust environment for the Sapphire technology as it continues to be deployed in next generation bio instruments for uses such as cell sorting. We have already received orders for our new 200 Milo watts version of the 488 nanometer Sapphire, the DNA sequencing. The 200 [milliliter] product emits 10 times the power of the first version, which was introduced approximately 2 years ago. The Sapphire remains a competitive differentiator for our customers. We have also received our first quantity orders for a new series of Violet Diode Lasers called the called the VioFlame, the initial order would be for cancer discovery. The acquisition of Molectron boosted our yield bookings by $1.4m, and our backlog by $700,000 in the month of December. And expands our laser instrumentation business, as a result of Molectron's strong OEM base. Finally, we are seeing significant strength from our customers in the defense market for a wide range of products and have seen an uptake in related orders, which should be no surprise given the news that can be heard on every television and radio. Material processing bookings were down slightly by less than 1% from the prior year period, and down 7.1% sequentially. Sales increased 54.8% from the prior year period, as a direct result of expanded use of photonic based tools in manufacturing environments. Particularly strong performance has been noted in Asia. The laser base solutions address shrinking feature sizes, improve yields and in some cases, reduce tool maintenance. One particular area of strength semiconductor laser diodes, experienced record sales in the first quarter and the pace of orders remained brisk. The demand for the GEM series of CO2 lasers continue to outpace our expectations for material processing applications.

The product was engineered to meet specific cost goals and has been a key part of our success in cost-sensitive markets, such as in Asia where its combination of power, size, robustness and pricing, are making it the tool of choice among many customers, including those manufacturing microelectro mechanical systems or [MEMS]. One market forecaster, [DBC], project in December 2002 that the worldwide market for [MEMS] devices currently estimated at $11b, is expected to exceed $26b by 2007. [MEMS] is used in products such as specialty medical devices, ink jet printer cartridges, motorized controllers, radio frequency filters, the cell phones, and a [inaudible] of consumer products. Again the benefits of [MEMS] devices include lower cost, lower power consumption and increased reliability versus conventional components.

As Lene mentioned in her presentation, the microelectronic segment has been redefined to include semiconductor capital equipment, flat panel display processing, direct write technology for printed circuit boards, micro machining and advanced electronic components.

Bookings were up 24% from the prior year period and 21% sequentially. The booking strength arises from silicon machining and flat panel display manufacturing applications. The semiconductor capital equipment market continues to adopt light based solutions at an increasing rate, but the catalyst for volume orders has not yet materialized. While we are pleased with the rate of incoming orders, it is unclear if this is the beginning of a sustained recovery.

Moving on to graphic arts and display. Bookings were up 80.3% versus the previous quarter -- the previous period and up 34.4% sequentially. As a reminder, we are starting from a smaller dollar base here. This segment continues to devoir the softness in the broader reprographics market, which is historically a function of ad spending. The spending on our products is directly linked to cost containment within print shops.

Part of the surge in orders resulted from winning a key customer from another vendor. In addition, our computer-to-plate laser business remains buoyant, and we are seeing a continuing shift towards dollar-based solutions.

Lastly, new products like Sapphire and VioFlame have begun to penetrate the graphics arts market

I will now give a brief report on the Lambda Physik business segment. Sales for the quarter were $20.5m, up 8% from a year ago and 11% from immediately preceding quarter, which included $2m of non-recurring royalty revenue. Lambda Physik's new orders of $14.5m during the first quarter of fiscal 2003 were again impacted by the downturn of the semiconductor industry and low orders from the TFT flat panel market.

With many recent announcements regarding reduced capital expenditures in the semiconductor sector, it is no surprise that Lambda's orders for the first quarter of 2003 decreased 35% from the immediately preceding quarter, but improved 18% from a very weak prior year period.

With a largest [inaudible] separate company indicating they are not able to issue guidance or forecast due to uncertain semiconductor equipment climate and a increasing vital order backlog. It could be at least a few quarters before any material pickup in [inaudible] order occurs. That being said, the [inaudible] separate manufactures have expressed interest and do want more than one laser supplier.

