Coherent Corp (COHR) 2004 Q3 法說會逐字稿

Good day everyone and welcome to the Coherent third fiscal quarter 2004 earning results conference call. For opening remarks and introductions I'd like to turn it over to the CFO of Coherent, Helene Simonet.

Good afternoon and welcome to our third fiscal quarter 2004 conference call. As is customary with our calls I will speak the results of the 3rd quarter and John Ambroseo, our President and CEO will provide a business and operational overview of the company. We will continue to provide forward looking financial guidance for the current quarter only. Please remember that such guidance provided is an estimate and subject to different risks and uncertainties, such that actual results may differ significantly. Additional information concerning these factors are contained in the company's filings with the SEC. Listeners are encouraged to refer to the risk disclosure described in the company's reports on Form 10K, 10Q and 8K as applicable. Copies are also available from the SEC, from the Coherent website or Coherent investor relations. Before I move on the results, let me remind the full text of today's prepared remarks will be made available through the Coherent's investor relations website. We reported third quarter revenues of 128 million and net income from continuing operations of 5.2 million or 17 cents per share. Net income included a .7 million or 2 cents per share gain from the sale of certain technology. Excluding this gain, non-GAAP net income was 4.5 million or 15 cents per share, representing a 56% increase compared to the previous quarter. Our overall book-to-bill ratio was .98 to 1. Ending Q3 backlog remained a healthy 155.1 million, down slightly from Q2 '04 backlog of 158.1 million. Third quarter orders of 124.9 million represent a 20.7% increase over the corresponding prior year period, and a 9% decrease from the immediately preceding quarter. Electro-Optic bookings in the third quarter of 103.4 million increased 18.1 million or 21.2% compared to the corresponding prior year period and decreased 5.2% sequentially. Lamda Physik’s orders of 21.5 million, were up 18.5% from the corresponding prior year period and decreased 23.9% sequentially. The decrease was the result of a large order received last quarter from a major industrial customer.

Total company sales in Q3, 04, were 128 million up 28.8 million or 29% from the same quarter a year ago and up 2.1 million or 1.7 percent, sequentially. Revenues are lower than previously guided primarily as a result of softness in the industrial--sorry, in the international scientific markets. Sales by business segment were as follows: Electro-Optics 105.5 million, an increase of 22.2 million or 26.6% from Q3, '03 and an increase of 1.6 million or 1.5% from Q2, '04. Lamda Physik had sales of 22.5 million for the quarter an increase of 6.6 million or 41.8% from Q3, '03, and an increase of .6 million or 2.7% from Q2 04. Electro-Optic sales by significant market application for the third quarter of fiscal 2004 are as follows: Scientific and government programs 26.2 million. Micro electronics 30.0. Material processing 16.6, OEM components and instrumentation 26.4, graphic arts and display, 6.3, for a total of 105.5 million. Gross profit of 55 million or 43% for the third quarter was ahead of our guidance range of 40.5 to 42.5%. The higher gross margin originated within the Electro-Optics segment primarily as a result of increased deals and productivity, better utilization of manufacturing overhead and favorable product mix as we saw increased volumes of higher margin products offsetting lighter volume from our lower margin scientific business. Gross margin reached the highest level in ten quarters for the company and the Electro-Optics segment gross margin reached the highest level in three years. Current quarter company gross margin of 43% compared to 41% last quarter and 37.3% during the same quarter of the prior year. The break-out in gross margin by segments for the third fiscal quarter is as follows. 45.4% for Electro-Optics, an increase of 2.6 percentage points from Q2, and 31.6% for Lambda Physik, a decrease of .6 percentage points sequentially.

