Coherent Corp (COHR) 2005 Q3 法說會逐字稿

Good day, everyone, and welcome to the Coherent Third 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 Chief Financial Officer of Coherent, Helene Simonet. Please go ahead, ma'am.

Thank you, Cynthia. Good afternoon and welcome to our third quarter fiscal 2005 conference call. As is customary with our calls, I will speak to the results of the third quarter and then John Ambroseo, our President and Chief Executive Officer, 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 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 reports on Forms 10-K, 10-Q and 8K 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.

Turning now to our third quarter results, we reported revenues of $125.3 million and net income of $9.6 million or $0.31 per diluted share. These results include a charge of $1.6 million or $0.05 per diluted share for in-process research and development related to our recent purchase of TuiLaser.

A tax benefit of $1.4 million or $0.05 per diluted share resulting from increased export tax incentives and R&D tax credits, and the favorable adjustments of $0.2 million or $0.01per diluted share to a previously recorded restructuring charge. Excluding the aforementioned items, non-GAAP earnings represent $0.30 per diluted share and compare to non-GAAP earnings of $0.31 per diluted share in the previous quarter and non-GAAP earnings $0.13 per diluted share in the comparable prior year period.

Excluding the above-mentioned exceptional items, third quarter earnings were in line with our guidance, but on lower than expected sales. During the quarter, we also revised the annual tax rate down to 30% from the previously guided 33%.

As mentioned in the previous release, Coherent acquired privately held TuiLaser AG located in Munich, Germany, for approximately €22.5 million net of cash acquired. As a point of clarification, we acquired TuiLaser and its Bavarian Photonics subsidiary, but not TUI's investment in TOPICA Photonics. TuiLaser is a designer and manufacturer of excimer lasers and Bavarian Photonics manufactures advanced solid-state infrared and green lasers that complement Coherent's solid-state laser products. The end markets for both companies include industrial, scientific, and OEM medical applications.

We are reporting TuiLaser's excimer laser sales as part of the Lambda business segment, while the Bavarian Photonics solid-state's laser business is part of our Electro-Optics business segment. Tui's most recent fiscal year included revenues of approximately €24 million. The third quarter results include one month of Tui's activity, with slightly negative contribution to the bottom line. However, this transaction is projected to become accretive at the end of Q1 fiscal 2006.

Our overall book-to-bill was 0.98 to 1 and our backlog at the end of Q3 is $163.9 million. This compares to a backlog of $155.3 million at the end of Q2 and $155.1 million a year ago. The increase in backlog can be attributed to our acquisition of TuiLaser.

John will talk more about the booking performance by major market application for both Electro-Optics and Lambda Physik, but in summary, third quarter orders of $123.2 million decreased by 1.4% over the corresponding prior year period and decreased 4.8% from the immediately preceding quarter.

Total Company sales in Q3 '05 were $125.3 million, down $2.7 million or 2.1% from the same quarter a year ago and down $5.9 million or 4.5% sequentially. Sales by business segments were as follows -- Electro-Optics, $101.2 million, a decrease of $4.3 million or 4.1% from Q3 '04 and a decrease of $4.2 million or 3.9% from Q2 '05.

Lambda Physik had sales of $24 million for the quarter, an increase of $1.6 million or 7.1% from Q3 '04 and a sequential decrease of $1.7 million or 6.8%.

Electro-Optics sales by significant market applications for the third quarter are as follows -- Scientific and Government programs, 26.9, Microelectronics, 26.0, Material Processing, 14.6, OEM Components and Instrumentation, 26.3, Graphic Arts and Display, 7.4, for a total of 101.2.

Lambda Physik sales by significant market application are as follows -- industrial, 13.6, scientific and medical, 6.1, lithography, 4.3, for a total of 24.0.

Our third quarter gross profit was $56.7 million or 45.2% of sales, which was slightly above the high-end of our guidance range of 44% to 45% of sales.