Lambda Physik did have some significant accomplishments in the first fiscal quarter, including the first shipments of their newest 193nanometer and 157 nanometer(nm) lasers. The 193nm four [inaudible] laser has fewer parts in the previous generation and features the lowest bandwidth at 0.3 Pico meters available worldwide. The 193nm laser is equipped with the sole system, were sole denotes single isolator, [ultra line narrowed] and operates at a power of 20 watts.

In the 157nm wavelength, the first lithography laser with a pulse repetition rate of 4 kilo hertz shipped to a [inaudible] scanner manufacture in the first quarter. The 4-kilo hertz lasers are already the fourth generation prototypes of the 157nm units that Lambda has shipped since its first installation in 1999.

The 197nm lasers are to be used for the production of [inaudible] sizes below 50nm starting in 2004 and 2005 and are already scheduled for shipment to specific end customers. To hear more about Lambdas end markets, please listen to a replay of Lambda's conference call, which can be heard tomorrow morning at, 49 for Germany, 699-205-6444.

Again that replay number is 49-699-205-6444, that call will be heard in English. Some of you may have recently seen the press release from Lumenis announcing Bernard Couillaud, Coherent Chairman has resigned from Lumenis Board of Directors. Bernard's decision has the complete support of Coherent. At this time we will not nominate a candidate to replace him.

I will now turn the call back over to the operator and we can begin the Q&A session.

Thank you sir. Today's Q&A session will be conducted electronically. To ask a question please press the "*" followed by the digit "1" on your touchtone telephone.

Also if you are listening on a speakerphone you may want to disengage your mute button to allow your signals to reach our equipment. Once again that's "*" "1" and we'll take our first question from Max Schuetz with Credit Suisse First Boston. Please go ahead.

Thanks guys. Two questions. The first on the TFT orders for Lambda. It sounds like there was some softness there, but it looks like in your own microelectronics business you saw strengths. I was wondering about what the disparity was there.

And second just wondering if they were any incremental charges you are planning to take or write-offs you expected to hit book value from the incremental restructuring moves. Thanks.

Max this is John Ambroseo. Addressing the first piece of the business, it's important to recognize that Lambda's business or Lambda's participation in the TFT process and the Electro-Optics participation address different stages of the manufacturing environment. So we have seen demand for the Coherent based products.

Lambda's orders tend to be -- I think lumpy might be the right word where they come in big chunks and then are shipped over a period of time. So the low order rate is not necessarily indicative for Lambda, that is, it's not necessarily indicative of weakness in the market but more [sequeltality] in that business. As far as the second part of the question, I'd asked you to restate because I am not quite sure I understood what you were asking.

Right. I just if for the facility consolidation that you have planned, if you have taken all the write-offs that you plan to or will need to take to get that done; Or if we should look for further assets write-downs in the quarters going forward here.

In relation to the two programs that John described, the [CO2] consolidation and the ET outsourcing. We don't anticipate and write-off. They have been factored in into our outlook for Q2.

And how about on the good will side?

Out goodwill is very small. We don't have a large goodwill numbers about our $35m for the company. So I don't anticipate any goodwill write-down.

Well this is super. Thanks a lot.

And Max in addition any expenses related to employee population will be factored into a quarterly guidance.

Okay. Great.

We have a question from John Harmon with Needham & Company. Please go ahead.

Good afternoon, can you hear me?

Yes we can.

I almost hung upon you; I'm sorry about that. I have a couple of questions on one, the restructuring the printed circuit for the outsource in the CO2 business. Does the gross margin benefit going to hit all in Q2 or a little bit in this current quarter?

John, as we've mentioned, and I think we've mentioned it today -- the full impact will be realized in Q4. As we go through this process, if you look at the CO2 consolidation, for example, we will have two factories running well. While the second for the new factories being brought on line will soon be producing products in the existing factory. And if not until we've started to turn that off that that we'll see a margin impact. And that's what the guidance we have given, suggest that the benefit would be recognized in Q4 of this year, so the June to September period.

