Coherent Corp (COHR) 2004 Q1 法說會逐字稿

Good day, everyone. Welcome to the Coherent first fiscal quarter 2004 earnings results conference call. Today's conference is being recorded. For opening remarks and introductions, I would like to turn the call over to the Chief Financial Officer of Coherent, Helene Simonet.

Good afternoon. Welcome to our first quarter fiscal 2004 conference call. As is customary with our calls, I will speak to the results of the first quarter and John Ambroseo will discussing operational initiatives and also provide a business overview of the company.

We will continue to provide forward-looking financial performance guidance for the current quarter only. Please remember it is an estimate and subject to uncertainties and risks such that actual results may differ significantly.

Additional information concerning these factors are contained in the company's filings with the S.E.C. Listeners are encouraged to review the documents as applicable. Copies are available from the S.E.C., from our website or from Coherent Investor Relations.

Before I move to the results, let me remind you the full text will be made available through the Coherent Investor Relations website.

We reported first quarter revenue of $108 million and a net loss from continuing operations of .3 million or one cent per share. Our overall book-to-bill was 117 to 1, and we added approximately 19 million in backlog bringing the ending Q1 backlog to $146.6 million.

First quarter orders of $126.8 million represent a 34.5% increase over the corresponding prior-year period, and a 21.2% increase over the preceding quarter. At constant exchange rates, sequential growth would have been approximately 17.5%. Electro-Optics segment bookings in the first quarter of $106.7 million represents a new record for this segment.

Bookings increased $26.7m or 33.4% compared to the corresponding prior-year period, and were up 20% sequentially.

Lambda Physik orders of $20.1m were up 40.9% from the corresponding prior-year period and up 27.9% sequentially. Total company sales in Q1 04 were $108 million, up 5.9 million or 5.8% from the same quarter a year ago and up $6.4 million or $6.3 sequentially.

Sales by business segment were as follows; Electro-optics, $90.6 million an increase of $12.7m or 16.3% from Q1 03 and an increase of $6.9 million or 8.2% from Q4 03. Lambda Physik, $17.4m for the quarter a decrease of $6.8 million or 28.2% from Q1 03, and down $400,000 from Q4 03.

The Electro-optics sales by significant market application for the first quarter of fiscal 2004 are as follows. Scientific and government programs 29.2. Microelectronics, 18.1. Material processing, 12.5. Components and instrumentation, 23.5. Graphic arts and display, 7.3, for a total of $90.6 million.

Gross profit of $41.4 million or 38.4% for the first quarter was well ahead of our guidance of 35 to 37%, primarily as a result of favorable product mix and higher volumes. In addition, the cost containment initiatives taken during the past year are starting to pay off.

Gross profit was up 8.5 percentage points when comparing to the prior quarter's 29.9% margin and slightly down from last year's Q1 margin of 39.6%. The breakout in gross margin by segment for the first fiscal quarter is as follows. 42.4% for Electro-optics, an increase of 10.4 percentage points from Q4 and 17.4% for Lambda Physik, a decrease of approximately 2.8 points sequentially.

We are pleased that the Electro-optic segment rebounded from the disappointing results of the first quarter. We experienced positive effects in the Q1 margin as revenues were stronger than anticipated. We experienced a richer mix of business with more business in the microelectronics area, which tends to contain our highest-margin products.

Furthermore, we did not have any large extraordinary ENO charges and warranty issues out of the norm as we experienced in the prior quarter's results. Looking ahead as we complete some of the major supply-chain efforts in the Electro-optic business segment, the benefits should become apparent in future results. Management continues to focus aggressively on improving the inventory turns and we're also moving forward with the roll-out of our global ERP systems which we expect to be mostly completed for the electro optic segment by the end of 2004.

Within our Lambda Physik segment, gross profit sales of 17.4% from 22.2 last quarter and from 35% achieved in the corresponding prior year period. The lower margins are primary results of a continued weakness in the lithography markets and higher service costs. Operating expenses for the quarter, including intangible amortization were $43 million or 39.9% of sales, compared to the guidance range of 41 to 43 percent of sales.

R&D spending for the quarter of $14.9 million was 13.8% of sales, within the guidance range of 13 to 14%. Absolute R&D dollars spending went up primarily as a result of the acceleration of Lamda Physik 193 nanometer litography program which John will talk more about in his presentation.

