Coherent Corp (COHR) 2011 Q2 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the Coherent Q2 2011 Earnings Conference Call hosted by Coherent, Inc. At this time, all participants are in listen-only mode. At the conclusion of the prepared remarks, we will conduct a question-and-answer session. (OPERATOR INSTRUCTIONS). As a reminder, this call is being recorded.

I would now like to introduce Ms. Helene Simonet, Executive Vice President and Chief Financial Officer. You may begin your conference.

Thank you, (inaudible). Good afternoon and welcome to Coherent's second fiscal 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 and Critical Accounting Policies 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 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, and a replay of the webcast will be made available for approximately 90 days following the call.

Let me begin by giving you the highlights of another successful quarter for the company. Bookings were $236.7 million, another record for the company. The book-to-bill ratio was 1.18, and for the first time in the company's history, quarterly net sales crossed the $200 million mark.

Our backlog at the end of the quarter was approximately $349 million, including about $2.6 million acquired backlog from the Hypertronics acquisition.

I would also like to announce --

Is there a problem with the line?

No, that's fine. Everything is fine. Thank you.

I would also like to announce the completion of our footprint restructuring program. We terminated all operations in Finland, completed the clean-up and returned the keys to the landlord at the end of April. As a result of the closure of all operations, we accounted for the dissolution of the legal entity which led to a non-recurring, non-cash accumulated translation gain of $0.24 per diluted share.

Pro forma earnings per share for the second quarter of fiscal 2011 were $0.83 per share and compared to pro forma earnings of $0.45 per share a year ago. This translates into an increase of pro forma earnings per share of 84% on a revenue growth of 35%, displaying continued strong financial performance and execution.

Net sales for the second quarter of $200.9 million grew 35% sequentially compared to the same quarter a year ago and 10% compared to the previous quarter.

Revenue increased in all four market applications, both sequentially and on a year-over-year basis. In addition, our Materials Processing, Microelectronics and Scientific markets achieved record revenue levels this quarter.

Geographically, Asia represented 44% of the second quarter sales, with half of it going to Japanese customers. US was 27%, Europe 21% and the rest of the world 8%.

Asia continues to be our strongest growth region. Microelectronics revenue in Japan and other countries in Asia continued to see robust growth rates following the increased demand in smartphones and tablets.

Japan's second quarter results also included strong Scientific sales, in part due to the fact that the March quarter represents the end of the Japanese fiscal year.

For the remainder of fiscal 2011, we are assuming that Japan will continue to represent approximately 22% of the company's revenues.

Sales by market application for the second quarter are as follows -- Scientific, $43.5 million; Microelectronics, $89.3 million; Materials Processing, $25.8 million; OEM Components and Instrumentation, $42.3 million -- for a total of $200.9 million.

The second quarter gross profit, excluding stock compensation and the Finland closure costs, was $89.7 million, or 44.7% of sales and compares to 45.1% last quarter and 44.6% a year ago. As mentioned during our last conference call, the Singapore operations are diluted for the company results for the second quarter and for the remainder of fiscal 2011. The benefits of higher sales volumes were offset by the negative impact of the acquisition and higher ramp-up costs associated with new product introductions and transfers to contract manufacturers.

Total pro forma operating expenses are $59.7 million, and as a percentage of sales, are in line with our expectations. Total pro forma expenses represent 29.7% of sales, compared to 29.5% of sales last quarter and 33.5% a year ago.

As a reminder, other income is exceptionally high due to the large accumulated translation gain from the closure of the Finland operations and, to a lesser extent, higher than usual income from certain deferred compensation plan assets.

Our cash and cash equivalents balance for the quarter was $271 million, compared to $297 million last quarter. The sequential reduction in the cash balance reflects the recent stock repurchase of approximately $27 million and the acquisition of the Hypertronics assets for approximately $50 million. In addition, we had a meaningful step-up in working capital and capital spending following our healthy bookings of revenue growth. Capital spending for the quarter reached $11 million, or 5.5% of sales, with the majority of the increases spent on capacity build-outs at several of our business units. We expect the higher capital spending to continue in the second half of the fiscal year, bringing the full-year spending to about 5% of sales.