On the PCB side, the same holds true. We are slightly ahead of schedule as I mentioned -- that's not significantly had a schedule. So it's measured in weeks here and we expect that to be completed by the end of the third fiscal quarter and that will give us a benefit in Q4 as well.

Thank you. Two more little ones please. One, I realized it was small, but what was the contribution of the revenue from Electron and what business line it's going to fall into?

Then the second one is -- do you have a breakdown for interest income, interest expense, and other income? Thank you.

The revenue for the month of December, we consolidated Electron effective at the beginning of the December. So we have $700,000 revenue included in our revenues.

Yes, John, while Lene looks up the other data the numbers that I had given from Electron, again for the month of December, the period of consolidation was $1.4m of orders and $700,000 of additional backlogs. So the difference would have represented the shipments of 700,000.

Thank you.

And Lene is feverishly calculating the numbers for you.

The net income interest number is about $800,000.

Okay. Interest expense and other income? Do you have those please?

That's netted against...[inaudible].

Oh! In that. All right. Okay. Thank you very much.

Thank you John.

You're welcome.

Our next question comes from Mark Miller with Hoefer & Arnett. Please go ahead.

I'm wondering if you have seen any changes ever since [inaudible] has been taking private. Our term [inaudible]. I notice there has been some consolidation announcements from them and I'm just wondering if they're exiting or entering any new businesses.

At this point of time, we track the performance and behavior of all of our competitors; Spectra-Physics of course is in there. We have not seen any major changes in the way they are behaving in the marketplace.

Thank you.

Once again to ask the question, please press "*" "1" on your touchtone telephone. We will take our next question from Ali Irani with CIBC World Market. Please go ahead.

Hi, this is actually Mary Birxi;Birxie for Ali Irani.

I have got couple of questions. The first one - it was more of a broad-based questions. I was hoping if you talk a little bit about the trends you were specifically within, I guess, semiconductor, you know, and the recent leaders in some pretty big optics and bookings, specifically within the process diagnostics arena. I hope you could just kind of talk a little about that and what you're seeing in your business.

In terms of the semiconductor business, Mary we've talked a little bit about Lambda and the softness that were seeing there. On the Electro-Optics part of the business we are seeing a fairly high level of interest at this point of time in life-based solutions. They have not translated into orders yet.

All right. Great. And then, just even on the [litho] side with Lambda, I know you probably can't talk about in too much detail, but you would mention that 157 is supposed to be -- it's already being shipped to [Stepper] scanner manufacturer and it's supposed to be shipped in '04-'05. Can you give us the general geographic region that it's supposed to be ship to?

You know, I can't tell you that.

: All right.

Nice try.

: Thanks a lot.

We will go again to John Harmon with Needham & Company. Please go ahead.

Hi. Two more questions please.

One on inventory ticked up a little sequentially. Was there any particular cause to that and second the Lumenis shares, at what price are they paid on your balance sheet now and has anything changed regarding your intention about what you want to do with them? Thank you.

Okay. The inventory increase is primarily related to the acquisition of Molectron. And then we also have some currency in Lambda Physik that - 5% strengthening of the Euro, that's increased their inventory. With regards to the Lumenis stock, it's valued at $1.83 per share, which equals about $9.9m on the balance sheet.

And is there anything that changes that you still going to - think you want to hold them or?

Nothing has changed to as to what our intentions are. We always communicated before that we would not -- would [inaudible] being a long-term holder in Lumenis. And we, when the time is right, we will look at that. So there is no change in our strategy there.

All right, thank you.

"*" "1" for questions please.

Well, there appear to be no further questions. But before turning the call back to our speakers, I'd like to remind everyone that a replay of today's conference will be available at 6:30 PM Central Time this evening, and will continue through January 30th at midnight. To access the replay, just dial 719-457-0820 and please enter confirmation code 73-11-76. I'll now turn the call over to Mr. John Ambroseo for additional or closing remarks.

Ladies and gentlemen, I'd like to thank you for participating in this quarter's call and we certainly look forward to your participation next quarter. Thank you.

Thank you again. That does conclude the day's conference call. We appreciate your participation and you may now disconnect.