Coherent Corp (COHR) 2007 Q4 法說會逐字稿

Good evening, ladies and gentlemen, welcome to the Coherent fourth quarter 2007 financial earnings results conference call, hosted by Coherent, Inc. At this time, all participants are in a listen-only mode. At the conclusion of our prepared remarks, we will conduct a question-and-answer session.

(OPERATOR INSTRUCTIONS)

I would now like to introduce your host for today's conference call, the Chief Financial Officer of Coherent, Helene Simonet. Please go ahead.

Good afternoon and welcome to our fiscal 2007 fourth quarter conference call.

On today's call, I will provide selected financial information and John Ambroseo, our President and CEO will provide a business overview. Let me first address the progress with respect to the restatement we announced in our September 27 press release. As you have seen, we previously announced an estimated range of $22 to $28 million for the pre-tax impact of noncash stock compensation charges through June 2006. We continue to work diligently to prepare our restated financials and we expect to file our fiscal 2006 and first quarter fiscal 2007 no later than mid-December. We expect the second and third quarter and full fiscal year 2007 to be filed in the beginning of calendar year 2008. We will only provide selected financials for our fourth fiscal quarter, but the forward-looking guidance for our first fiscal 2008 quarter will include additional pro forma 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 committee investigation and other financial and business risks. We also encourage you to refer to the risk disclosures described in the company's registration statement on form S-3 and the report on Form 10-K, 10-Q and 8K as applicable. These forward-looking statements are subject to the Safe Harbor provisions of the Private Securities Litigation Reform Act. The full text of today's prepared remarks which will include references to historical bookings and sales by market and a special note regarding non-GAAP measures, will be made available through the Coherent investor relations website. A replay of the webcast will be made available for 90 days following the call.

Our overall book-to-bill for the quarter was 1.03 and our backlog at the end of Q4 '07 was $188.4 million.

John will provide the market application updates for bookings, but in summary, bookings of $163.8 million increased by 7.2% over the corresponding prior-year period, an increase of 17.7% sequentially. Year-to-date bookings grew 1.2%. Net sales for the fourth quarter were $158.9 million, a record for the company. Sales were up .5% from the same quarter a year ago, and up 11.4% sequentially. On a fiscal-year basis, sales increased approximately 2.8%.

From a market perspective, we continued to see outstanding performance in materials processing, bioinstrumentation and medical, resulting in an annual growth of 24.1% for material processing and 16.9% for the OEM components markets. Compared to fiscal '06, microelectronics sales declined 3.9% primarily due to slow demands in the flat panel display markets. The scientific markets whose annual growth was 5.5%, showed a strong fourth quarter partially due to the revenue recognition of large custom lasers. As previously communicated the graphic arts and display business had a tough comparison versus the prior-year period as a result of our previously announced decision not to pursue further IAB business. This decision resulted in approximately $18 million lower sales this fiscal year compared to last fiscal year. Company sales by significant market application for the fourth quarter are as follows-- scientific and government programs, 31.4, microelectronics, 53.7, material processing, 25.5, OEM components and instrumentation, 43.2, graphic arts and display, 5.1 for a total of $158.9 million.

Let me move onto the balance sheet. Our cash balance net of net for the quarter was $361.8 million, representing an increase of $44.4 million compared to last quarter. The increase includes approximately $24.8 million from the sale of the Condensa building which was the home of our former medical segment. This transaction resulted in a pre-tax gain of approximately $3.6 million. We also completed the sale of our Auburn campus, as well as the sale of our Imaging Optics business located in Leister, U.K. However, the cash inflow for both transactions is included in other receivables as the transfer of funds occurred on the first day of fiscal 2008. Our first fiscal 2008 quarter cash balance will include approximately $16 million from both transactions. The sale of Auburn resulted in a pre-tax loss of approximately $12.6 million, and a sale of the imaging optics business resulted in a pre-tax gain of approximately $1 million.

We have virtually no debt as of September 2007, compared to a debt balance at the end of the third quarter of $200.9 million. As we previously announced, the convertible debt we put in place during the second quarter of fiscal 2006 was accelerated and paid in full during the fourth quarter of fiscal 2007. This resulted in the write down of previously capitalized bond issuance and other costs of $4.3 million.

