Coherent Corp (COHR) 2008 Q3 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the Coherent third quarter 2008 financial earnings results conference call. Hosted by Coherent Inc. At this time, all participants are in a listen-only mode. (OPERATOR INSTRUCTIONS) This call is being recorded. I would now turn the conference over to your host the Chief Financial Officer of Coherent, Lene Simonet. Please go ahead, ma'am.

Thank you, good afternoon and welcome to our fiscal 2008 third quarter conference call. On today's call I will provide financial information and John Ambroseo, our President and CEO will provide a business overview. 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 Firms 10-K, 10-Q, and 8-K as applicable and as filed from time to time by the Company. 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 will be made available through the Coherent investor relations website. A replay of the webcast will be made available for approximately 90 days following the call.

Before we discuss the results of the third quarter, I would like to highlight that we recently announced that the SEC has ended its informal investigation into the Company's option granting practices with no action recommended. We reported third quarter revenues of $157 million and GAAP net income of $8.4 million or $0.35 per diluted share. Excluding the litigation charges resulting from last years internal stock investigation the restructuring costs resulting from our footprint reduction and manufacturing improvement programs and the stock related compensation expense, the pro forma net income for the third quarter of fiscal 2008 was $12.7 million or $0.53 per diluted share this compares to the previous quarter's pro forma net income of $0.40 per diluted share and the prior year third quarter net income of $0.15 per diluted share. Our adjusted EBITDA percentage for the third quarter was 15.5%, a significant step up from 14.3% last quarter and 12.4% in the first quarter of this fiscal year.

The third quarter results and the projections for the fourth quarter do not yet reflect benefits from the outsourcing or the footprint reduction programs that we launched. Last quarter we discussed the outsourcing of optics manufacturing and the closure of our our Auburn location. We are making good progress towards our goals of exiting Auburn no later than the second quarter of fiscal 2009. We also recently completed the consolidation of our German EPS test manufacturing into one location in Germany. The combination of the two projects resulted in a third quarter pretax restructuring cost of $2.2 million of which $1.3 million was recorded in cost of sales, $0.6 million in SG&A and $0.3 million in R&D. As you may remember, during our first quarter conference call we announced a transfer of a U.S. manufacturing product family to a contract manufacturing partner in Asia.

Let me recap that the expected annual run rate savings of all today's announced projects is estimated to be in the range of 5.5 million to $7.5 million. Net sales for the third quarter grew 1% sequentially and increased 10% from the same quarter a year ago. From a market perspective, we saw the strongest performance in OEM components and instrumentation showing a 10% growth compared to Q3 '07 and 12% growth compared to last quarter which is primarily the result of continuous strong performance in both the medical and Vaya instrumentation markets. Adjusted for divestitures and acquisitions, the year-over-year growth would have been approximately 18%.

Scientific revenues showed strong growth of 9% sequentially and 30% compared to last year which is primarily the result of revenue timing of larger systems and new product introduction. The decreases in the material processing market of 4% sequentially and 11% compared to last year is predominantly the result of the stocks in China and U.S. as we already highlighted in our bookings commentary last quarter. The microelectronics business grew 10% compared to last year and was down approximately 11% sequential. Solar sales remained strong and were growing at a high rate. During the quarter we saw an increase in flat panel display revenues offset by lower advanced packaging sales and a sizable shipment last quarter in the micro materials processing market.

The Company sales by significant market application for the third quarter are as follows. Scientific and government programs 33.7, microelectronics, 52.4, material processing, 22.6, OEM components and instrumentation 48.3 for a total of $157 million.

The third quarter gross profits was $69.3 million or 44.1% of sales. On a pro forma basis, excluding stock compensation charges and restructuring costs, gross profit was 45.3%. The third quarter sales and gross profits were favorably impacted by a one time net 2 million contract cancellation fee resulting in a gross profit percent improvement of 60 basis points. Excluding this one time benefit, the third quarter gross profits would have been 44.7% compared to guidance of 43 to 44% and a second quarter gross profit of 43.5%. We experienced favorable product mix and market mix in particularly in the medical markets and we continue to see excellent returns from our procurement rationalization efforts driving cost reductions.