The breakout in gross profit by segment is as follows -- 49.2% for Electro-Optics, an increase of 2.4 points compared to last quarter and 28.6% for Lambda Physik, a drop of 7 points from Q2 '05. Electro-Optics segments continued on its path towards the previously communicated gross profit improvements of 2 to 4 points by the end of fiscal 2006.

The quarter-on-quarter increase in gross profits is primarily the result of reliability improvements, but in addition, we saw a positive impact from our global procurement and supply chain initiatives aimed at reducing the cost of materials and the cost of transportation. Within our Lambda Physik segment, the sequential decrease was primarily the result of an increase in inventory reserves for slow-moving lithography consumables. Lambda's gross profit was also negatively impacted by approximately $0.4 million of inventory step-up amortization following the Tui purchase price accounting.

Operating expenses for the quarter, including intangible amortization, but excluding IP R&D and restructuring were $44.4 million or 35.5% of sales above the high end of the guidance range of 34% to 35% of sales, primarily the result of the lower than anticipated sales.

R&D spending for the quarter was $13.9 million or 11.1% of sales, which is within our guidance range of 11% to 11.5% of sales. SG&A spending for the quarter, including amortization of intangibles, was $30.5 million or 24.4% of sales. Higher intangible amortization resulting from the Tui acquisition and lower than projected sales caused SG&A to come in above the high end of our guidance range of 23% to 23.5%.

In addition, during the quarter, the Company granted restricted stock to a number of employees and our fourth quarter guidance includes approximately $0.3 million stock compensation expense.

Our ending cash balance for the quarter, including restricted cash, was $226.3 million, representing a decrease of $18.2 million compared to last quarter. As previously mentioned, during the quarter we acquired TuiLaser for approximately $27 million and we also made a debt payment of $13.5 million of principal and related interest. During the quarter, we generated approximately $24.2 million cash flow from operations, resulting in a year-to-date cash flow from operations of almost $73 million.

Capital spending for the quarter was approximately $4.2 million or 3.3% of sales. Coherent's book value at the end of the third quarter stood at approximately $20.18 per share.

Our receivables and inventory DSO are negatively impacted by the acquisition of Tui, as we only have one month of Tui's revenue in the consolidated results. Notwithstanding, the third-quarter accounts receivable day sales outstanding improved 3 days from the second quarter and stood at 59 days, our best showing since Q1 2001.

Both Electro-Optics and Lambda Physik contributed to this improvement. On the flip side, inventory days for the Company increased by 7 days, from 75 to 82 at the end of the third quarter. Lambda's inventory days increased from 114 at the end of Q2 to 128 days at the end of Q3, but primarily as a result of the acquisition of TuiLaser.

Within our Electro-Optics segment, inventory day sales outstanding crept up by 6 days and stood at 71 days at quarter end. Although some of the increase was the result of lower than anticipated shipments and strategic inventory bills, we're not very proud of these high levels of inventory and operations management is focusing on developing a roadmap to improve this metric.

Let me now give you the guidance for the fourth quarter of fiscal 2005. We're estimating fourth quarter revenues to increase by 5% to 8% from the third quarter. We expect gross profits 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 expenses, excluding intangible amortization, are anticipated to be in the range of 22.5% to 23.5% of sales.

The intangible amortization run rate will increase as a result of the Tui acquisition. We estimate the Q4 amortization charges to be approximately $2.5 million. Other income is estimated at about 1% of sales and includes a gain of approximately $0.7 million from the sale of Lambda Physik's 50% interest in XTREME technologies to [invention]. The transaction closed subsequent to the quarter end in early July.

The effective annual tax rate is expected to be about 30%, and capital spending for the full year is now projected to be approximately 4% of the sales.

In summary, although the quarter didn't progress exactly as we had anticipated, we're still very proud of our performance and are well positioned for future growth and profitability. The addition of TuiLaser should further bolster our product offerings in both business segments and allows for further opportunities to consolidate our operations. We believe we can continue on the path of improving both gross profit and operating margins and continue to generate strong cash flow from operations.