The year-on-year cash balance net of debt increased $68.8 million. Stock compensation investigation costs for fiscal 2007 amounted to $10.1 million of which $9 million was paid during fiscal 2007 and reflected as a reduction in cash.

Accounts receivable days sales outstanding at the end of the fourth quarter improved to 58 days compared to 63 the previous quarter, which contributed to a strong fourth quarter cash flow from operations. Capital spending for the quarter amounted to $4.2 million or 2.6 % of sales, and year-to-date capital spending was approximately $22 million or 3.6% of sales.

The pro forma guidance provided for the first quarter of fiscal 2008 excludes the impact of any stock compensation charges. We expect our first quarter sales to be in the range of $144 to $148 million. As mentioned earlier, we no longer have the imaging optics revenue, which reduces our quarterly sales by approximately 4 million. Also remember that the first quarter is our seasonally weak quarter due to the Thanksgiving and Christmas holidays, and if you have seen in prior year, our first quarter sales typically decline approximately 2% to 7% on a sequential basis. We expect the gross margin to be in the range of 42% to 43.5%. The gross margin percentage is lower when comparing to our last published percentage in Q3 '06 primarily due to the negative impact of market and product mix and a stronger Euro.

R&D spending is estimated to be approximately 12.5% of sales, and SG&A expenses excluding intangible amortization and nonrecurring items such as the stock compensation investigation costs, are anticipated to be in the range of 21% to 21.5% of sales. Intangible amortization, including the impact of Nuvonyx our latest acquisition will be approximately $2.1 million. Other income is estimated at about 2.5% of sales and capital spending for the full fiscal 2008 is projected to be approximately 4% to 5% of sales.

We continue making it a priority to get our historical financials on file as quickly as possible. And we thank you for your patience. I will now turn over the call to John Ambroseo, our President and CEO.

Thanks, Helene, good afternoon everyone and we can to our fourth fiscal quarter conference call.

Before discussing our results I would like to provide some clarity on our recent announcement regarding long-term EBITDA targets. We established the goal of 19% to 23% EBITDA exiting fiscal 2010 which was well-received by our investor base. In our model we assumed historical growth rates, potential acquisitions were not factored into the equation. The achievement of the EBITDA goal is based on a multistep plan that will deliver benefits in phases over the next three years, which are staged to insulate our customer supply chains from any disruption. We believe the company and its shareholders will be rewarded from the successful execution of this plan.

Orders in the fourth fiscal quarter totaled $163.8 million, which were up 17.7% from the prior quarter, and 7.2% versus the prior-year period. The book-to-bill for the quarter was 1.03. For the full fiscal year, orders were $591 million, corresponding to an increase of 1.2% and a book-to-bill ratio of 0.98. As you will hear in the following commentary, the total increase does not reflect the performance in the individual markets. We are encouraged by the results in materials processing, instrumentation and some of the sub markets within microelectronics.

Orders of $31.3 million in the scientific market increased 10.5% sequentially and decreased 4.3% versus the prior-year period. Bookings for the fiscal year decreased 4.4% versus fiscal 2006. The annual results were partially affected by research funding delays in the United States, and our decision to exit certain custom laser business earlier in fiscal 2007. The custom laser business is technically and financially challenging. The benefits are pushing the edges of the technical envelope did not offset the cost of this activity.

While U.S. funding was delayed for much of fiscal 2007 it did improve in the fourth quarter. Domestic orders were paced by a new record for Chameleon lasers to be in biological research down slightly from Q3 and Asia up sequentially.

Record orders of 45.9 million for instrumentation and OEM components were up 39.9% sequentially, and 43.7% versus the prior-year period. For the fiscal year, orders grew by 28.1%.

We received several annual orders in the fourth quarter, which is consistent with previous trends. Our OPS lasers continued to enjoy a leadership position in the instrumentation market. There are two developments that we believe will bolster this pattern. We are expanding our OPS product offering to provide more overlap with existing customer portfolios, and this may result in further market gains. Within the genomes markets, DNA sequencers are transition to new architectures. As we experienced in cytometry this transition creates an opportunity to displace legacy technology from other vendors. Bookings for medical OEM's were up significantly versus Q3. The refracturer surgery market was very strong in the fourth quarter, as the effects of consolidation and customer initiatives have fueled demonstrate for our Excistar, Excimer lasers. In the as architect markets orders are up for CO2 lasers, used in skin resurface since they provide higher efficacy and a better overall laser experience compared to other laser sources.

