Coherent Corp (COHR) 2007 Q2 法說會逐字稿

Ladies and gentlemen, thank you for standing by. Welcome to the Coherent second fiscal quarter's 2007 earnings results conference call. Now, for opening remarks and introduction, I would like to turn the call over to the Chief Financial Officer of Coherent, Ms. Helene Simonet. Please go ahead, ma'am.

First, the special committee of our Board of Directors has not yet concluded its independent review of the company's historical stock option practices and related accounting. At this time, Coherent has not determined if it needs to record any non-cash adjustments related to prior stock option grants or to restate any of its previously filed financial statements. The company will provide only select financial information until the special committee completes its review. On today's call, I will provide select financial information and then John Ambroseo, our President and CEO, will provide a business overview. We will also limit our forward-looking financial guidance for the current quarter to select financial information.

Please remember, any guidance and any statements in today's conference call pertaining to future plans, events or performance are forward-looking statements that involve risks and uncertainties and actual results may differ significantly. Factors that could cause the actual results to differ significantly include risks and uncertainties, including risks associated with general market and business conditions, currency adjustments, contract cancellations, manufacturing risks, competitive factors and uncertainties pertaining to customer orders, demand for products and services, development of markets for the company's products and services, successfully integrating our recent Nuvonyx acquisition, the final conclusions of the special committee and the timing of such conclusions and other risks as identified in the company's SEC filings.

Listeners are encouraged to refer to the risk disclosures described in the company's registration statements on Form S-3, as amended and filed with the SEC on October 4, 2006, and the reports on forms 10-K, 10-Q and 8-K, as applicable. Let me also remind you that the full text of today's prepared remarks, which will include references to historical bookings and sales by markets, will be made available through the Coherent investor relations website. A replay of the web cast will be made available for 90 days following the call.

Our overall book to bill for the quarter was one. And our backlog at the end of Q2 '07 remained strong at 189.3 million. This compares to a backlog of 189.8 million at the end of Q1 '07 and 195 million a year ago. John will provide the market application updates, but in summary, the second quarter order intake was strong. Bookings of 151.9 million improved by 3.8% over the corresponding prior year period and increased 11.5% sequentially. Total company sales for the second quarter were $152.1 million, up 4.2% from the same quarter a year ago and up 3.1% sequentially.

From the market application point of view, the largest area of growth, both sequentially and year-over-year, was in the materials processing market. On a geographic basis, strength was seen mainly in Asia. The Asian region represented approximately 36 of the company's second quarter revenues. The company sales by significant market applications for the second quarter are as follows: scientific and government programs 30.6; micro-electronics, 53.8; material processing 25.2; OEM components and instrumentation 36.8; graphic arts and display, 5.7 -- for a total of $152.1 million.

Our ending cash balance for the quarter was $527 million, representing an increase of $5.1 million compared to last quarter. Cash flow from operations was approximately $11 million. Receivable day sales outstanding increased from 58 days at the end of Q1 '07 to 63 days at the end of Q2 '07. The increase in days reflects the exceptionally strong performance last quarter, more back end loaded shipments in some of the regions and higher growth in Asia. Capital spending for the quarter amounted to $7.5 million, or 4.9% of sales and year-to-date capital spending was $12.5 million or 4.2% of sales. The year-on-year cash balance increased $97.8 million and our long-term debt balance at the end of the second quarter was $201.1 million, which is similar to the balance at the end of the first quarter.

Guidance for the third quarter will be limited to sales and capital expenditures. We expect our third quarter sales to be approximately in the range of $153.5 to $157 million. And this includes about two months of revenue from Nuvonyx, our most recent acquisition. Capital spending for the full fiscal 2007 is projected to be approximately 4 to 5% of sales. 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 Q2 conference call. Orders in the second fiscal quarter totaled 151.9 million, representing increases of 11.5% from the prior quarter and 3.8% versus the prior year period. The book to bill was one.