SG&A spending for the quarter including amortization of intangibles was $28.1 million, or 26% of sales, approximately two points lower than the lower end of the guidance range of 28 to 29%. The highest sales level was the primary reason why SG&A as a percent of sales was lower than the original guidance.

Our ending cash balance for the quarter was $190.1 million, of which $53.9 million was classified as restricted cash. The cash balance of $190.1 million represents an increase of $1.5 million compared to Q4 03. Cash from operations was in excess of 25 million, as we received cash amounting to 24 million from a tax refund resulting from the loss on the sale of our Lumina shares. As a note, during the first quarter, we completed the sale of our Luminous ownership.

As mentioned during or fourth quarter conference call, we terminated the lease on the building that housed our former medical division, resulting in a cash outflow of approximately $23 million during the quarter. We also purchased an additional .5% of Lambda Physik shares for approximately .7 million bringing our ownership at the end of Q1 to 94.8%. In the meantime, we reached a 95% threshold, which allows us to move forward with the squeeze-out procedures for the remaining 5%. We have approximately $8.4m as restricted cash earmarked for the purchase of the remaining Lambda shares. The remaining $45.5 million in restricted cash is reserved as a result of our long-term debt arrangement.

Capital spending for the quarter exclusive of the conversion of the synthetic lease of $23 million in Q1 was approximately 4.8 million or 4.4% of sales, and below our initial guidance range of 6 to 8 percent of sales for the fiscal year 2004. Coherent's book value at the end of September 2003 was approximately $18.7 per share.

At the end of Q1 04, accounts receivable day sales outstanding stood at 62 days compared to 65 at the end of Q4 03 marking the fourth consecutive quarter of improvement. Electro-optic day sales outstanding stood at 62 days compared to 61 days last quarter. Lambda Physik receivables DSO was 64, another big improvement, a drop of 17 days from 81 at the end of September 2003. Inventory day sales outstanding dropped from 89 at the end of Q4 03 to 86 at the end of this quarter. Within our electro-optic segment, inventory DSO decreased further from 64 to 58 days, our best results in quite some time, actually, in almost three years. However we saw an increase at Lambda Physik from 204 at the end of Q4 03 to 234 days at the end of the first quarter.

The following represents management's guidance on operating results for the second quarter. As a reminder, our guidance is Exclusive of any major restructuring or other charges unless otherwise noted. The following guidance is provided. We expect revenues to be 10 to 12% above Q1 04. Gross profits will rebound to a range of 40 to 42%. R&D spending is expected to be in the range of 12 to 13% of sales. SG&A expenses, including intangible amortization are anticipated to be in the range of 24.5 to 25.5% of sales. Other income expense is estimated to be slightly negative, and until we firm up our tax-planning opportunities with respect to Lambda’s loss carry-forward balances, we are guiding the annual tax rate to be identical to the Q1 actual rate of 46%.

As a reminder we're not taking any tax benefits against Lambda’s operating losses in Germany, as we are recording evaluation reserve under FAS 109. Capital Spending for the year is projected to be in the range of 6-8% of sales exclusive of the conversion of the synthetic lease.

On our plate now, with the turnaround at Lambda Physik. Last week it announced a restructuring plan, costing approximately 1.5 to $2m with benefits of a similar size to be realized over the next 12 months. The majority of the costs are anticipated to occur in our third fiscal quarter. The second quarter guidance includes approximately .3 million costs net of savings.

In summary, I'm pleased that the improving business conditions and the execution of responsibilities by all Coherent personnel during Q1 enabled us to etch closer to the profitable sooner than we anticipated. I will now turn over the call to John Ambroseo, our CEO.

Good afternoon. Welcome to our first quarter fiscal 2004 conference call. If any of you had doubts about how much our business can change in 90 days, I would respectfully offer our Q1 results as proof positive of that notion.

Incoming orders surged by 21% sequentially and 35% over the prior year period. Increases occurred in most of our markets and confirmed our prediction that development and preproduction orders would give way to volume orders. The book-to-bill for the total company was 1.17. Sales were up 6% sequentially and 6% versus the prior-year period. The improved results were due in part to our customers placing shippable orders late in Q1. The recovering gross margin is also very gratifying as we were able to demonstrate that many of the unfavorable charges were one-time events, and while it is not Q1 news, we announced last week we had surpassed the 95% required to launch a squeeze out to Lambda Physik. This will allow us to maximize the synergy between the entities.