And as we have indicated during prior quarters micro electronic market segments tends to contains our highest margin products and we continue to see strength in this area. Looking ahead we anticipate a more modest improvement in the Electro-Optics segment gross margin than we have seen in the past quarter. Within our Lambda Physik segment, gross profit dipped slightly from 31.6 to 31.6% from 32.2% last quarter so it was up significantly from 17.5% achieved in the corresponding prior year period. The sluggish to slightly lower margin was a result of construction costs, associated with Lambda's previously announced manufacturing consolidation plans, and an unfavorable product mix within Lambda's industrial business. Service costs within the lithography market continue to benefit from improved quality of our new tube design. Operating expenses for the quarter, including intangible amortization were 45.7 million, or 35.7% of sales compared to the guidance range of 35 to 37% of sales. R & D spending for the quarter of 15.5 million was 12.1% of sales within the guidance range of 11.5 to 12.5%. SG&A spending for the quarter including amortization of intangibles was 30.1 million or 23.6% of sales, near the low end of the guidance range of 23.5 to 24.5%. The lower number is a direct result of controlling our administrative expenses.

Let me move on to the balance sheet. Ending cash balance for the quarter was 193.1 million, of which 39.1 million was classified as restricted cash. This cash balance of 193.1 million represents a decrease of 2.6 million compared to Q2 '04. As a reminder, we made a debt payment during the third quarter, of 13.9 million of principal and interest with a corresponding reduction of long term debt of 12.7 million and a reduction of 15.2 million restricted cash requirements. We still have approximately 8.3 million of restricted cash earmarked for the purchase of the remaining Lambda shares and 30.4 million is classified as restricted cash to comply with our long term debt covenant arrangement. Cash flow from operations was positive at 16 million as we had higher income and good working capital management. Capital spending for the quarter was approximately 7.8 million, or 6.1% of sales and within our guidance range of 6 to 7% of sales for fiscal 2004. Coherent book value at the end of third quarter increased approximately to $19 per share. At the end of Q3, '04, accounts receivable day sales outstanding decreased by 4 days, from Q2 '04 and stood at 62 days. Electro-Optics day sales outstanding of 60 dropped by three days from the prior quarter's performance. Lambda's outstanding was 74, an improvement of 4 days from Q2 '04. Overall accounts receivables benefited from improved collections both in Europe and Japan. Inventory day sales outstanding improved from 76 to 75 days at the end of the third quarter. Primarily the result of Lambda Physik's performance. Lambda's inventory improved for the best we’ve seen in a year, decreasing from 175 days at the end of Q2 '04 to 156 days at the end of the third quarter an improvement of 19 days. Within our Electro-Optic segment inventory days increased from 55 to 58 days primarily as a result of higher anticipated sales during the quarter. The following represents management’s guidance on operating results for the 4th quarter. We expect revenues to be up between 3 and 6% above Q3 '04. Gross profits will be in the range of 42 to 44%.

R and D spending is expected to continue to be in the range of 12 to 12.5% of sales and SG&A expenses, including intangible amortization are anticipated to be in the range of 22 to 23.5% of sales. Other income expense will be slightly negative and the annual tax rate is expected to be approximately 45%. Lambda's losses, although reduced during the past few quarters remains significant to our results. 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. Our tax rate will return to historical levels as soon as we finish implementing the reorganization of Coherent's German entities. Capital spending for the full year is projected in the range of 5 to 6% of sales, exclusive of the conversion of the synthetic [inaudible] to occur in the 1st quarter of this year. In summary, I'm pleased Coherent continued to improve its gross margin and operating income results during the third quarter. We are generating strong cash flow from operations and continue to maintain a healthy backlog. Management also remains focused on improving Lambda Physik's financial performance. I will now turn over the call to John Ambroseo, our President and CEO.

Thanks, Helene, good afternoon everyone, the third quarter marks a number of significant milestones for the company. First, I'm pleased Coherent continues on its path on margin expansion and increased profitability. As our third fiscal quarter, Electro-Optics segment margin of 45.4% indicates, we achieved our goal, of taking the Electro-Optics segment margin to the mid-forties, a quarter earlier than expected. Second, just after the end of the third quarter, Lambda Physik introduced the LithoTex, it'sits new high power excimer laser for the lithography market. This was a significant accomplishment, given the amount of engineering involved and the time constraints imposed on the development team. I commend all those individuals who helped deliver on time as promised. I'll provide more color on this topic and the privatization of Lambda during the update on the Lambda segment.