Bookings for microelectronics of $54. 2 million increased 6.6% sequentially but declined 13.3% versus the prior-year period. This is the second consecutive quarter of increasing bookings, which is consistent with many market recovery predictions. For the fiscal year, orders declined 17.8%, mostly due to weakness in the flat panel market.

Fourth quarter semi cap order were up modestly on a sequential basis. The inspection market led the way with a ratio between new systems and service weighted in favor of new systems. While customer outlook remains mixed, we believe the upcoming product introductions will enable us to gain share within the semi cap space due to advantages in performance, reliability, and total cost of ownership.

Orders from the advanced packaging market increased for the third consecutive quarter and exhibit strong growth over the third fiscal quarter. Flip chip packages and cell phone PCBs were the primary drivers. The growth trend could continue as Intel transitions to the X66 flip-chip substrate which may require 30% to 40% additional production capacity. According to industry reports, it is estimated that Intel currently consumes approximately 60% of flip-chip substrates.

Bookings from flat panel display manufacturers were down significantly from the prior quarter. The end user business continues to suffer from eroding panel prices leading to margin compression and capital constraints. There are two potential at catalysts to restart this market. With the further absorption of existing capacity being the first and the most obvious catalyst. The second is the ability to utilize new capacity in either their LTPS or AMOLED display manufacturing, which speaks of process flexibility, where our Excimer lasers enjoy a leadership position. Laser-based silicon sing litigation and scribing continue to gain momentum in the near term and some tool providers are projecting gaudy growth rates of up to 50% per year over the next few years. Our existing and future portfolios address these applications.

I am also pleased to report that we saw another bump in bookings from solar cell manufacturers resulting in record quarterly and annual orders. This is a good trend, but much work remains if the industry is to close the gap between solar and fossil fuels. As in several other markets, the laser industry must work aggressively towards improving the total cost of laser ownership.

Bookings of $5.1 million for graphic arts and display were up 8.2% sequentially and 3.3% versus the prior-year period of time. For the full fiscal year orders were down 25% on a relatively small base.

As we mentioned during the last call, our high power OPS platform was gaining traction in the entertainment market for light shows. The compactness and energy efficiencies of the OPS lasers were the compelling factors leading to our first volume order in this application.

Materials processing orders of $27.3 million increased 21.4% sequentially, and 31.9% from the prior-year period. Orders for the fiscal 2007 increased 32.2% over fiscal 2006. These results reinforce our prediction that over the next five years the materials processing market represents one of the key growth engines for the photonics industry.

Orders in the fourth quarter of fiscal 2007 from core applications and marking and nonmetallic processing in Asia, especially China, and Europe, continue to exhibit strong performance. The core bookings were augmented by first-time customers and new products. In particular, we received orders from an OEM integrator in India who serves the marking and medical device markets and for a recently released MATRIX platform which will be used in marking applications. We view as both positive developments since India represents a potentially sizable opportunity and the MATRIX was selected over other laser technologies for various laser marking applications.

As Helene mentioned, we engaged in three asset transactions at the end of 2007. We sold our thermal imaging optics business located in Leister, England, to CVI Mellis Griot in an all cash transaction. The Leister operation was a stand alone business within Coherent. It primarily served European military contractors and had margins and capital needs similar to the broader optics industry. This performance was not consistent with our longer term objectives and we believed divesting it was the best interest of our company and shareholders. We also sold the Condensa and Auburn sites. The three transactions account for approximately 425,000 square feet of space equivalent to a 33% footprint reduction.

Our underlying story speaks to high growth markets and the value of diversification. While there are many global factors that could influence fiscal 2008, including energy prices, credit markets and exchange rates we believe we are well-positioned to capitalize on current market trends and the capital investment recovery in the flat panel display market.

I'll now turn the call back over to Matt to begin the Q&A session.

(OPERATOR INSTRUCTIONS) We will pause for just a moment to assemble the queue. We will take our first question from John Harmon with Needham & Company.

Hi, good afternoon. A couple questions, please. John, I was wondering if you could just tell us about the sub components of your microelectronics business, just maybe tell us which two or three are largest or rank some of them, if you could, please?

