Coherent Corp (COHR) 2004 Q2 法說會逐字稿

I want to welcome you to the Coherent second fiscal quarter 2004 earnings conference call. For opening remarks and introduction I would like to turn the call over to the Chief Financial Officer of Coherent, Helene Simonet.

Please go ahead ma'am.

Thank you (inaudible). Good afternoon and welcome to our second quarter fiscal 2004 conference call. As its customary with our calls, I will stick to the results of the second quarter and then John Ambroseo, our CEO will provide a business and operational overview of the company.

We'll continue to provide forward-looking financial guidance for the current quarter only. Please remember that such guidance provided is an estimate and in subject to distinguish and uncertainties such that actual results may differ significantly.

Additional information concerning these factors are contained in the filings with the SEC. Listeners are encouraged to refer to the risk disclosure described in the company's reports and forms 10-K, 10-Q and 8-K as applicable.

Copies are available from the SEC from the Coherent web site or from Coherent investor relations.

Before I move on to the results, let me remind you that the full text of today's prepared remarks will be made available through the Coherent's investor relations Web site.

We reported first quarter revenues of 125.8 million and net income some continuing operations of 2.9 million or 9 cents per share. Net income was 10 cents per share and included a net gain from discontinued operations of 1 cent per share.

Our overall book to bill ratio was 1.09 to 1. We added approximately 11.6 million in backlog bringing the ending Q2 backlog to 158.1 million. Second quarter orders of 137.4 million represents a 33.3% increase over the corresponding prior year periods and then 8.3% increase over the preceding quarter.

At constant exchange rate year-over-year and sequential growth would has been approximately 25% and 7% respectively. Electra optics bookings in the second quarter of 109.1 million represent a new record for this segment. Bookings increased 25.4 million or 30.3% compared to the corresponding prior year periods and were 2.3% sequentially.

Then the physics orders of 28.3 million were up 46.5% from the corresponding prior year period and up 40.4% sequentially.

Total company sales in Q2, '04 were 125.8 million up 22.3 million or 21.5% from the same quarter a year ago as up 17.9 million or 16.5% sequentially. Sales by business segment are as follows.

Electra optics 103.9 million, an increase of 24.6 million or 31% from Q2 '03 and an increase of 13.3 million or 14.7% from Q1 '04. Lambda Physik, 9 million for the quarter, a decrease of 2.3 million or 9.6% from Q2 '03 and an increase of 4.5 million or 26.2% from Q1 '04.

The Electra optic sales by significant market applications for the second quarter of fiscal 2004 are as follows - scientific and government programs 32 million, micro electronics 25.8, material processing 13.9, OEMs components and instrumentation 25.4, graphic arts and display 6.8 for a total of 103.9.

Gross profit of 51.6 million or 41% for the second quarter was slightly in the middle of our guidance of 40 to 42%. Increase in the gross margin has been the primary goal of the company and we're pleased with the progress make to date. It is the first time since the first quarter our fiscal 2002, nine quarters ago that we have seen margins at this level.

Current quarter gross margin of 41% compared to 38.4% last quarter representing an increase of 2.6% percentage points. The breakout gross margin by segments for the second fiscal quarter is as follows.

42.8% for Electra optics, an increase of .4 percentage points from Q1 and 32.2% for Lambda Physik, an increase of 14.9 points sequentially. We're pleased at the Electra optic segment continued to extend it through us margin during the quarter.

As we have indicated during prior quarter we might have electronic market segments hence to contain our highest margin projects as we continue to see strength in this area. Looking ahead we're still anticipating at the Electra optic gross margin will reach the mid-40s by the end of the fiscal year.

Our ending cash balance for the quarter within our Lambda Physik segment gross profit improved significantly to 32.2% rising from 17.4% last quarter and from 27.6% in the corresponding prior year period.

The higher margins are primarily the result of reduced charges against photography service contracts and a more favorable mix as we saw a substantial increase in revenues in the industrial market, more specifically in the flat panel display at in-check business.