When comparing to the third quarter a year ago, pro forma gross profits increased from 40.3% to 45.3%. In addition to the points mentioned before, we are benefiting from 10% higher revenues, stronger microelectronic sales and lower other manufacturing costs. Improving gross margins remains a focus for us and we are pleased with the recent progress. Our cash and cash equivalents balance for the quarter was $197.7 million, representing a sequential increase of $13.1 million. Cash flow from operations was approximately $15 million.

Compared to the previous quarter, we improved our accounts receivable day sales outstanding but inventory levels increased as we are building safety stocks in preparation of the outsourcing and various manufacturing consolidation programs. Also coupled with inventory builds to support new product introductions. Capital spending for the quarter was $6.9 million or 4.4% of sales, bringing the year to date capital spending which was $16 million or 3.5% of sales.

Let me give you the guidance for the fourth quarter. We project our fourth quarter sales to be in the range of 154 million to $157 million. We expect pro forma gross profit margins to be in the range of 45 to 45.5%. Pro forma R&D spending is projected to be approximately 11.5 to 12% of sales and pro forma SG&A expense are anticipated to be approximately 21.5 to 22% of sales. Intangible amortization costs are planned to remain about $2.2 million and other income is projected to be approximately 2% of sales. Our pro forma annual tax rate is projected at approximately 35%.

Capital spending for full fiscal 2008 is anticipated to remain at about 3.5% of sales. Stock compensation charges for the quarter are estimated to be $2.5 million, of which $0.3 million relates to cost of sales, $0.3 million to R&D, and $1.9 million SG&A. The fourth quarter restructuring costs are estimated to be in the range of $3.1 million, of which $2 million is expected to be classified as cost of sales $0.2 million as R&D and $0.9 million as SG&A. Let me now turn over the call to John Ambroseo, our President and CEO.

Thanks, Lene. Good afternoon everyone, and welcome to our third fiscal quarter conference call. As Lene has already described in her commentary, we posted solid results for the June quarter and have made further progress towards our long term financial goals. As discussed during earlier calls the attainment of these goals relies upon certain restructuring and outsourcing initiatives.

I am pleased to report that we are on schedule and on budget for the previously announced programs. Orders in the third fiscal quarter totaled $149.1 million which were flat versus the prior quarter and 7.1% higher versus the prior period. The book to bill for the quarter was 0.95. Orders of $29.7 million in the scientific market were flat sequentially and increased 4.8% versus the prior year period. As a reminder, last year's numbers included bookings of Custom Laser Systems, a business we have exited. The average run rate for Custom Laser Systems was 1 million to $2 million per quarter.

We matched our record for Chameleon orders and continue to enjoy very solid market share with this product family. We plan to bolster this position through key product augmentations scheduled through fiscal 2009. We are also seeing greater adoption of the OPS based Mantis laser as a seed source for high performance amplifiers. These products combined with the Legend (inaudible) amplifiers constitute one of our strongest scientific product portfolios ever.

Orders of $38.4 million for instrumentation at OEM components were down 14.7% from the prior quarter and increased 2.2% versus the prior year period. As a reminder the prior year period included approximately $4.2 million a quarter, for thermal edging optics, a market we have exited. To understand a large sequential change in bookings, it is useful to look back over the past couple of years. As our instrumentation business has grown we have settled into a bookings pattern with many of our accounts in which the third fiscal quarter represents the trough. This effect has been partially offset by sustained strength in OEM medical bookings, especially for refractive surgery lasers. During the third fiscal quarter we introduced an important extension of our patented OPS platform. The Genesis laser system is the first OPS laser to produce pure continuous wave output at 355 nm with very hide mode quality. Prior competitive products relied on inefficient gas tubes or more complex and expensive quasi CW designs, which limited lifetime and/or scalability. The initial versions of Genesis are configured for the instrumentation market and revenue shipments have already begun. Future versions will deliver higher powers and a range of wavelengths to support users in the microelectronic and scientific markets.

