Coherent Corp (COHR) 2005 Q2 法說會逐字稿

Good day, everyone, and welcome to the Coherent second-fiscal quarter 2005 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. Please go ahead, ma'am.

Good afternoon and welcome to our second-quarter fiscal 2005 conference call. As is customary with our call, I will speak to the results of the second 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 guidance for the current quarter only. Please remember that such guidance and other statements in this his 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 disclosures described in the Company's reports on Forms 10-K, 10-Q and 8-K, as applicable. Copies are available from the SEC, from the Coherent website, or from Coherent Investor Relations.

Let me remind you that the full text of today's prepared remarks and a replay of the webcast will be made available through the Coherent Investor Relations website.

We reported second-quarter revenues of 131.2 million and net income of 19.6 million, or $0.63 per diluted share. These results include a tax benefit from the reversal of Lambda Physik's deferred tax valuation allowance of 9.6 million, or $0.31 per diluted share, as well as a favorable adjustment of 0.3 million, or $0.01 per diluted share, related to Lambda Physik's previously booked charge in connection to the discontinuation of future lithography investments. Excluding the aforementioned items, non-GAAP earnings represent $0.31 per diluted share and compared to non-GAAP earnings of $0.26 per diluted share in the previous quarter, and $0.09 per share from continuing operations in the comparable prior-year period.

The second quarter includes the purchase of the remaining 5% of Lambda Physik following the registration of the squeeze out on January's 14th. (indiscernible) the quarter we completed the merger of one of our existing German legal entities into Lambda Physik, enabling us to release the entire FAS 109 deferred tax valuation allowance. The current and projected income of the combined entities will be more than adequate to allow the utilization of Lambda's net operating losses in a reasonable amount of time.

Currently German net operating losses can be carried forward indefinitely, subject to an annual limitation of 60% of each year's taxable income. To date, the combined entities have approximately EUR30 million available as net operating losses.

As I indicated in our last conference call, our Lambda segment made significant progress and it is important to note that the second quarter Lambda reported high single digit operating profitability.

Before moving on to the specifics of the results, let me also comment on the restatement we just announced.

As mentioned in the press release, during Q2 '05, management reviewed the accounting of its deferred compensation plans and determined that since the inception of the deferred compensation plan changes in calendar 1999 the accounting methodology did not comply with GAAP. While it is unfortunate to restate the Company's financial results, we feel it is appropriate to record the changes in the periods they should have been incurred. The corrections are not material to the reported net income or loss for any of the applicable fiscal years or the first quarter of fiscal 2005, nor do they relate to our core operations.

For example, the impact to each of the two most recent fiscal years was $0.01 per share. However, the cumulative adjustments for the five fiscal years involved would have been material relative to the current quarter's results, hence the decision to restate prior period financials instead of recording the error in the second quarter.

Let me move on to the specifics of the results now.

Our overall book-to-bill was 0.99-to-1, resulting in a backlog of 155.3 million in Q2. This compares to a backlog of 157.1 million at the end of Q1 and 158.1 million a year ago. John will talk more about the bookings performance by major market application for both Electro-Optics and Lambda Physik, but in summary second-quarter orders of 129.4 million decreased by 5.8% over the corresponding prior-year period, but increased 0.6% from the immediately preceding quarter.

Total Company sales in Q2 '05 were 131.2 million, up 5.4 million or 4.3% from the same quarter a year ago, and increased 5.2 million, or 4.1%, sequentially.

Sales by business segment were as follows -- Electro-Optics, 105.4 million; an increase of 1.4 million, or 1.4%, from Q2 '04, and an increase of 4.5 million, or 4.4%, from Q1 '05. Lambda Physik sales were 25.8 million for the quarter, an increase of 3.9 million, or 18%, from Q2 '04, and a sequential increase of 0.7 million, or 2.7%.