I will now turn over the call to John Ambroseo, our President and Chief Executive Officer.

Thanks, Helene. Good afternoon, everyone, and welcome to our Q3 conference call. The third quarter brought mixed results for Coherent. Revenues were lower than projected due to the timing of certain orders and delays in completing product builds. While it is not unusual to receive shippable orders late in the quarter, we should have done a better job of moving the process forward. In other cases, we had shippable orders in hand, but did not get the product out the door. I could recite a litany of reasons but, in the end, it comes down to execution, which despite our recent gains, can still improve.

On the positive side, we did deliver on our core goals. Gross margins in EO reached 49% in Q3. The largest catalyst was improvements in product reliability resulting in reduced warranty expense. This is a positive development, but it is prone to fluctuate quarter-to-quarter. For those of you keeping score, this puts us past the midpoint of the 200 to 400 basis point expansion in EO margins that I highlighted during the November 2004 conference call. Helene has already discussed cash from operations which was over $24 million for the quarter. Year-to-date, we have generated almost $73 million from continued operations, surpassing last year's full-year total.

Let me now go on to market updates for the Electro-Optics segments. The book to bill for EO was 1.0. Orders for EO segment, the EO segment increased 1% sequentially and decreased 2.3% from the prior year period. Bookings in our Scientific and Government Programs Business dipped 0.1% sequentially and decreased 3.6% versus the prior year period.

Within the research market, our Chameleon product line continued to do well, with near record bookings in Q3. The amplifier business was mixed. Demand for standard products was down slightly from last quarter, which was more than offset by a $2 million order for a custom system.

On a geographic basis, the US market was sequentially lower and Asia was down slightly. Europe recovered nicely from a disappointing Q2 as funding improved. Bookings in microelectronics increased 16.3% sequentially and were lower by 3.2% compared to Q3 '04. Orders were up again for lasers used in photomask writing, although we do not have transparency on units used in wafers versus flat panel displays.

Wafer inspection also picked up, primarily due to leading edge tools of 65 nanometers. On the packaging end, bookings for carbon dioxide and ultraviolet lasers used in microvia drilling strongly improved, as customer inventories bottomed out and pricing for microvia PCBs strengthened.

During the third quarter, we launched a number of new products at LASER 2005 in Munich including our new AVIA 355-20. It is the first all solid-state Q-swiched laser to offer total watts of 355 nanometer ultraviolet output at 100 kilohertz. The combination of high power and high pulse rate translates directly into higher processing speeds to microelectronics applications, such as VIA drilling, processing low-k dielectrics, large area solar cell scribing and chip singulation.

Although it was not a third-quarter event, I would like to provide some feedback on the SEMICON West tradeshow. The overall mood was decidedly upbeat compared to last year. Customers cited high fab utilization rates as a reason for a modest pickup beginning later this year. Should this occur, we would expect to derive a benefit, as we have in past recoveries.

Orders in components and instrumentation decreased 3.3% sequentially and 11.2% in the same prior year period. Instrumentation orders were slower than expected due to delays in new product releases by a few customers. The medical OEM market rebounded from Q2, as customers appeared to move toward the semiannual buying pattern. Similarly, bookings from laser OEMs were up in Q3, as customers continued to balance their inventories.

On the product front, we introduced the Compass 115M, a low-power continuous wave 532-nanometer laser optimized for OEM applications in bioinstrumentation and inspection. This laser enables a new generation of economical instrumentation at lower power levels than are prior Compass models, but with a 30% cost reduction over these earlier models. Typical applications in bioinstrumentation for the Compass 115M include flow-cytometry, confocal microscopy and spectroscopy.

Booking for material processing we're down 0.1% sequentially, but grew 30% from the prior year period. The June quarter traditionally marked the beginning of the seasonal slowdown in the materials processing market. This year's buoyancy is therefore surprising and attributable to strong demand for carbon dioxide lasers used in marking, engraving, and cutting.