(Inaudible) now give you the guidance for the third quarter of fiscal 2011.

We project our third quarter revenue to range from $201 million to $208 million, which represents approximately 21% to 25% growth, compared to the third quarter of last year, and up to 3.5% growth sequentially. In addition, we are increasing our full-year revenue projection to a range of $790 million to $805 million.

Pro forma gross profit levels are projected to be approximately 43.5% to 44%.

During the second half of fiscal year, we will see a higher level of shipments against the previously-announced large flat panel display volume orders. We already mentioned that these volume orders have gross profit margins below the company average.

Pro forma period expenses are projected to be in the range of 28.5% to 29% of sales, which is lower than the quarter just ended. This includes intangible amortization of approximately $1.9 million.

Stock compensation charges are estimated to be approximately $3.3 million, and we are assuming a pro forma tax rate of 34.5% for the remainder of the year. The slightly higher rate is mainly the result of having losses in Singapore without a corresponding tax benefit. As previously mentioned, we are investing in headcount, training and manufacturing capacity to prepare for several product transfers to Singapore. We expect the entity to be profitable in fiscal 2012.

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

Thanks, Helene.

Good afternoon, everyone, and welcome to our second fiscal quarter conference call.

Before discussing market performance, I'd like to provide an overview of the current situation in the Japanese market. We will focus here on three areas -- customers, vendors and our distribution organization.

By far, the majority of our customers are located in and south of the greater Tokyo area. They sustained little to no damage and quickly resumed manufacturing operations. Some of them continue to deal with rolling blackouts. We have a very small number of commercial customers and various research users in or near Miyagi prefecture. We are responding to service requests from these customers as circumstances allow.

We have a limited number of tier 1 suppliers in Japan who provide semiconductor lasers, electronic components and specialty crystals. We have not experienced any supply disruption and we are working closely with these vendors and second sources to ensure material continues to flow.

We have also analyzed tier 2 and tier 3 vendors and have not identified any unmanageable risk. Our Japanese staff is safe and sound. Other than a few cracks on the walls, our facilities were unaffected. The rolling blackouts affecting Tokyo are manageable.

We set a record for quarterly bookings with second-quarter orders of $236.7 million, representing increases of 1% sequentially and 43.9% versus the prior-year period. The book-to-bill for the second quarter was 1.18. Orders of $32.5 million in the Scientific market were down 24.9% versus the prior quarter and 2.9% compared to the prior-year period.

Orders in the second quarter were a mixed bag, with continued market share gains in Europe and Asia being offset by funding shifts in the US. Bookings from Japan and China remain robust as investment in life science research resulted in solid demand for the Chameleon product family. In Europe, ultrafast amplifiers joined Chameleon in driving incoming orders. The US research market slowed, which we attribute to our funds being nearly exhausted and timing delays in certain orders. In the longer term, the US will also be pressured by research spending cuts included in the new federal budget. The combined effects results in projected growth rates for our Scientific business reverting to historical levels of 0% to 5% per annum.

Orders of $32.7 million for Instrumentation and OEM Components were down 10.1% compared to the prior quarter and 8.4% versus the prior-year period. The bookings reflected the timing of annual orders, seasonal effects and a decrease in our related spending by end users.

Within the submarkets, demand for Instrumentation lasers remains strong, due in part to continue investment in Life Sciences in Asia. This will be an important trend for the remainder of fiscal '11 and into fiscal '12.

The Machine Vision business is on a steady bookings ramp following the integration and fortification of the Lazarus product line from Stocker Yale. The Medical OEM market continues to benefit from improved discretionary spending but also exhibits the greatest lumpiness in orders. Defense Applications are under pressure from spending cuts, although countermeasures and non-lethal weapons are still supported.

Microelectronics orders of $144.6 million were up 11.6% sequentially and 101.3% versus the prior-year period. The trend line for semi-cap equipment, according to various market tracking reports, points towards 15% to 17% growth in calendar year 2011. While we see evidence to support these projections, we are cautious about the longer-term supply chain impact from the devastating events in Japan. (Inaudible) supply and fab operations have been affected either by quake-related damage and/or rolling blackouts. These issues aside, customer engagement is especially high for advanced nodes.

