Coherent Corp (COHR) 2012 Q2 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the Coherent second quarter 2012 earnings conference call, hosted by Coherent, Inc.

(Operator Instructions)

As a reminder, this call is being recorded.

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

Thank you, Candace. 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, market trends, 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 first give you an overview of the second-quarter results. Bookings for the quarter were $183.1 million, and our backlog remained strong, ending the quarter at approximately $349 million. Revenues for the quarter were $193.3 million, with corresponding pro forma earnings of $0.73 per diluted share. The earnings were negatively impacted by a lower than expected gross profit percentage, which I will expand on in a few moments. The pro forma EBITDA percentage for the quarter is 17.3%, and our GAAP earnings of $0.67 per diluted share include the regular stock compensation charges and a $1.6 million tax benefit from the release of tax reserves and related interest as a result of the closure of certain open state tax years.

We continued to have strong cash generation, ending the quarter with a cash balance of $215.2 million, representing an increase of 6% compared to last quarter.

Net sales for the second quarter grew 1.3% sequentially and declined 3.8% compared to the same quarter a year ago. We saw solid performance in each of our major markets, with a more notable sequential growth in the material processing market, largely the result of demand recovery in China.

Geographically, on a trailing 12-month basis, Asia accounted for 48% of the total Company's revenues, US 24%, Europe 22% and rest of the world 6%.

The Company's sales by market application for the second quarter are as follows -- scientific $37.6 million, microelectronics $91.3 million, material processing $26.5 million, OEM components and instrumentation $37.9 million, for a total of $193.3 million.

The second quarter gross profit, excluding stock compensation charges, was $78.1 million, or 40.4% of sales, and compares to 42.3% of sales last quarter. The sequential decline was the result of several factors. First, we experienced a higher level of startup costs, service events and overall manufacturing costs primarily relating to the new products we introduced for the flat panel display market. In addition, we experienced a negative product mix in both of our business segments, and we continued to see the effect of lower volumes in the advanced packaging market, impacting one of our business units disproportionately.

Going forward, we anticipate the gross margin to increase gradually over the next two quarters. We estimate our margins in the third quarter will improve approximately 50 to 100 basis points compared to the second quarter as we see volume picking up in several of our business units. We are on track to ship the first excimer tubes for revenue from our recently completed Korea refurbishment facility. However, the first units ship late in the quarter and will therefore have little positive impact in our third quarter. We anticipate a ramp-up in the fourth quarter, resulting in more overhead absorption, leading to an estimated incremental gross profit of approximately 50 to 100 basis points when comparing to our third-quarter projection.

Our operating expenses as a percentage of sales are in line with expectations, and we anticipate to see more leverage opportunities as the volume increases.

Our cash and cash equivalents balance for the quarter was $215 million, compared to $203 million last quarter. Cash flow from operations for the second quarter was $16.6 million, and capital spending was $11.4 million, bringing the year-to-date spending to 5.1% of sales. As indicated before, the capital spending is higher than our normal run rates due to the significant manufacturing investments in Korea and Goettingen, Germany, to support our flat panel display business. We project the full-year spending to remain in the range of 4.5% to 5% of sales.

Let me now give you the guidance for the third quarter. We expect our third quarter revenues to be in the range of $193 million to $195 million. As previously mentioned, the pro forma gross profit percentage for the third quarter is expected to increase approximately 50 to 100 basis points compared to last quarter, which translates into a range of 40.9% to 41.4% of sales.

We project the pro forma period expenses to decline as a percent of sales, to be in the range of 27% to 27.5% of sales. The period expense guidance is inclusive of $1.6 million intangible amortization costs.

Stock compensation charges are estimated to be approximately $4.1 million, which is similar to last quarter, and we anticipate our non-operating gains or losses to net to zero. We are assuming a pro forma tax rate for the third quarter in the range of 33% to 34%, and the diluted shares outstanding for the quarter are estimated to be about 24.1 million. And again, also, as previously mentioned, capital spending for the year is expected to be in the range of 4.5% to 5% of sales.