The Electro-Optics sales by significant market application for the second quarter are as follows. Numbers are in dollars as million. Scientific and government programs, 32.0; microelectronics, 25.0; material processing, 15.2; OEM components and instrumentation, 26.9; graphic arts and display, 6.3; for a total of 105.4.

Lambda Physik sales by significant market application for the second quarter are as follows -- industrial, 16.1; scientific and medical, 5.6; lithography, 4.1; for a total of 25.8 million.

Second-quarter gross profit was 58.5 million, or 44.6% of sales, which was slightly above our guidance range of 43.5 to 44.5% of sales. The breakout in gross profit by segment for the second quarter is as follows -- 46.8% for Electro-Optics, an increase of 1% compared to last quarter; and 35.6% for Lambda Physik, a vast improvement from the prior quarter's results of 21.8%, or 30.8% when excluding Lambda's Q1 lithography restructuring charge.

Electro-Optics maintained its strong gross profit performance and benefited from a favorable product mix. Within our Lambda Physik segment, the sequential increase was primarily the result of the improved product reliability positively impacting the lithography service business, coupled with favorable product mix. Also, remember that Q1 '05 included 1.6 million revenue for an EUV unit at distributor margins negatively impacting the Q1 margin by 1.7%.

Operating expenses for the quarter including intangibles amortization were 44.4 million, or 33.9% of sales, compared to the guidance range of 34% to 35.5% of sales. R&D spending for the quarter was 14.2 million, or 10.8% of sales, or 11.1% when excluding the favorable adjustment of 0.3 million related to last quarter's lithography charge. Spending was at the low-end of our guidance range of 11 to 11.5% of sales as Lambda Physik is in the early stages of reallocating its development resources to new non-lithography projects.

SG&A spending for the quarter including amortization of intangibles was 30.3 million, or 23.1% of sales. Sales came in at the high-end of the guidance range, resulting in SG&A to come in at the low end of our guidance range of 23 to 24%.

Cash flow from operations was positive at approximately 17.9 million. And our ending cash balance for the quarter was 244.5 million, of which 32 million was classified as restricted cash. The cash balance of 244.5 million represents an increase of almost 6 million compared to last quarter, despite paying approximately 11.8 million for the remaining Lambda shares.

As a reminder, in the upcoming third fiscal quarter we have a debt payment of approximately 13.5 million of principal and interest with a corresponding reduction of the long-term debt of 12.7 million and a reduction of 15.2 million restricted cash requirement. Our final debt payment will be during May 2006.

Capital spending for the quarter was approximately 3.7 million, or 2.8% of sales, which is below the low-end of our annual guidance range of 5 to 6%. We will see some quarterly fluctuations, but we anticipate the year to come in below 5% of sales.

Coherent's book value at the end of the second quarter stood approximately $20.36 per share.

The second-quarter accounts receivable days sales outstanding remains identical to the first quarter and stood at 62 days. Electro-Optics days sales outstanding increased slightly by 1 day to 62, while Lambda's receivables days sales outstanding was 62, an improvement of 5 days from Q1 '05.

Inventory days for the Company improved by over 3 days from 78 to 75 days at the end of the second quarter. Lambda's inventory days sales outstanding decreased from 129 at the end of Q1 '05 to 114 at the end of Q2 '05, an improvement of 15 days and Lambda's best showing in quite some time. Within our Electro-Optics segment, inventory days sales outstanding improved from 66 to 65 days.

The following represents management guidance on operating results for the third quarter. We're estimating third-quarter revenues to be consistent with Q2 '05 levels. We expect gross profit to be in the range of 44 to 45%. R&D spending is expected to be in the range of 11 to 11.5% of sales. And SG&A including intangibles amortization are anticipated to be in the range of 23 to 23.5% of sales. Other income expense will be slightly favorable and the effective annual tax rate is expected to remain approximately 33%. Capital spending for the full-year is now projected in the range of 4 to 5% of sales.