Orders of 22.4 million in the scientific market decreased 26.6% sequentially and 19.1% versus the prior year period. The large sequential decrease followed an exceptionally strong Q1. Several other factors impacted Q2 scientific bookings, including the pushout of certain orders due to funding delays, as well as a mix shift in certain pump lasers. On a geographic basis, North America and Europe were lower, following impressive performances in the preceding quarter. The Pacific Rim was essentially flat with Q1.

Bookings of $42.1 million for microelectronics were down 11.1% sequentially, and 34.3% versus the near record prior year period. Orders for semi-cap applications were up nicely compared to Q1. In particular, bookings for lasers used in inspection were solid. Especially for 45 nanometer known applications. The advanced packaging market continues to display weakness as the via drilling market remains depressed, as ample capacity is currently deployed. The laser direct imaging market is benefiting from higher throughputs afforded by the new tool and laser enhancements. In particular, our 8-watt paladin is helping expand tool throughput by enabling higher processing speeds.

The flat panel display space was a mixed bag in Q2. Orders were sluggish, as customer ramp-ups were slower than expected. Some of this may be associated with customers bringing new manufacturing processes online that have not been completely debugged. On the positive side, there have been a number of OLE technology and product announcements recently from major consumer electronic players. Our LSX series is used for kneeling in many of them.

Orders of 53.8 million for instrumentation in OEM components were up 61.8% sequentially and 68.8% versus the prior year period. Bioinstrumentation orders were very strong. Flow psychometry led the way, with bookings for OPS, DPSS and laser diode module products from established and emerging accounts. We also received initial orders for integrated sub-systems which provide higher value to our customers. Several other applications also contributed to the strong instrumentation bookings, including confocal microscopy, DNA sequencing and medical imaging. In all cases, our Sapphire and Compass products with the desired solutions.

Bookings from medical OEMs rebounded significantly during Q2. There were several drivers. The refractive surgery market recovered, as the Chinese market overcame regulatory changes in the procurement cycle. We converted another account from an internal provider to the Exostar platform. Finally, we are experiencing a resurgence in CO2-based skin resurfacing, as the marketplace [discovers] the efficacy, that is fewer treatments and faster recovery time, versus fiber laser based treatments. It is also noteworthy to report, that we have received our first volume order for OPS lasers for ophthalmology.

Bookings of 3.8 million for graphic arts and display were down 19.2% sequentially and 30% versus the prior year period. The graphic arts business has nearly completed its transition to low-cost diode laser solutions, an area in which we do not participate. The display space has offered another example of markets that refuse to go quietly into the night. We have received initial orders for our high-power OPS lasers for use in light show applications. Combined with today's projection techniques, including DLP, the modern light show is a distant cousin to the stick figure projections popular during the days of disco.

Material processing orders of 29.7 million increased 46% sequentially and 72.9% from the prior year period. As has been the case in recent quarters, Asia is leading the way on new orders. We experienced strong demand from several applications and multiple product lines. Our G and Gem Series CO2 lasers and our Prisma and Matrix solid state lasers did well in the marking market. We are particularly pleased with early feedback on the Matrix, since the primary competition is from fiber lasers. Gem products also did well in the engraving space, due to a key competitive win. In the K Series, CO2 lasers posted good numbers in the converting market, where higher powers support throughput. And last but not least, the textile market contributed solid orders, as customers build up capacity to support year-end demand.

Earlier this week, we announced the acquisition of St. Louis-based Nuvonyx, which has expertise in the stacking and cooling of laser diodes, also known as arrays. The Nuvonyx team has demonstrated the highest power arrays commercially available, with powers in excess of 50 kilowatts. They have also delivered industrial laser systems for hardening and cladding of metals. These industrial systems include both direct beam and fiber integrated, fiber delivered versions up to two kilowatts.

The main motivation behind the transaction, was the opportunity to address the developing market for material processing with direct diodes. This technology represents the simplest, most efficient and most cost-effective solution. This is possible, since these applications are not as dependent on the characteristic, which we refer to as the mode structure of the laser beam. Put another way, traditional solid state lasers or fiber lasers produce highly focusable beams that are overkill in such applications as heat treating of metals, welding of plastics and braising of metals.

