Coherent Corp (COHR) 2005 Q1 法說會逐字稿

Good day, everyone, and welcome to the Coherent first fiscal quarter 2005 earnings results conference call. Today's call is being recorded. For opening remarks and introductions, I'd like to turn the call over to the Chief Financial Officer of Coherent, Helene Simonet. Please go ahead.

Good afternoon and welcome to our first quarter fiscal 2005 conference call. As is customary with our calls, I will speak to the results of the first quarter and then John Ambroseo, our President and CEO, will provide a business and operational overview of the Company.

We will continue to provide forward-looking financial data for the current quarter only. Please remember that such guidance and other statements in the conference call pertaining to future events are forward-looking statements that involve risks and uncertainties and 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 report on Forms 10-K, 10-Q and 8-K as applicable. Copies are available from the SEC from the Coherent website or from Coherent's investor relations.

Before I move onto the results, let me remind you that the full text of today's prepared remarks and the replay of the webcast will be made available through the Coherent Investor Relations website.

We reported first quarter revenues of 126 million and net income from continuing operations of 5.4 million or 17 cents per diluted share. These results include a charge of 3.1 million or 10 cents per diluted share, related to our previously communicated decision to discontinue future product developments and investments in the semiconductor lithography market within our Lambda Physik subsidiary.

We also recorded a tax benefit of .5 million or 2 cents per diluted share related to a few federal tax law changes enacted during the quarter. Excluding the two aforementioned items, non GAAP earnings represent 26 cents per diluted share and compares to non GAAP earnings of 20 cents per diluted share in the previous quarter, and the loss of 1 cent per share in the comparable prior year period.

I am pleased to report that we continue to improve on managing our business more efficiently. As we expand a little more on the impact of the decision we announced on December 15th to discontinue investments in the semiconductor lithography market at Lambda Physik. The resulting 3.1 million charge relates primarily to inventory write-offs and the provision for other outstanding commitments, of which 2.3 million is included in cost of sales and .7 million is included in period expenses primarily in R&D.

The savings following this decision are expected to be approximately 7 million on an annual run rate basis and these savings are net of redeploying a portion of Lambda's lithography R&D dollars into the most promising growth areas of Lambda's industrial assignment (ph) markets. As we have mentioned previously Lambda's industrial and assignment market groups are profitable and have ample opportunity for growth.

Starting this quarter we expect Lambda to turn the corner into profitability. Our overall book to bill was 1.0221, resulting in a Q1 backlog of 157.1 million. This compares to a backlog of 146.6 million a year ago and 154.6 million in the prior quarter. John will talk more about the booking's performance in the various markets we serve later in today's presentation but in summary, first quarter orders of 128.6 million increased by 1.4 percent over the corresponding prior year period and decreased 3.1 percent from the immediately preceding quarter.

Total Company sales in Q1 '05 were 126 million, up 18.1 million or 16.7 percent from the same quarter a year ago and down 7.2 million or 5.4 percent sequentially.

Sales by business segment were as follows. Electro-Optics 100.9 million, an increase of 10.3 million or 11.3 percent from Q1 '04 and a decrease of 8.3 million or 7.6 percent from Q4 '04. Lambda Physik had 25.1 million sales for the quarter, an increase of 7.8 million or 45 percent from Q1 '04 and a sequential increase of 1.1 million or 4.6 percent.

Electro-Optics sales by significant market applications for the first quarter of fiscal 2005 are as follows. Scientific and government programs, 30.2. Microelectronics, 25.7; material processing, 14.1; OEM components and instrumentation, 25.5; graphic arts and display 5.4 for a total of 100.9 million.

Lambda Physik sales by significant market applications are as follows. Industrial, 15.6; scientific and medical, 4.3; lithography, 5.2 for a total of 25.1 million.

First-quarter gross profit was 51.7 million or 41 percent of sales. Gross profit, excluding the Lambda lithography charge, was 42.8 percent, just a tad below the low end of our guidance range of 43 to 44.5 percent of sales.