The advanced packaging market remains strong due to demand for smartphones and tablets. Consider that in Q4 of calendar 2010, smartphones outshipped PCs for the first time with more than 100 million handsets going out the door. Most analysts expect more than 50 million tablets to ship in 2011. The compact designs are putting greater demands on packaging technologies, but it doesn't stop there. Emerging capabilities in 3-D chip packaging create a roadmap that extends several years into the future. For very similar reasons, demand within the laser direct imaging space is buoyant, which will lead to a record number of palleting shipments in fiscal 2011.

The LED equipment market appears to be exiting the absorption phase and ramping up again. This should create demand for our AVIA and Talisker products, which have undergone recent upgrades to be better aligned with this market.

We set another record for flat panel display orders in the second fiscal quarter. WE had previously announced a $32-million order for LTPS display manufacturing. This was complemented by an additional $20 million of orders for OLED manufacturing. All orders were for Viper lasers and we are scheduling shipments into fiscal 2012.

Other steps in the FPD manufacturing process contributed to the bookings record, including CO2 lasers for light-guide panel production and semiconductor fab lasers for FRIT welding.

Materials Processing orders of $27 million rose 6.6% sequentially and 14.4% versus the prior-year period. All submarkets within the Materials Processing area are showing signs of continued growth. Laser marking, currently our largest opportunity, is growing at greater than 10%. While laser marking covers a broad array of products, two standouts are textile manufacturing -- which benefits from the expiration of the European tax on Chinese leather imports -- and packaging of consumer electronics, where the next i-product will require additional manufacturing capacity.

The sub-kilowatt laser market is also forecasted grow at greater than 10%. This is an important trend, given the application alignment with our CO2 semiconductor and solid-state lasers.

I am pleased to report that our laser manufacturing tools -- or LMT -- business remains on plan, and we will be introducing an augmented version of the METABEAM tool that provides greater throughput at Lasers Munich.

As Helene mentioned, given our visibility and the strength of our backlog, we are increasing our fiscal 2011 revenue outlook to $790 million to $805 million. This represents 31% to 33% year-over-year growth.

We'll be presenting at the Noble Financial Conference in Florida on May 17 and the SPECTARIS Conference on May 24 in Munich, Germany. The SPECTARIS Conference is affiliated with the Lasers 2011 Trade Show.

And I'll now turn the call back over to the operator for the Q&A session.

Thank you. (OPERATOR INSTRUCTIONS.) And our first question comes from the line of Larry Solow. Please go ahead.

Good afternoon.

Hi, Larry.

Hi, Larry.

Hi. In terms of the closing of Finland, will we start seeing some benefit or is there still going to be a lag and still some excess or costs or the -- expect like, I guess, as a closing, I imagine you will start seeing some saving?

Hi, Larry. It's Helene. Yes, we previously communicated an additional $3 million on an annualized basis --

Right.

And a full quarterly run rate of 750 will commence in the fourth quarter.

Okay.

The third quarter includes about 50% of that quarterly benefit.

Gotcha.

And then you could assume that about 50% will be captured in cost of sales and the remaining 50% in operating expenses, with the majority coming out of SG&A.

Gotcha. And just in terms of the gross margin, looking out in the next few quarters, I guess there's some push -- give and takes there because I would imagine that since the Microelectronics is one of your higher-margin areas, and clearly it's really driving a lot of your growth, I would think that your gross margin would start kicking up. Or are there just some offsets on that maybe on the cost of materials side and -- as you add more labor?

Yes, but I'm not sure if you heard that I mentioned the impact of the large --

Right.

Flat panel display volume orders?

No no. I got that. So -- forgetting maybe the next one or two quarters, but as you look out -- some of these bookings might take a few quarters to run through and obviously trends there -- it sounds like they're so strong that assuming that these -- that you -- looking out a year -- 12 to 18 months -- obviously no one knows what's going to happen in this world, but assuming that Microelectronics is your -- remains your best -- so your strongest growth driver -- is it fair to say that gross margins should rise?