With a healthy backlog, we look forward to a robust conclusion for the fiscal year. Our book to bill for the EO segment was .98. Orders for the EO segment were down 5% sequentially and up 21% from the prior year period. While bookings were lighter than our expectation because of slow down in scientific market we believe that market is rebounding nicely at the start of our fourth fiscal quarter. Bookings in our scientific and government programs business were down 2.7% sequentially and 3.8% over the prior year period. The slow-down exhibited both geographic and product line characteristics. While orders in the U.S. were up sharply from Q2 04, demand in Europe and Asia was considerably lower than expected. The European market is suffering from slower and potentially decreased funding for research. We believe orders for Asia have simply been delayed and expect to book in upcoming quarters.

Competitive pressure could be contributing to the delays, although we have not seen any increase in either discounting or lost business activity. On a product line basis, incoming orders for our standard scientific products were weak during the third fiscal quarter. Several of these products have relatively short lead times which also impacted revenues for the quarter. By contrast, our custom laser business is quite active. These systems represent leading edge performance and are configured to the customer's specification. And please bear in mind a custom system can sell for 1 million dollars or more. Bookings increased 3.8% sequentially, an increase of 115.9% over the prior year period for our microelectronics segment. We sustained--we have seen sustained demand for wafer and packaging applications. Demand within wafer inspection, mask inspection and metrology remain strong, as we benefited from legacy business as well as design wins achieved over the last 18 months. Furthermore, given the high factory utilization rates and our installed base, our service bookings and revenue in this market have also improved.

While we are pleased with these results we continue to develop new technologies to meet our customers' new application and cost of ownership needs. Packaging applications also remain buoyant during Q3, new orders for advanced packaging and interconnect or API and printed circuit boards were especially strong in Japan. We believe this signals continuing penetration of photonic-based Avia drilling systems in PCB shops world wide. Growth in this market is dependent on higher throughput and support of new materials. To this end we recently launched the new Avia-4 laser which is an ideal tool for high throughput, real hole drilling in PC boards as well as drilling and cutting and trenching hard materials, such as stainless steel, silicon, ceramics, diamond and sapphire. There are encouraging signs for PCB direct imaging, as adoption of laser based tools are expanding. To date we have populated the market with our 4 watt ultraviolet Paladin laser. While early results have met expectations the keys to growth are throughput yield and cost per part. We recently released an 8-watt version of the Paladin to support these growth drivers. Although the acceptance of this product is at an early stage, we expect the final tool will represent a more compelling ROI for PCB manufacturers. Orders within OEM components and instrumentation decreased, 3.3% sequentially and increased 8.4% over the same prior year period.

We continue to solidify our position in the buyer instrumentation market as deliveries of Compass and Sapphire lasers have increased by more than 50% over the last 12 months. The vast majority of this business is for low power lasers. There are emerging applications in chip readers, also known as lab on a chip, DNA sequencing and microscopy, that will leverage the higher power version of the Sapphire laser. Material processing bookings were down 30.5% sequentially from an exceptionally strong Q2 and down 9% from the prior year period. Normally a drop in orders of this size would cause significant concern. However, detailed reviews with our customers, indicate that end user demand need remain strong for the photonic-based equipment. We have had no requests for delivery push-outs or order cancellations. Many of the customers stated that their large Q2 orders were driven by the desire to lock in deliveries. We would not expect to see these large booking fluctuations in upcoming quarters. Orders on the graphic arts and display market rebounded 12.7% sequentially and increased 56.6% from the prior year period. The uptick was dominated by thermal computer to plate or CTP applications which were also the clear winners at the recent industry trade show, Drupa, held in Düsseldorf Germany in May. The strength of thermal CTP is predicated on image quality speed and cost. Upgrades to our legacy products as well as new product offerings target all 3. Other applications are gaining momentum, high volume newspaper printing, using our Paladin laser, should begin to grow in the upcoming quarters. Lithography and screen printing for textiles is also exhibiting growth potential. For research and development during Q3, Coherent Incorporated spent $15.5 million or 12.1% of our revenues on research and development. R and D as a percentage of sales has decreased with rising revenues but absolute dollar spending has been fairly flat. A significant amount of R and D spending has been dedicated to Lamda’s lithography efforts at 193 nanometers. It is anticipated that these burn rates will begin to subside in early FY05 as we reduce the high material spend on the LithoTex program. As we reported, EO gross margins have improved again and reached the 45% level. We are clearly pleased by these results.