In summary, I'm pleased Coherent was again able to deliver strong results. As we promised, our Lambda Physik segment is now much healthier without the high burn rate from lithography and with the benefits from the improved reliability. We should continue on our path of improving both gross profit and operating margins and generating strong cash flow from operations.

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

Thanks, Helene. Good afternoon, everyone, and welcome to our Q2 conference call.

I'm pleased Coherent was again able to deliver solid results in what has been a very mixed reporting season for tech companies. I attribute our resiliency to two factors -- market diversification and execution.

The product families that we developed over the past few years seem to have hit their marks. Our attention to business fundamentals, factory operations and reluctance to chase unprofitable business has allowed us to expand both gross and operating profits while generating good operating cash flows.

I would also like to emphasize that we have not shortchanged investment in the future for the sake of near-term profits. Our commitment to R&D remains steadfast, which will keep Coherent well positioned for the future.

Our book-to-bill for the Electro-Optics Segment was 0.95. Orders for the EO segment increased 3.1% sequentially and decreased 8.3% from the record numbers set in the same quarter in the prior-year period. Bookings in our scientific and government programs business improved 3.9% sequentially and declined 6.1% versus the prior-year period. We again experienced strong demand from the biological imaging market, which is consistent with our previous predictions. Within product families, we posted the second highest ever order rate for our Chameleon product line. Our amplifier business was mixed, as orders for stand (ph) products were in line with expectation and stiff price competition from European suppliers led us to pass on some custom laser business. As you can imagine, we hate to lose orders, but we hate dumpster diving even more. We set a record high for orders for our evolution laser, which has emerged as the standard for pumping amplifiers, including those from other vendors.

On a geographic basis the US market recovered from its first-quarter sluggishness and Asia remained on track. Europe had a disappointing Q2, due mostly to funding delays.

Bookings in microelectronics increased 3.1% sequentially and were lower by 13.6% compared to Q2 '04. There was good activity in the wafer inspection and metrology arenas for both leading-edge and legacy products as fab utilization continues to climb. One recent report put the utilization rate at 90%. There was a resurgence during Q2 for lasers used in photomask tools, both for semiconductors and flat-panel displays. The market is pushing for next-generation devices to support shrinking feature sizes.

Bookings for ultraviolet lasers used in PCB direct write were strong, presumably reflecting increasing demand for high-resolution PCBs. There is a push to extend the direct write technology to other PCB formats, although this will require a different cost structure for the tool and the laser. We're currently testing concepts for this purpose.

Microvia drilling also seems to be picking up as inventories and microvia PCB pricing seems to have bottomed out. As we have previously mentioned, this market will pull both carbon dioxide and ultraviolet lasers.

For OEM components and instrumentation, orders decreased 18.9% sequentially and 11.2% from the same prior-year period after coming off two successive quarters of decent growth. Our instrumentation business remains healthy as our Sapphire and Compass products continue to dominate this market. Emerging applications in HIV screening, live imaging microscopy and automated hematology hold future promise. Orders from medical OEM customers were weaker following inventory buildup orders in the preceding quarter. Similarly, bookings from laser OEMs were down sequentially after several annual buys placed in Q1.

Materials processing bookings were up 36.6% sequentially and fell 9.5% from the prior-year period. This is our third successive quarter of increasing demand, although we have a tough comparison from the blockbuster quarter in Q2 '04. The seasonal upswing leading into the summer was evident in several end markets, including textiles and marketing and engraving. We believe an additional updraft (ph) was created when earlier this year the World Trade Organization lifted quotas on Chinese-made apparel, thereby creating demand for more processing capacity.

We are also seeing a slight shift away from locally-made carbon dioxide lasers in China towards commercial-grade products. It is far too early to call this a trend, but it is a development worth watching as we estimate more than 10,000 domestic carbon dioxide lasers are sold in China each year.

In the longer-term we remain concerned about energy prices and interest rates given their historical impact on this market.