All three geographic regions benefited, which is unusual, since the dollar has strengthened against the Euro and the US government has flip-flopped on WTO quotas for Chinese textile imports. In retrospect, our concerns about energy prices and interest rates may seem dubious since oil is still north of $55 a barrel and the Fed raised their rate by another quarter point at the end of June. While we are pleased with the market's resilience, we continue to believe that macroeconomics determine the long-term vector of this market.

Orders is in the graphic arts and display market decreased 32% sequentially and 24.9% from the prior year period. Bookings were predictably weaker following last quarter's high order rate. The trends in the market remained consistent. The push to infrared devices is unabated, given the cost benefits in hardware and consumables.

In visible imaging, systems are becoming more efficient in wavelength flexibility, therefore allowing greater flexibility in the light source. Needless to say, these trends are influencing our technology investments.

During the June quarter, we announced the acquisition of TuiLaser AG and its subsidiary Bavarian Photonics. Tui is the leading manufacturer of small to midsize excimer lasers and their products are largely complementary to our existing excimer lasers manufactured by Lambda Physik The Tui product portfolio serves the vision correction market as an OEM supplier, as well as emerging industrial and scientific applications. With the exception of one product pair, we have concluded the product rationalization and informed those customers affected by the changes.

We have also completed a staffing analysis, which resulted in headcount reductions in both Gottingen and Munich. Bavarian Photonics is a small and innovative company producing diode-pumped solid-state lasers that are synergistic with our existing products. They have developed differentiated products for a number of applications, including the security marking and solar cell manufacturing industries. The majority of business with both entities has been in Germany, but will in the future be sold on a global basis through Coherent's worldwide sales force.

Moving on to Lambda Physik, for the quarter, bookings decreased 24.6% sequentially and increased 2.8% year-over-year. The largest sequential decline came from lithography service bookings, which tend to cluster around certain annual contracts. The bookings include a $1.5 million contribution from Tui for the month of June. The book-to-bill ratio was 0.92. Industrial orders were solid following a spectacular Q2. Orders were down 10.6% sequentially, but grew 24% versus the same prior year period.

Ink jet nozzle drilling and flex circuit packaging were among those applications contributing to the order stream. LTPS also pitched in, but on a much less grander scale than last quarter. After many quarters of speculation, a new competitor has formally declared itself in the LTPS tool space. They are promoting a different annealing methodology than is currently qualified and deployed. We do not have enough tangible data to comment on the validity of their marketing claims. However, this does serve to highlight that the annealing process for LTPS and active-matrix [olids] is evolving. It is important to note that the choice may not come down to excimer technologies. High-power visible lasers may also play a role.

Our roadmap contains both technologies so as to maintain our market-leading position. SciMed bookings declined 14.7% sequentially and 17.1% versus the prior year period. The addition of the Tui product portfolio expands our footprint in the medical OEM market where we will converge on the Tui platform. Lithography bookings decreased 72.9% sequentially and 50.5% from the prior year period, which reflects the timing of service contracts.

As Helene has already mentioned, we sold our 50% interest in Xtreme technologies to Ushio. We had expected this transaction to close in June, but the three-body collision turned out to be more time-consuming than we had anticipated. During the third quarter, we introduced the new COMPexPro 1000 excimer laser, which combines the economy of a midsized laser platform with a high repetition rate and long lifetime previously available only from high-end products.

The high repetition rate of this new laser enables increased process speed for a number of micromachining, drilling, direct write and inspection applications, such as ink jet nozzles and some conductor photomasks.

Again, we continue to drive significantly low cost of ownership for our customers, which is particularly beneficial for those customers running 24/7 applications that can easily consume several billion pulses per year.

With a number of new products in both internal development and acquisition, we continue to solidify our position as the market leaders in lasers and remained well positioned to unlock the earning power of this corporation.

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

Thank you. The question-and-answer session will be conducted electronically. [OPERATOR INSTRUCTIONS]. And our first question will be from John Harmon with Needham & Co.