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

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

Before discussing market performance and trends, I would like to add some color to Leen's comments on gross margin. Coherent has done an outstanding job of managing performance roadmaps over many product cycles. For the purpose of this discussion, performance is broadly defined. Our primary goal is to be on the same point of the same roadmap as our customers. We achieve this through constant innovation and invention, which requires managing multiple actions in our development programs.

Last quarter, we experienced a performance dislocation in specific excimer products. Please understand that I can't define the nature of the dislocation without disclosing customer confidential information. We have reprioritized certain development activities to resynchronize performance expectations. We expect to complete this in the next few quarters.

Let me turn my attention to last quarter's results. Second-quarter bookings of $183.1 million were down 9.3% compared to the prior quarter and 22.6% lower than the prior-year period. The book-to-bill for the second quarter was 0.95.

Scientific orders in the second quarter were $29.9 million, down 30.6% sequentially and 7.9% compared to the prior-year period. While the second quarter is seasonally lower, high order intake in the first quarter also contributed to the large sequential decline.

Bookings by application were mixed. Orders for multiphoton spectroscopy applications were very strong, particularly in the US, where we set a new quarterly record. We believe part of the strength arose from the expiration of a key application patent, which enabled a new set of OEM suppliers to enter the market. We established supply contracts for Chameleon lasers with a number of these players. Multiphoton investments in Europe, led by Germany, and Asia, led by China, remained solid.

Bookings for ultrafast amplifiers were down sharply due to the timing of orders in Asia. We had strong bookings in the first quarter that included customer pull-ins from the second quarter. Given the funding cycle, we did not expect this to repeat in the second quarter.

Timing aside, we're excited about the amplifier market. Our portfolio has never been broader or deeper than it is today. Recent product introductions are helping us extend the performance gap versus competitors. We are seeing strong interest in high-performance systems, where we hold the leading position and enjoy high ASPs.

Instrumentation and OEM component orders of $31.2 million were down 12.7% sequentially and 4.6% versus the prior-year period.

Orders from the medical OEM market benefited from strong consumer demand for vision and aesthetic procedures. We expect current applications, including refractive surgery, skin treatment and hair removal, to remain stable. We project growth in several ophthalmic treatments such as laser-based cataract removal, microkeratotomy and interocular therapy. These latter procedures rely on short-pulse lasers that are part of our current and future product family.

Instrumentation bookings were down sequentially, due in part to the timing of large orders and regional shifts. Lower spending in the US and Europe was offset by investments in Asia, especially China. Current application trends are unchanged, with cytometry and microscopy representing the major sources of revenue.

In terms of future growth drivers, one of the largest opportunities is low-cost genome testing that is being developed by several companies. We believe our OBIS and OPS products are ideally positioned to address this application.

Microelectronics orders of $92.1 million declined 8.1% sequentially and 36.3% versus the record-setting prior-year period.

Bookings for semi cap applications posted solid growth compared to the first quarter, which is consistent with the market model we have discussed for the last couple of quarters. Increased deployment of 20nm nodes across multiple customers has boosted new system orders, and higher utilization rates are driving service demand. We are engaged with key customers on new products that will increase accuracy, sensitivity and speed for the most advanced inspection and metrology applications. This requires us to further extend the performance of our industry leading laser solutions. We expect these products to contribute to 2013 and 2014 revenues.

The API market has been in a slump for several quarters, but we are seeing signs of near-term relief and some long-term drivers. Key customers are reporting an increase in the number of sales inquiries, which historically has correlated with higher orders. This is likely due to capacity constraints and imminent credit easing in China.

Longer-term growth comes from increased 4G deployment and policy changes related to LED lighting. The governments of Japan, South Korea and China have set targets of 50%, 30% and 20%, respectively, for LED lighting as a percentage of general lighting by 2015. Previous Chinese investment subsidies resulted in an overshoot of MOCVD capacity for LED manufacturing. Packaging technologies, particularly laser dicing or singulation, were not eligible for similar subsidies. This mismatch will drive demand for lasers to meet the lighting targets.

Orders for FPD were down sequentially, but in line with expectation. The order rate is poised to dramatically increase in the second half of the year, driven by continued growth in high definition LCDs and OLEDs, first shipments of OLED TVs and the emergence of China-based LTPS manufacturing. It's a pretty good guess that many of these customers are vying for future-generation Apple products.