Orders in the graphic arts and display market increased 36.2% sequentially and increased 24.4% from the prior-year period. The large increase in orders was driven by several applications. We experienced an uptick in demand for the Paladin solid-state ultraviolet lasers used in newspaper printing. The main customer benefits are print speed and lower operating costs. Our penetration into professional film finishing and digital writing areas continues to gain momentum with new placements of our Sapphire Series lasers. While green lasers used in computer-to-plate printing have nearly completely succumbed to diode lasers, there is a substantial installed base of legacy systems which drove a moderately sizable order for service stock.

We have run a number of demonstrations of our previously announced RGB laser emitter for the commercial and display market. Based upon feedback, we appear to be on target in terms of fit, form and function. Not surprisingly, lifetime and costs have rapidly emerged as key success factors. We are continuing to evolve the technology for this and other markets while we explore various manufacturing models.

As Helene has already reported, the merger of Lambda Physik has been completed. It was an interesting experience which none of us wish to repeat anytime soon. For the quarter, bookings decreased 7.1% sequentially, but increased 3.7% year-over-year. The book-to-bill ratio for Lambda was again above 1, coming in at a healthy 1.14. I am also pleased to repeat that Lambda turned the corner of profitability for the first time in more than two years.

The industrial market dominated the order screen for the Lambda segment. More than half of the industrial bookings came from a large order for lasers used in LTPS annealing. This might seem odd given the reports of excess capacity in FPD market, but LTPS continues to gain market share against amorphous silicon. In fact, one recent report suggested that LPTS panels would account for 30% of the FPD market by 2008 versus its current 9% share.

Cymet (ph) bookings grew 31.5% sequentially as our optics pro lasers (ph) have gained attraction with customers in the medical OEM and scientific markets. Orders were down 6.1% versus the prior-year period when we received some unusually high scientific orders.

Litho bookings increased 80.7% sequentially and 44.4% from the prior-year period. And sales and bookings should remain 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 the option to sell Lambda's interest in Xtreme Technologies, its joint venture with Jenoptik, to develop EUV light sources.

For those of you interested, our next major trade show is the conference on lasers and electro-optics, or CLEO, held in Baltimore from May 24 to May 26. We will also be presenting at the CIBC World Markets Technology Conference in New York on Tuesday, May 10th. We look forward to seeing you at one of these events.

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

(OPERATOR INSTRUCTIONS) John Harmon, Needham & Company.

Good afternoon. Congratulations. Good quarter in getting the Lambda Physik acquisition finally behind you. Just a few questions. I guess first of all, looking at Lambda's industrial segment, last quarter you saw a big surge in orders that didn't really translate to revenues this quarter, and then orders declined a little bit. What is happening there?

In the industrial segment?

Correct.

Last quarter we had a mix of orders from a variety of customers in industrial, which did not include, to the best of my recollection, any large orders from LTPS. And as we have mentioned in the past, given the size and cost of these systems, they tend to come in blocks. So in Q1 you saw orders -- non LTPS industrial orders leading the way; in Q2 you see the LTPS orders lead the way. And it's just the sizing of those orders. I wish I could give you a better explanation than that, John, but that's really the simple fact of the matter.

As far as revenues tracking, a lot of these orders are placed with fairly long call off dates, given long leadtime items, etc. So they're programmed out over a number of quarters. They're not necessarily programmed out in the next quarter.

Secondly, in the gross margin improvement you saw in the Electro-Optics Division, is this related to the gross margin improvement program you're working on, or was it just due to operating leverage?

I think as we said in the notes, the gross profit improvement for Electro-Optics was due to product mix primarily. (multiple speakers) and it was primarily due to product mix.

Thank you. Finally, just more of a general question. The latest and the really only available market research out there says the laser industry is going to grow 9% this year; 12% for diode lasers, 5% for non-diode lasers. What is your feeling on these estimates? Do they seem realistic? Do you think you will grow in line with the market or grow faster and why?

You're asking a question on long-term guidance, John, which we have not given before. So it's a little bit difficult to qualify that. But if you consider that in terms of historical growth rates, is it off of the marketplace? Probably not.