Hi, good afternoon.

Hi.

So a few questions. Just looking at the numbers, it looks like that sales in the Scientific Government segment decreased quite a bit sequentially. Is that just due to lumpiness of orders?

Yes, in one of the areas, John, that we look at -- let me step back. There are two things to it. First of all, some of the shippable orders that I referred to at the end of the quarter that didn't get out the door were related to some custom systems in the scientific arena. Secondly, some of the orders that we were expecting late in the quarter to ship against, were also scientific orders

Okay. Thank you. And this tax credit received, this $1.4 million tax credit for export tax incentives and RD credits, was that in your guidance? Were you anticipating to receive that or not?

No, no, this is the result of the return to provision reconciliation.

Okay.

It was not in the guidance.

Not in the guidance. And so this 30% rate is -- did you say you expect that for the fiscal year?

Yes.

So 33% for Q4?

No, no, no, no, no. The annual rate is going to be 30%, so therefore, Q4 will be at approximately 30%.

30 as well?

Yes.

Okay. Thank you. And John, just this one time, since you said part of Tui goes into Electro-Optics and part goes into Lambda Physik --

Um-hum.

-- could you give us a rough breakdown how much Bavarian Photonics is of the total?

I am going to ask Helene to pull up the numbers on that. I believe it's -- in the chart, the vast majority of it is [external agents] from Tui. I'm tempted to say it's in the 85-15 range in terms of percentages but I'm going to let Lene verify that.

Okay. Thank you. And that's mostly in the medical portion of Lambda Physik?

That sounds like it's in medical and industrial.

Thank you. Helene?

Yes, it's about if 50% for TuiLaser and about -- sorry, 15% for Tui, and excuse me, 15% for Bavarian Platonic and 85% for Tui.

Okay. Thank you.

[OPERATOR INSTRUCTIONS]. Now will go to Mark Miller with Hoefer & Arnett.

Congratulations on another solid quarter and a good outlook. Just wondering, you mentioned your semi customers are talking about high utilization rates and did you see an improvement in orders and bookings this quarter from them, or were they relatively flat, and what's your forecast for business from that segment?

Well, as I mentioned, Mark, in the bookings commentary for microelectronics, it was up a little over 16% quarter-on-quarter. I think it was the third quarter in a row that we've seen somewhat higher bookings, so that's -- it's a positive development to be sure. When I look at what we've seen, in terms of pickup, it's probably more on the back end than it is on the front end, which is also consistent with comments that were made during the Semicon West show by a number of people that the back end looks to be poised for a better recovery than the front end later this year.

Thank you.

Sure.

And we'll move on [John Terrell] with [Terrell & Co].

John, do you think there can continue to be fill-in acquisitions to your product line and can you find fill-in acquisitions at reasonable prices?

Well, our goal has always been to use acquisitions strategically to fill needs in the product portfolio or market technology roadmaps. Are there other opportunities out there? Yes, there are. Are they at a value that we would consider to be appropriate for what we get? That remains to be seen and is something that worked through during a discussion with the other side. In the case of Tui, we fulfilled all of our mission goals in finding a company that had good technology, a good cultural fit, and could benefit from a global presence that Coherent could offer, and I think we paid a very fair and reasonable price with them.

Any other thoughts for the cash as it continues to build?

Well, as we mentioned before, we plan to use the cash to grow the Company and it's going to go back to your first question, looking out into the M&A front.

Thank you.

Sure.

Now I have a follow-up question from John Harmon with Needham & Co.

Thank you. Looking at your order numbers that were down not only sequentially, but year-over-year and your backlog decreased as well, how do you interpret that and how do you apply that to the laser market? Do you think the laser market is taking a pause, or is this related to more operational issues?

Well, there are two separate questions, I think. One is, or maybe three. One is sales; one is backlog and how orders ties into both of them. Clearly, the fact that we didn't get all the orders that we expected to get in this quarter affected both bookings and backlog. Is the market taking a pause? It's difficult to say, to the answer that question with any certainty, because we see different dynamics in different markets.

