Coherent Corp (COHR) 2007 Q3 法說會逐字稿

Good day, everyone and welcome to the Coherent third quarter 2007 financial earnings result 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 third quarter fiscal 2007 conference call. On today's call I will provide select financial information and then John Ambroseo, our President and CEO will provide a business overview. As mentioned in our press release, the special committee concluded its investigation into our stock option practices and the company is now diligently working to determine the correct measurement dates and their impact on the financial statements. Until the analysis of the impact is completed, we will continue to limit our forward-looking guidance to select financial information.

As a reminder, 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. Please refer to our press release for more detailed information on specific risk factors resulting from both the special committees investigation and other financial and business risks. We also encourage you to refer to the risk disclosures described in the company's registration statements on form S-3 and the reports on forms 10-K, 10-Q and 8-K as applicable. These forward-looking statements are subject to the Safe Harbor provisions of the Private Securities Litigation Reform Act.

Let me also remind you that the today's full text of todays prepared remarks, which will include references to historical bookings and sales by market, will be made available through the Coherent investor relations web site. A replay of the webcast will be made available for 90 days following the call.

Our overall book-to-bill for the quarter was 0.97 and our backlog at the end of Q3 '07 was $184.6 million. This compares to a backlog of $189.3 million at the end of Q2 '07, and $199.1 million a year ago. John will provide the market application updates for bookings, but in summary, bookings of $138.6 million decreased by 9.4% over the corresponding prior year period, and decreased 8.7% sequentially. Total company sales for the third quarter were $142.6 million, down 4.6% from the same quarter a year ago, and down 6.3% sequentially. The acquisition of Nuvonyx on April 20, contributed approximately $1.1 million in sales during the their quarter. On a year-to-date basis, sales increased approximately 3.7%.

From a market perspective, we were most impacted from weak sales to the microelectronics customers, down 16.1% year-over-year, mainly as a result of prior weakness in (inaudible) combined with order and shipments pushouts in the flat panel display market. Following our strong bookings last quarter,both material processing and the OEM components and instrumentation markets, showed stellar performance. An increase of 27.6% and 16.7% respectively. The scientific market sales decreased 7.3% year-over-year which is primarily the result of a mix shift in certain [pump] lasers coupled with the impact of funding delays we saw last quarter. As previously communicated the graphic arts and display business had a tough comparison versus the prior year period, as a result of a previously announced decision not to further pursue the IAB business. And this decision resulted in approximately $5 million lower sales this quarter compared to Q3 '06. On a geographic basis is, Asia represented 32% of total sales compared to approximately 36% last quarter, which is in line with the slowdown we saw in the microelectronics market. Europe represented 28% of sales and the U.S. sales during the third quarter grew in both absolute dollars and as a percentage of sales, rising to approximately 33% of total company sales.

Let me now give you the sales by significant market applications for the third quarter in millions of dollars. Scientific and government programs, $25.9, microelectronics, $47.6, material processing, $25.3, OEM components and instrumentation, $40.1, graphic arts and display, $3.7, for a total of $142.6 million. Our ending cash balance for the quarter was $516.3 million, representing a decrease of $10.7 million, compared to last quarter, primarily as a result of the acquisition of Nuvonyx for approximately $14 million. Cash flow from operations was approximately $10 million and was negatively impacted by higher finished goods inventory levels as we experienced several customer push-outs this quarter.

Compared to last quarter, receivable day sales outstanding remain flat at 63 days. Capital spending for the quarter amounted to $5.2 million or 3.6% of sales, bringing the year-to-date capital spending to $17.7 million or 4% of sales. The year-on-year cash balance increased $52.8 million and our long-term debt balance at the end of the third quarter was $200.9 million which is similar to the balance at the end of the second quarter and our fiscal year end. The guidance for the fourth quarter of fiscal 2007 will be limited to sales and capital expenditures. We expect our fourth quarter sales to grow sequentially between 6% to 8%, and capital spending for the full fiscal 2007 is projected to remain approximately 45% of sales.