The breakout in gross profit by segment for the first quarter is as follows. 45.8 percent for Electro-Optics, almost similar to last quarter's performance and 21.8 percent for Lambda Physik. However, excluding the litho charges, Lambda's gross profit would have been 30.8 percent.

The Electro-Optics segment maintained its strong gross profit performance, despite lower revenues, primarily the result of lower spending due to factory shutdowns. Within our Lambda Physik segment, gross profit decreased to 30.8 percent, excluding the litho charges from 38.7 percent last quarter but was up significantly from 17.4 percent achieved in the corresponding prior year period.

The sequential decrease was the result of higher-than-anticipated lithography service costs and a negative product mix towards higher lithography and scientific system revenues vs. industrial revenues. For instance Lambda recorded a 1.6 million in revenue for an EUV unit at distributor margins, impacting the gross profit negatively by 1.7 percent during the quarter.

Operating expenses for the quarter, including intangible amortization but excluding the impact of the lithography charge, were 42 million or 33.6 percent of sales compared to the guidance range of 34.5 to 35.5 percent of sales. We saw lower spending across all functions as the savings from additional vacation and planned shutdowns during the holiday period surpassed our expectations.

R&D spending for the quarter, excluding the lithography charges, was 13.5 million or 10.7 percent of sales representing almost 1 percentage point below the low end of guidance range of 11.5 to 12 percent of sales.

The lower spending was partially due to lower development spending at Lambda Physik, which is a direct result of the decision to discontinue future lithography investments. In addition, our Electro-Optics business benefited from reimbursements from outside parties for R&D development projects.

SG&A spending for the quarter including amortization of intangibles was 28.3 million or 22.5 percent of sales, compared to a guidance range of 23 to 23.5 percent of sales.

Let me move onto the balance sheet. Our ending cash balance for the quarter was 238.5 million of which 43.6 million was classified as restricted cash. The cash balance of 238.5 million represents an increase of almost 29 million, compared to last quarter. Cash flow from operations was positive at approximately 30 (ph)million primarily the result of solid earnings, accounts receivable improvement, and tax refund of approximately 5 million. Capital spending for the quarter was approximately 4.2 million or 3.4 percent of sales below the low end of our guidance range of 5 to 6 percent.

Reviewing book value at the end of the first quarter increased to approximately $20 per share. As mentioned before, Q1 '05 accounts receivable day sales outstanding ended strong and decreased by 3.5 days from Q4 '04 and stood at about 62 days. Both business segments showed improvement. Electro-Optics day sales outstanding of 61 decreased by 3.5 days from the prior quarter and Lambda DSO was 67, also an improvement of 4 days from Q4 '04.

Inventory dates for the Company, however, increased from 71 to 78 days at the end of the first quarter. Lambda's inventory DSO decreased from 136 at the end of Q4 to 129 days at the end of Q1, an improvement of seven days. However, the majority of this business improvement was a result of the previously mentioned lithography inventory write-off.

Within our Electro-Optics segment, inventory day sales outstanding increased from 56 to 66 days which is due to the combination of lower sales volume, the buildup of safety factors and key components, increased inventory levels to improve customer service, and timing of revenue recognition.

Let me now give you the guidance for our second quarter for fiscal 2005. We are estimating second quarter revenues to be in the range of flat to 4 percent up from Q1 of '05. We expect gross profit to be in the range of 43.5 to 44.5 percent. R&D spending is expected to be in the range of 11 percent to 11.5 percent of sales. SG&A expenses, including intangible amortization, are anticipated to be in the range of 23 to 24 percent of sales. Other income expense will be neutral and the effective annual tax rate is expected to be approximately 33 percent.

Capital spending for the full year continues to be projected in the range of 5 to 6 percent of sales.

In summary, I am pleased Coherent delivered good results during the holiday-shortened period. With the lithography decision behind us, we should continue to improve both gross and operating margins and management remain focused on improving Lambda Physik financial performance. Our backlog remains healthy and we plan to continue generating strong cash flow from operations.

