Coherent Corp (COHR) 2008 Q1 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the Coherent first quarter 2008 financial earnings results conference call, hosted by Coherent, Incorporated. 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. You may begin your conference.

Good afternoon, and welcome to our fiscal 2008 first quarter conference call. On today's call I will provide financial information and John Ambroseo, our President and CEO, will provide a business overview.

Let me first give you an update with respect to our SEC filings. Last week on February 6, we filed our fiscal 2007 form 10-K and today we filed our first quarter fiscal 2008 form 10-Q. We have now completed all the required SEC filings and we're pleased to announce that the company will be relisted on the NASDAQ global select market, effective with the opening of trading on Thursday, February 14, 2008.

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.

We encourage you to refer to the risk disclosures described in the company's reports on forms 10-K, 10-Q and 8-K as applicable, and as filed from time to time by the company. The company does not undertake any obligations to update these statements as a result of events or circumstances after the date hereof or to reflect the occurrence of unanticipated events.

The full text of today's prepared remarks, which will include references to historical bookings and sales by market, 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.

We recorded first quarter revenues of 144.3 million and net income of 4.7 million, or $0.15 per diluted share, excluding the charges related to the restatements of our financial statements and litigation resulting from the stock option investigation.

And excluding the quarterly stock compensation charges. The proforma net income for the first quarter of fiscal 2008 was 9.5 million, or $0.30 per diluted share, compared to a proforma net income of $0.37 per diluted share for the first quarter of fiscal 2007.

The primary reason for the decline in proforma earnings relates to increased expenses resulting from a weakened dollar. During this period the euro strengthened approximately 13%.

Looking for the quarter, we're strong at 154.9 million, an increase of 13.7% over the corresponding prior year period.

Our book to bill was 1.07 and the backlog at the end of Q1 '08 was 198.4 million. Net sales for the first quarter of 144.3 million are within guidance, but at the low end, primarily as a result of delivery push outs from a few customers, not due to lost business.

Market prospective when comparing to the similar quarter last year, we saw strong performance in materials processing, via instrumentation and medical applications, resulting in a 26.5% growth for materials processing and 14.5% growth for OEM components and instrumentation, when adjusted for the sale of the optical imaging business.

Microelectronic sales declined 12.7% as a result of the slow demands we saw in the flat panel display markets during the second half of fiscal 2007, coupled with normal timing of the demand in other micromaterials processing markets.

The scientific market decline of 8.5%, is primarily the result of our previously announced exit from the custom laser business. Please note that effective Q1 '08, we are consolidating the graphic arts and display business into the OEM components and instrumentation markets. Prior period market information has been combined to conform to the current presentation.

The company sales by market application for the first quarter of fiscal 2008 are as follows: scientific, 30.1, microelectronics, 48.7, materials processing, 24.5, and OEM components and instrumentation, 41. For a total of 144.3 million.

First quarter gross profit was 60.5 million or 41.9% of sales. On a proforma basis, excluding stock compensation costs, gross profit of 42.2% is similar to the first quarter of 2007.

The projected accretion of having no imaging optics revenue and lower scientific custom business was offset by the negative impact of the weak dollar and it continued unfavorable microelectronics market and product mix. When comparing to the previous quarter, proforma gross profit increased slightly from 41.9% to 42.2%, and this sequential increase was primarily related to improved yield across several of our business units.

Total operating expenses for the quarter, excluding intangible amortization of 2.2 million, excluding the restatement of financial statements and litigation costs related to our stock option investigation of 4.7 million, and excluding stock compensation charges of 2.3 million, was 50.1 million or 34.7% of sales.

Proforma R&D spending for the quarter was 12.5% of sales, in line with guidance, and proforma SG&A spending for the quarter was 32.1 million or 22.2% of sales. This is higher than our guidance, primarily as a result of the previously mentioned customer driven revenue push out. The adjusted EBITDA percent for the quarter was 12.4% compared to 14.7% the previous quarter.

We remain committed to our long term goal, ranging from 19 to 23% and we look forward to discussing our EBITDA improvement program in future quarters.

We did, however, launch the transfer of a product family to a contract manufacturing partner and we anticipate completion of this transfer by the end of the fiscal year. The annual benefits commencing in fiscal 2009 are expected to be in the range of 1 to 2 million.