We look forward to outlining the impact of the stock investigation conclusions in the near future so that we can move on to discussing and disclosing our full financial statements. We thank you for your continued patience as we bring closure to this matter. I will now turn over the call to John Ambroseo, our President and CEO.

Thanks Helene. Good afternoon, everyone, and welcome to our Q3 conference call. Today we announced that the special committee concluded its investigation of historical stock option practices at Coherent. We have been asked repeatedly why the process was taking so long. The special committee had two main objectives: thoroughness and accuracy. This review covered a 10 year period and involved the review of over 1 million documents and over 30 interviews of past and present employees.

The sheer magnitude of this task is daunting. We got through it with perseverance and sweat equity. The attention now shifts to management, to complete the accounting and bring our files up to date. We intend to move with all deliberate speed to complete this as soon as humanly possible.

Lets turn our attention to the quarterly results. Orders in the second fiscal quarter totaled $138.6 million, which were down 8.7% from the prior quarter and 9.4% versus the prior year period. The book-to-bill was 0.97. Orders of $28.3 million in the scientific market increased 23.3% sequential and 0.5% versus the prior year period. Third quarter bookings rebounded due to improved funding conditions in the U.S. and Europe, as well as increases from emerging markets in South America and Asia, which have historically lagged behind the U.S., Europe and Japan. Two trends remain clear.

First, funding for life science research is outpacing all other basic research. This is not surprising given the aging populations in the western world and longer life expectancies globally. The scientific market also continues to be bifurcated between plug-and-play demand from the life sciences and high-end performance for the physical sciences research. The breadth and depth of our product portfolio allows us to address both groups.

Orders of $32.8 million for instrument at OEM components were down 39.1%, after a record setting Q2 and up 0.5% versus the prior year period. The second quarter had a very high level of volume and/or annual orders which we did not expect to be duplicated in the third quarter. While bioinstrumentation orders ebbed after an outstanding second quarter, overall conditions are still favorable. Low cytometry customers are consolidating their supply chains which offers opportunities to increase market share. The market potential of DNA sequencing and genomics is attracting new players for applications and in diagnostics and drug discovery.

Bookings for medical OEMs were also slower in Q3 following a break-neck pace in Q2. The news in this market is more consolidation, including the recent acquisition of German based light wave -- I'm sorry wave light by Al Con. We believe consolidation will lead to lower costs, provision correction systems, which translates into higher adoption. Ultimately this would benefit laser sales, including those provided by Coherent.

Bookings for microelectronics of $50.3 million, increased 19.4% sequentially but declined 22.8% versus the prior year period. While we are pleased with the sequential improvement, there was volatility in some of the submarkets. Third quarter semi-cap orders were similar to Q2, with service orders remaining strong. As in several other markets, customers are expressing a desire to aggregate suppliers. We believe we are in a good position to capitalize on this trend, given the strength and diversity of this product portfolio. He advanced packaging market, posted encouraging numbers for existing and emerging applications.

There are cautious signs of recovery and the microvia market, especially for high-powered UV lasers. Our new 14-watt AVIA, has demonstrated outstanding processing capabilities especially for ceramic substrates. Sustained recovery, will require current capacities for flip trip packages to be consumed which is projected to occur through the reminder of 2007 and into 2008. And for another surge in cell phone complexity.

The flat panel display business was the biggest disappointment in Q3. We experienced a number of pushouts that impacted sales as well as the delays of new order as the industry seems to struggle with margin and capital investment issues. Given the higher average selling prices of our products in this market -- FPD push-outs, constituted the majority of our sales and order shortfall in Q3. While the short term results were unfavorable, further progress was made on the AM/OLED front.

In conjunction with the leading customer our development team as improved yields for AM, OLED and Nieling, close to the level of LTPS. This was a significant achievement since yield is among the pacing items governing deployment. This open simulation market appears ready to take flight. We have received our first volume order for AVIA lasers for microSD singulation.. The shape of the microSD is not well suited to continuous cutting. A laser-based tool can easily trace the contour of the package. We expect power scaling of the laser to increase the market prospects.