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

Good afternoon, everyone, and welcome to our Q1 conference call. The December quarter laid out along the lines we had expected. Despite lower revenues, we delivered solid bottom-line performance by optimizing our utilization rates and controlling expenses. We also generated a significant amount of cash, one of our key objectives for FY '05.

Looking so the quarter was mixed, with Electro-Optics business experiencing some push outs in the scientific and microelectronics businesses.

Let me switch now to an EO segment update. Our book to bill for EO was 0.96. Orders for the EO segment were down 10.7 percent sequentially and 9.1 percent from the prior year period. Within our scientific and government programs business, bookings were down 27.2 percent sequentially, following a very strong Q4, and declined 15.4 percent over the prior year period.

Demand was solid in Europe and Asia. Orders from North America were light, due to the timing of funds and for several large custom systems. This lumpiness will likely continue as we expand our offerings in the high-performance custom laser market. The biological imaging market again led unit volumes among the various applications.

We believe this trend will likely continue through the remainder of the year.

Booking to microelectronics decreased 14.1 percent sequentially and 28.3 percent compared to Q1 '04, which represents our historical booking to peak. The majority of the quarter-on-quarter decline is tied to a single account. Our customer has been asked to introduce a process change by their end market to accommodate environmental initiatives. That is, a greener manufacturing process.

This modification will take from one to three quarters to complete. The new process requires a modified light source which we will have ready in ample time. We have seen a slowdown in demand for CO2 lasers used in gear drilling. This is consistent with industry reported capacity trends.

By contrast, orders for UV lasers and via drilling remain solid as this technology enables the next generation of feature size reduction as well as addressing different material combinations.

Bookings from semiconductor applications were also up during the quarter, as we continue to benefit from new methodologies in photomask, 300 mm and 65 nm applications.

Orders within OEM components and instrumentation increased to 5.3 percent sequentially and 9.9 percent over the same prior year period. We enjoyed another successful quarter within the bio-instrumentation market as incoming orders for our Sapphire and Compass products remain buoyant. We also have several new products and qualifications trials for bio-trip readers and DNA sequencers.

Bookings for diode and CO2 lasers used in laser marking applications were good and a reflector of the broader use of laser marking in lot and security codings. Orders for diode lasers used in automotive welding systems were up as the use of laser welding systems continues to gain traction.

Orders for medical device components rebounded in Q1 as customers rebalanced inventories for the upcoming summer cycle. This is especially true for lasers used in aesthetic procedures, such as permanent hair reduction.

Maturial processing bookings were up 7.9 percent sequentially, and 2.1 percent from the prior year period. We benefited from seasonal upswing in the market, which typically extends through the early summer season. During Q1, we had encouraging bookings for ultraviolet lasers used in stereolithography or 3D imaging -- sorry 3-D modeling and fiber array packages, or FAPs, for high-speed market. The geographic picture has not changed much from the prior quarter. Policies in China remain constrained from emerging companies and the dynamics in North America and European markets are similar to Q4 '04.

Energy prices, interest rates and cost of ownership are still the big drivers for this market.

Orders in the graphic arts and display market decreased 2.2 percent sequentially and increased 75.3 percent from the prior year period. The largest crepancy is indicative of the timing of annual buys from certain customers. The trend described in last quarter's call regarding migration to diode-based thermal computer to plate or CTP printing continues, as we have seen an increase in order volumes for our diode lasers.

We are making progress in the UV CTP predominantly for newspaper printing with our Paladin laser. We are working on an updated version of the Paladin that should help accelerate the adoption rate in FY '06 and beyond.

There is some interesting news for the consumer in commercial display markets. For many years, there has been a desire to incorporate in 3 color RGB as in red, green, blue, laser emitter into the display markets. The main advantage would be to approximately double the accessible color gamut, thereby enhancing the view and experience.