Input from customers suggests that metal oxide TFTs will not be production ready in the short term. This has shifted interest towards LTPS backplanes for OLED TVs. Chinese LTPS manufacturing will be based on Japanese, Taiwanese or Korean designs. End products will address the lower end of the domestic Chinese mobile market. We expect most of the orders will be for Gen 5 and Gen 6 systems, and the order rate will be lumpy.

Materials processing orders of $30 million were up 31.3% sequentially and 10.9% versus the prior-year period.

The recovery to near-record bookings during the second quarter is largely due to improved order flow from Asia, particularly China. North America and Japan were slightly up and Europe was flat on a sequential basis. Orders for marking and engraving lasers were driven by consumer electronics manufacturing and replacement of lost capacity in Japan from the Sendai earthquake. We received sizable orders for lasers used in cutting and converting in textile applications. We also saw a modest increase in component demand, which are mostly OEM sales of semiconductor lasers.

Customer inquiries at the Laser China exposition in Shanghai last month provided valuable insight into future opportunities in laser-based manufacturing. Interest remains strong for current applications, including marking, textile processing and metal cutting. An increasing number of companies are entering precision remanufacturing business, utilizing high-power direct diode lasers for cladding, brazing and heat-treating. The goal is to reduce the maintenance cost in automotives, electronics, heavy equipment and the semiconductor industries. We will participate in this market as a light source supplier through our Highlight products or as a semiconductor laser supplier to local integrators.

We continue to make steady progress towards the release of our high-power laser platform. We have delivered evaluation units to multiple customers and have received positive feedback. We will release our first product within the next few months.

We encountered a number of speed bumps in the first half of fiscal 2012. I'm happy to say most of these are in the rearview mirror, and we anticipate that bookings will accelerate in the second half of the year. We have an action plan to resynchronize our excimer product roadmap and are confident we will achieve this in the timeline specified.

For those of you who like the beach, we'll be presenting at the B. Riley conference in Santa Monica, California, on May 22.

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

Thank you, sir.

(Operator Instructions)

Our first question will come from the line of Patrick Newton, with Stifel Nicolaus. You may proceed.

Yes, thank you. Can you hear me?

Yes, we can.

Oh, hey, John, Leen. Quick question, I guess. I want to drill a little bit on the gross margin side. If you could, could you kind of discuss the mix between the manufacturing costs startup and then just the negative product mix, if you had to bucket those two to kind of explain the nearly 200-basis-point decline sequentially?

Hi, Patrick. I highlighted three factors. The first one is the startup, service events and manufacturing cost, and that's about 50% of the total decline. And then the next two each have 25% contribution to the decline.

Okay, and then on the manufacturing cost, is that on the entire excimer laser system, or is that purely driven by the laser discharge units?

It is across the laser system.

Okay, so no gross margin impact at this point from the LDUs?

Well, the LDU is part of the system.

I guess can you -- the thought process in the past, I guess what I'm trying to get at, is that LDUs were seen as being pretty materially accretive to the gross margin structure longer term. So, as you ramp Korea, get that volume up and utilization, is that still the thought process long term?

That is the thought process long term. There is no change in our long-term outlook.

Okay. And then, Leen, did the -- was the Singapore facility a drag at all on gross margin sequentially?

The Singapore facility is a drag on the total profitability. As you may recall, we always said that we had about $0.05 negative impact on the earnings per share on average for the past six quarters. Going forward, we will see a reduction in our tax rate, so we will probably have about a $0.50 reduction -- 50-basis-point reduction in the tax rate in Q3, and going forward we hope to improve that even further.

Okay. And then just one last one on R&D, I guess, if you look at last year you produced three flat panel display generations. You invested [and] add a second technology, and you ramped some expenditures I think for your fiber laser product line. And, given those significant investments, should we see the pace of R&D growth that we saw in fiscal '11 kind of moderate as we move through fiscal '12 and into fiscal '13?

We would certainly expect the growth in R&D spending to slow going forward, the growth rate to slow going forward.

Perfect. Thank you for taking my questions.