Bookings of $4.7 million for graphic arts and display were up 25.3% sequentially and down 13.8% versus the prior year period. The majority of our graphic arts business came from direct diodes, computer to plate application, consistent with past quarters. On the display side our miniG OPS laser is gaining traction within the light-show market. This could become a reasonably sized opportunity, over the next few years.

Material processing orders of $22.4 million, decreased 24.4% sequentially on the heels of a record Q2 and increased 4.3% from the prior year period. The adoption of laser marking for product identification and textile markings maintained its velocity. This translated into increased demand for our CO2 products, which provide optimal material response. Much of this business came from Asia, although Europe showed solid results.

Our emphasis is to further improve the cost of ownership that is critical to increased adoption. We are also expanding our product portfolio with the Matrix UV laser, which has been specifically designed for high volume material processing applications, such as trimming and marking. The introduction of our highlight, direct diode system at Lasers 2007 in Munich was well received. The combination of processing power, compact footprint and low cost of ownership resonated well with customers.

I'm also pleased to announce that we received our first highlight order for use in an automotive application. The performance of the FPD market not with standing our core markets including the balance of microelectronics posted decent performance in Q3. We continue to believe that meaningful market opportunities exist and remain committed to developing higher value solutions for our customers. I will now turn the call back over to Paula to begin the Q&A.

Thank you. ( OPERATOR INSTRUCTIONS) And our first question will come from John Harmon with Needham & Company.

Hi, good afternoon.

Hi.

First of all, congratulations on finally completing your option investigation. I guess, first a question for Helene, What are -- what are the steps you need to take between now and being able to provide more complete financials and do you have any estimate of how long those steps might take?

Well, first thing we need to do is as we laid out -- as I mentioned in the press release, is to establish the correct measurement dates. Once we have the correct measurement dates, then we have to determine the correct accounting. And then we need to assess the impact in each of the years to determine the restatements. Now, how long that will take, I -- you know, as John said, we will work as hard -- as fast as we can and I really don't have a time commitment on that.

Oh, sure. Of course. Though it's just my understanding these investigations focused on prior periods. How does that -- how does that preclude you from talking about current periods?

Until we have completed the analysis on each of the years, we really can't communicate anything on the current years. Let me give you an example. If there were incorrect dates, let's say in 2000, the charge, if we have a charge, the charge would be amortized over the vesting period of the options. And so it's not if you find a charge in a particular year, you really need to look at the accounting, how it will impact that in the future years.

Clearly, I understand and I assume -- given the amount of work you have to do it's not possible to provide pro forma results in the interim that would exclude option compensation or stock compensation? That is a question, though it didn't sound like one, I apologize.

I think it's the recommendation that as long as we haven't determined the -- an estimate of these charges, that we would not report pro forma numbers.

Okay. Thank you. Another question, reading your press release, the results of the investigation ended up that they found no wrong doing among the current management team. What about the two recent directors that left the board, Mr. Gauthier and Mr. Cleo?

John, you shouldn't draw any assumptions regarding the circumstances for their decision to leave the board.

Okay. Fair enough, thank you. I had to ask the question. I believe in the past when you've seen pushouts in your (inaudible) laser business for flat panel displays, generally those were genuine pushouts where the revenue did come in the next quarter or two, is that what you feel the current environment is like? And any way to tell whether the current order levels represent a trough in microelectronics orders?

Let me try to answer the questions -- the two questions separately. And I'm going to start with the second one. Interestingly, if you look over the last, you know, four five quarters, six quarters, whatever it may be. Q2, I think was the numerical trough for microelectric orders. Q3, the most recent quarter, I think, was up. I think it was $8 or $10 million, I can't remember the exact number versus Q2. If you just look at numerically, it would suggest that we pass through the local trough. Whether there's a future trough, I can't -- I can't predict.

As far as the pushouts go, your assumption, I believe, is correct. I don't think this is cancellation of orders. I believe that this is a genuine pushout, as companies struggle with capacity and yields and other things.

Okay. And --

(OPERATOR INSTRUCTIONS) Okay and our next question will come from Jiwon Lee with Sidoti & Company.

Good afternoon.

Hi, Jiwon.