In order to enable this opportunity, the light engine needs to satisfy stringent form, fit, form, function, cost, and reliability targets. The ideal solution would be high-powered visible laser diodes but this technology does not currently exist. All of the legacy technologies fail at two or more of the base criteria.

Our advanced engineering unit has built a prototype RGB laser engine, based on our patented OPS technology. The system delivers suitable power and is comparable in size to the lamps currently used in rear projection or RPTVs.

In order to address the cost issue, our team focused designs with similar component count and optical complexity to other optimum mechanical systems used in consumer electronic products. This is a substantial technological accomplishment. We have little lifetime data at this juncture as the prototypes have been running for less than 1,000 hours each.

There is an additional hurdle that needs to be addressed. When lasers are used in any projection display a phenomenon known as "speckle" occurs which causes of fluctuation in the image. Methods to suppress speckle have been worked on for years but a practical one needs to be perfected and incorporated into the projection system. Without it, speckle will certainly kill the video star.

We will discuss the RGB laser technology during L.A.'s 2005 conference taking place this week in San Jose, California. As a proof of principle, we have equipped an RGB emitter with a primitive speckle suppressor and coupled both to an RPTV. It was an impressive first step although the RPTV was configured for a lamp, rather than lasers, so the color balance was not optimized.

We have shipped out the units of the RGB light engine to commercial customers for evaluation. If all goes well we plan to partner with Consumer Electronics Manufacturers to refine the package, evolve the technology to demonstrate acceptable lifetimes, and outsource the manufacturing.

I will now switched to Lambda Physik. For Q1, Lambda posted revenues of 25.1 million growing 4.6 percent sequentially and increasing 45 percent from the prior year period. Bookings increased 35 points -- excuse me 31.5 percent sequentially and 56.8 percent year-over-year. The book to bill ratio for Lambda was 1.26.

The industrial market once again continued to garner the bulk of revenues and orders. Sales decreased 16.2 percent sequentially but were up 95.6 percent from the prior year period. Bookings increased 69.5 percent sequentially and 95.9 percent from the prior year period.

Despite mixed inputs from the end market demand from the flat-panel display manufacturers continue to dominate Lambda's industrial landscape. We are also encouraged by the deployment of Lambda products in the automotive industry.

Audi AG is using Lambda lasers in an innovative procedure to treat engine cylinder wall liners, resulting in a reduction of oil consumption by up to the 75 percent. This treatment process also lowers the wear of the cylinder liners and piston rings by as much as 90 percent. Audi is now using the procedure in its 3 liter, V-6 diesels for the Audi A6 and A8. The process soon will come in the use for the Audi A4, VW Phaeton and VW Toureg.

Sonet sales increased 99.9 percent sequentially, as a result of the timing of the large OEM medical order for our OpTex line but decreased 5.1 percent from the prior year period. Bookings were down 39.8 percent from Q4 '04 and 20.9 percent from the prior year period, again due to the timing of certain OEM orders.

Lithography sales increased 58 points, 5 percent quarter on quarter and 8.5 percent when compared to Q1 '04. Bookings decreased 3.6 percent sequentially and increased 12.3 percent from the prior year period. Sales and bookings were mostly service-related.

As we mentioned in our December press release, we will continue to support our installed base but will discontinue future investments in lithography. We are also exploring options to sell Lambda's interest in Extreme Technologies, its joint venture with Yen (ph) Optic to develop EUV light sources.

I am also happy to report that we see light at the end of the privatization tunnel and it is not an oncoming train. All complaints filed by minority shareholders have been settled and the Gurdington (ph) Court registered the squeeze out on January 14, 2005. The registration of the squeeze out gives Coherent 100 percent ownership of Lambda Physik. We will file the merger paperwork within the next 30 days and we expect to complete the transaction prior to the end of the current quarter as planned.

For those of you attending the Photonics West Show in San Jose you are most welcome to visit our booth. The laser-based RPTV is not at the show. If you would like to see a demo, please contact our Investor Relations department; and we will do everything we can to accommodate you.

I will now turn the call over to Jim so we can begin the Q&A session.