It's fair to say that as volume continues that we should see some benefits from that --

Okay.

Into the future of fiscal years. And I also mentioned that Singapore has a dilutive impact. It's about 0.4% for Singapore alone.

Right. Right. In the near term. And then I guess my other question would be on Singapore and as you -- I imagine as you transfer product over to Singapore -- and I realize that'll take a few quarters and there's probably a learning curve on that -- but as that occurs, would you also expect to achieve better profitability? Also, I know the other reason is just being close to the customer?

We didn't make the investment in Singapore to step backwards. We made the investment to step forwards. Right.

Okay. Great. And then, John, actually you mentioned that the research spending cuts in the US -- the reimbursements or the funding for that -- I think I had on a transcript of a competing company that the spending cuts were not quite as much as feared and they were actually pretty minimal. Is that -- was that incorrect or was that a different cut they were referring to?

So there are two different considerations here.

Right.

One is the expiration of the ARRA funds.

Right.

So the American Recovery and Reinvestment Act. And that gave us a boost in the latter part of '09 and through '10 and into fiscal '11. Those funds are reaching the end of the line. The actual budget cut, excluding the impact of ARRA, is projected to be about 1%, which is sort of a nominal number.

Okay.

So when you take ARRA out of the way and you look at a 1% cut and then you factor in what's happening in Europe and Asia, that's why our view is, in the mid to longer term, this market goes back to being a GDP kind of market.

Got it. Gotcha. Last question. Just on the Materials Processing, you mentioned the sub-kilowatt markets are (inaudible) going strong. They high-powered area, I know -- which has sort of been a laggard. Any signs of that improving?

So we have -- I think as I mentioned previously, we've launched two of the three products that we were targeting in that area, and those products are doing okay in the marketplace today. We still have the third product to get into the market, which is a fiber-based system. And that's scheduled to go this year as we've discussed.

Sounds good. Thank you.

Sure.

Thank you. And the next question comes from the line of Mark Douglass of Longbow Research. Please go ahead, sir.

Hi, John and Helene.

Mark, how are you?

Hi, Mark.

Fine. How are you?

Good. Thank you.

Good. Helene, you mentioned one of the drags on gross margins was contract manufacturers. Is this kind of a temporary measure until you get more capacity online or is it something kind of just -- you just want to outsource a little more?

Mark, it's Helene. Yes, it is temporary. I mentioned ramp-up costs associated with transfers to contract manufacturers.

Right.

And ramp-up costs with new product introductions, and so that typically is a temporary issue.

But is it the intent to eventually move that in-house necessarily or not necessarily?

No. Actually, it is moving production from Coherent to the contract manufacturers.

Okay. And then, John, it was a little bit quick. Can you go through again in the orders in Microelectronics -- flat panel displayed? Were there additional orders -- large orders this quarter (inaudible) highlighting what you had seen past quarters?

Sure. So for Q2, when we made our Q1 announcements in January --

Right.

We already had in hand an order for $32 million for flat panel display manufacturing. Over the course of the quarter, we received additional orders for flat panel manufacturing of about $20 million, so that brought it to about $52 million in orders for flat panel display manufacturing during the course of the quarter.

Okay. And is it fair to assume that --

I should correct myself. $52 million for annealing systems for flat panel display manufacturing.

Annealing. Right.

Yes.

Then those weren't necessarily all OLED?

It was a combination. The initial orders were all for LTPS. That's what we had announced back in January. And then the subsequent orders were a combination of LTPS and OLED.

Okay. And is it fair to say that there could be continued follow-on orders in the future? This well has not run dry yet?

We are certainly working with customers on additional orders and we do believe that there is meaningful future potential in this market, but we don't have any new ones to announce today.

Right. Okay. Thank you.

Thank you. And the next question comes from the line of Ajit Pai from Stifel Nicolaus. Please go ahead, sir.

Yes. Good afternoon.

Ajit, how are you?

Good. And you?

