Coherent Corp (COHR) 2010 Q1 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the Coherent first quarter 2010 earnings 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 Ms. Leen Simonet, Executive Vice President and Chief Financial Officer. You may now begin your conference.

Thank you, Jasmine. Good afternoon, and welcome to Coherent's 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.

As a reminder, any guidance and any statements in today's conference call pertaining to future guidance, 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 10K, 10Q, and 8K, as applicable and as filed from time-to-time by the company.

The full text of today's prepared remarks, which will include references to historical bookings and sales by market, will be posted on the Coherent Investor Relations website. A replay of the webcast will be made available for approximately 90 days following the call.

Let me first summarize the key highlights of the quarter. Orders grew 18.7% sequentially to $158.4 million, resulting in a book-to-bill ratio of 1.29 and a record backlog. Orders included a large solar production systems booking of $22 million, all shippable during fiscal 2010. Revenues of $122.8 million grew 14.1% sequentially and exceeded our expectations and guidance. We returned to profitability, delivered very strong earnings on both a GAAP and pro forma basis and achieved an adjusted EBITDA of 12.9%.

During the quarter, we generated $17.6 million cash flow from operations resulting in an ending cash balance of $240.6 million. As announced during last quarter's conference call, this balance reflects $15 million spent to acquire certain assets of StockerYale, Inc. As a reminder, these acquired businesses are projected to contribute about $16 million to our fiscal 2010 revenue and are expected to be accretive in the fourth quarter of fiscal 2010.

With respect to the first quarter earnings, we reported a pro forma income of $0.21 per diluted share compared to a pro forma loss of $0.04 per share in the previous quarter. The GAAP to pro forma pre-tax reconciliation items include $1.2 million restructuring costs, $2.2 million stock-related compensation expenses, and $2.2 million gain from the receipt of a settlement payment following the conclusion of our stock option litigation.

Net sales for the first quarter increased 14.1% sequentially with increases in all four markets. Scientific and OEM components and instrumentation in particular showed strong double digit growth primarily due to our record scientific bookings last quarter and approximately $3 million OEM components revenue from our recent acquisition. Within microelectronics, we experienced the highest growth in advanced packaging.

Company sales by significant market applications are as follows. Scientific, 36.1, Microelectronics 39.1, Material Processing 15.2, OEM components and instrumentation 32.4, for a total of $122.8

The first quarter gross profit was $51 million or 41.6% of sales. On a pro forma basis, excluding $0.5 million restructuring and stock compensation charges, pro forma gross profit was 42% compared to 35.6% last quarter and our prior guidance of 39% to 40%. The sequential pro forma improvement was primarily due to the benefits of higher sales volume coupled with the favorable impact of last year's cost reduction efforts. In addition, we experienced a more favorable mix and lower other charges.

Pro forma period expenses of $44.7 million, excluding $2.9 million for restructuring and stock compensation charges and a benefit of $2.2 million from the litigation settlement, increased $2.5 million from the previous quarter. This sequential increase is primarily due to the acquisition of certain StockerYale businesses and higher headcount related variable spending.

Our cash and cash equivalents balance for the quarter was $240.6 million, representing a year-year-year increase of $40.7 million, despite the cash demands from the footprint consolidation programs and our first quarter acquisition.

In particular we are pleased with our working capital management results. Inventory turns improved sequentially and inventory balances increased only slightly from the fourth quarter of fiscal 2009, even though projected sales volumes increased significantly. In addition, the acquisition added approximately $2.6 million to the outstanding inventory balance.

Accounts receivable collections were strong, with days sales outstanding decreasing to 56 days, an improvement of six days compared to last quarter.

Capital spending for the quarter was $3.3 million or 2.7% of sales.

Let me now give you the guidance for the second quarter of fiscal 2010. We are entering the second quarter with a strong backlog and we expect revenues in the second quarter to be in the range of $135 to $140 million representing a 10% to 14% sequential increase. The second quarter revenue guidance includes approximately $8 million from the solar production systems order.