You want me to rank the sub markets within microelectronics?

Yes or tell us which top, two or three are the largest so we can put it in perspective.

The market is actually reasonably balanced, John, between semi cap applications, advanced packaging applications, and historically the flat panel market. That mix obviously shifted in the last quarter, with advanced packaging probably making the biggest gain and flat panel giving way as new system orders were lagging, as I mentioned during the commentary. The recovery in the flat panel market, as I mentioned, is still on the horizon, we expect that to occur as this capacity issue rights itself. We also firmly believe, again, as I refer to my commentary, that all future systems have to be capable of doing either LTPS or AMOLED as customers are seeking to balance out capacity in the future.

Okay, thank you. That helps. I recall a couple quarters ago, I think your customer for your Excimer lasers and panel manufacturing was holding off orders in anticipation of a new product platform. Sorry if I missed it, but did that happen? Is that customer ordering again?

Well, as I mentioned, the market itself is pretty much on hold right now. New system orders have been lagging for a few quarters. So even though there are new technologies available from us, that is not driving an increase in bookings within the flat panel market right now, it's a very challenging space for the reasons I alluded to during my commentary.

Okay. Thank you.

Sure.

(OPERATOR INSTRUCTIONS) We will hear from Jiwon Lee with Sidoti and Company.

Good afternoon.

Hi, Jiwon.

Hi, John. When you guided, the first quarter for '08, what type of end market or the product assumptions did you build in? Especially if you can focus on the materials processing or the microelectronics?

Jiwon, typically we don't provide the kind of granularity that I think you may be asking for. I think the best indicator for the market mix is reflected in what bookings have been over the past one to two quarters. So if you look at the fourth quarter as an indicator, it will give you some indication as to where to expect revenues to come from in the first quarter. Historically speaking, the first quarter tends to be a bit stronger or a bit more weighted towards scientific than to commercial, and that's largely due to the fact that many of our commercial customers don't want to go into the year-end holiday season with more inventory than they need.

Okay. I've heard recently from other laser vendors that they have seen some softness, especially out of Japan, and that may be related to you, particularly to Excimer lasers. Have you seen a similar landscape or how old you characterize Japan, versus China even?

The Japanese market for us, at least in the most recent quarter, was in line with expectations, with the exception of the flat panel display market. I think you're aware that we serve a very large customer that based out of Japan with an FPD, while their orders for service spares and services continue to move along at a pretty good rate, the orders for new systems is quite slow right now.

Okay.

So other than that example, I don't think that we saw any anomalies in Japanese bookings in the fourth quarter.

Okay. And the solar panels, is there some customer concentration? How many, roughly, are you selling into that market right now?

Are you speaking to customers or units?

Customers, please.

So it's probably somewhere between 5 and 10 customers that are taking the product right now. As you might imagine, given the historical trends, many of those customers are in Europe. I think there may be a couple in Japan, and some emerging ones in the U.S. But that's consistent with where the business has developed over the last decade.

Okay. Fair enough. And last quarter, you guided Nuvonyx sales contribution to be about $3.5 million. Did they meet that expectation?

I'm going to refer to Helene on this, because she has to look at her cheat sheet here, so if you give us a moment.

Okay. That's my final question, thank you.

Nuvonyx was a little lighter this quarter because they have some major contracts where sometimes it shifts in the next quarter. They were north of $2 million, but below $3 million.

I see. Okay, fair enough. Thank you.

(OPERATOR INSTRUCTIONS) We do have a follow-up from John Harmon of Needham & Company.

Hi, when you were talking about scientific and government, you said there was a product line or a product category that you exited. What product, what market was that, please?

We have -- we're changing our strategy a little bit on highly customized systems. So we're providing configurable solutions, we're trying, we're tending to shy away from highly customized solutions because they are fairly time consuming to manufacture, and the ongoing support, as you can imagine, is also heavier than a configurable or a standard product. For the fiscal year, it's not very much in terms of revenue, John, it's probably somewhere between $5 and $10 million.

Okay. Thank you.

Sure.

And at this time, we have no further questions in the queue. I will turn the call back over to John Ambroseo for any additional or closing remarks.

We'd like to thank everyone for participating in the call and we look forward to speaking with you in January.

Once again, this does conclude today's call. Thank you for joining us, and have a great day.