As a fully vertically integrated supplier, we clearly expect that direct diode solutions could have a substantial cost savings over traditional lasers and fiber lasers in these applications. This is a very important consideration for markets that are influenced by total cost of ownership. Moreover, there are customer trials underway to expand their field of use to metal welding and, given our capabilities in laser diode development, we hope to extend the serviceable arena to include this large market.

We expect the Nuvonyx portfolio to contribute revenues of $13 to $16 million in our fiscal 2008. We paid $14 million cash for the company and expect it to be accretive in fiscal 2008. In closing, we are pleased by the bookings performance in Q2, as we continue to grow our customer base. The second quarter also highlights the benefits of our diversity, as other markets have provided opportunities during a sluggish period for microelectronics. During this quarter, we will participate in two major trade shows -- CLEO in Baltimore and Laser '07 in Munich. We plan to release several new products for the scientific and commercial markets. Information about these shows is available on our website.

Finally, once we are current with our securities filings, we plan to outline the next steps in our gross margin and EBITDA expansion. I'll now turn the call back over to Erica to begin the Q-and-A session.

Thank you, sir. (OPERATOR INSTRUCTIONS) And we'll pause for just a moment. First we'll hear from Mark Miller.

Congratulations on what we're hearing so far on -- for the quarter. John, the big question out there on everybody's minds, and we have seen the semiconductor index inching up over the last couple of weeks -- are you seeing anything forward from your microelectronics customers, where we might be at the bottom of the cycle here and start coming up?

Good question, Mark. And if you replay the comments that I made, our semicap business is actually doing okay. We've seen continued orders in that space. And as I mentioned for this last quarter, the inspection space in particular was quite good for those applications. Within our microelectronics portfolio, the sluggishness right now is really in the packaging area or the via drilling market.

Just another question. We've talked about this before. Fiber lasers. Do you think they're going to be able to effectively penetrate the visible area using frequency conversion techniques?

There's a lot of chat -- chatter about that in the marketplace. And certainly there are strong proponents of it. We have not seen it, we have not seen it as of yet. I would point out that, if you look at the benefits in terms of cost, because that's really what it comes down to, I'm not sure that a fiber laser that has been frequency doubled, even if it's using a second fiber to do that, really offers cost advantages over OPS technology, as an example. So from the standpoint of performance, I don't believe that it's a -- it's going to offer anything superior to what we see in the marketplace today and we'll actually have some time to catch up to where the marketplace is today.

Thank you.

Next we'll hear from Jeffrey Lin with Global Crown Capital.

Thank you for taking my call. I just have a few questions about the Nuvonyx acquisition. So, it seems like here, you guys are entering a market where there's not too much overlapping customer base. You've got new competitors and new customers and my question is, what's your justification for entering this market? Is it part of a larger scope plan to get into high power industrial processing?

As we've said in, in -- a number of times in the past, today the materials processing market is the largest market for lasers outside of the consumer electronics space. And it's a market, materials processing, which we participate in not in a significant way on a revenue basis for Coherent today. And we have highlighted, in the past, that this is an area where we want to expand our position. The materials processing market is different than, say, the microelectronics market, where you're constantly pushing the performance envelope to be able to enable smaller and smaller features.

By contrast, the materials processing market is all about cost of ownership, reliability, et cetera. And as you try to address various applications in that space, you need to keep that squarely in your sights. The Nuvonyx deal, we believe, has the potential to do that, because in terms of laser-based solutions, it doesn't get much simpler than an integrated direct diode package. That's really it in a nutshell.

Okay. So would it be correct to say that you see this opportunity of direct diodes as potentially disruptive technology, as a vehicle for you to get into this market instead of trying to get into, say, solid state lasers, competing against the entrenched guys.

Well, I want to just separate for a moment. We are in solid state lasers. But, we're not in --

I mean high powered.

But not in high powered. Right.

Right.