Bookings from microelectronics of $58 million increased 17.9% sequentially and 14.1% versus the prior year period. Orders from semicap applications applications surged on a sequential basis due in large measure to new system orders for lasers used for wafer and radical inspection. We are cautiously optimistic that we will continue to outperform the industry due to several key design wins. Bookings for lasers used in advanced packaging were stable. The Microvia business posted good orders due to growth in handsets and flip chip substrates.

Laser based silicon singulation inscribing continues to gain acceptance and or expectations are for further expansion in this space through [RRVia], Matrix, and Talisker platforms. We are very pleased with the reception that Talisker has received and evaluations are going exceptionally well. Orders for the flat panel display manufacturing market grew significantly on a sequential basis for systems and service. In keeping with our strategy to address more of the FPE value chain, systems booking included lasers for lift off applications, solid state lasers for touch pad scribing and CO2 lasers for glass cutting as well as line beam optics upgrade for kneeling systems. Service bookings were tied to maintenance contracts for an installed base, for the LTPS and Kneeling lasers.

Bookings for Soto manufacturing again exhibited strong growth and we are on pace to double year on year. Our current business is predicated on UV lasers were Coherent enjoys a considerable advantage over its competitors. This is true for crystalline silicon and thin film application including Ed's isolation and patterning. Materials processing orders of $23 million decreased 6.2% sequentially and increased 2.5% versus the prior year period. As reported last quarter the materials processing market remains in a dynamic state. Sluggishness in the U.S. and Chinese export market has been offset by new product growth in the Chinese domestic, Japanese, and European markets. In general these products offer better performance at a lower cost of ownership than other products on the market. The E Series CO2 laser has achieved a 100% qualification rate amongst the many customers who have performed evaluation testing. This is an unprecedented result. We are also making good in roads with our Matrix platform and rapid prototyping and specialty marking of ID cards and glass. Both platforms are scheduled for expansion over the next 12 months.

While we are pleased with third quarter results our attention is firmly fixed on long term goals. We believe we have excellent opportunities, based on customer alignment, product platform strength, and superior financial execution. I will now turn the call over for the Q&A session.

(OPERATOR INSTRUCTIONS) We will take our first question from Josh Harmon with Needham & Company.

Hi, this is me, Josh. Good afternoon.

Good, Josh, how are you.

Good, thank you. I have a few questions, please. I was wondering if you -- you talked about the new consolidation move, consolidating your BPSS lasers. I was wondering if you have the cost savings of that one part by itself? Or you gave the total cost savings, maybe you gave the total cost savings of the prior steps on a previous quarter?

John, we -- the I can give you the numbers. We physically announced the outsourcing of the U.S. manufacturing product family that was 1 million to $2 million. The Auburn was 3.5 million to $4.5 million and the BPSS one is approximately $1 million.

That helps. Thank you.

John, just to remind you that project just completed so there are no savings in the Q3 numbers for it.

And nor are savings projected in the Q4 numbers.

I'm sorry, you said BPSS was just completed so there were no savings in Q3 but it's not included in your Q4 guidance?

Q4 the savings are so minimal John. It will really kick in with the first quarter of fiscal 2009.

Okay. Thank you. The order numbers kind of flew fast and furiously so I didn't catch them all so I just want to roll it into this one question. Looks like your Q4 revenue guidance was flat to down a bit and it is normally your seasonally strongest quarter so which order category is driving your guidance in that direction?

We are just pulling numbers here.

All right. Take your time.

It is predominantly materials processing. At the lower end product range of materials processing. Which is one of the reasons the quality of revenue in Q4 is going up.

You just answered my next question. You guided up on gross margins, so meeting the materials processing are lower margin products which use the average higher as your guidance?

At the lower end of the materials processing portfolio, those margins are lower than the Company average. As proportionally as they decline and other products are higher share, yes, the gross margin does go up.

Sure. Of course. Thank you very much.

Sure.

(OPERATOR INSTRUCTIONS) And moving on to Mark Miller with Brean Murray.