What I think is clear, John, when we look at the different segments that we participate in, some of the buying patterns tend to fluctuate from quarterly orders to semiannual to annual orders and we're seeing some big swings. I mean, if you look at lithography service and the decline there quarter-to-quarter in orders, I think was north of 4.0 or $4.5 million. That's a pretty big swing. Should it be anticipated? Of course, it had to be because there's only a limited number of systems that you're going to be deriving service contracts from. So, some of these market opportunities, I think it takes a longer view than one quarter. Are we concerned that the market overall is pausing or declining? No, we're not.

Okay. Thank you, and then a follow-up to that one. Just looking at the sales again, in Lambda Physik's industrial segment, it dipped a little sequentially and you talked about the strength of areas other than LTPS. Is that also attributable to lumpiness in orders, such a high ASP --

They're very high ASP.

-- lasers.

You've answered your own question. Yes, they're very high ASP and they tend to generate some fairly large fluctuations for Lambda Physik. To be perfectly blunt, I was very impressed with the strength in Lambda industrial orders this quarter. Now, as you may remember from last quarter, we received a very large order for LTPS systems and those are very high ASPs. So to have this kind of strength, even though bookings pulled back a little bit, does suggest that other markets contributed and, in fact, contributed significantly.

Thank you. And finally, you talked about starting to see the benefits of your second gross margin improvement program, but yet, the high point of next quarter's guidance was slightly below what you achieved this quarter, and I'm comparing on an aggregate basis to Electro-Optics. Are you being conservative or are you just looking for some mix change in Q4?

You've got it right, John. It's all mix changes.

Okay. Thank you.

Now we will move on to [Mary Richey] with CIBC.

Hi, guys. Most of my questions have been answered, but I'm still hoping we can kind of circle back on the competitor that just entered the market. And I know that you really -- you said that they're promoting a different technology, but I was wondering if you could kind of give us some color on if you've seen them in any bake-offs, or have come up against them and kind of talk about that.

And then also, on another front, can you talk about the opportunity for the LTPS segment with an industrial, as we look further into the second half of '05, because there's a good number of fabs coming on line within the PD arena. Thanks.

Sure. To answer you first question, Mary, have we seen them? This has probably been the worst kept secret in the industry for quite a while. They haven't exactly been bashful at saying that they were looking at this market. I think the fact that they went out with a complete tool solution may have surprised some people, because it does limit their opportunities in some respects because they have to compete against the tool manufacturers now, rather than just compete against light source manufacturers, and I assume that that's a strategic decision on their part.

As far as we know, there is a very limited number of units out there and it's certainly less than a handful and I can't tell you whether these have actually been delivered as part of a purchase order, or if they're in customer testing. But it's a very, very limited number at this point. So that's the amount of visibility that we have and it will be interesting to see how the market develops because it is promoting a very different methodology. Your second question, if you would repeat it?

It's basically on the outlook for the flat panel display market and basically, so the visibility that you might be seeing on your end, going on to the second half of '05, given the fact that you have a number of generation fabs, Gen 5, Gen 6 and a good number of next generation fabs coming on line.

The feedback from the marketplace is that LTPS still appears to be poised to grow as a percentage of the total, and if you look around at some of the recent releases in terms of [glass] for LCD, etc., those numbers seem to be growing. I would have to assume that that means future opportunities exist. Can I quantify them for you today? No, I can't, but the indicators are certainly there.

Okay. Great. Thank you.

John Ambroseo Sure.

[OPERATOR INSTRUCTIONS]. It appears that there are no further questions at this time. Mr. Ambroseo, I'd like to turn the conference back over to you for any additional or closing remarks, sir.

Thank you. We'd like to thank you all for participating in the call today, and we look forward to talking to you in a few months. Thanks.

And that does conclude today's conference. Thank you for your participation.