Our cash and cash equivalents balance for the quarter was 388.4 million, representing an increase of 26.5 million compared to last quarter. I want to remind you that the increase includes the receipt of approximately 16 million from the sale of the Auburn campus and the imaging optical business, located in UK as previously reported.

Cashflow from operations was 13.1 million. And capital spending for the quarter was 4.7 million or 3.2% of sales.

During the quarter we paid approximately 3.4 million for expenses arising from the restatement of our financial statements and litigation related to our stock investigation. Cumulative to the first quarter of fiscal 2008, the stock investigation and related litigation have resulted in an expense of approximately 16 million.

A cash balance of 388 million and a continuing strong free cashflow generation led to the company's decision to launch a potential stock repurchase program. The board of directors authorized the repurchase of up to 225 million of our common stock through a modified Dutch auction tender offer. The tender offer is expected to begin on February 15, 2008, and to expire on March 17, 2008, unless extended.

Additionally, the board of directors has approved a repurchase of up to an additional 25 million of its common stock, following the tender offer and terminating no later than February 11, 2009. Please refer to our separate press release and 8-K. announcing the specifics of the Dutch tender offer.

Let me move on to the guidance for the second quarter. This guidance excludes the impact of stock compensation charges and also excludes the remaining restatement expenses resulting from the stock investigation and related litigation costs.

We expect our second quarter sales to be in the range of 150 to 153 million. We expect gross margins to be in the range of 42.5 to 43.5% of sales. R&D spending is estimated to be approximately 12.5% of sales, SG&A expenses, excluding intangible amortization, are anticipated to be in the range of 21.5 to 22% of sales.

Intangible amortization will be around 2.2 million. Other income is estimated at about approximately 2% of sales, and the annual tax rate is estimated at approximately 34%.

Capital spending for the full fiscal 2008 is projected to be approximately 4% still.

I will now turn over the call to John Ambroseo, our President and CEO.

Thanks, Leen. Good afternoon, everyone. Let me add my welcome to our first fiscal quarter conference call.

As you've seen in our various releases and heard in Leen's commentary, we are engaged in a significant number of exciting developments. Our relisting on the NASDAQ global select market this coming Thursday is occuring sooner than previously communicated. I'd like to acknowledge the NASDAQ staff for the speed with which they processed our application.

The completion of all of our SEC filings also enabled us to announce the Dutch tender, which will return a significant amount of cash to our shareholders.

With respect to business execution, we have launched a new product platform with another poised for release. Both are part of our three-year EBITDA plan.

We have also extended our OPS platform to higher powers and new wavelengths, which opens additional market windows. I'll provide more details in my market summaries.

Orders in the first fiscal quarter totaled 154.9 million, which were down 5.4% from the prior quarter, and up 13.7% versus the prior year period. The book to build for the quarter was 1.07.

Orders of 30.9 million in the scientific market decreased 1.4% sequentially and increased 1.1% versus the prior year period. Bookings were paced by ultrafast lasers, funding for research in the life sciences lead to a record number of orders for our chameleon lasers.

In the physical sciences, we experienced increased demand for our mirror and micro products. We also introduced a new ultrafast laser at the Photonics West show. The Mantis is a short pulse laser well suited as a seed source for an amplifier system. It is the first product in this category to incorporate a high power, OPS laser, which has a favorable cost basis compared to our traditional pump lasers.

Orders of 47 million for instrumentation and OEM components were down 6.8% from a record performance in the prior quarter and increased 25.3% versus the prior year period. As a reminder, we have incorporated the former graphic arts and display market into the OEM components and instrumentation market, effective in the first quarter of fiscal 2008 and combined results for prior periods as well.

Bookings for instrumentation applications remain solid for OPS, Compass and LDM products. A number of applications contributed to the strength, including cytometry, microscopy and genetic sequencing.

Orders from medical OEM's were up significantly on a sequential and prior year basis. The refractive surgery market was the most active, with orders from many of the key customers. Part of this trend was driven by the consolidation of a customer's product portfolio. In the non-refractive market, the photocoagulator platform incorporating the OPSL-577 laser is in the FDA approval process.