Operating expenses for the quarter including intangible amortization were 46.4m or 36.9% of sales compared to the guidance range of 36.5% to 38.5% of sales. R&D spending for the quarter of 15.5m was 12.4% of sales within the guidance range of 12 to 13%. The Mopa (ph) project has Lambda continued to be a major area of spending as we started approaching our time frame of releasing a system a 40 watt 193 nanometer lithography system later in this year.

SG&A spending for the quarter including amortization of intangibles was 30.9m or 24.6% of sales near the low end of the guidance range of 24.5 to 25.5% of sales.

The higher sales level was the primary reason why SG&A the percentage of sales was at the low end of the guidance range. Our ending cash balance for the quarter was 195.7 million of which 54.1 million was classified as restricted cash.

The cash balance of 195.7 million represents an increase of 5.6 million compared to Q1 '04. Cash from operations was positive at 7.8 million as we had higher income and good working capital management. We have approximately 8.2 million as restricted cash year marked for the purchase of the remaining Lambda shares and 45.5 million is classified as restricted cash to comply with our long-term debt cover and arrangements.

Our net debt payment is scheduled for mid May and consists of 13.9 million of principal and interest payments with a corresponding reduction of long-term debt of 12.7 million and the reduction of 15.2 million restricted cash requirements.

Capital spending for the quarter was approximately 5.8m or 4.6% of sales and well below our guidance range of 6 to 8% of sales for the fiscal year 2004. Book value at the end of the second quarter was approximately 18.77 cents per share.

At the end of Q2 '04 accounts receivable date standing at 66 dates compared to 62 at the end of Q1 '04. Electra Optic date withstanding at 63 remains closed to last quarter's performance. Lambda's receivable dates of withstanding was 78 days, an increase of 14 from Q1 '04 primarily the result of a proportionally higher accounts receivable mix from Japan relative to other regions.

Inventory improved from 86 to 76 days at the end of the second quarter. Within our Electro-Optics segment, inventory dates outstanding decreased further from 58 to 55 days, our best results in over three years. Lambda's inventory also took a positive turn with sales outstanding decreasing from 234, the end of Q1 '04 to 175 dates at the end of the second quarter an improvement 59 days.

The following represents management's guidance on operating results for the third quarter. We expect revenues to be approximately 5% above Q2 '04.

Close profit will be in the range of 40.5 to 42.5% of sales. We continue to expect gross margin improvements. However, the gains are largely upset by a restructuring charge at Lambda of approximately $1 million.

Last quarter we announced a manufacturing consolidation plan at Lambda Physik costing in total approximately 1 to $1.5 million with benefits of a similar size to be realized over the next 12 months. A majority of the charge was anticipated in the third quarter.

R&D spending is expected to be in the range of 11.5 to 12.5% of sales. SG&A expenses including intangible amortization are anticipated to be in the range of 23.5 to 24.5% of sales. Other income expense will be immaterial.

We continue to guide the tax rate in the upper 40's range. Lambda's losses are significant to our results and as a reminder, we're not taking any tax benefits against Lambda's operating losses in Germany, as we are recording a valuation reserve under fast 109.

Our tax rate will return to historical levels as soon as we are implementing the reorganization of Coherent's German entities. Capital spending for the full year is projected in the range of 6% to 7% of sales, exclusive of the conversion of the synthetic lease that occurred in the first quarter of this year.

In summary, I'm pleased with Coherent's return to profitability during the second fiscal quarter and with a healthy backlog and improving business conditions, we look forward to a good second half of the fiscal year.

Management remains focused on increasing its growth margin and improving Lambda Physik's financial performance. John will provide more detail on the progress we are making with respect to improving the product reliability and the product development process at Lambda Physik.

I will now turn over the call to John Ambroseo, our CEO.

Thanks. Good afternoon, everyone. As our second quarter fiscal results indicate, the economic recovery is well on its way and the strategic decisions made during fiscal year 2003 are bearing fruit. I am pleased that Coherent continued to make progress across a number of fronts during our second fiscal quarter.