We project pro forma gross profit to be in the range of 42% to 43% of sales, a sequential increase of up to 100 basis points. The positive leverage from increased volumes is partially offset by the impact of unwinding the temporary measures that we introduced in fiscal 2009, in particular the mandatory time off and the shortened work weeks.

Pro forma expenses increases for the second quarter also reflect the elimination of the mandatory time off and some selective hiring. However, pro forma expenses, expressed as a percentage of sales, are projected to be in the range of 34% to 34.5% of sales, which is slightly lower than the first quarter actual results.

As a point of reference, the elimination of the mandatory time off and fewer holidays will impact the second quarter expenses negatively by approximately $3 to $3.5 million when compared to the first quarter.

Intangible amortization is projected to remain at $2 million, or approximately 1.5% of sales. Stock compensation charges for the second quarter are estimated to be approximately $2 million, and restructuring costs related to the integration of the recent acquisition and the closure of our Finland facilities will amount to approximately $1.3 million.

Other income and expense is projected to be minimal as interest income is estimated to be immaterial to the results. And we are assuming an annual tax rate of 34%.

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

Thanks, Leen. Good afternoon, everyone, and welcome to our first fiscal quarter conference call.

The results for Q1 were impressive on many fronts. Sales were up 14% sequentially and nearly equal to the prior year period. Mix is shifting towards higher margin markets. We returned to both pro forma and GAAP profitability and handily beat expectations. Cash generation remains solid.

And as for demand, orders in the first fiscal quarter totaled $158.4 million, representing an increase of 18.7% sequentially and 53.3% versus the prior year period. All markets are up significantly compared to one year ago. The book-to-bill for the first quarter was 1.29.

Orders of $38.9 million in the scientific market were down 11.3% versus the record setting performance in the prior quarter, but represented an increase of 25.9% from the prior year period. The first quarter bookings were the second highest all time and included records for Europe and Japan and inline seasonal performance for North America. We established a second consecutive bookings record for our Chameleon product line with about half of the orders for our latest version of the Chameleon Vision.

Stimulus money has undoubtedly played a role in the increased volume, but we also believe we are gaining market share. Orders for non-biological imaging products accounted for the sequential bookings decline as the total number of opportunities was lower in Q1 compared to Q4 and we lost several deeply discounted deals.

We, like every other company, are tracking the flow of stimulus funds. The best information we have is that NSF has committed approximately half of its ARRA funds and the other half represents a future opportunity. By contrast, very little stimulus money has been released by the NIH. When it does begin to flow, it should represent potential upside for 2010.

On the product front, we have introduced several enhancements to our scientific portfolio. We released two new versions of our Legend Elite amplifier, one of which targets the emerging field of attosecond physics. And for those of you who are keeping score, an attosecond is 10 to the minus seconds. We also introduced the Verdi G7 that is based upon our highly successful OPSL platform.

Orders of $35.7 million for instrumentation and OEM components were up 2.3% from the prior quarter and 30.1% versus the prior year period. We have been working with leading ophthalmic system manufacturers to qualify our Genesis 577 OPS laser for use in non-refractive procedures including photocoagulation and photodisruption. We continue to capture design wins and are booking initial production orders as well.

The instrumentation market was up significantly on both a sequential and annual basis as customers see demand trending towards 2008 levels. Demand was strong for our Sapphire OPS laser, recognized as the industry standard for visible light sources, as well as our Genesis 355 OPS laser, which is rapidly becoming a standard for UV light sources. Some of the recent order strength has been attributed to year-end spending in Asia, specifically Japan. It is not clear whether projected NIH stimulus funds have been factored into orders received over the past two quarters.

For the past several quarters, we have seen a resurgence in the light show market through our Taipan OPS lasers. These lasers have sparked renewed interest from the digital cinema crowd, who value color gamut, power, reliability, ease of use and cost. While a technical solution is readily achievable, we believe the financing model for cinema operators will be the ultimate decision factor.

Bookings for microelectronics were a record setting $66.6 million, representing increases of 64.7% sequentially and 108.6% versus the prior year period.