Just going back today (inaudible) display, John. Was the weakness predominately on the (inaudible) side, or was there something else going on in the flat panel display? Because I am trying to reconcile -- there appears to be some sign of a pickup in the overall display market?

Well, what's interesting is if you look at the number of panels, that number continues to rise. And the -- the business that we are affiliated with right now is the (inaudible) LTPS panels, as well as process development around OLED panels and that's a subset of the market. So you have to look at two things.

You have to look at the overall market dynamics and then you have to look at the dynamics of the individual component, which is, in this case, LTPS, as well as some of these developing units. And we've seen the softness that we refer to is predominantly tied to the LTPS and the AM OLED development programs.

All right. And help me a little bit your next quarter sales guidance. Your guidance implies pretty nice sequential uptick, and I'm wondering, you know, where you see in conjunction with the booking numbers, you know, where you are enthusiastic about.?

Well, as I mentioned, at least during my comments, you know, the interesting thing is that if you look at some of the individual markets, they actually performed in a reasonably good fashion. Sales were up in several of them, and some of the important ones. Orders were up in some of them as well. The order stream, you know, tends to be a little bit more lumpy, I guess, than the revenue stream and that's certainly indicated, if you look at the detail over the past X number of quarters in microelectronics where we've seen the sales performance differing from the order performance and that has to do with the fact that customers place a number of long-term orders which we then deliver on call-ops over the course of, you know, three, six, 12 months.

Having said that, you know, the level of enthusiasm and the level of interest amongst customers, I think, is reasonably good. You know, the indications of that, if you attended the laser show in Munich was unbelievable in terms of number of employees, the number of companies presenting. It doesn't seem as though the industry is lacking for opportunities. It seems more a matter of timing, more than anything else.

Okay. And on the materials processing, you know, your bookings numbers are down, as much as it was up the quarter before. Anything that you can highlight on that bookings front?

Well, as I mentioned in the last quarter, we did have a spike in some annual purchases and those tend to move around by, you know, 30, 60, 90 days from year-to-year. I think if you look at the annual trend in the orders and revenue for that market or the TTM trends, they actually look quite good. They are double digits, if I'm not mistaken.

Okay.

And there's always -- you know, I don't want to harp on this too much because everybody uses their own methods of interpretation, but if you only look at a 90-day pattern in some of these markets, you don't get the correct interpretation because you are looking at too short of time horizon, to actually see the full dynamics.

Okay, consequently, you considerable pick-up from -- well is that a pick-up a little bit? Actually, your research market was okay, but it wasn't really sequential increase -- all right, never mind. And finally on I guess back this options issue, and you have, I guess, some issues going on with the NASDAQ listing council. Anything else that you can add at this point? Any more color as to, you know, what could be happening?

I think the process that we are going through with NASDAQ is consistent with what other companies have seen. We have been in constant communication with them and we are managing that process along with the rest of it.

Okay. That's all for me. Thank you.

All right Jiwon, thanks.

And moving on, our next question will come from Mark Miller with Brean Murray.

Good afternoon.

Hi, Mark.

Hi. It's been kind of a hectic day for me. But, I just wanted to get, -- make sure I got the guidance. You only provided sales guidance, and that was up 6% to 8% sequentially. Or do I have the right --?

That is correct, 6% to 8% sequentially.

And that was the only guidance you provided for the quarter?

Correct.

One of your competitors yesterday really brought down expectations for the micro -- basically semiconductor sales. You don't seem to be at least as bothered by that. I'm just wondering is there assured or is the difference in where you are marketing? They felt the semi conductor market will remain depressed for most of this year. And I don't sense that, maybe I am misinterpreting your statements. But, if you could you give us some more color about that, I'd appreciate it?

I think you first have to look at what the concentrations are for the two companies in the microelectronics market. If it's who I believe you are referring to, there's certainly not 100% overlap in where we transact business. We are involved in a number of applications that they aren't and they are probably involved in some applications in which we aren't. So my comments refer to the -- the pieces of business that we're involved in right now and this tends to be some of the high-end performance UV driven processes, whether thats VIA drilling or you know applications for visible ages like Singulation, or other applications for infrared lasers.

