Coherent Corp (COHR) 2005 Q4 法說會逐字稿

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

Thank you. Good afternoon and welcome to our fourth quarter fiscal 2005 conference call. As is customary with our calls I will speak to the results 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 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 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 revenues of 133.8 million and net income of 5.3 million or $0.17 per diluted share. These results include a aftertax charge of 4.1 million or $0.13 per diluted share related to excess inventory as a result of the accelerated discontinuation of the lithography service business following a decision that we will no longer offer litho service contracts after December 31, 2005.

Excluding this charge, non-GAAP earnings represent $0.30 per diluted share and compare to non-GAAP earnings of $0.30 per diluted shares in the previous quarter and non-GAAP earnings of $0.24 per diluted share in the comparable prior year period. As mentioned in our previous guidance, the current quarter results include a gain from the sale of Lambda's 50% interest in Extreme Technologies. This transaction closed during Q4 and yielded a net gain of $0.9 million which is slightly higher than we estimated at the time of communicating the guidance. Our annual tax rate excluding one-time events was close to 30%. Let me also mention that the EE acquisition became accretive during the fourth quarter which is a bit earlier than originally projected.

On a year-to-date basis, revenues grew 4.3% while GAAP earnings from continuing operations increased 129% representing outstanding positive income leveraging. On a pro forma basis, earnings increased 144% which is predominantly the result of a 2 percentage points improvement in the gross profit coupled with the reduction of total period expenses as a percent of sales of 2.4 points. Our overall book to bill for the quarter was 1.23 to 1 and our backlog at the end of the Q4 was 194.1 million. This compares to a backlog of 163.9 million at the end of Q3 and 164.6 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, fourth quarter orders of 164 million increased by 23.6% over the corresponding prior year period and increased 33.1% from the immediately preceding quarter.

Total company sales in Q4, '05 were 133.8 million, up 0.4% from the same quarter a year ago and up 6.8% sequentially. The Electro-Optics sales by significant market applications for the fourth quarter are as follows. Scientific and government programs, 24.0, microelectronics, 27.6, material processing, 16.5, OEM components and instrumentation, 23.9, graphic arts and display, 8.8, for a total of 100.8 million. Lambda Physik sales by significant market application for the fourth quarter are as follows. Industrial, 16.7, scientific and medical, 12.0, lithography, 4.2, for a total of 32.9 million.

As we mentioned last quarter we recorded EE laser sales as part of the Lambda business segment while the Bavaria photonics solid state laser business is part of our Electro-Optics business segment. To further simplify our reporting structure, effective Q1, '06 we will consolidate the entire Lambda Physik bookings and revenues under the five markets of Electro-Optics. Fourth quarter gross profit was 51 million or 38.1% of sales. On a pro forma basis, excluding the 6.8 million Lambda lithography charge, gross profit would have been 57.8 million or 43.2% which is below the low end of the guidance range of 44 to 45%. This quarter Lambda represented approximately 25% of the total Company's revenue compared to 19% in Q3, '05 impacting the overall gross profit negatively by approximately 0.4 percentage points. Electro-Optics gross profit percentage of 46.1% represents a decrease of approximately 3 points compared to last quarter and this drop was primarily the result of a negative product mix and higher than usual product rework cost.

Although the Electro-Optics margin for the quarter is lower than we projected, we are maintaining our guidance and commitment to improve the Electra-Optics gross profit by the end of fiscal '06 by 2 to 4 percentage points from our Q4, '04 reported levels. Fiscal year 2005 gross profit was 46.9% compared to 44.2% the prior year. Lambda's fourth quarter gross profit of 13.5% was negatively impacted by the 6.8 million inventory charge as we accelerated moving out of the lithography service space. Excluding this charge, Lambda's gross profit would have been 34.1%, an increase of 5.5 points compared to last quarter. This increase is primarily the result of a higher contribution from EE medical business. Fiscal year 2005 gross profit excluding the litho charge was 32.5% compared to 30.9% in the prior year.

Operating expenses for the quarter excluding intangible amortization were 45.1 million or 33.7% of sales which is at the low end of the guidance range of 33.5 to 35% of sales. R&D spending for the quarter was 11.4% of sales which is within our guidance range. For the year, R&D spending represented 11.1% of sales compared to 12.7 in fiscal 2004. The lower R&D is primarily the result of our seasoned future investments in the semiconductor lithography market at Lambda. SG&A spending for the quarter excluding amortization of intangibles was 22.3% of sales, slightly below the low end of our guidance range. Our ending cash balance for the quarter including restricted cash was 247.6 million representing an increase of 21.3 million compared to last quarter.