As already mentioned, incoming orders for the company increased 33% from the prior year period and sales increased 22% from the prior year period and 17% sequentially. The book to bill was outstanding considering the strength of the previous quarter's rate.

Margins continue to improve across the board with the largest improvement occurring at our Lambda Physik segment. The return to profitability is very welcome.

And with the economic recovery, we look forward to the opportunity to aggressively exploit the earnings potential of the company.

Our book to bill for the EO segment was up 1.5%. Orders for the EO segment were up 2% sequentially and 30% in the prior year period. The bookings were another all-time high for the segment. Bookings in our scientific and government programs business were down 6.4% sequentially and increased 37% over the prior year period.

The large year over year increase has reflected our acquisition of positive light. Geographically orders from the European customers were ahead of forecast, Asia was at forecast, and the US was behind its plan. The lower bookings in the US followed several quarters of very strong performance.

Our analysis indicates a change in product mix as well as push outs relating to procurement cycles and some creative specsmanship from competitors. Orders for OEM components and instrumentation increased 24% sequentially and 20.9% of the prior year period. We continue to see strength in the bioinstrumentation market where our competent software lasers are taking share.

To satisfy demand, production of these lasers has increased 30% from Q1 '04 and 110% from Q2 03. We have seen an increase in defense-related orders for use in measures and remote detection.

Demand from the medical market has also shown a slight upturn largely due to a pickup in ophthalmic and dental applications.

One area of disappointment is, sales of high-powered diodes for use in industrial laser pumping applications.

Due to sluggishness, and end market demand and a high density of competitors. Bookings for material processing were up 23.3% from the prior year perpendicular largely following our previous predictions. We recorded strong orders across all geographic regions.

The highest performance was in the Asia Pacific region, particularly China, as customers completed their inventory burn off and locked in capacity to address end market and seasonal demand.

From an application perspective, marking and graying and textile processing led the curve. We also made end roads in computer numerical control of CNC and thin metal processing. These applications have traditionally been served by machine tools.

Broader penetration into these areas would obviously increase our (inaudible) base. Microelectronics bookings decreased and increased 119.8% over the prior year period. These results are in line with commentary provided during last quarter's conference call.

We had predicted that the orders would be at a lower but (inaudible) rate. Several wafer and patch in applications contributed to the results. Semi cap orders for inspection of enterology were up 20% versus Q1 '04 and 93% over Q2 '03 as we benefited from legacy business as well as design wins achieved during the past 18 months. Booking for (inaudible) the first half of the fiscal year, since fiscal 2000. There are two drivers behind the (inaudible) growth, market growth and functionality. Many electronic manufacturers have constrained capital capacity to create better leverage of their own infrastructure.

Utilization rates are running high and additional capacity is warranted. Product functionality is compounding this effect. The increased capabilities of cell phones and PDA's require complex and dense was up to 1.5 million vias (ph) per square meter.

We're also seeing encouraging signs from the printed circuit board, direct imaging market as adoption of laser-based tools is expanding along with the growing market.

Orders in the graphic arts and display market rebounded 91.9% sequentially and decreased 53% from the prior year period, so the lumpiness continues. Thermal computer to plate or CTP imaging continues to do well while visible CTP is phasing out of new product shipments and will become a service business.

In ultraviolet CTP our pilot and laser is gaining traction for high volume printing applications. As mentioned last quarter, a major worldwide trade show for this industry-DRUPA--occurs once every four years and takes place in Dusseldorf, Germany from May 6 to the 19.

We are represented in a number of new products being introduced by our customers. On the research and development front, last month we announced that Luis Spinelli was appointed executive Vice President and Chief Technology Officer of Coherent. This promotion is well earned as Luis has consistently contributed to Coherent technical prowess and prosperity throughout his 19-year career. His position has continued to influence on our technological evolution. Luis will have a number of responsibilities as our CTO. His top priority is to recommend and help coordinate major technology investments, he'll work with our business units to promote synergistic developments that leverage our fundamental component technologies into (inaudible) product platforms and Luis will also lead our intellectual property strategy.