Sure.

Our next question will come from the line of Mark Douglass, with Longbow Research. You may proceed.

Afternoon, John and Leen.

Hi, Mark.

Hi, Mark.

Okay, John, can you talk about the orders? You mentioned them picking up in the second half --

Yes.

-- that you were seeing signs of pickup, but your 3Q sales guide is basically flat with 2Q. Would a lot of that shipment come in 4Q, or can you just explain some of the dynamics there?

So, it's an excellent question, obviously. Part of the growth that we will see in orders, a large part of that growth, actually, is coming out of the microelectronics segment. That typically is a scheduled business rather than a turns business.

Right.

And that's especially true for things like flat panel display and semi cap. I think the part of the microelectronics business that will probably more resemble a turns business would be API, because that's been starved for investment for a pretty extended period of time. So, once that spigot turns on I think you'll see faster order fulfillment based on what the customers' needs are. For pickup that is going to take place in materials processing, again, that tends to be closer to a turns business than it is a scheduled business. So it will be a mix, but I do have to highlight that a lot of the orders, especially the large-dollar orders, we are projecting to come from microelectronics, which is more scheduled backlog.

Right. Then API you've not really seen it turn yet? Is that fair to say?

We didn't see any significant turn in the second quarter, but the indications from the customer base is that orders are starting to free up. The number of sales inquiries, as I mentioned, that they're dealing with has stepped up considerably. Supposedly, the Chinese government has made some policy changes on credit availability, although we haven't seen the manifestation of that in the marketplace yet. The end customers are anticipating that that is going to be a benefit over the next couple of quarters and therefore will allow them to start to invest again.

Okay. So, the chatter is picking up but hasn't translated into orders.

In the second quarter, no. I don't typically comment on orders that are taking place during the current quarter.

Right. Right. And then can you talk about scientific? I think you mentioned timing there. I didn't realize there was so much timing involved in scientific other than maybe some seasonality. Can you explain scientific a little more?

We had -- so, if you look at the two pieces of the scientific market, and I would say that the two major application groups are the multiphoton excitation market and then the amplifier market, which is sort of basic R&D across a number of different disciplines, the multiphoton market has benefited not only from the expiration of a key patent out of Cornell, and that's allowed a number of new entries into the market, and our sales team has done a terrific job of capturing a number of those companies as OEMs, so that led to a surge in orders for products like Chameleon. On the amplifier side, which is tied, obviously, to the funding cycles, the business that we saw in the latter part of calendar '11 was quite strong, in fact unusually strong.

Right.

And it looks like we ended up having some orders come in earlier, so, in other words, we got orders in Q1 that we had originally forecasted for Q2. So, while the order rate was lower in Q2, that's not going to have as much of an impact on revenue, because we'll be able to smooth that out from backlog as well as order intake during the quarter. We also have -- we do have a seasonal effect. Typically we see Japan slowing down in the March quarter, because it's their end of the fiscal year and government funding policies require that any capital that's been ordered has to be delivered and installed before the end of the fiscal year in order for the funding to be granted. So, most of the Japanese customers who are buying big systems like amplifiers place those orders by the end of December to ensure delivery in March, and then -- and we see this contraction in business in the March quarter.

Okay. That's very helpful. And then one final one on the materials processing pickup, is that mostly in your CO2 business, and then can you talk about how the growth in your cutting machine business is going?

So, the growth was predominantly in CO2, you're correct. We are fielding, or we are taking orders for DDF systems or direct diode systems, as well. For the LMT tool, or the laser manufacturing tool, we have a very high level of interest. The orders are moving -- they're sort of fluid between quarters right now. I think the outlook for the year is actually quite strong, although we did see a shift of orders from Q2 in both directions. Some of them we got early and some of them got pushed out.

Okay, thank you.

Sure.

Our next question will come from the line of Larry Solow, with CJS Securities. You may proceed.

Hi, good afternoon, guys. Just one last question, just a follow-up on the gross margin issue, just if we're basically about 200 basis points down sequentially and, say, 300 or maybe a little more than that sort of from your 2011 run rate, fiscal '11 run rate, so you basically gave us sort of what Q3 looks like, and as you go into Q4 I know you've mentioned this 50 to 100 BIPS improvement just from the excimer plant. Is there potential for some of the other issues, particularly volume, overhead absorption and mix that would actually lead to a greater than that improvement, or is that sort of the floor from where you stand today?