Shifting to our EO segment, as Helene mentioned or book-to-bill was 1.18. Our orders for EO segment were up 20% sequential and 33.4% from the prior-year period. The bookings were an all-time record for the segment.

Bookings in our scientific and government programs business were up 4.4% sequentially and 37.7 percent over the prior-year period. During Q1, as in the previous quarter, the order rate in the U.S. was particularly strong for our chameleon product used in biological imaging. The most notable event in our scientific business was the expiration of the distribution contract for amplifier systems between our positive light subsidiary and another laser company on December 31st, 2003. As of January 1st, Coherent now offers the broadest solution set of high-performance amplifiers for the research community. We are showcasing our newest products, the opera, Libra, and legend and photonics west at the San Jose convention center. They replace those generation products which are being retired at the end of our current products commitments. Orders increased 4.8 percent sequential and declined 1.8% in the prior year period in the OEM instrumentation business. We continue to take market share from the bioinstrumentation market with the receipt of additional large orders for Compass and Sapphire. These new orders are consistent with our criteria of providing added value to our customers, leveraging our existing infrastructure and contributing to the growth margin at Coherent.

For materials processing, bookings were up 9%, and 9.5 for the prior year period. The markets displayed good growth across most geographic territories. Nonmetallic also showed recovery. We had previously predicted that our customers in China would burn through their inventories by late Q1 or early Q2. It has a mixed bag as some still hold inventory positions. It is not clear if they're over capacity or competition or general economics. We expect much better visibility at the fair in March. Bookings in the microelectronics segment were up 125.3% and 175.8%. This is the fifth consecutive quarter of increased bookings and marked by a significant updraft in orders. We have booked volume orders for via drilling, waver inspection and PCB direct-write customers. In addition, we have received a volume order for solid state ultraviolet lasers. While none of these orders are annual buys, they do represent demand bubbles for these specific customers. We expect the follow-on orders will be at a swan lower but sustainable rate. Graphic arts and display bookings sagged sequential and 59.3% from the prior-year period.

While these numbers may seem dreadful they're indicative of two factors. First of bulk of orders received in prior quarters were annual buys, and Q1 was an off-quarter in the buying cycle. Second, the graphic arts industry is preparing for its major worldwide trade [indiscernible], which occurs once every four years. A staggers number of major products are introduced there, and the end customers typically wait to see what the market has to offer. We remain optimistic about the longer-term growth rates.

For R&D we maintained or investment during the first fiscal quarter. Coherent spent 14.9% -- $14.9 million or 13.8% of revenues on R&D in Q1. Our electro-optic segment is displays nine new products.

Let me switch to operations. I spent a fair amount of time in our last call. This update will be short by comparison. The recovery in EO gross margin to 42.4% was impressive, as factory utilization benefited from increased sales and we recognized benefits from our restructuring efforts. Mix was favorable as predicted. I would like to recognize our management team for mitigating the warranty and inventory charges that partially eroded or Q4 performance. In fact, inventory management within Electro-Optics improved as the DSO dropped to 58 from 64 we're also nearing the end of our restructuring effort in the electro optics segment. To recap the past year's activity, we have reduced the number of manufacturing sites from 13 to 8. We have reduced our total footprint by about 30% and we have outsourced non-core manufacturing which includes nonessential optics. These changes have helped solidify our foundation and will be instrumental in driving EO margins into the mid 40s and perhaps a bit higher about the by the end of the fiscal year.

As was recently announced Coherent through its wholly owned subsidiary Coherent GMBH has surpassed 95% Lambda Physik AG. In accordance with German law, we have initiated squeeze-out proceedings. The formal vote will occur at the upcoming general shareholders meeting in May 2004. To remind everyone, the 95% position guarantees the outcome of the vote. Following the filing of the requisite paperwork, Lambda will be delisted from the Frankfurt stock exchange and the stock corporation will be converted to a limited liability company. Last week Lambda announced a restructuring program. Within the framework of this program, it has planned to merge production sites and reduce headcount. It's approximately 1.5 million euros, and will be spread over the remainder of fiscal 2004. It's anticipated that the savings will largely offset the charges in FY 04. The FY 05 savings are estimated to be approximately 2 million euros.