During 2-2, Coherent spent 15.5 million or 12.4% of revenues on R&D. As we mentioned in the past, R&D is a percentage of sales, should decrease over time but absolute dollar spending on R&D should remain fairly constant. Let me now switch to operations. One of the most commonly asked questions is how we are faring on capacity expansion.

Obviously, we have added head count to satisfy increased demand. Our capital investments have been much more modest however. We are running our factories more aggressively than we have in the in the past with second shift being the most common expansion vehicle. There is ample opportunity left in this model. We have had to reverse our direction on our facility in Glasgow, Scotland.

We were negotiating to sell the operation to an investment group. The deal included a supply agreement for certain products for key customers. Despite everyone's best effort, we were unable to structure an agreement that provided our customers with satisfactory supply chain assurances and the principles with an acceptable financial model.

We have applicably ended discussions and will retain the facility as a Coherent entity. Now let me turn to Lambda Physik. For q 2 Lambda Physik posted revenues of 26.2%, but decreasing .6% from the prior year period.

Orders of 28.3 million were up 40.4% sequentially and 46.5% from the prior year period. Incoming orders are at the highest level over the past seven quarters. The book to bill ratio for q 2 was 1.29. The industrial market dominated the orders. The continued strengthening in the market resulted in multiple system orders. Lambda also saw fresh activity in the Ink jet market. Litho revenues and orders were all service related.

As has been my past practice, I'll now provide an update on Lambda's lithography developments, which have focused on a Hugh high power 193 platform and reliability engineering. Our goal for production release of our new laser system remains calendar Q4. The intent to exhibit the new plat form scheduled for this July in San Francisco.

As a result of novel design concepts, it will have industry leading performance and significantly improved efficiency compared to incumbent product offerings, which is key to reducing overall cost of ownership. Our engineering efforts are also bearing fruit.

Over the past six months, Lambda has been releasing upgrades in its tube design. The combination of these efforts is a series d-2. The two most advanced test units have in excess of 11 billion shots. Both remain within customer specifications. These are the best results ever recorded at laming and are competitive with industry averages.

The series d production tubes have shipped. If customer results mirror our in house testing, we should see a favorable compact upon customer satisfaction and our warranty costs. While these developments are encouraging and should give the customers reasons to reconsider Lambda, our goal is to run a profitable business.

We will know by the end of this calendar year if this is this is probable. Our privatization of Lambda is reaching the final stages. Lambda's general meeting is scheduled for May 4 - I am sorry, May 5 and 6 in Frankfurt. The squeeze out resolution is the main proxy item.

We expect ample and animated discussion, even though we own a sufficient number of shares to carry the vote. The merger will be complete the once we have satisfied owl legal requirements under the German takeover act. The minimum time frame for completion is 30 days from the shoulder meeting. -- the shareholder meeting.

Before turning the callback over to the operator, let me remind everyone that Coherent will be holding its analyst day during the morning of Tuesday, May 18, at our corporate headquarters in Santa Clara, California. The analyst day will start at 9:30 AM and conclude at approximately 11:45 A.M.

For those interested, immediately following the facility tour, we will provide transportation to the near by semi Silicon Valley lunch forum entitled 100 nanometers below. If you haven't already responded and are interested in joining us, please contact our investor relations department at 408-764-4174.

For those unable to attend the analyst day, the event will also be available by web cast at www.coherent.com. We hope to see you on May 18.

Also, I would like to remind you that the conference on lasers and Electro-Optics I am going to refer to as Cleo is being held at the Mosconi center in San Francisco, simultaneously to our event and lasts through Thursday, May 20, at Cleo you will be able to see first hand the selection of Coher's product offerings.

I will now turn the call over to the operator so we can begin the question and answer session.

Thank you very much sir.

[OPERATOR INSTRUCTIONS]

Our first question today from Mark Miller with Hoefer and Arnett.