What actions could you be taking to grow faster than the market, for example?

You mean as we did last year?

Right.

Well, we're trying to repeat some of the things that we did last year. The markets need to cooperate with us obviously. There's a fair amount of I would say choppiness in some of the end markets. You have seen a lot of mixed results even from competitors in our space; some of them doing well, some of them not doing well as this market shakes out a bit. And clearly the opportunity to drive new technologies and potentially to participate in some markets that we don't participate in now either through organic investments or through acquisitions is certainly something that we could consider.

Okay, thank you.

Mary Brixie, CIBC.

It's Mary in for Ali. If I could just touch on the gross margins a little bit, I guess, John, you've given guidance over the past couple of quarters that you're going to see at least 4 points improvement over the next 12 to 24 months in the Electro-Optic Division. And clearly you're starting to see some significant pickup. I know you just said that it's based on more product mix, but I have to assume that some of it is coming also from internal -- internally in operations. Do you think that the 4% is kind of erring on the side of conservatism and it's looking more like 4 to 6% now versus just this 4%?

Let me first restate what we had said in terms of our guidance. I think it was during the November call. We had projected adding 2 to 4 points in gross margins to the Electro-Optics margin over the next 24 months. We also said that it would be back-loaded.

As Helene mentioned in response to John Harmon's question, the most recent pickup really was a reflection of mix rather than any significant changes in factory operations. So we're sticking right now to the guidance that over those 24 months it's 2 to 4 points.

Great. Now that a little bit of time has passed -- and you alluded to kind of your formal decision with the lithography segment -- can you kind of give us an update in some of the areas that you're targeting for your research and development opportunities for Lambda?

You mean give you an indication without telling all our competitors what we're doing? No, sorry.

How about just on the automotive market? Last quarter you had talked a little bit about making inroads into some of the automotive market for your high-powered lasers. Can you talk a little bit about that? Have you seen any other penetration other than Audi, and also maybe even for other applications other than just the cylinder walls?

Are your questions specific to Excimer lasers or generically?

I guess even both.

With respect to the Excimer systems, we have mentioned that we have some traction with Audi. It's being implemented, or it's being used on, one line and will probably be used on two more lines within the next -- I can't remember the dates, whether it was six or twelve months. And we're working with a number of other manufacturers to determine their level of interest.

It does seem to be a compelling story from the standpoint of lifetime of the cylinder walls, and also from oil consumption and emissions. So it's one of those stories that if people can justify the cost it's pretty much a slam dunk in terms of the benefits that are derived from it.

As far as the broader automotive -- and you have to capture sort of automotive and aerospace because these are the big, very large lasers that are used for cutting, welding, etc. -- we still perceive that as being a pretty tough market to crack given the market dynamics and given the gross margins that are involved there. There are some potentially specialty opportunities within those markets that we certainly are taking a look at. Whether we will enter them or not, we haven't made a decision at this point simply because we don't have a fleshed out business plan that says it is something that we want to support.

And then just a housekeeping question. Helene, could you give us a geographic breakout of the revenues?

Sure. Okay, we have Asia, 45.6 million; (multiple speakers) 34.7 million; US, 44.1; and other, 6.7.

Great. Thanks guys.

Jackie Waterman, Jesup & Lamont.

Nice quarter. I'm just wondering can you talk about the deployment of the R&D dollars at Lambda? I know you can't go into specifics about new projects that you're working on, but how long until you might begin those projects. Are they already underway?

We fire those up fairly quickly. We assembled the roster of things that we wanted to work on, and then we did the usual analysis on what we could afford to invest and what we wanted to invest in, and that led to a matrix. Many of those programs are already underway. We may start some other things as we go forward. But again, it's going to be driven by a business opportunity, not by a technology opportunity.

Okay. How long until we might hear about what you have up your sleeve?

With respect to --?

Those new projects.