For Q1, the Lambda’s revenues of $17.3m were down 2.5% sequentially and 28.2% from a year ago. The year over year decline in sales resulted from continuing softness in the lithography market and the decline in the industrial market. Q1 orders of 20.1 million were up 27.9% sequentially, and 40.8% versus the prior-year period. The book-to-bill ratio for Q1 was 1.16 Like the electro-optics business,Lambda is benefiting from a recovery in the micro electronics market. Demand for the products is improving as flat-panel sales continue to grow. The newest product, the Lamda steel 2000, will enable the production of larger panel size than previously available using the LTPS process. We have also seen an up tick in the medical segment as a result of the introduction of the pro. It's a new cost-effective platform for vision correction.

With two of the three key markets showing signs of recovery, I would like to update you on Lambda’s lithography efforts. The high power 193 program remains on track for a calendar Q4 release. The mission critical criteria are reliability, cot of ownership and performance. On the lower power front, there are several A 4003 lasers at customers for processing -- process development and pilot production.

A market opportunity also exists for our 248 nanometer lasers. Lambda’s participation in this opportunity is dependent upon the success of our reliability and of our engineering efforts. While I do not have exp data to share, customer feedback confirms that the lifetime of the 248 nanometer product is increasing.

I am pleased with the progress that the Lambda team is making and look forward to capitalizing on the upside opportunity that the lithography market represents for the company. Before turning the call over to the operator, I would like to announce we have rescheduled our analyst day for Tuesday, May 18. The meeting will be held at our worldwide headquarters in Santa Clara, California. For those of you on our e-mail distribution our investors relations department will be sending you information in the future. We'll now begin the question-and-answer session.

Thank you. If you'd like to ask a question today, press star-1 on your Touch-Tone telephone. If you're on a speakerphone, make sure your mute function is turned out of to allow your signal to reach our equipment. Our first question today comes from Byron Walker with UBS.

I have several questions. John, of some of the issues in terms of getting the controls back in place, what remains to be done at this point?

For the electro optics segment? They're being in place and being tested routinely so the confidence level in those tools is reasonably high. The other measures, the warranty effect was a one-time event, we don't expect that to be another recurrence. And mix was predicted to improve as it did. Those were the majority of the hits that were taken last quarter. So we're around the corner on those, Byron.

You sound pretty comfortable that the worst is behind you and that you have your hands around this thing. Fair statement?

Fair statement.

On microelectronics, you have a pretty steep ramp it appears.

Um-hmm.

How are you doing with sufficient capacity, on-time delivery schedules, and as you look forward to what I suspect is continued order acceleration, any issues in terms of CAPEX requirements and personnel hiring to make the ramp?

We will -- the ramp continues at this kind of rate, obviously we'll need to add people. We have the capital, equipment and space available to deal with an increase in capacity.

And you had also mentioned about resurgence in the optics side. Exactly what is being asked for and to what kinds of customers are those products going to?

I think, as you know, we tend not to speak to specific customers. However, in terms of what they're looking for, we're focusing our emphasis on laser optics, by and large, and those optics tend to be synergistic with what we use internally. The updraft in demand is from customers who have similar to our needs, so there are other laser companies

The flat-panel display business, certainly for the industry on a generic basis has been pretty strong. Can you address that in terms of what Lambda’s seen for their product?

We did see an upswing in orders during the first quarter and we would expect that to continue through the fiscal year.

Okay. Thank you.

We'll take our next question from John Harmon with Needham & Company.

Hello. This goes on Byron's question a bit, but it's not really a very difficult move to go from 42.5% on gross margins to 45 on Electro-Optics. How much of that is volume and how much of it is a couple remaining steps in the restructuring program?

We should see some nominal benefits, and I would say that will probably by the predominant piece of recovery. While the restructuring efforts are not completed, many of them are in place already, and we have a few things to finish up.

Thank you. Maybe you can talk a little bit about -- it's pretty remarkable that your markets turn so quickly. What do you think drove that. Is it the electronics industry or the general economy, and what gives you confidence that it's sustainable?