The trend for the semiconductor market remains positive with utilization rates continuing to rise and CapEx spending projected to increase by greater than 50% compared to 2009. This translated into greater service bookings and new capacity buys, resulting in a 20% sequential increase in orders for Coherent. We also continue to capture design wins which should enable us to maintain our market leadership position for years to come.

Orders for advanced packaging applications doubled from a year ago with increased activity in all three submarkets. While not yet at 2008 levels, the vector is encouraging. The via drilling market is benefiting from two technology trends. Global demand for Smart Phones is driving overall capacity expansion, and recent enhancements to our CO2 platform is helping our lead customer gain market share.

Laser direct imaging applications in the printed circuit board industry that rely on our high power UV lasers are also rebounding.

Finally, we secured production orders for silicon singulation for logic devices and sapphire scribing for high brightness LEDs.

Orders for the flat panel display market remain well above 2009 levels as utilization rates and corresponding service orders rise. Orders were down compared to last quarter when we booked multiple annealing systems for use in OLED manufacturing. We have already begun work on the next round of deployment for notebook and netbook displays. We'll report on progress as appropriate.

For several quarters I've been describing our work in the crystalline silicon solar cell market, partnering with industry leaders in several new applications such as those that enhance optical-to-electrical conversion efficiency. During the first quarter, we received orders in excess of $23 million for both process development and high volume production level tools, with the majority from our lead customer. These orders are scheduled to be delivered within 2010.

Materials processing orders of $17.1 million increased 20.9% sequentially and 31.6% versus the prior year period.

Materials processing remains a tale of two markets. Low power applications in marking and engraving that largely serve consumer products continue to trend up, especially in China. All relevant products, CO2, diode and solid-state lasers, are benefiting from the trend. Although this is positive news, we expect customers to closely manage inventory versus demand, leading to lumpiness in bookings.

The high power market still lacks a catalyst and we do not foresee a change before the middle of calendar 2010 at the earliest. The timing may turn out to be fortuitous. The customer qualification process of the E-1000 kilowatt CO2 laser is proceeding on schedule. The feedback has been very positive. We have begun to accept production orders and revenue shipments will commence next quarter. We are also seeing very encouraging results for our kilowatt fiber laser program, thanks in part to optimized material provided by our recently acquired fiber facility. We expect to ship prototypes this year as originally planned.

The final phase of our previously announced footprint consolidation remains on schedule and we expect to exit our epitaxial growth facility in Finland on-time by the end of fiscal 2010. Some of you may be wondering what impact our rapidly rising revenue outlook may have on the timeline. At present, it is manageable. But we are continuously assessing capacity versus demand. If we would determine that customer commitments or revenues were at risk, we would err on the side of caution and push out the schedule.

The transfer of our Montreal facility is also proceeding and we expect it to be accretive in our fourth fiscal quarter as planned. Interestingly, customers from Montreal are taking a cautious approach. To safeguard against supply disruption, many of them have increased their orders and scheduled delivery prior to the shutdown of the Montreal location. This will have little impact on annual orders and revenue, but could skew quarter-to-quarter totals.

There are a number of important takeaways from our Q1 results. The performance and outlook for microelectronics are consistent with those being reported by other vendors and we are well positioned for the future through design wins. Our scientific business is benefiting from both market share gains and stimulus money. In OEM instrumentation, we are maintaining our leadership position through innovative solutions, any increase in discretionary spending should lead to growth.

While the materials market, processing market is in need of a longer term catalyst, we like our chances of expanding into the higher power market.

Given these factors and a record backlog, we are increasing our full fiscal year revenue outlook to $525 to $550 million dollars, which represents a 20% to 26% increase over fiscal 2009. To achieve this range, we are eliminating the furlough programs and other temporary measures implemented during fiscal 2009.

I'll now turn the call back over to Jasmine for the question-and-answer session.

(Operator Instructions) Your first question comes from the line of Ajit Pai with Thomas Weisel Partners. Please proceed.

Yes. Good afternoon, and congratulations on a very solid quarter.

Hi, Ajit.

Two questions. I think the first one is just looking at what the gross margin impact of both Montreal and Finland would be once they're off, completely off. And the timing of that, I think you mentioned, that they'll be off by the fourth quarter, does that mean that the fourth quarter will have the full impact of having them off?