So, I'd say the question is not unanticipated, Larry.

Right.

From the standpoint of mix, we can make some guesstimates, but until we have hard orders in hand it's always difficult to say exactly what the mix is going to be in any given quarter.

Absolutely.

Especially when we have some portion, some reasonable portion of our business is based on turns within the quarter.

Right.

So, obviously volume improvement [in theory] should help --

Right.

-- in specific product lines.

Right.

The business unit that's being beaten up right now because of volume, incremental volume helps an awful lot there. That's -- there's no great secret.

Right.

But we can -- as we talk about the business going forward, there are things that we can predict based on actions that we can take --

Right.

-- and we can put a timeline in place. There are other factors that influence things like mix and volume that are market driven --

Right.

-- which obviously are more difficult to predict.

Right. But let's just say, and not even putting a [time], an actual [timeline] on it, let's just say we're in Q4 and I say, well, looking out one or two years from now based on let's just assume middle-of-the-road mix in terms of historically and what your business looks like today, I mean, are there significant reasons to believe that you can't or is it not feasible to get back to that mid-40s range in a couple of years, I mean, or would it be very challenging, let's put it that way, to get to that mid-40s range?

I guess the way that I would characterize what happened this current -- this past quarter --

Yes.

-- is a speed bump.

Right.

I wouldn't characterize it as a structural change in the business. We have actions that we have to take to correct it. We have a pretty good idea of what those actions are. We're working on them diligently.

Yes.

And our long-term outlook hasn't changed.

Right.

We think that getting into the -- comfortably into the 20s in pro forma EBITDA and whatever that translates into gross margin, that's still part of our plan.

Got it.

We're dealing with a hiccup here, and we've got to fix it and move on.

Got it. And then just one sort of much more longer term question, and, again, I'll ask you for a timeline, but it's -- I expect a much bigger range, just in terms of the LED lighting and the policy changes, and I know these are global-type things that can take a long time, but were there actual dates they put on there, and when would you potentially possibly see some capital build-out from this?

So, the report that I saw --

Yes.

-- it said that Japan, Korea and China --

Right.

-- have all set targets for 2015 --

Okay.

-- that requires in Japan it's 50% of general lighting, in Korea it's 30% of general lighting, in China it's 20% of general lighting --

Yes.

-- will be LED based. And the reason for this is power consumption more than anything else, right, because LED lighting compared to incandescent lighting, even compared to fluorescent lighting, represents a pretty significant power reduction.

Absolutely.

And in Japan it's not surprising, right? They lost a major power generating facility. They're doing -- they're still doing rolling blackouts and conservation. They've got to figure out a way to cut their energy bill, and this is one of the ways to do that.

Yes.

As I mentioned during my prepared comments, a few years ago, when China decided that it wanted to be the player in LEDs, there were a tremendous amount of national and local subsidies to encourage build-out of LED fabrication, and that resulted in an awful lot of MOCVD reactors being ordered. Not all of those reactors have been installed, and I've heard reports that there are an awful lot of them still sitting in crates in various parts of China that can be plugged in, turned on and start producing product. With these kinds of targets in mind, it now creates a market action that will require some of those things to be turned on.

Yes.

And I think the good news for the laser industry, not just Coherent, for the laser industry, is that a lot of the processing or the back-end packaging, etc., are laser-based processes, and there were no subsidies in place to put that back-end capacity out there. So, as they start producing more and more of these, you'll need more and more packaging tools and more and more laser tools to help make that happen. And we see that as a positive. We think we have a set of products that dovetail nicely into that, and, given the targets are only three years away --

Not too far away, right.

-- somebody's got to start making some investments in the not-too-distant future.

Right. Okay. Great. Thanks.

Sure.

Our next question will come from the line of Jim Ricchiuti, with Needham & Company. You may proceed.

Thank you. Good afternoon.

Hi, Jim.