Historically we don't go out in front of ourselves by announcing technologies very early. We like to be very much closer to deployment before we announce things. So given that the timeliness for technology developed can be anywhere from 12 to 24 months, that's the kind of timeframe you should be focusing on.

Okay, great. And then previously you had commented that your Co2 laser business was impacted by a tightening in the credit policies in Asia. And based on your earlier comments it sounds like you might be seeing an improvement in that specifically in China. I'm just wondering can you elaborate a little bit please?

It does appear that things are starting to loosen up a bit. And I can't help but believe that the WTO decision which has opened up much broader markets than the domestic markets in China is partially helping that.

Also, what are you seeing in Japan in terms of demand? Is that any different than Asia? Or have you seen any marked change recently?

Looking at the Japan numbers, I can't say that we've seen any change of note.

Okay, great. Thank you.

Mark Miller, Hoefer & Arnett.

Congratulations. You guys keep on cranking them out, which is rare what I'm hearing this quarter. If I can ask my question, it seemed like in the semiconductor areas, which everybody is reporting flat to weaker results for this quarter, it actually sounds like business was pretty good for you guys. Could you give any color on that, or am I misinterpreting?

The business was okay. I don't know if I want to go so far as to say that it was good, but it was definitely okay given everything else that we've been hearing similar to what obviously you've been hearing. And when we look at it -- I keep making these statements over and over again, but we believe that they're true. The first one is that we made decisions over the past few years in terms of the product portfolio that specifically targeted some front-line emerging applications which are still pulling investment even in a tight market. And the legacy products are benefiting a bit from factory utilizations. So yields -- or not yields, replacement business, etc., for installed base is certainly helping. I wish I could tell you that there was a magic formula, but it's basically blocking and tackling. And we made some good decisions that the Company is now benefiting from.

Well, I think that make sense to me, because like you said, if you're in some of the leading apps, you should be at the higher factory utilization point, which we understand is around 90%. But actually overall things are close to 80, 85. But the leading applications are around 90% on factory utilization.

Just last question. Two of your competitors made interesting moves within the last month or so. JDSU bought the small firm Lightwave Electronics, which seems like it's focused in a couple of your areas. And then Cymer has come out of the closet with talking about a new laser processed tool for the flat-panel display market sometime next year. Any comments or thoughts about those two developments?

I'll touch on the Cymer one first. This is not necessarily new information. They've been talking about this market as a possible opportunity for themselves for some time. So the fact that they're continuing to tout it is in line with their previous statements.

We believe that we're in a very strong position in that market. And we have a number of opportunities to not only defend the position that we have, but potentially expand as well. So we will let the market decide, but we're confident there.

As far as the JDS-Lightwave deal, I think I found it interesting like a lot of other people did. It seemed a bit out of character given the business mix. Our opinion of Lightwave is it's a good company. They have -- they've done some good things over the year for a company its size. And it's a small operation; probably 30, $35 million in revenue. So they paid a pretty high multiple for it. Obviously they think that it's going to be -- and I mean they meaning JDS -- thinks it's going to be the genesis of something for them. And time will tell what that's going to be. But I would contend it's a very different business model from virtually all our other businesses, which is components.

Thanks. And like I say, congratulations on keeping the ball rolling.

(OPERATOR INSTRUCTIONS) John Harmon.

Just one quick one for Lene. I was wondering if she could explain what's going on with your restricted cash a little more. My understanding was part of it was to complete the squeeze out of Lambda Physik. And you were saying in your remarks that part of it is allocated to pay off the debt that you have coming in two installments. Is that correct?

That's correct. We have a cash covenant requirement against the debt.

Which one -- is the Lambda portion short-term and would that go to 0 next quarter?

That should go to 0 fairly shortly, yes.

Okay, thank you.

And there are no further questions.

We would like to thank all of you for participating in the conference call, and we look forward to touching base in three months. Thanks.

We thank you for your participation in today's conference call. Everyone have a great day.