Hi, Ajit. Yes, the fourth quarter will have the full impact of having the Montreal facility off. And the gross margin of the -- that business is higher than the average of the Coherent -- than the Coherent margin.

With respect to Finland, I believe we gave you -- we have not changed any of our estimates that we communicated the last conference call, that come Q1 fiscal '11, we'll see a step up to the benefits from $8 million to $14 million. We're right now at a run rate of $8 million. That was effective Q4 '09. And we'll step that up to a run rate of $14 million come fiscal '11. And so far we have not changed our estimate.

Got it. And then the second question is just looking at the order book and the orders you've disclosed. You have specifically called out the order from the solar market and said that that's all shippable within fiscal year '10. Could you give us color on the rest of your orders, like the orders that you get, the number that you provided, is it all shippable within one year? Is that the way you record orders? And were there -- there were some orders that was shippable beyond this period that are not included in the number you provided us?

Ajit, clearly the $202 backlog that we report is typically backlog, it's always backlog that's shippable in the next 12 months. So that's the way we report our backlog, it's shippable in the next 12 months. Some of this, therefore, could be in the first quarter of '11, shippable in the first quarter of '11.

Right. But did you get orders that were shippable -- were there material orders that were shippable beyond the next 12 months? Or there's nothing really material that was shippable beyond 12 months?

I don't believe that we have many orders during this quarter that are shippable outside of 12 months, and, if there are, they're probably quite small.

Okay. And then just looking at the solid cash balance that you have and the tremendous cash generation that the company is providing, can you give us some color as to uses of cash again, how you are prioritizing that? And also the M&A environment, how does it look?

So we continue to evaluate a variety of uses of the cash as we've mentioned a number of times in the past. There are M&A opportunities out there that are currently being vetted. And as those come to fruition, of course, we will let you know a lot more about them. We are taking -- continuing to take a critical view as we look at M&A to make sure that they can deliver an appropriate return for the amount of money, effort, and risk that we would undertake.

We also will consider additional buybacks. That will have to be, of course, vetted through our Board of Directors. And if and when appropriate, we'll make an announcement on that.

Got it.

Okay. Thank you.

Very good.

Your next question comes from the line of Larry Solow with CJS Securities. Please proceed.

Hi. Good afternoon. Congratulations on an excellent quarter. A couple questions. John, in your guidance, are you assuming basically sort of booking trends similar to what you see? In other words, you don't assume a big increase from stimulus funds, additional solar orders in 2010? In other words, you basically have good confidence in what your bookings are and what your backlog is in hand versus your guidance? Or do you need further continued growth?

We've taken a, I think a pretty conservative look at bookings for the remaining three quarters of the year, the one that we're currently in and the two out quarters. Clearly, there's been about $30 million of orders that we've recognized just in the last two quarters, the $10 million for the OLED annealing systems, and then the roughly $20 million for solar production tools this quarter. We don't see those as regular orders or part of the standard business. They're obviously extraordinary orders.

We're [not] counting on similar extraordinary orders in the second half of the year to materialize in order to make our number.

Right. But would you -- would commonsense dictate that maybe this could occur? I mean, I imagine you -- maybe not every quarter, but over the next one to two years, I imagine solar, you said you're working on seven different products, and that -- this sounds like you got $22 million from one product by itself. Is that correct? Or is that just --

We've got a large order from one customer for their application.

Okay.

We are clearly working on other opportunities. I think we've been clear on that. This opportunity in solar is the one that we started first and it's the one that developed first.

Right.

And we hope to capitalize on that and develop other opportunities as we go forward. Exactly the timing and the size of those orders, very difficult to project at this juncture.

Understood.

With respect to the flat panel market, I think we've been very clear as to what we see the progression of the opportunity looking like over the next few years, moving from handheld devices to notebooks and netbooks and then ultimately to televisions, and that's created a very clear chain of events within the company to develop the solutions that will support that.