We remain committed to further improving our supply chain and driving additional gains to gross profit. Let me now switch to Lambda Physique. For Q3 Lambda posted revenues of 22.5 million, growing 2.7% sequentially and increasing 41.8% from the prior year period. Q3 orders of 21.5 million, were down 23.9% sequentially and increased 18.5% from the prior year period. The book-to-bill ratio for Lambda was 0.96. The industrial market continued to dominate revenues and orders. Sales were up 151.1% from the prior year period and increased 12.6% sequentially. Industrial bookings were up 55.9% from the prior year period and decreased 30.1% from Q2 '04. Lasers used to produce low temperature poly-silicon flat panels, or LTPS panels, dominated revenues and bookings. The large swings in bookings reflect the lumpiness of incoming orders for LTPS systems. The Sci-Med market posted good numbers in Q2 '04 and sustained much of the gain in Q3 '04. Sales and bookings increased 52.9% and 49.7% from the prior year period, although they decreased 3.7% and 3.3% sequentially. Sales of our optics line were up nicely during the quarter and incoming orders for scientific systems were up significantly in the U.S. Lithography revenues and orders decreased 53% and 47% from the prior year period and went down 20% and 21% sequentially. The large year over year drop reflects revenues and orders for our A4003 laser in FY03. The sequential changes were due to the timing of certain service contracts. All current revenues are service related. Q3 '04 bookings do include an ArF laser for emerging lithograph process development, placed by International Sematech. Subsequent to the end of the quarter, Lambda introduced the LithoTex, its new high power 193 laser at Semicon West. The laser is based upon a unique architecture called MORRA, which is an acronym for master oscillator regenerative ring amplifier. The design addresses two specific customer needs, first, it produces a longer naturally occurring temporal pulse width. These results in peak intensities, approximately 50% lower than competitive products for any given power level. This serves to protect expensive objective lens assembly from long-term intensity driven degradation. The end benefit is a lower cost of ownership for fab operators. The second advantage is the low specified levels of amplified simulated emission, or ASE. ASE is background light that can be projected through the optical delivery system and thereby compromising image contrast on the wafer. Minimizing ASE helps improve yields and lowers costs for chip manufacturers. The LithoTex has also been designed with future needs in mind. The system can accommodate increased output power and repetition rate. Line width reduction is also possible. Coherent's privatization of Lambda also continues. Following the Lambda shareholder meeting in May, several minority shareholders exercised their rights to contest the squeeze-out. This was not unexpected and we're working through the legal process. In the upcoming week an initial judicial review of the shareholder claims will take place. We'll keep our shareholders apprised of any key developments.

Before opening the Q and A, I would like to review some key additions to our executive management team and board of directors. We extend a welcome to Dr. Garry Rogerson, our newest board member. Gary is president and CEO of Varian Instruments. Varian's business model, as many of you may be aware, is very similar to Coherent's. He brings a wealth of strategic and operational expertise to our board of directors. Earlier today, we announced that Michael Cumbo and Paul Meissner have joined Coherent. Michael has nearly 20 years of experience in the photonics industry. He was most recently at JDS Uniphase where he held a series of positions including CTO of the OCLI division, general manager of the OCLI Telecom division, and general manager of JDSU's laser division. Michael has been appointed Executive Vice President of Optical Technologies, which includes Semiconductor lasers, optics, instrumentation and exotic materials. Paul is a 10 plus year veteran of the Semiconductor capital equipment market. He joins us from KLA-Tencor where he is a vice-president and general manager of the Viper Division. Prior to KLA, Paul held a series of senior management positions at Applied Materials, including Vice President and General Manager for Thermal Systems and Modules and Vice President of Strategy and New Business development. Paul has been appointed EVP for laser systems covering solid state, ion and carbon dioxide products. These two new additions to the management team, further strengthen our leadership in engineering marketing and manufacturing across the organization. I'll now turn the call back over to Jim so we can begin the question and answer question.