(OPERATOR INSTRUCTIONS). John Harmon Needham & Co.

First of all, looking at your guidance for Q2, the gross margin and the operating expense ranges are better than in prior quarters which seemed pretty similar. Is this the result of some productivity improvement programs or what is going at Lambda? Can we take this as an operating model?

The margins are improving, primarily because of also product mix. Remember that we have less lithography business in Lambda so the mix there is also favorable. So that is the main reason for improving the margins.

Then the improvement in the tax rate. Is that a permanent shift up and it's not related to Lambda at all, is it?

No, the 33 percent change from the 35 percent guidance. Is that what you mean?

Yes (MULTIPLE SPEAKERS) -- so you can use that for the rest of the year?

That you can use other rest of the year. It is not related to Lambda yet.

And finally can you give us anymore insight as to the amount of Lambda's NOLs and what it could mean for your financial performance?

The devaluation research right now is about 13.5 million, approximately 13.5 million. So as John told you the squeeze out has been registered on January 14. We will now proceed with the paperwork for the merger. That merger will allow us to restructure our legal entities so that we can gain efficiencies from the German taxable income and at the point in time -- the timing is unclear, yet, as to whether we can release that 13.5 million. It is anticipated that we will release that completely in one single quarter. I can't give you the exact timing; but I will communicate that as soon as I know.

Okay.

(MULTIPLE SPEAKERS) anticipate that this will be released before the end of fiscal '05.

Thank you. Finally, quickly, what was Lambda Physik's operating loss in the quarter?

Lambda was about, I would say, around $300,000.

Ali Irani with CIBC World Markets.

Congratulations on the strength of your results. I am hoping you can give us a sense, John, of the Lambda Physik booking strength and when you see that delivering in terms of timing to revenues? Also if you could please provide us with some color of the current bookings environment in this quarter and whether you would expect Electro-Optics strength to come back in the bookings at least this quarter?

So for Lambda Physik the bookings strength is as was mentioned came predominantly out of the industrial sector with a couple of applications contributing there. We have quite frankly, Ali, we have seen some stability in the flat-panel market that I think many players in that market had not necessarily seen and again it is a reflection of us being us a specific play in that market which is for LTPS penetration rates there are growing. I think that is one of the things that your team has been seeing as well. Even if the overall growth in that market has slowed down temporarily.

So that continues to be an opportunity driver and clearly taking the litho investment out of the picture will allow Lambda to focus on some other opportunities which, quite frankly, we didn't have the bandwidth to address when we were spending so much time and energy on litho. So there are some other emerging applications within the industrial space and assignment space that we are going after.

I can't give you more detail on those right now but I will say that Lambda is not suffering from a lack of opportunities. As always, it is going to come down to execution.

For Electro-Optics, the lumpiness that we saw in scientific I don't want to call it a pattern, but we have seen some ups and downs over the last few quarters. And you need to remember that in the last sort of 18 months or last 12 months, we added these very high-performance amplifier systems to our portfolio. These are, in many instances, custom systems. So there are million dollar plus kinds of hardware; and they have a different procurement cycle than does the standard laser systems that go into that market.

And when you have big system orders being placed in clumps, obviously, it has an impact on your bookings rate. As far as that translating into orders, our policy is these things have to be shippable within 12 months to be recognized in the backlog. So any number that we have given you today is reflective of that.

For the microelectronics business, again, I would say the resiliency of our bookings was pretty good. We have identified one customer that accounted for the vast majority of the bookings decline, quarter on quarter. When you can identify a specific application and a specific customer, it gives you a lot more confidence than if you have a broad-based change in the bookings pattern. And at least in the first quarter we didn't see that.

So it sounds like excluding that customer, the rest of the microelectronics book has benefited from the technology applications you're serving. When would you expect to see this customers green (ph) redesign come back to orders for you, John?