Given the timelines that we talked about, '09 and '10, or '10, '11, rather, for handhelds and sort of '11, '12, and beyond for netbooks and notebooks and probably '12, '13, '14, for televisions, I think that that gives you a sense of when things need to happen and when things should happen.

Right. Right. And just kind of switching gears. You talked about design win, recent design wins. And is there any way to kind of look at design wins today versus how they were maybe last couple years? And, secondly, I imagine the design wins, there's sort of a production cycle. Would I -- Can we expect a lot of the design wins you've gotten over the last couple quarters to not really be impacting revenue until we look out to '11 and beyond?

I think that's a very fair way to look at it, Larry. When you capture a design win, there is a -- there's also work that has to be done on the part of the customer to bring that product or to bring their product into the market which ultimately drives demand for our products. And while these design wins are critically important for the future, they have small -- a small amount of impact in 2010, as you're shipping mostly development units in the current year, and we'll start shipping production units as they ramp up to take advantages of market conditions.

Okay. And just last question. On the furlough program and the, I guess the elimination of the furlough program, Leen mentioned sort of a $3, $3.5 million sequential increase. And if I kind of do the math on your sales guidance for next quarter, relative, I sort of take the midpoint of your full year guidance, it looks like your next three quarters, obviously, it's not an exact science, but could be sort of in the similar $135 to $140 million revenue range.

So is it fair to say that you'll kind of reach a sustainable run rate of expenses in the next quarter or will it up tick further going out? Does that make sense?

Larry, the second quarter forecast reflects the step up in expenses for the elimination of the mandatory time off. So that piece is already captured in the second quarter guidance. Going forward, the spending will vary based on kind of variable spending --

Right.

-- changes. But the expenses for the mandatory time off have been captured in the second quarter.

So it will be essentially a full unwinding of any temporary cost reductions really at the revenue levels?

With respect to mandatory time off, the answer's yes, it's fully captured.

Got you.

There may be other discretionary spending measures, but we haven't quantified them.

Got it. Okay. Great. Thanks.

Your next question comes from the line of Jiwon Lee with Sido (sic) and Company. Please proceed.

Yes. It is Sidoti and Company. And thanks for taking my questions. Just going back to the new fiscal 2010 revenue guidance. Sort of backing out the solar orders that you received that's about $22 million, the level is obviously higher than what you previously saw. So, John, I wonder whether you could sort of kind of highlight where is this incremental growth coming from if you think about your four key markets?

I think the answer, the easiest answer to that question, Jiwon, is if you look at where activity is taking place, there's a general sense that the microelectronics market is picking up. We're hearing lots of positive news around the CapEx cycle for the remaining part of 2010 and into 2011 and perhaps 2012 as well. So that's going to drive additional business for us.

We are heartened by the fact that NSF has only spent half of their money at this point. So there could be more money coming via NSF into the scientific market. And if NIH can arrange their bureaucratic priorities, that also can drive some additional funding, not only for the scientific market, but for the instrumentation market as well.

With respect to materials processing, it's steady as she goes. Right now on the low-end part of the market there's a wild card in the high-power part of the market for the end of the fiscal year and the second half of the calendar year. And, as I mentioned, instrumentation has picked up nicely. We need a boost in discretionary spending on the part of the consumer to really drive a growth curve in that business.

Okay. So taking all that microelectronics mean, John, if you have to rank where your backlog stands in terms of the [stop] market, semicon, packaging, flat panel displays, and solar, can you help us ranking the size of your backlog or the order, whichever is more relevant?

Well, I can't tell you the exact numbers. I won't tell you the exact numbers. But as we mentioned, we're seeing an up tick in all of those markets right now. It's easiest to rank the low one and say that in the grand scheme of things flat panel's probably the lowest backlog, because that tends to come in big chunks with short delivery times.

The other three markets, there's going to be a burst of activity around solar as we ship all of these tools. And then the sustaining ones, I guess I would put them as a semicap and packaging. Right now I wouldn't be surprised if packaging is a little bit ahead of semicap in terms of backlog, just given that it's recovered a little later than semicap, and, therefore, there's probably a little bit more of a buildup or a backlog in that area.