So I really can't comment on necessarily on what they are seeing. I can only comment on what we have seen and what's been communicated from -- from customers. And the weak point for us right now is the FTD space. We are hoping that that's going to recover sometime in the second half of the calendar year.

So, that was primarily the reason for your lower than anticipated sales?

For lower than anticipated sales, as well as --

Orders.

Orders,you know, as I mentioned during my comments, the ASP's for those products are among the highest, if not the highest in the company. So it doesn't take many of them to have a material impact.

Thank you.

Sure.

And our next question will come from Ali [Ironing] with A-1 capital.

Hi, John, hi Helene. I was wondering if we could go back a little bit to discussing costs and the cost efforts you have made. I know you have been preoccupied with both the changes in the markets and the investigation. You had a program in place to structurally reduce the costs in the business and see the business move towards higher margin product. Could you give us a qualitative idea of how those things are doing?

Ali, it's a great question and it, however, speaks directly to what's happening in terms of margins and we are precluded currently from discussing what -- what margins are, given that we haven't concluded the accounting on the investigation.

Okay. Is there any reason for us to believe that you would have put in place a new strategy?

We -- we -- if we put something in place, we likely would have communicated it; however, we wouldn't have been able to give you any details as to what the economic impact would have been.

At least we are on the same path as we've been before probably?

Can't comment.

Okay. Thank you.

And moving on, our next question will come from Joe Turtle with Carroll and Company.

John, the conclusion of the options investigation from the press release appears there were no back-dating questions or no major fraud problems as unfortunately we have seen at a few other companies. Safe to conclude that?

You can draw no conclusions at this point.

What does that mean?

I would suggest that you go back and reread the press release because it does outline what the findings were from the standpoint of the special committee. And that would be -- let me -- I will try to count the number of paragraphs. If you refer to the section titles (inaudible) this conclusion, it's one, two, three, it's the fifth paragraph. It actually starts with "The special committee" and then it goes through some of the findings that they came to.

All right. And then the follow-up question to that, it's safe to assume that any question about continuing a stock buyback program is postponed until all the accounting is brought up to date?

Our registration has to be current before we can be buying stock.

And any best guess how long before you will be able to straighten out the accounting issues?

As Helene mentioned in response to, I think the first question, we will work as fast as humanly possible but we can't give a timeline at this point.

Thanks, John.

Sure.

(OPERATOR INSTRUCTIONS) Moving on, our next question comes [Nicholai Deshanko] with Global Crown Capital.

Hi, this is Jeffery Lynn calling in for Nick. I have a question on the OLED opportunity here, lets say if you look forward a few years, OLED's penetrate the market and you know, begin to dominate some of the LED -- put (inaudible) space, how do you feel that the laser processing, is the market opportunity there will be compared to say what to you have now in LTPS?

I think -- I think the simplest way to answer that is that currently LTPS is a small fraction of the total LCD market and you know, depending on whose data you look at, it's probably between 5% and 10%. By contrast, all of the OLED devices need from of (inaudible). So, the opportunity is significantly larger than what it's been with LCD's. I will -- I will, of course, state, as I have in the past, that there are multiple technologies that are all vying to capture that business.

Some of them laser-based, and some non-laser-based. So the laser-based ones we feel we are pretty well positioned, given our portfolio.. If it goes non-laser-based, of course, that's a different discussion.

Can you give us an opinion on what do you see as in terms of these -- computer technology is? How do they look like they are coming out right now?

Well, the competing technologies right now are XMR based, which is nominally the incumbent, because its used in LTPS. There are a number of efforts to try to use green lasers to do this as well and then there are some hybrid approaches using a combination of visible and infrared lasers to try to do this. The best results to date have come with the XMR laser approach. The green approach has not demonstrated the same process stability and there have been some intriguing announcements around using a diode approach at a recent conference, but even the authors claim that that's years from deployment.

So, as of today XMR is still the best solution, however, we fully expect a number of players to try to challenge that because they are looking for the lowest possible cost of ownership which is something that we have been working on and that will be one of the -- one of the deciding factors right after, you know, process stability and yields, costs will be close behind that.