Good. Thank you. A couple of quick questions. I think first is just looking at the impact of Singapore. I think you did talk about investing over there and being a temporary drag and then gradually, in the long run, moving forward rather than moving backward. So could you give us some indication, one, as to the drag? If you had to quantify it right now in margins or even in dollar terms, how much should we be thinking about over the next few quarters? And also, longer term, when you look at your gross margin structure, it's come a long way over the past maybe 8 to 10 quarters, but looking at your business, looking at the mix, looking at your vastly-improved scale, do you see potential for the gross margins of your business getting back to the high 40's that you enjoyed in the late '99-2000 time period?

Hi, Ajit. It's Helene. I'll take the first part of your question. Singapore -- the impact on the gross profit -- percentage is about 0.4% -- so 40 basis points. And the impact on the earnings per share is similar to what I announced last quarter. It's about $0.05 dilutive to our earnings per share in both quarters to come -- in Q3 and Q4. And it was also $0.05 in Q2.

And then with respect to the second question, it is certainly our objective to continue to make progress on the gross margin line. We have had to make some investments in order to prepare ourselves to take that next step, and Singapore is a piece of that. It would be -- I think it would be inappropriate for me to comment about getting back up to the high 40's or 50's until we have some track record in getting into the upper 40's, but certainly we want to head in that direction.

Got it. And then the second thing is -- question would be about the approach that you're using to fiber lasers -- the more modular approach. Have you had some traction over there? Is the -- are the products that you are planning to introduce over there -- are they out already? And what's been the response to that approach from customers?

So we've had detailed conversations with a number of customers or potential customers. The product architecture seems to resonate with them. We will be getting prototypes into their hands for extended evaluation in the coming months. The program is basically on track for product releases, as we delineated previously. So from our standpoint, things are going according to plan. Ultimately, the customers will decide what products they like and what products they don't, but we think that the modularity does bring some benefits to the marketplace.

Got it. And then the last question is, just looking at your cash and the fact that you've stepped up your investments and made a few acquisitions right now, are you still looking actively for further acquisitions and how rich is the pipeline right now in uses of cash? You did do a buyback in this most recent quarter, but how would you prioritize the use of cash?

I think we did do a buyback.

Yes, you did.

(Inaudible) recent quarter. Yes.

Yes.

Oh, I thought you said "you didn't." I'm sorry. We continue to look at the M&A landscape for opportunities and I'd say that the pipeline is reasonably full. I've made the comment previously -- it's like the kids' fairy tale where you kiss a lot of toads to find a prince, and we continue to do that. We're certainly not done in terms of acquisitions. We're very mindful of valuations and return on investment, so the selection criteria remains pretty rigid.

Right. And in terms of prioritizing the uses of cash, would you say that your current net cash level is the appropriate level that you'd like to keep for being opportunistic for acquisitions or do you see yourself either initiating a dividend or a share buyback or continue with the share buybacks?

Well, we still have -- I think it's $48 million under the previous authorization for a share buyback. I think we had $75 million approved and we deployed $27 million in the most recent quarter. So that option remains open to us. If we can find the right acquisitions -- and we think we've done a reasonably good job of that over the last couple of years -- that can grow the top line and disproportionately grow the bottom line, obviously that would be a great place to invest. As far as dividends go, that's a very different conversation -- one that we've had a number of times. It is something that is an option for us, but it really comes down to total shareholder return and what's the best way to drive that.

Got it. Thank you.

Okay.

Thank you. And your next question comes from the line of Jiwon Lee from Sidoti & Company. Please go ahead, sir.

Thank you and good afternoon.

Hi, Jiwon.

Hi, Jiwon.

John, the new revenue guidance -- I wonder whether that is mostly on better microelectronics and specifically on large follow-on orders or are there other things that you could point to?

Well, certainly Microelectronics has been leading the charge for us. We've had a disproportionate number of design wins over the last couple of years that have translated into a terrific revenue trend. But I would also highlight that the other markets have done exceptionally well. If you look at Materials Processing and the growth in that business over the past year, it's been terrific. It gets dwarfed because the Microelectronics business is off the charts right now. The Instrumentation business has also held up reasonably well and the Scientific business, with the ARRA benefits, had a terrific run and we think that continues to grow but at a much lower rate than we've seen over the past couple of years. So the short answer to your question is right now, some of these big opportunities that are being driven by mobile commuting -- whether it's smartphones or tablets, various display technologies, packaging architectures, etc. -- we've achieved terrific alignment and it's driving a lot of business for us today. But we're making good progress in the other markets we participate in and we remain a leader in three of the four verticals that we serve.