That's very helpful. Thank you. And lastly from me, this new one kilowatt CO2 laser, Diamond E2000, can you help us, where in the industrial space you are beginning to generate some early traction?

So we're targeting the middle of the space, right. We're well positioned in low-power applications with CO2 lasers. We're not going after the multi-kilowatt market. That's a very small, at least small from the unit size, and specialized market. The one kilowatt space touches a broad range of opportunities. As you may or may not be aware, CO2 lasers are good for cutting organics as well as metals. And that flexibility is very attractive to, as an example, job shops which are the dominant players in the one kilowatt space. And that E1000, we really view it as a game changer. It's not a little bit better than what's out there, it's a lot better than what's out there. And that's being reflected in the feedback we're getting from customers and the fact that we're already getting production orders in well ahead of first revenue shipments.

Very good. And one quick clarification. StockerYale revenue contribution, there was still $16 million for the year?

I think we gave guidance of $16 to $17 million against fiscal '10.

Okay. Great. Thanks so much.

(Operator Instructions) Your next question comes from the line of Mark Douglass with Longbow Research. Please proceed.

Hi, John and Leen.

Mark, how are you?

Hi, Mark.

Fine. So on the orders with scientific and research, the orders are still relatively high. But taking a takedown sequentially, would you also expect that the flow through to sequential decline in sales, which I think is kind of a -- might be a seasonal pattern with budget flushes for researchers at the end of the year? What are you thinking about that for the second quarter?

I'm sorry. Were you asking about revenues or sales for the second quarter? Just which --

Revenues for the second quarter, would you expect maybe a little bit of seasonal decline there in scientific reflected in the orders?

You know, Mark, we don't guide revenues by market. So I'm a little bit hesitant to start doing that here. Obviously, the scientific market is much more of a book-and-ship market than the other markets. Relatively --

Right.

-- short lead times. So your comment, your question, is not an unreasonable one.

Okay. That's helpful. All right. And then on the Equinox, you've given some pretty good insight there as when you expect to be shipping it. You said right now these are primarily a development related event?

The largest order that we took is for production level systems. So these will actually be used on a line for production solar cells.

Okay. And then, so then what are your views then as far as capacity and CapEx plans? I mean, I guess primarily for you, the crystal and silicon markets. Is this indicative of a general pickup there or is this more of a technology game changer, there's something about your laser system that intrigued them to install it into current capacitors. So is there a capacity expansion going on that you're seeing or is this indicative of anything in that market?

As I mentioned during my comments, we have been focusing our efforts not exclusively, but largely so, on applications that can help drive optical to electrical conversion efficiency.

Right.

That's been our mantra internally in terms of where we feel we can change the game. I don't think that you could look at the solar market today and say there's a new CapEx cycle taking place there. But if you can drive changes in the way these devices are manufactured that affects efficiency or yield or cost, end cost, obviously, then you do have an opportunity to capture business. And I think that's what's happened here. The other customers that we're working with in the space, they're working on a variety of processes, some of them also on optical to electrical conversion efficiency. And as we fully develop those, there may be opportunities to capture production orders from them as well.

Okay. And then just finally, I just feel this is intriguing. Do you think your ability to provide a whole system was a very important part of you winning the business? Had you not had a system, it would have been a much tougher fight for you?

The answer is, yes, I think it helped. Was it pivotal? Maybe. But clearly, what we were trying to do in working, especially in working with these customers, is something that hadn't been done in any kind of a formal way before. So it wasn't as though we could just turn to an integration partner and say, hey, you know, we want you to go and do this. And once we got to the point where we had actually done the prototype for the customer, the conversation changed very quickly to, okay, how can we move this into production. And there were some very long and involved discussions around that because it's not just building these tools, but making sure that you have the capacity to provide the uptime that is absolutely necessary in a production environment. And once we figured out the solution there, it became a pretty easy decision for us and then, obviously, for the customer as well.

Okay. Thanks.

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. Please proceed.

We'd like to thank everyone for participating in today's call, and we look forward to speaking to you again in a few months.

Ladies and gentlemen, this concludes the presentation. You may now disconnect. Thank you and have a great day.