Well as I said in my comments, for some reason I was tonguetied going through them. We expect in one to three quarters for them to bring this modification online; and we have to have our light source ready, obviously, prior to them being done and we fully expect that to happen. So I can't give you a tighter window than that, Ali, because there's some qualification testing and acceptance testing that has to go on in the end market in order to migrate that technology into the space.

Mark Roberts, Wachovia.

John, you were talking about some of the new applications in the automotive area. Are those still considered low-power laser applications or are you moving more into some high-power applications?

The UV lasers that are being used are fairly high-powered; and they need to be given the process that is being driven. Because what we're doing here, or I should say what Audi is doing here is using an (indiscernible) laser to condition the cylinder wall liners to make them smoother and reduce friction. As a consequence of that, it cuts down on the oil consumption. You can't do that with a 10 watt laser. At least you can't do it quickly with a 10 watt laser. So these are pretty beefy devices and I'm not sure that

Audi has released specific details of what they are using; so I'm not comparable releasing that information today.

Is it your intent to introduce some more applications in the high-powered area which, if I recall, is an area which you have historically kind of stayed away from?

I think for the traditional light sources, that is probably true; but for the (indiscernible) light sources we have long been involved in the high-power market. Even if you look at the LTPS or the flat-panel display market, those devices are hundreds of watts. They're not kW but they are hundred of watts. We have products in the Electro-Optics portfolio that are in that range as well.

So if you're talking about high-powered that extends beyond that into the kW range and above, the answer is no. We are not currently in that market.

Would you anticipate, since you have got some product changes at Lambda Physik in lithography, are we going to see some seasonality in the business going forward that will be noticeable?

It's a good question and I don't know that I have a good answer for it at this point. We have been so focused on trying to get through the lithography process and decision, that the underlying business has performed pretty stably over that period of time and we have had some big influxes of orders for example, again, from the TFT market. But the rest of the business has been reasonably stable.

As we change our focus and go into some of these other commercial applications, it is quite possible that we can introduce the same kind of lumpiness that we see in some of the big-ticket items like the flat-panel display systems. Where we typically see a couple of large orders per year and they carry six months of shipment within each.

My last question if I could, and maybe I missed it, Lene, did you give us a geographic breakdown of revenues?

No. I did not. But if you would like that, I can get you that.

That would be great.

Mark, would it be okay while Lene is looking up the data if we go to the next question?

We will -- oh, she has it.

Asia was about 32 percent. Europe 26 percent, U.S. 38 percent. That is trailing 12 months. Is that what you want or just for the quarter? I'm sorry.

I just want it for the quarter.

Okay, start it over again. Asia 32 percent, Europe 27, U.S. 36 and other 5.

(OPERATOR INSTRUCTIONS). Ali Irani, CIBC World Markets.

Thank you for taking my question. John, when I am clicking at your gross margins, given the significant improvements you have seen in both the cost structure and the mix, and some of these new applications that you are talking about that are highly enabling. You have talked in the past about potential to see margins increase by 100 to 200 basis points. We are already seeing that reflected in some of your guidance.

I am wondering where ultimately you can manage the business model towards and whether looking out 12 months we should be thinking already about 46 or 48 percent gross margins?

Ali, the guidance that we gave at least for our Electro-Optics group was over the next 24 months. We anticipated adding 2 to 4 percent to the gross margins for IO.

(MULTIPLE SPEAKERS)

And we have not made any statements on Lambda yet.

When you look at some of these new products, general ballpark, their gross margins vs. some of your legacy products. What kind of a range is there in the gross margin distribution? I think enabling subsystem technologies is often commanding 50 percent or better gross margins. Do you see that in the mix as well at this point?

You can ask that question several different ways and you'll get the same answer. The guidance that we have given is 2 to 4 points at this juncture and as we introduce new products, we will reflect that in our gross margin guidance.

Thank you.

We have no further questions at this time. I will turn it back over to you for any closing remarks or comments.

I would certainly like to thank everybody for participating on the call; and we look forward to speaking with you in three months. Take care.

That does conclude our conference call. Thank you, everyone, for your participation and have a great day.