During the quarter we generated approximately 20 million cash flow from operations resulting in year-to-date cash flow from operations of almost 94 million. We collected approximately 4 million from the sale of our Extreme share and capital spending for the quarter was 5.5 million, or 4.1% of sales. For the full fiscal year CapEx was 3.4% of sales. The fourth quarter accounts receivable day sales outstanding remains at 59 days, a solid performance given the high international mix of our revenues. Electro-Optics improved by 1 day to 59 days at the end of the fourth quarter, while Lambda Physik increased to 60 days as revenues during Q4 were not as linear compared to Q3, '05. It should be no surprise that inventory days for the Company improved by 13 days to 69 at the end of the fourth quarter. However, even after excluding the impact of Lambda's 6.8 million lithography charge we saw an improvement of 8 days compared to last quarter and this reduction was entirely the result of Lambda's efforts to improve its inventory turns.

Let me now move on to the guidance for Q1, '06. The guidance includes some costs and benefits related to the final steps we're taking to complete Lambda's integration into Coherent. During Q1, '06, we are concluding the integration of Lambda's [INAUDIBLE] operations into Coherent leading Pro facilities charge of approximately 1 million. The integration of Lambda's Japanese operation into Coherent will lead to a one time tax benefit of approximately 3 million. In addition, we commenced the outsourcing of the final piece of our electronics product manufacturing leading to a Q1 charge of approximately 0.4 million.

Q1, '06 will also be the first quarter we are required to record stock compensation expenses. The impact of the stock option expensing will be reported inside the individual income statement line items and we will separately make note of these expenses in the footnotes to our GAAP financial statements. With respect to Q1, '06 guidance, we are forecasting a reduction in GAAP EPS of approximately 0.07 to $0.08 per diluted share.

The following is a summary of the guidance by major line item of the income statement. Due to the many holidays, Q1 is typically a short quarter for us, so we are estimating first quarter revenues to be flat to slightly up from Q4, '05. We expect gross profit to be in the range of 44.5 to 45.5% of sales. Some of the gross profit increase is the result of including a one time license to incoming revenues. The impact of stock compensation in this line is minor, it's 0.2%. R&D spending is expected to be in the range of 12.5 to 13% of sales. Excluding stock compensation it would have been 12 to 12.5% of sales. SG&A expenses excluding intangible amortization are anticipated to be in the range of 23 to 24% of sales, excluding stock compensation, it would have been 21 to 22% of sales. Intangible amortization will be similar to Q4 run rate.

Other income is estimated at about 1% of sales and the effective annual tax rate is expected to be about 33%. The higher rate reflects the expiration of the Federal R&D tax credit effective December 31, 2005, as well as the impact of the stock compensation. If the R&D credit is reinstated we will revise the tax rate down at the time. In addition, as mentioned earlier, we have approximately $0.10 per diluted share tax benefit from the Lambda Japan merger into Coherent Japan. Capital spending for fiscal 2006 is projected to be approximately 5% of sales.

In summary, we think we're very well positioned at the start of the new fiscal year. The issues related to Lambda's lithography business appear to be behind us now and the strong order rates at both business segments should yield payback in the upcoming year. We strive to continue improving our operating results and are starting the new year strong. I will now turn over the call to John Ambroseo, our President and CEO.

Thanks, Helene. Good afternoon everyone, and let me add my welcome to our Q4 conference call. As Helene has already mentioned, we were able to deliver on revenue and profit guidance for the fourth quarter. The big story for Coherent is new orders. We reached an all-time quarterly high of $164 million bringing our year-to-date total to $545.1 million. We experienced order growth across several markets and technologies which is consistent with our diversified portfolio strategy. Even more encouraging were the big wins from existing and newly released products providing validation for our investment strategy. We also took the opportunity to increase our technology pool by acquiring the intellectual property and physical assets of former telecom equipment provider Iolon. Lastly, we launched plans to further streamline our supply chain and to bring closure to our lithography service business.

I'll now turn to market updates for the Electro-Optics segment. The book to bill for the EO segment was a whopping 1.28. Orders for the EO segment increased 27.3 sequentially and 18.4% from the prior year period. We benefited from several annual buys which are unlikely to repeat before the June to September time frame. Bookings in our scientific and government programs business were up 4.3% sequentially and decreased 21.1% versus the prior year period. We achieved record orders for our Chameleon product line fueled in part by the release of the Chameleon Ultra early in the fourth quarter. The Ultra is the highest performing laser for power and wavelength tunability in its class. These performance characteristics are critically important for applications like biological imagining as they influence the touching resolution and sensitivity. Geographically, European market exhibited seasonal softness, demand in the U.S. market was robust, posting a large sequential increase, and Asia was also strong, particularly among the Pacific Rim countries.