Okay. And if (inaudible) lasers to flat panel displays are below corporate average now, what does it take for that product launch to drive above corporate average margins?

We'll have to do some cost engineering to drive it north of the corporate average.

Okay. I guess that would -- yes?

I would highlight for you, however, that the speed at which we're building these things -- we're not trying to ship a handful of these things over the next year. We're trying to ship multiples of handfuls, so to speak. So the pace is quite crazed right now in terms of getting product out the door. And as I mentioned, we're already scheduling into 2012 on those products. So speed is of the essence for the customers and for us.

So staying on the (inaudible) lasers to the flat panel displays, does the competitive landscape still remain as was?

In terms of --?

Addressing the OLEDs and other flat panel displays?

Well, I think if you look at the number of units -- and you have to sort of define the number because neither company is giving absolutely pristine guidance in terms of units -- but if you do an estimate in terms of dollars per unit, I think the deployment is going somewhere on the order of 10 to 1 or maybe greater than 10 to 1 in our favor.

Perfect. And then on the Hypertronics side in Singapore, once they're done diluting, what are the expectations for fiscal 2012?

We haven't given any yet and it's a little premature to do that. When we did this acquisition, we highlighted that this was going to be an investment mode in order to position us for the next round of capacity expansion, proximity to customers, and cost management, and we're working towards that. We need to get all our ducks in a row and when we enter fiscal 2012, we'll give you some guidance as to what we think the numbers are going to look like.

Okay. And lastly for me, could you give us a little more specific updates on your industrial lasers with the -- especially the E-1000 and the fiber laser (inaudible)?

So the E-1000 is progressing in the marketplace. We're doing a lot of demos. We're trying to get as much product as we can out there right now. The market is in an interesting position where customers are working pretty hard to delivery product and they're probably not spending as much time on generating new product architectures as they are shipping existing product architectures. And that represents an opportunity for the future and a challenge somewhat for the present. As far as the fiber laser, I think I responded to an earlier question on this. We remain on track to get that product into the marketplace this year. The feedback continues to be positive from the customers that we're speaking to, but I always bear in mind that it's easy for customers to say the right things until they have to put cash on the barrelhead. And that ultimately is the litmus test and it's one that we're looking forward to taking.

And then the initial introduction would focus around 1-kilowatt level. Was I correct?

We will start out probably at the 1-kilowatt level. That is correct.

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

Okay.

Thank you. (OPERATOR INSTRUCTIONS.) The next question comes from the line of Mark Miller from Noble Capital Financial Markets. Please go ahead.

First, my congratulations on your record quarter.

Thank you, Mark.

Thank you, Mark.

In terms of the quoting activity, one of the laser firms is reporting that they were expecting a drop-off in sales to microelectronics customers. I'm just wondering, that seemed to be in contrast to what we're seeing elsewhere. I'm just wondering your comments about that.

We've not seen anything in terms of weakness in the microelectronics market.

In terms of the backlog, excluding the OLED business, is the margins of the orders in that backlog similar to what we've seen the last couple quarters?

Mark, it's Helene. Yes, I don't see any major differences. They're not -- they're certainly not significant differences.

Anything to report on solar sales?

We continue to sell individual lasers and we continue to sell development tools. We've not taken another volume order for production tools at this point.

And finally, I apologize if I missed this. Cash from operations?

I did not give it yet, Mark. It's approximately $6 million and it's a little lower than usual because we stepped up our working capital inventory to fulfill the requirements -- the customer requirements -- and also receivables because the revenue was higher.

Thank you.

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

We'd like to thank everybody for participating in the call and we certainly look forward to running into you at one of the conferences that we'll be speaking at in the next few months. Have a good day.

Thank you, ladies and gentlemen. You may now disconnect and enjoy your day. Thank you.