Bookings from microelectronics of 53.9 million decreased 0.5% sequentially and increased 13.8% versus the prior year period. Orders from semicap applications including inspection and metrology were down on a sequential basis as the industry continues to struggle with capacity requirements and capital investments. Despite the short term results, we are receiving encouraging signals from multiple customers regarding design wins. We could see benefits from these wins in the fourth fiscal quarter of 2008.

The advanced packaging market posted double-digit growth over the previous quarter where we received record orders from laser direct imaging customers. Increased user adoption in Asia was cited as the driver for the bookings growth. More than half of these units go into production environments rather than prototyping applications. This is a positive trend for future growth.

In order to fully capitalize on the opportunity, we must support higher tool throughput by increasing the laser output power and reducing the dollar per Watt cost. We're fully capable of doing both.

The microvia market remains a game of throughput and feature sized advancement. We have been addressing these through developments in CO2 and UV laser technologies.

As an example, our newest CO2 designs deliver higher peak powers, which are important for copper direct drilling and PCBs and enhanced duty cycles.

Within the industry, the introduction of the X66 flip-chip substrates, using the 45 nanometer design rule, creates new growth opportunities, although this is dampened by current sentiment in PC demand. We believe this will correct itself over time.

Bookings for flat panel display manufacturers were skewed toward service orders as well as non-annealing applications. We did not receive new system orders for laser annealing users, however, customers are at or close to maximized yields, which is a positive indicator for future business. We have also demonstrated key results using our SLS process in AM-LCD and AM-OLED to achieve larger panel sizes. This is critical to gem 5.5 deployment.

I last reported that laser based silicon singulation and scribing were gaining momentum, and this continues to be the case. We have been developing a breakthrough technology for the space based upon a fiber platform. One of our lead customers achieved a 250% increase in dye strength, which is a tremendous result.

We will formally be releasing this new platform within 90 days. It is the second installment of the platform strategy described during our Q4 conference call.

Material processing orders of 22.5 million decreased 17.3% sequentially and grew 10.8% from the prior year period. The sequential change appears to reflect the timing of orders rather than a change in market conditions.

The quarter was marked by new product introductions. We released our new E-series platform at the FABTECH show this past November. The E-series represents the new standard for sealed CO2 lasers. It has an integrated RF power supply for ease of deployment, the lowest cost of ownership in the industry, superior mode quality for processing power, and a modular design that facilitates scalability. Feedback from our lead customers has been terrific and the early order book is solid.

We also released an IR version of our [Hops] platform for certain marking applications. The mini-IR meets all the performance required for cw marking and boasts direct modulation capabilities.

In addition to market execution, we are working on a number of initiatives to achieve our previously announced three-year EBITDA goal. As Leen mentioned, we have commenced the transfer from commercial product line to a contract manufacturing partner. The success of this transfer will serve as a barometer for future transfers. We anticipate announcing other programs over the next few months.

We move forward in fiscal 2008 with a solid backlog, a host of new products that address new market opportunities and deliver better financial returns, key design wins in several markets and plans to further fortify our financial performance. The successful execution of our objectives coupled with the benefits of the Dutch tender, provides a compelling opportunity for our shareholders, customers and employees alike.

I'll now turn the call back over to Angelina to begin the q-and-a session.

Thank you. (OPERATOR INSTRUCTIONS) We'll take our first question from Miss Jiwon Lee, please go ahead.

Hi, good afternoon, thanks for taking my questions. Just a few quick ones, first of all, John, did you mention there was no order received for laser annealing for the quarter? Did I hear correctly?

That's correct.

There is a large customer concentration with that particular laser in the market, isn't there?

We sell to a single customer, single integrator that is correct and they serve the entire market.

Could you give us a little more color -- this has been going on for several quarters as to why there is order pushout happening? So the question, I'm not sure if we're discussing the same customer Jiwon, but what we've been highlighting is that the LCD market for annealing has been undergoing a tremendous amount of upheaval, as capacity has been trading off against capital investment, etc.