John, could we follow up on just what you're seeing in the display market? I think you're anticipating some sizable orders. Is that correct?

We are expecting some sizable orders, and we expect those to start flowing in the second half of the year and probably will continue into 2013, as well.

Okay, second half of the fiscal year.

Of the fiscal year, yes.

And is that coming from multiple customers, or is it concentrated with one major?

It's multiple customers. We are in discussions, I think, with almost every display manufacturer in Asia right now.

Okay. And this is both for enhanced LCDs and OLEDs?

It's for -- I don't want to put too fine a point on it. It's for LTPS backplanes, and those are applied to both LCDs and OLEDs. So, the answer to your question is correct, but I just want to make that clarification.

Okay. Fair enough. And I was wondering if you could also provide an update on the 1 kW fiber laser.

Yes. I made a brief reference to it in my comments. We continue to make good strides there. We are shipping evaluation units to key customers. The feedback has been generally positive. One of the things that most of the customers have noted is the insensitivity of the product to back reflection, and the reason that's important is it allows the customer to work at normal [incidence] so they can fire the beam directly at the work surface, and if any part of the beam reflects back up into the laser it doesn't negatively affect laser performance. And that's something that they haven't seen before in fiber lasers, so that's been an interesting selling point, as has been the modularity and the potential for the [BOMs] to provide any service that's required. So, again, the dialog is positive. We see that as an encouraging sign. But until we start seeing some big OEM orders I'm not ready to declare any victories.

Right, and I guess that's what I was getting to. Just based on the feedback, when would you anticipate, or are you in a position to anticipate when?

I don't think anything has changed there. My comment from I think the last conference call when I was asked a similar question is I would expect low volume of -- a low volume of orders this year, customers buying one or two of them to really put them through their paces, do system integration, make sure that the control systems are compatible, etc., and once they've been vetted and qualified for deployment we would be in a position to start to see volume orders. That's probably not a 2012 event. That's probably a 2013 event.

Okay. And just with respect to the pickup you've seen in the materials processing area in China --

Yes.

-- how would you characterize it as you went through the quarter? Has it been steadily building? Was it -- did it come late in the quarter?

It certainly came after Chinese New Year. Chinese New Year was a bit early this year. I think it was the third week of January, if I recall correctly. Dialog started to improve shortly thereafter. Orders started to flow I would guess somewhere mid of February and continued from there.

Okay. And just maybe if you could touch on what you're seeing in Europe, and I know that cuts across several areas of the business, but just given the macro concerns there, what are you seeing there in that market?

So, Europe is kind of an interesting -- is an interesting situation, because the scientific business, which is dominated by Germany, has been largely unaffected at this point. There have been some small changes in funding in some of the smaller regions. On the commercial side, the overwhelming majority of commercial customers in Europe are exporters to Asia. So the domestic or the European economic situation has not been as much of a burden on them yet.

But you do have this sort of cycle that you have to deal with, right, that the customers in Asia that are buying European products are manufacturing products that then get shipped to other parts of Asia as well as to the Americas and to Europe. At some point if European consumer demand slows you would have to assume that global markets are going to be affected by that, because you won't need as much capital equipment around the world to satisfy demand.

Okay. But as yet it's holding up relatively well?

It's holding up now. It's holding up right now. But, again, you have a series of interconnected actions here that you need to understand, and perhaps if I was an economics professor I'd understand it better, but that's the way we currently view it.

Okay, thanks a lot.

Sure.

Our next question will come from the line of Jiwon Lee, with Sidoti & Company. You may proceed.

Thank you, and good afternoon.

Hi, Jiwon.

Hi, Jiwon.

Just wanted to kind of quickly go back to the gross margin commentary. If the -- my understanding is the API and the related mix issue existed last quarter, as well, so if we did -- the first part, did the API revenue decline more in the second quarter? And then, if we net out everything from the flat panel displays and mix issues, would your sequential margin have been flat, better or still slightly worse?

So, the API business, the revenue --

Yes.

-- did deteriorate --

Okay.

-- from Q1 to Q2. Okay? The question -- could you repeat the second half of the question? I'm not sure I completely understood it.