We received record orders in microelectronics. Bookings increased 21.5% sequentially and 25% compared to Q4, '04. On the advanced packaging end, we experienced strong demand for ultraviolet lasers used in direct imaging of printed circuit boards. Orders for lasers used in silicon drilling for the semiconductor back end and glass cutting for flat panel displays were also up. Despite an increase in R&D activity within the customer base, the silicon singulation market is moving much slower than we had anticipated. The mechanical techniques used at larger nodes seem to be adequate down to 65-nanometers. We will revisit this application as the node size shrinks further. Orders for lasers used in photo-EMF applications, wafer inspection, and metrology were down following a strong Q3. We believe this is a timing issue since the demand for R&D tools remain strong.

During last quarter's conference call, I mentioned that several different techniques could vie for a piece of the TFT Annealing market. Our Excimer lasers remain the industry standard but could soon be joined by our high power solid state green lasers. The interest in green has increased due to the depth of penetration, that is more of the bulk or morphous material, is converted to the performance enhancing crystalline structure. The smaller footprint and reduced power consumption of solid state lasers as well as the potential for much longer operating lifetimes. The use of green light also relaxes demands on optical components such as mirrors and lenses when compared to ultra-violet light. All of these lead to reduced manufacturing costs for panel producers. 2

In the OEM and component and instrumentation sector orders increased 7.1% sequentially and declined 11.6% versus the same prior year period. Bookings for sapphire and compass lasers used in full cytometry were the top contributors in Q4. This market is becoming increasingly crowded as other vendors are introducing or reintroducing their own platforms. While we are mindful of the competition, we continue to build our installed base and execute against our plans to deliver higher performance and reduce cost. The OEM components business is flat as customers burn through inventory.

Material processing orders were down 4.4% sequentially following a very strong Q3, but grew 40.7% from the current prior year period. We were delighted by these results since the September quarter has been seasonally soft in the materials processing space. Carbon dioxide lasers used in marking, engraving, and cutting, again led customer -- led bookings, pardon me. Customers in the United States and Europe were the main contributors. The Chinese market has cooled slightly as demand for foreign-made goods peaked during the summer putting pressure on domestic suppliers and causing China's trade surplus to shrink significantly in September.

Orders in the graphic arts and display market increased 400.7% sequentially and 353.4% versus the prior year period. The significant upswing was due in large part to an annual purchase of a newly released product platform. The new device architecture is a multiple element semiconductor laser which facilitates rapid exposure of high volume printing plates. We view this platform as transformational and envision future versions playing a role in other markets including microelectronics, instrumentation, and materials processing. On the operations front, Coherent recently announced plans to outsource the remaining assemblies from its internal electronic products manufacturing to contract manufacturers. The transition will be complete by June, 2006. Upon completion, we expect the project will yield savings of 2.2 million per year with upfront costs in the range of 700,000.

Let me turn to Lambda Physik. For the fourth quarter, excellent bookings increased almost 60% sequentially and 47% year-over-year. The book to bill ratio in our Excimer business was 1.07. Industrial orders were down 28.7% sequentially and 19.1% versus the same prior year period. The business came from a diverse set of applications including ink jet manufacturing, light industrial processes, and colored filter exposure which is the fabrication of LCD color filters for display. We did not receive new system orders for TFT lasers as our customer draws down on a previously placed order.

Nonetheless, we continue to push the process envelope with the introduction of the new LSX series. The first laser in the series, the LSX 315C provides substantial optical performance improvement over its predecessor in terms of pulse to pulse stability and timing. Additionally tube lifetime and serviceability have been improved. Taken together, the new LSX 315C will increase the process window and provide the lowest operating costs available for deployed or planned Excimer laser systems. In addition, each LSX laser is compatible with line beam annealing, sequential lateral solidification, or line scan lateral solidification allowing the customer to choose the specific process most attractive for their particular panel being processed at the time.

SONET bookings increased 433.5% sequentially and 260.2% versus the prior year period. Medical OEM orders reached an all-time high and led all segments within our Excimer business. Annual purchased contracts from several accounts and new technology platforms were the drivers. We also saw broad geographic participation. On the scientific side, we are beginning to reap the benefits of the sales force integration we launched earlier in 2005. Lithography bookings increased 25.9% sequentially and decreased 40.5% from the prior year period which reflects the timing for service contracts.

We have recently informed customers that we will no longer offer new service contracts on lithography lasers after December 31, 2005. Our decision is based on the economics of supporting a shrinking customer base. Switching service contracts to a time and materials cost basis will result in a significant increases in service costs for customers. This makes decommissioning a likely alternative. We would expect the bulk of the active installed base to be out of service during FY '07. Helene has already mentioned that this decision carries a 6.8 million pretax charge associated with excess inventory.