We see this as another way to address the market need. You know, in the high power solid state stuff, yes there are a lot of players, and it's being -- it's being addressed today. But for many applications, you need photons of okay quality or sufficient quality. You don't need the high quality photons that come out of a discrete element, in other words a YAG laser, or a fiber laser. They're overkill for applications like the ones we've mentioned. If you look at metal welding, which is one of the holy grails, having a discrete element laser or a fiber laser in that application doesn't really give you a huge benefit. It drives, if anything else, cost. So we're really trying to align the capabilities with the requirements of the market and that's what we believe this represents.

Okay. Thank you.

Again, everyone, (Operator instructions) And next we'll hear from John Harmon with Needham & Company.

Hi. Good afternoon.

Hi, John.

A couple of questions about Nuvonyx. First of all, do they make the diodes they use in their lasers? Or do they purchase them?

They -- today they purchase them.

And would the logical roadmap to be to get them to integrate your diode (inaudible) into their lasers?

I would say that's a pretty good assumption.

And that I think it was a 46-kilowatt figure you used. Is that for a laser system or a laser bar?

That's an array, so that's a series of bars that have been packaged together.

So not the output of a laser system then? Okay. I was curious --

They delivered 50 kilowatts out of the package.

Okay. Thank you. I was curious of the status of an acquisition you made awhile back -- [Iolans] -- you were going to use the technology on your own diodes. Have you gotten to the point where you can use it yet or you qualified it?

I think -- I guess I'm a little bit, a little bit off base here, John. When we announced the Iolan acquisition, we didn't talk about using it for diodes. We actually talked about using it for the OPS platform. That was our goal. And yes, in fact, we are building the high power OPS lasers using the technologies that were acquired there.

Right, I thought it was packaging technology. And conceivably, it's more efficient than doing it by hand or --

It is telecom quality packaging capability, which they were using to build swept-tune transceivers and swept-tune filters. The architectures in those devices is not significantly different than the architecture that we use in our high power OPS products. So, that's what we're using it for. I guess you could say, in a way, it is packaging diodes, because diodes are incorporated into those devices. But the specific goal of Iolan was to, to drive the automation or semiautomation of OPS manufacturing.

Okay. Thank you. I was curious, I think you had kind of a similar phenomenon during the last slowdown in the semiconductor equipment sector, but last quarter you saw a pretty sharp decline in microelectronics orders. Yet, the sales development quarter over quarter didn't drop off quite that sharply. Any way to explain that or understand that?

As we've mentioned, I hope at least a few times in the past, many of our customers place longer term orders with us. So when we get an order, it's typically not for 30-day delivery. It's typically covering months or sometimes up to a year. So the deliveries that you are seeing in microelectronics are orders that were placed in the past. And we're fulfilling those orders.

I see. Got it. And finally, you hinted at the idea you might be out from underneath the stock option investigation in talking about your productivity improvement plans. Any milestones you can talk about in that process? Or is that indication that you're close to wrapping it up? And I'm sure you haven't been standing still. I'm sure you have been working on productivity in the meantime anyway. Can you talk about what you've been doing? Or are you saving it all up until that time?

John, I hope that you understand. No one wants to get out from under this process more than we do. But the guidance that we're operating under is, we can't talk about gross margin today, in the future, et cetera, until this process is complete. So you'll have to stay tuned. I highlighted the fact that we're looking forward to communicating our forward going plans once we're current on our filings.

Okay. Thank you very much.

Next we'll hear from Sid Parakh with Mcadams Wright.

Hey, good afternoon. Just a few questions. Could you -- and I joined the call late, so excuse me for that. Just sort of trying to understand whether the growth in orders that we saw in the materials processing business and the instrumentations, I mean, is that -- is there something like sort of a one-time event there? Or is it just a regular flow? Specifically, I mean, I'm trying to understand how should we look at these orders going forward.

So within the materials processing space, while a lot of the seasonality has come out of that market, it's not unusual for us to build orders or see order momentum during the first -- the first half of the year. It used to be that we peaked nominally in the June quarter and then we saw a rollover heading into the end of the year as capacities were being put in place. And you know, it was seasonal effects, let's say. Especially for year-end productions for shopping seasons. We've seen less of that seasonality over the past few years as the adoption rate of photonics has increased.