I would like to say congratulations on another good quarter. Just wondered for the future, these results are quite strong. Where do you see more growth coming from your key businesses? What do you think is going to continue to grow over the next six months most strongly?

Well, as we have mentioned in the past, mark and first of all, thank you for the congratulations.

As we have mentioned in the past, we would expect to see similar performance in the microelectronics market and some new applications coming online, would certainly be interesting there. The materials processing, which went through a slump last year is benefiting by a number of factors, obviously the situation in China has improved dramatically since the middle of last year and the general economy is picking up, so we would expect that market to continue to grow and post drupa I think is a reasonable probability of business picking up for graphic arts and display.

The scientific market will continue to behave as it has traditionally, and the components base is waiting for some new applications to break out.

Just one other question. Give us a little more visibility or feeling about the tax situation you heard the tax rate and may be just a little more color on that.

As we indicated in the call, we are working on reorganizing our German entities, and as soon as we have completed, that our rate will go back to the historical rate. If we exclude the Lambda losses or if tax assess the Lambda losses as we normally do we would have a rate of 33% so we just cannot do that right now. We apply a reserve, so it's past 109, so, it's a matter of timing as to when we can --when we can tax effect the Lambda losses.

Thank you.

And we will go next to Ali Irani with CIBC World Markets.

Good afternoon, gentlemen, and ladies. Congratulations on the strong results. I am hoping you can give us some idea of where you stand in negotiations at this point on the 40 watt laser and just to follow up on that, again on the laser theme out of Lambda Physik, there's been a pickup in volume adoption for the ltps flat handle displays that your system targets. Can you give us an idea of the pipeline as we go through 2004?

Ali, the orders that came in for the industrial segment, were dominated by ltps, so a lot of the industrial orders for quarter 2 in fact represented those systems. Most of those orders are scheduled to ship in q 4 and q 1, so q 404 and q 105 and we are seeing some reasonable activity there. I don't think we have quoted an exact number but it is a good portion of the industrial bookings. As far as the first part of your question, I think referred to the litho, is that correct?

That is.

OK. So to rehash some of the comments that I already made, you know, we have been working basically in two years.

One is reliability engineering, which was absolutely critical to give customers a reason to do business with us, and the team has made some very good results there. You know, the lifetimes that we are seeing, at least in these test systems is probably a factor of two or three higher than we had seen in previous synchronations of the two.

So, that's a big factor for the customers and obviously the company as well. On the systems side, I have to commend our engineering staff. I think they have done some very clever things to address key operating points of the customers in terms of performance and cost of ownership. It's a little premature for us to talk about those. We would rather save the bang, if you will, for semi-con rather than putting that information out on the street just yet.

Have you shared some of this data with the customers at this point, John?

Absolutely.

And their response?

Well, on the reliability side, you know, they are pleased that we have made progress. You know, it's been a long time coming and, you know, that better than I do, you know that up time is of paramount importance in these, and that's addressing one of their key concerns.

On the performance end, he think they think we have done some clever things as well which ultimately address one of there key goals in terms of employment. So, from the standpoint we are getting positive feedback, yes, it's there. That has not translated into orders yet, and, you know, we are anxiously awaiting for that to happen. But again, I feel that the steps we have taken are giving customers reason to reconsider Lambda. You know, we still have to prove ourselves on a number of fronts.

Great, thank you very much.

Sure.

[OPERATOR INSTRUCTIONS]

We will go next to John Harmon with the Needham and Company.

Hi, good afternoon.

Hi.

Hi.

I guess I should add my congratulations as well on the quarter. A couple of questions. One, I was wondering if you could break out the impact of positive light on your results for the quarter.

Sequentially it has no impact on the growth because we had it in last quarter as well.

Ok. Fine and subsequently you said that gross margins of Lambda Physik benefited from the amount of the surge in service revenue. Is there any way you could quantify what your gross margin on services is or what your gross margin on just products alone would have been?