Today, Coherent announced the acquisition of the assets of Iolon Incorporated. Iolon, which was founded in 2000, developed tunable lasers and filters for the telecom market, was fueled by approximately $85 million in investment. They developed proprietary MEMS, or micro electro-mechanical systems, and automated assembly and text techniques. This enabled MEMS to deliver teleportic qualified products for network deployment. While the products met all the technical requirements, the market failed to develop as they had anticipated. Their volumes were not high enough to reduce costs, and the costs were not low enough to drive their volume.

We attend to apply the acquired intellectual property and technology in our core product portfolio. In particular, we believe that we can drive the next revolution in solid state lasers by combining MEMS and automated assembly with our optically pumped semiconductor platform to create a broad range of power and wavelength coverage. If successful, Coherent would be able to leverage these new devices in all five of our existing markets while enabling new applications particularly in medical therapeutics, display, and instrumentation.

Clearly we are starting fiscal 2006 in good shape. We have a healthy backlog, a good product pipeline, an improving margin model, and a solid balance sheet. We intend to use these assets to drive greater value for our customers and our shareholders. We have been invited by NASDAQ to participate in the market opening ceremony, this coming Monday, November 7, to kick off Coherent's 40th anniversary celebration. We're going to take the opportunity to showcase a prototype of a new OPS based device called Tracer. In case you miss it, we will be releasing more information about Tracer in the coming months. We have also confirmed our participation at the medium growth conference scheduled for January 10, and 13, in New York. I'll now turn the call over so we can begin the question and answer session.

[OPERATOR INSTRUCTIONS] Our first question comes from John Harmon.

Good afternoon, congratulations on your strong orders and backlog.

Thank you.

So several questions. Are you expecting any meaningful revenues from the Iolon asset purchase or do you start with zero since you're repositioning the product?

We're not making the acquisition, John, to enter the telecom space. There are some products that come with it and maybe some niche opportunities for those. We're really acquiring those assets because we want to apply them to our core markets.

Okay. Thank you. If you could just talk about order and revenue patterns. I believe you said in your last call you had some products that you didn't get out the door in time. Which suggests that you entered the quarter with some pent up demand but it looks like really the -- as you said, the exciting part of the quarter was in orders. Is this just a seasonal order pickup or is it more of an annual pickup related to new product?

Well, I think, what I hope to -- excuse me. My kids gave me a horrible cold. What we've seen is a combination of annual orders for existing products as well as orders coming if for some newly released products and for some new applications that we've been working with customers on for some time. So it's really a combination of those factors. I can't tell you that it's one versus the other or one dwarfed the other, because they didn't. It was a pickup in the existing markets and it was a turn-on of some stuff we've been hoping for.

Okay. Thank you. It sounds like you're letting out that the lithography portion of the Lambda Physik business potentially goes to zero in '07, are you going to still sell spare parts for some time. Is that a correct assessment and who would perform the performance. Are there other vendors out there that could perform the service function?

Well, certainly I guess we could have third party players provide service, but quite frankly the switch to a time and materials cost basis, whether it's us or someone else drives up the cost of keeping those lasers running for the customers. And I think as you're probably well aware and hopefully everybody else that's listening is aware most of our installed base is 248, these are older systems, larger node sizes, et cetera. It's probably the most cost prohibitive part of the business. So escalation and service costs will drive those customers to retire those lasers. We believe that the active base will be long gone and we'll support those customers through the deinstalllation. The service assets that we have are capable of taking care of the litho lasers as well as the non litho lasers in the portfolio.

Okay. Thanks. Just finally, quickly about your segmentation, changing your segments next year. Is it as simple as adding lithography into microelectronics, putting industrial into materials processing and scientific medical into -- at an OEM or will you provide us with revised historical segment numbers?

We will give you revised numbers, but it's not complicated. So there's a few exceptions, but mostly it lines up the way you just mentioned.

Okay. Thank you very much.

Thank you. [OPERATOR INSTRUCTIONS] Our next question comes from Mark Miller with Hoefer & Arnett.

Add my congratulations for a strong quarter in orders. I just wanted to clarify, in terms of you're now expensing stock options and that's going to come to $0.07 or $0.08 for the entire year. Did I hear that right?

For the quarter.

$0.07 or $0.08 per quarter?

Yes.

Wow. A question I didn't hear anything about the stock buyback. I'm just wondering your thoughts on that. Give us a little more color where you're at on that.

Well, we've announced it. The rules around these things is that we can't start buying stock back until the window opens, which is 48 hours from now. And we'll have a buyback plan in place that will have certain conditions under which it will be exercised. It's a pretty standard package.

Okay. Thank you.

[OPERATOR INSTRUCTIONS] And Mr. Ambroseo, there appear to be in further questions. I'll turn the call back over to you for any additional or closing remarks.

I'd like to thank everyone for their participation and we look forward to talk to you in a few. Thanks.

That concludes today's conference call. We'd like to thank you all for your participation.