What we've been working on with customers for the past three or four quarters now is really focusing on yield enhancements for the existing tools. And the yields that I've heard quoted are in the 90s at this point and I think they started out somewhere in the 60s or 70s. So there's been a fair amount of capacity that's been added simply by increasing the yields, but they are, in fact, running out of room as I alluded to in my comments, and we believe that orders will have to start to flow to facilitate growth. You expect that pretty much when, John?

I can't tell if you it's going to be a Q2 or a Q3 or a Q4 event. But we do believe it's going to be this fiscal year.

Okay. Fair enough. And then I missed the commentary on your contract manufacturing as part of your EBITDA goal by F0 10. Could you give us a little more color on what programs or what components you're moving and what type of contract manufacturers you're retaining on that front?

I'm not going to go into the specifics of what products we're moving, because we feel that some of that at this point is actually proprietary. We are using contract manufacturers who are skilled in optimechanics, so we're not trying to develop that skill within the contract manufacturing community. There are a number of notable ones that are in existence today and we are using one of the ones that is well known.

We've announced the first product family that's going and it is one of our mid to higher level commercial products that will be transferred and that process will be started relatively soon, the actual transfer will start relatively soon, the process itself has already started, and I believe it will be finished probably within a year.

I think investors may appreciate now that you have all these back historic financials filed on as to gaining a little more insight into your operations, the last few quarters, now, and I do appreciate you have put out two additional segments, the custom lasers and special lasers. And if I look at the second half of your F '07, both products had declining profit margin and I think you eluded to some yield issues, can you give us a little more sense as to what, in terms of your operations might have happened in the second half of F '07?

It's Leen. The gross margin in both segments actually declined. And as we had indicated, we did have a very, very negative mix throughout all the quarters, particularly in microelectronics.

The other item that was negative related to the IAB business that we referred to before, that in itself has a 0.8% decline in the gross profit.

There are multiple ups and downs, but if you net it out, and those two combined had an impact of more than 2%, about 2% decline in gross profit. We had some other smaller ups and downs with some of our greening products. Predominantly you could almost say it's entirely due to mix.

And any more additional colors at this point you can provide on your EBITDA margin goal of F '010 other than this contract manufacturing that you just announced?

So our intention Jiwon, is to announce from time to time various programs that will be addressing the EBITDA goal. The other things that I mentioned during my segment was the fact that we brought out two new platform designs, one the E-series CO2 lasers, the other our first fiber laser offering that will be formally released in a few months here.

Both of those were part of the EBITDA plan, and as they roll out, our future ones roll out, we'll give you some feedback as to what the impact is.

I think my last question and I'll jump into the cue. Investors would like to see your microelectronics, that is your most profitable line of operations. How do you see that outlook this year? I mean, other than what you highlighted in your remarks?

We've seen several quarters of strong bookings in that market. The two areas that we've seen some challenges, as I've already discussed, is in the annealing business, that's been disappointing for a few quarters here.

We talked about that a couple of minutes ago, and the semicap market is struggling at this point in time. Our business there has been reasonably good, again given the distribution that we enjoyed being more at the leading edge of that market. However, the whole market needs to cooperate in order to create lift.

Fair enough. I'll jump back into the cue. Thank you.

(OPERATOR INSTRUCTIONS) And we do have a question. Mr. Caroll, please go ahead.

John, could you talk for just a minute about any pricing pressures in the industry, and also on the other side, any cost pressures with raw materials?

I'm sorry, who's on the line?

John Caroll.

So from the standpoint of pricing, the dynamics remain pretty much as they have been for several quarters. We continue to see aggressive pricing from -- in certain markets, the scientific market is an example of that, has historically been one that has demonstrated or exhibited aggressive pricing.

From the standpoint of the commercial markets, the tradeoff between value proposition and cost has always been an important one for us, and we think we're managing that one effectively. Clearly, the impact on revenues from the euro as Leen mentioned earlier is one that we watch very closely, especially since so many of our contracts are dollar-based contracts.

With respect to raw materials, I think the team has actually done a pretty good job of managing that. We haven't seen shortages of any critical components and where we have critical items or very sensitive items, we have backup channels to deal with that, so no issues there.

It appears there are no further questions.

I'd like to thank everyone for joining us, and we look forward to speaking to you again in three months.

That does conclude today's program, we appreciate your participation, and have a wonderful day.