If you look specifically where the gains have been made in micro -- in materials processing, they are the markets that have been strong for the past year or two. It's the marking and engraving market, it's the converting market. We are seeing a lot of activity, as customers become more adept at pulling gains out of these various laser-based processes onto the shop floor.

Within the instrumentation space, the bioinstrumentation space has been quite strong for an extended period of time. I would say that the big difference this past quarter is that the medical OEM business was better than it has been, particularly as China has recovered. And we've seen some orders come in within the -- the aesthetic space that we hadn't seen before and we believe some of those will represent longer term orders.

But should we sort of expect similar growth rates over the next few quarters? Or do you expect those to moderate?

I'm trying to answer the question as delicately as I can. Because we don't give forward going bookings guidance.

That's fair. Also can you give us an update on maybe where the appeals process is for the XLTC acquisition?

So the appeals process is on the FCO decision. As I mentioned during the last call, we were in the process of filing an appeal. That has been filed. And a hearing date has been set for some time in September. And the exact date escapes me at this point in time.

And also, I know there were some questions around fiber lasers earlier in the call. But I'm trying -- can you maybe just summarize what Coherent's standards are on fiber laser technology and maybe your strategy in that area?

So I can -- I'll answer the first part of the question. I don't think I'm going to answer the second part of the question for you. You know, we view fiber laser technology as an important technology in today's marketplace. It's clearly demonstrated its efficiency and reliability and those are two very important characteristics for the materials processing space. We have fiber programs going on internally, nothing that we have announced today. And we will continue to closely monitor the space. And as we make either product announcements or other announcements, our strategy will become clearer.

Okay. Thank you.

Sure.

On to [Joe Terrell] with Terrell & Co.

John answered my first question with the comment about top lasers and what your policy is and maybe what you think the competition is. (technical difficulty) what you think the competition may be in the future on the fiber lasers.

Today we -- we sell very few CW infrared lasers of the type of products we've historically made. And to separate them from fiber lasers, I'll refer to those as discrete element lasers. And these are traditionally YAG lasers, [yealth] lasers, whatever it may be. A fiber laser is an outstanding mechanism or method, let's say, to take the output of a diode or diodes, which basically comes out like a flashlight beam and, by using those to pump a fiber laser, you can end up with a very clean point source. So it is essentially a mode converter. I don't want to oversimplify it, but that is one of the ways to look at it. For many applications, that is important. Today, for our markets, we have seen relatively limited competition from fiber lasers, even in the materials processing space, again because of the types of products that we've historically shipped.

A fiber laser, for many of the materials processing applications, can't replace a CO2 laser or it doesn't replace a CO2 laser directly, because of the response of certain materials to CO2 light which is around ten microns, versus the response to fiber laser light, which is nominally around one micron, is very different. So, the crossover in the marketplace, for us, thus far, has been pretty limited.

When you go into other applications like cutting metals, et cetera, perhaps there is more overlap. And I would refer you to people who are in that space rather than talking about it myself, because we don't have direct experience in high power metal cutting today. From the standpoint of where it's headed -- well again, one of the earlier questions was around fiber lasers and where did we think they were going to go. There are people out there who believe that fiber lasers are going to take over the world.

I can tell you that building some of the products of that are used in the marketplace, using - today, using fiber lasers on products that are projected from the marketplace going forward is nontrivial. And some of the cost benefits, as you have to add other components to diversify the performance of fiber lasers, destroy their inherent cost benefit that they enjoy in the CW regime as an example.

So our view, is that fiber lasers are an important component in the market. There are certain applications where they bring benefit and will continue to bring benefit. But they are one arrow in the quiver, let's say. They are not the only arrow in the quiver.

In your press release for the acquisition, I read it that you wanted the technology to be able to compete against fiber lasers. It sounds like from today's call you actually want to enter a market right now that you are not even in, where you don't have competition.