I believe the statement that Helene made is that the gross margin improvement at Lambda benefited from lower service costs, not necessarily a surge in service revenues. If you remember, John, in Q1, when we were discussing the results, we talked about a warranty provision or a service contract provision that was booked at Lambda and I think that totaled about $2m. And that hit the gross -- the cost of goods sold line. We did not record such a charge in this quarter, so there was about a -- I guess a $2 million improvement of quarter-to quarter in the gross margin as a result of that.

And that's something that would be persisting, that would stay around?

Well, this is one of the reasons that we wanted to -- that we've been working so diligently on the reliability piece, because as you're probably well aware and I'm delving into an area that probably is better suited to discuss, but, you know, if you know the forward cost of the contractors going to be higher than the revenues you collect, you have to book a provision for it. If we get the reliability up, then one would expect we don't have to take those kinds of charges in the future.

Right. OK. And finally, I was wondering if there's any way you could talk about your margin improvement in terms of how much came from the increase in revenue and how much came from the productivity project that you've completed?

I don't know that we have enough data to break that out, John

Maybe we could look at it this way. If you look at your guidance but yet rise the EPS range I get is between 8 cents and 18 cents with a midpoint of 13 for starters, is that correct?

That's very close, yes.

Looking back about a year ago, you did, you know, roughly nine, 9 cents a quarter so the Delta between the mid point would be about three cents. Could you view that maybe as the benefit of product benefits?

You have two things going on? There's a tax impact rate as well. So you're comparing a year ago probably a 30 -- normally a 33% tax rate versus the current guidance which is the current tax rate we've seen the last few quarters which is in the upper 40's.

Ok. Thank you very much.

The next is Byron Walker with UBS.

Hi John. I was hoping that you would perhaps give us some milestones for the 193 lasers so that we can track progress as the year rolls out.

Well, in terms of what the schedule is, you know, we've already -- I just talked about the fact that we have plans to show this to the world at SemiconWest the alpha, beta and gamma units that re scheduled.

The alpha unit, I believe, will remain in house (inaudible) will go after customers and they are scheduled over the next several months and Byron, I should have that schedule in front of me but I don't but I know it's staged to happen between now and probably October or November, those events will all transpire. And quite frankly, it's the beta tests that are probably the most important for us, because that's when the customers will have a firsthand opportunity to test them in a tool.

And the other is the order for the June quarter, do you expect orders to be up?

I'm sorry for?

For June quarter for the company.

We normally don't give guidance on incoming orders.

OK. Book-to-bill, you think it will improve in June?

Isn't that asking the same question?

It's close. Not quite the same.

Sorry, we can't answer that one.

OK. Thanks, John.

Sure.

We go next to John Terrell with Terrell and Company.

Can you give me an idea of the change in receivables and cash possession?

Well, the change in receivables, in dollars went up, of course, because we had a significant revenue growth. On a day sales outstanding point of view is went up as well and that's predominantly because the mix of receivables in Lambda Physik was more towards Japan where we have higher terms, longer terms. So most of the increase was related to the higher sales volume. And there was a little bit of foreign exchange in there as well, about $2.5 million.

And how about the cash? Balance?

The cash balance, we indicate went up about 5.6 million, I think I said and significant portion of that was our cash from operations. We had 7.8 million cash flow from operations and we clearly contained our capital spending which was lower than our expectations.

Thank you.

[OPERATOR INSTRUCTIONS]

We'll go back to Byron Walker.

John, as I recall, first revs on the 193 product, that's probably an 2005 event?

The first revs, you mean production tools?

Yeah.

We're currently on schedule to release the production tool in December, that's our current plan. So first shipments would take place in principle the earliest they would take place is the first quarter of calendar 2005.

Great. Thanks.

And Mr. Ambroseo, it appears we have no further questions today, sir. I would like to turn the conference over to you for any closing remarks.

Well, let me offer my thanks to -- sorry about that.

Let me offer my thanks to everyone who are participating and for those of you who will be joining us on the 18th of May, we look forward to having an opportunity to talk some more.

Thanks very much.