Okay. Now, I was wondering if you could talk a little bit about the Nuvonyx acquisitions and the products that this brings, well, rather the markets? I'm assuming you guys have used -- leveraged your existing sales infrastructure and probably gone after some new customers. Could you discuss that a little bit?

So the approach on Nuvonyx, and the whole goal was to expand our presence in the materials processing space because the potential for using direct diodes for things like, welding, heat treating, et cetera, is pretty compelling. In theory, they should be amongst, if not the lowest cost alternatives, and reliability should be very high because there are no components after the diode, so to speak. We had a great introduction of that portfolio at Lasers 2007 in Munich.

You know, the arguments, as I said during my call, and I think I used the term resonated and it's a great way to describe it. People were very enthusiastic. They saw the potential to attack some opportunities, such as free space welding or -- or, you know, automotive welding, et cetera, with an option, a cost option or a cost model that was pretty compelling. And that resulted at least in the first sale into an automotive application for us during the quarter.

So we are off to a good start. Bookings, as I mentioned were 4.4 million during the quarter and that was for, you know, nominally two months and the team in St. Louis deserves an awful lot of credit for that because that was, you know, largely stuff that they started. But so far, so good.

Have you guys seen any particular challenges or, you know, attacking these new markets -- these large industrial customers tend to be quite different from your other -- you know, your traditional customer base?

That's absolutely correct. Now, the St. Louis team does have some experience in doing that because they have been selling heat treatment systems into the market place for a few years. So they have some good visibility there. The types of devices that we're working on and deploying really are minimal service models because they are pretty simple. And that's the whole goal to achieving higher and higher deployment.

With respect to, you know, what are the pacing items -- as I mentioned last quarter during the call, the holy grail here it really is to address the welding market with a direct diode solution and that requires higher brightness than is currently incorporated and we're working on that internally and with a variety of partners to try to get there.

Okay. Thank you.

Sure thing.

We do have a follow-up and that will come from from Jiwon Lee with Sidoti & Company.

Thanks for taking my questions. Back on the flat panel displays. With your (inaudible) lasers, you do have a fairly focused consumer concentration there, do you not?

Geographically and customer, yes.

Okay. And I think the LTPS, in particular addresses sub20-inch flat panel displays or has the applications been broadened a little bit?.

No, its actually, I would say even smaller than that. The predominant part of that market is still in hand helds.

Right. I see, so what has to happen in the hand held market for your (inaudible) lasers to, I don't know, kind of, to pick up again? And, you know, you are sort of -- if I may, sort of confident in that?

So the answer is that, you know, the number of displays continues to rise, as we see from, you know, data -- industry data. That's not a surprise. You know, new generations of hand held devices certainly will be a contributor to that. And if we can succeed in expanding the size of the panel in conjunction with customers, obviously, that's yet another opportunity. The -- the forward going, you know, opportunities, I mentioned in response to one of the other questions, however, is if OLED's take off and they rely on lasers and here it's irrelevant to us whether it's XMR's or solid state lasers because we play in all of that, that's an opportunity that, you know, in theory is 15, 20 times -- 10 to 20 times the size, let's say, because you go from a 5% to 10% share to, you know 100% share. That's a pretty compelling opportunity.

And where are you in terms of your OLED opportunity again? I do apologize if I am repeating.

Many of the OLED's that have been demonstrated have been in yield using our XMR-based systems. So, we have good experience thus far.

Again, as I mentioned in response to an earlier question, you know the customers are looking at a number of things and it's process stability, it's yield and it's cost of ownership, and the XMR laser systems are doing well in the first two. They are not the greatest in the third one. But if you can't solve the first two, so process stability and yield, you know, the cost is -- it's a cost that's half or a third or tenth of what XMR lasers are, its irrelevant because you can't satisfy the need. So we are managing, you know, multiple -- multiple pathways here, as the market place decides which technology that it chooses to deploy for OLED's.

Okay. Thank you.

Yes.

Sir, there are no further questions. I would like to turn the conference back to you for any additional or closing remarks.

I would like to thank everyone for their participation today, and we certainly look forward to speaking with you again. Thanks.

And that does conclude today's conference. We would like to thank you for your participation.