Enter a market that -- where we aren't present today or we've entered a market where we weren't present two days ago. And there is competition in that market from other laser sources, as well as non-laser sources. Our belief --

I maybe misspoke with that. You're not defending existing territory. (Audio difficulty) expand and take maybe some of the market that fiber lasers have right now and you're going to try to take some of that away from them.

I would put it differently. I think fiber lasers are finding it difficult to compete in the applications that direct diodes are addressing today. Because even as efficient as fiber lasers are, they actually produce output or beams that are of such high quality that they represent dramatic overkill for these applications. And therefore introduce costs that the market is unwilling to bear. You have to have a solution that is appropriately targeted at the market.

So if you again go back to the metal welding market, it's a holy grail if you can get the price point right and the cost of ownership right. Today, fiber lasers or discrete element lasers, which both produce very high quality laser beam output, have a cost basis that makes it difficult to really engage those markets. And our expectation and our hope is that a direct diode solution will be much more appropriately targeted for that type of application.

I'll get off. One more question and I'll get off the fiber lasers and quit beating that horse. I missed the very first part of the call. Did you give some indication that you're optimistic that the option audit is near an end? Or did you make no comment about that?

We've made -- the only comment we made is that we're still in it and we have nothing to report.

Okay. Do you have any ability, John, to put some pressure on them to wind it up? Or are you strictly at their mercy for them to take as long as they want?

I can't comment on that.

Okay. Thank you.

Sure.

Again, everyone (OPERATOR INSTRUCTIONS) We'll take a follow-up from Jeffrey Lin of Global Crown.

Thank you. My call -- my question got answered, though.

We'll move on then, to Rama Rao of RR Capital Management.

Thank you, guys for taking the call. Hi, John. How are you?

Rama, good how are you.

Very good, John. John, I will ask you a bigger picture question. How do you characterize the global economy in deference to your future growth prospect?

How do I characterize the global economy with respect to our future growth prospects?

Does it impact you, this economy fluctuation of -- they're expecting U.S. economy to be down? Does it anywhere impact your --

Well, you know, it is a good question, Rama. If you start to look at the macroeconomic picture, I can tell you we've had it -- we've had it skewed for awhile. We've had -- we had concerns a few years back that very high crude oil prices and the impact that they would have on energy prices would depress the materials processing market and that's turned out not to be true at all. In fact, if you look at the materials processing market for lasers it's been going pretty well for a number of years.

From the standpoint of where the action is for us today, going back to Helene's earlier comments about where our revenue came from, more than 60%, if I remember correctly, more than 60% of our revenue comes from either Europe or Asia and, in particular, Asia was 36% of our revenue in the most recently completed quarter. So the vagaries of the U.S. economy are not having much of an impact there, because the infrastructure buildout is so steep.

So you anticipate your future goals to come more from Asia and Europe than U.S.?

Certainly, where a lot of the growth has been taking place over the last few years has been Asia. If you look at the mix, and we report this on a pretty regular basis, you know, revenue from the U.S. versus revenue from Europe and Asia. A few years ago I think we were probably 50/50 or maybe even 40/60 U.S. versus rest of the world and now we're 35% maybe U.S. and 65 -- or maybe even less than 35% U.S. and more than 65% rest of the world. We are seeing - and that's not to say that the U.S. economy has shrunk during that period. But the international economies, particularly the Asian economies, have grown at a much higher rate.

You think you are reaching a saturation point in the U.S., while the infrastructure build-up in the international world is getting aware to your sale for these products?

You know, the thing that never ceases to amaze me and I would say amaze us is, there are always new applications on the horizon. So as you see some applications reach saturation, there are several new applications to take its place.

I see. Good job, John. Good quarter. Thank you.

Thank you, Rama.

Bye.

And as a final reminder (OPERATOR INSTRUCTIONS). And it looks like we have no further questions, at this time. Mr. Ambroseo and Ms. Simonet, I'll turn things back over to you.

I'd like to thank everyone for participating today and we look forward to talking to you very soon.

Again everyone, we do thank you for your participation. That does conclude today's conference.