If anyone in our audience would like to ask a question, signal by pressing the star key, following the digit 1, star-1, if you want to ask a question. We'll take your questions in the order that you signal us. First question comes from John Harmon with Needham & Company.

Hello, couple questions, one, can you comment on what that technology sale was generally.

The technology sale was a particular filter configuration that was sold to 26 Corporation.

Okay. Question for Helene, you were guiding for 45% tax rate for the rest of the fiscal year. That looks like you will have an average of 40% in the last two quarters of the year, or are you guiding for 45?

I'm guiding for 45%.

Per quarter for the rest of the year.

For Q4.

Thanks. John, one final question, could you make a comment on, for lithography, lasers, laser power, and what customers want regarding your newest product and the new product from your competitor.

The product is LithoTex came out at 50 watts and based on customer inputs this seems to be more than adequate for the present time. There was a recent product introduction at 60 watts, the LithoTex is capable of reaching those powers so it doesn't represent a large gap for us to bridge, if necessary. But we haven't seen a tremendous push for 60-watt device.

And just one follow up, you said it is capable of higher powers. What kind of time frame would it take you to supply that kind of power if your customers wanted it.

If it became a critical issue I would think we could do it within six months.

One--can you tell us roughly what Lambda Physik's losses were in the quarter?

Yes. Just a second. About 1.8 million.

Thank you.

We'll take our next question from Mark Miller from Hoefer & Arnett.

Congratulations on good quarter. I was wondering how SpectraPhysics is combining with Newport, do you see any changes or anything new in term of what is coming out in terms of strategy or products?

You know, this deal closed I think on the sixteenth of July. It was the official closing date, if I recall correctly. So it's probably a little bit too soon to tell what is going to come out of that acquisition of SpectraPhysics by Newport. Clearly the approach that they have--that they claim they want to take is to be able to offer integrated solutions to customers and I think that makes a lot of sense considering that, you know, Newport has a lot of these building blocks and Spectra has some systems. We'll have to see—it remains to be seen, Mark, how well that works in application.

Applied Materials at Semicom, was telling everyone they thought the semi-cycle, counter to what a lot of Wall Street people feels, will continue to be strong for the foreseeable future and the reason for that was the build-out of 300 millimeter fabs, I wonder how you’re linked in your microelectronics and other areas to 300 millimeter versus 200 millimeter.

From the Electro-Optics segment the link is that we sell significant number of products into the inspection market, some of those products will go into 300 millimeter fabs and some will go into 200 millimeter fab and we believe we're well positioned to take advantage of the 300 millimeter buildup on EO. Clearly on the Lambda side our goal is to participate in the exposure tool part of that business with the LithoTex.

Just wondering what was the feedback from Semicon on LithoTex?

Well, we had spoken to a number of customers prior to Semicon. This market doesn't have a large number of customers, so many of them were aware of what we had. Number of them stopped by the booth and they congratulated us on having done this so quickly and they were certainly impressed by some of the specifications, pulse width was a big one, as was the ASE as we already mentioned. So I would say the initial feedback was encouraging but this is a step in the process as we stated before, we have to go through qualification before we would expect to receive any orders.

Are you in qualification of these sites right now.

We said we wouldn't be shipping a qualification laser until August.

Thank you.

Sure.

I would like to remind our audience that is star-1 if you want to ask a question. We'll pause for just a moment. And one final reminder, that is star-1. And it appears we have no further questions. Mr. Ambroseo I'll hand the comments back to you for closing comments.

Thank you, we would like to thank everybody for taking the time to participate in this call and we look forward to speaking with you at our call in October.

That concludes our conference, thank everybody for their participation and hope you have a great day.