Well, from the standpoint of the Q1 bookings, clearly the biggest impact was felt in microelectronics, and for the past -- well, the previous four quarters, we had seen a pick-up in orders, or increase, and we had been predicting, John, this was sort of a bellwether for volume breakthrough, and some of that came in relatively late in Q1. That did, by the way, help the revenue side, because we were able to ship again some of those orders to satisfy demand. As far as what gives us confidence going forward, we're working with a significant number of customers in the various markets, microelectronics included. The orders that came in were from a subset of customers, so as that market shows signs of recovery, with you would expect them to come in from the customers that didn't participate in the first quarter. The other markets we participated in were by and large where we thought they would be, maybe slightly up, with the exception of graphic arts. As I mentioned during my talk, so I think we're seeing two effects, demand within microelectronics from a severe down cycle there and a pickup in the general economy from the other markets.

Thank you. And the restructuring you talked about at Lambda Physik, are those measures you can only enact once you turn it into a GMBH, or are there additional cost savings you can achieve.

They're taken at Lambda Physik by Lambda Physik, so these are not related to any integration or squeeze-out by Coherent. These are designed to address capacity within Lambda. If you may recall in the Q4 call and even at your conference, I had mentioned we are reviewing the capacity plan for Lambda and that some changes were under way. That plan is a result of that assessment. As far as what happens afterwards, there are some other synergies that we can leverage, but we need to get theze-out done before we announce what those are.

Finally, is Lambda going to report its results separately?

They're not required to do so so there will not be a report from Lambda.

So there won't by a breakdown of their revenue by segment.

No.

Thank you very much.

Sure.

Once again, please press star-1 if you'd like to ask a question. Next we'll go to Mark Miller from Hoefer & Arnett.

Congratulations for getting the ship turned around so quickly. Just questioning about potential share pickup or share defense. I'm wondering how you're doing, you mentioned you picked of some shares. Are there any other opportunities to gain measure share. What about the transistor market. You had a dominant share there. Is that still the case?

For the two markets you mentioned, Mark, the bioinstrumentation, we continue to pick up share, because everything we get there is essentially new business for us, and as far as pressures from competitors, they're all trying to catch up with their own products, et cetera, their own pricing strategies. Thus far, we've been quite successful in defending the position that we've taken and continue to expand that position. On the TFT side, Lambda continues to enjoy a very strong market share for that particular business. The opportunity to expand is really a function of how that market expands. Remember the LTP process, the slow process, the polycrystalline silicon is maybe 10% of the total market, so it will grow with the market, but it also creates a follow-on opportunity for Lambda.

There's word that some of the communication industry or part of it might be finally awakening here at a three-your slumber. Are there any opportunities there for you?

There may be opportunities from the standpoint of providing equipment that's used to make telecom products, and maybe some isolated opportunities to provide documents directly, but we largely exited that business last year.

Thank you.

Sure.

We'll take our next question from Mary Brixie from CIBC world markets.

Congratulations on the great turnaround. Quickly on the orders, you want you saw a pickup in the shippable orders late in the first quarter. Has that continued into the second quarter at the same pace?

We can't comment on that, Mary. I'm sorry.

Actually on the ERP implementation, Ed Electro-Optics should be completed by the end of fiscal 04?

Correct.

And how about Lambda Physik?

Again, we need to complete the squeeze-out before we start to announce any actions on that front, so you shouldn't expect anything to happen this fiscal year. We need to get the electrooptics implementation completed.

Okay. Agree. Thank you.

Sure.

There are no further questions at this time. We'd like to give everybody a final opportunity. Please press star-1 if you'd like to ask a question. We have a follow-up question from Byron Walker.

Helene, could you address the tax issue? It just seems it's a hefty tack rate. Is there any efforts going forward trying to reduce that tax rate?

Yes. As I mentioned, we have some tax opportunities and we need to firm them up, and it's basically associated with the Lambda integration as well. It's going to be a timing issue. If you strip out the Lambda losses, our underlying tax rate remains in the low 30s, as we have seen before. So it's a function of being able to take the benefits against the loss carry-forwards.

And what are your NOLs, the lots carry-forwards that you can use, the quantity, dollar value?

For Lambda Physik?

Yeah.

It's about 8 to 10 million.

I see. Thank you.

There are no further questions at this time. I'll turn the conference because to Mr. Ambroseo for any closing comments.

Speaking for Helene and myself, we would like to thank you for participating in the call and look forward to speaking you with you next quarter.

That does conclude the call, thank you for your participation, you may now disconnect.