Congratulations on a good result. Just was wondering, your microelectronics continues to go against what other firms and I cover in terms of your gains there. I am just wondering how much of that is attributed to new products. How much of it is -- I think you mentioned share gain. We heard about more missteps by one of your competitors in terms of some reliability issues. I'm just wondering what do you attribute -- the strength there which seems to go against everything else we're hearing about other peoples supply to the industry..

It's a very good question, Mark. Part of what we attribute this to is over the last few years we have really been putting a tremendous amount of emphasis on alignment with key customers in the space. Obviously we want to align with all the customers but we have been focusing some efforts here and that alignment is creating greater opportunity with some of the customers. The other emphasis we have put on, and we've talked about it so many times you are probably sick of hearing me talk about it is the whole notion of cost of ownership, better yields, lifetimes, et cetera. And those things are working well from the customer perspective. So we are able to work with these customers to drive incremental benefits into their model even in a tough cycle for many of the players in the microelectronics space.

Thank you.

Yes.

(OPERATOR INSTRUCTIONS) We will take our next question from Sid Parakh with McAdams Wright..

Just a quick question. Seems like the cash position is building up again. Can you maybe talk about the strategic use of that cash and what do you see in terms of acquisitions out there? Given that Excel was just bought out by GSI?

It is a high quality problem to be sure, Sid. We are committed to using the cash to the best value of the shareholders. We are looking at a variety of things, including various acquisitions. The emphasis on acquisitions at this point in time, though, are ones that can help us achieve our goals in terms of growth as well as gross margin. And those are, quite frankly, few and far between.

Okay. And then maybe can you touch upon the laser -- the fiber laser space? I know we have talked about this a couple of times in the past. Maybe how that is shaping up and how are you viewing it from a Coherent perspective?

Well, in terms of fiber technology, we have introduced our first fiber platform with is the Talisker. And that is doing pretty well in the marketplace as I reported during the call and during the previous call. We continue to see opportunities for other fiber-based platforms in our portfolio as well as in the market. With respect to the broader, the the high power or mid power and low power CW and Q switches fiber market, it is a space that is continuing to grow, and we see that the opportunity or maybe the challenge there is going become one of commoditization and how to best manage that. So we are very mindful of where that is. I do want to stress again that with respect to the material's processing portfolio, while we certainly see fiber lasers an awful lot in the space, thus far they have had virtually no impact on our business because our business is largely based on CO2 lasers and in low power applications CO2 lasers and (inaudible) are not readily interchangeable.

And then maybe a final question on the guidance. I am looking back a few years now and seems like the fourth quarter is seasonally higher. I don't know if it is seasonality or one time events. It seems like in all four years that I have on my model here since 2004 it seems like Q4 is sequentially higher, about 5% sequentially increase and this time you are guiding lower. Can you give us a better feel for what is happening?

As we have already mentioned, the area of softness is in the low power materials processing space, which is giving us a cautious outlook in that particular market.

Is it any specific geography or is it just broad based?

As I mentioned during this call and I think we talked about in the previous one as well, we are seeing sluggishness in the U.S. market and the Chinese export market which are two areas that have contributed to us in the past. And as those slow down we are talking a cautious look on what those can do in the fourth quarter.

Okay. That is all for me. Thank you.

Sure.

And moving on to our last question from [John Tarrel] with Tarrel & Co.

John, part of my question was answered. So are you continuing to go through with the German court appeal? Or have you notified them? Forget it? Not worth it now?

The court process is running right now because the Appellate Court did hand down a partial decision to the FCO and the Appellate Court agreed with us that the FCO decision may have been unlawful. Interestingly, even though the opportunity is gone, the Court will continue to prosecute that with very little input from us and the end result may be that the decision gets struck, which is not necessarily a bad thing for the industry. As we held for a very long period of time, that was not a good piece of law to be on the books.

Back to share of the overall market, do you guys attempt to at all track what your share of the overall market is?

We do have internal projections of share. We don't release those publicly however.

Okay. Thanks, John.

There are no further questions at this time, sir.

Like to thank everyone for joining us for the call and we look forward to speaking to you in a few months.

Ladies and gentlemen that does conclude today's conference. Thank you for your participation, and have a wonderful day.