Oh, I was wondering if you exclude all those extra factors that you highlighted for the second quarter, would your sequential margin have been better or flat?

I guess I don't know how to do that, or -- if you're -- if the question you're asking is if we hadn't had the startup costs, if mix wasn't unfavorable and we didn't see deterioration in this one business unit, would gross margin have been flat or better, the answer is it probably would've been flat or better.

Okay. Okay, well, that's helpful. And then, John, your comments on the materials processing, I think your still mix is on the low to mid power, right, with the CO2 lasers? Could you talk a little more about how much of it is your fiber lasers, or is there any revenue contributions from direct diode lasers at all?

So, the mix is still, in materials processing, is still heavily skewed towards CO2 lasers. During the second quarter, the mix within CO2 was probably a little bit better for mid power systems, so up to 400 or 500 watts.

Okay.

And those went into applications like the textile industry. We have seen some good growth year over year in direct diode systems. I can't tell you that I remember exactly what the number was within the quarter, but the sales engagement on direct diode solutions, as I said, for precision remanufacturing, does appear to be on the increase.

And --

And there was no revenue from CW fiber lasers in that number, because we haven't released the product for revenue yet.

Okay. And then the direct diode lasers that you commented, what power level would that be?

These are typically at 4 and 8 kW.

Okay, so that addresses what, mostly welding applications?

Actually, these lasers or these laser systems are used more for applications like brazing, cladding and heat treating. There are some welding applications, but these are typically applications where you're trying to cover large areas with a lot of power.

Oh, I see. And could you talk about which sort of geography these development efforts are a little more active than others?

For which products?

The direct diode.

We're seeing a lot of interest in China.

Okay, terrific. And then, lastly for me, if your, say, flat panel display revenues or the bookings indeed pick up in the second half, would that revenue mix change quite a bit from where it is now in terms of the product mix, I'm sorry, not revenue mix, product mix, or would it be sort of a similar mix as it is now, but just more volume?

So, my comment is I think a lot of the orders --

Yes.

-- for FPD that will come in in the second half of the year and into 2013, they'll probably be skewed towards Gen 5 and Gen 6 systems.

Okay.

Right? Because that is the industry standard. There's one customer that's out there at Gen 8.5, and they will probably order a mix of systems. But because we're dealing with such a broad customer base, I think you end up seeing a distribution that's more centered around the industry standard of Gen 5/Gen 6.

Okay, that's all for me. Thank you.

Okay.

Our next question is a follow-up from the line of Patrick Newton, with Stifel Nicolaus. You may proceed.

Yes, John, I just want to dovetail off that last question on Gen 5 through 6 flat panel displays. I think previously you had said that there were kind of three solutions to OLEDs getting mass produced longer term, one being a quick fix of issues with metal oxide TFTs, which appears to not have occurred, two being a mix of using your annealing systems until metal oxide is ready, and then three your annealing systems being the long-term solution.

Correct.

So, I guess my question is is if we start to see orders shift from just Gen 5 and 6 to the broader base customers outside of this one larger customer ordering Gen 8 systems, would that be a sign in your mind that laser annealing is the long-term solution for this market?

No, I don't think that our thinking has changed, at least for the TV market, right, because if you go back and review my comments from last quarter, I really was talking about the TV market for an alternative backplane to LTPS, and metal oxide appeared to be the leading candidate at that point. This becomes a cost game at the end of the day, and if you can build a backplane for a TV that is less expensive than LTPS and gives you the image quality, then that's going to be the winning technology. Because, remember, you're not dealing with a system where heat dissipation is necessarily a big issue, because you have a large area and you have a lot of circulated air around it. You're not dealing with a battery-powered device, so power conservation is more of a lifestyle decision than a necessity. So it comes down to manufacturing cost, and that's why we thought option two was the most likely candidate, that it would be LTPS until an alternative backplane technology could take over.

I would say what's happened in the last few months as manufacturers are trying to get ready to ship OLED TVs for this -- for the 2012 holiday season, they've had to start making some decisions about what manufacturing technologies they were going to utilize, and the conclusion was that metal oxides are not ready for production yet. Will they ever be ready? I don't know enough about the technology or exactly where it is to make that comment. But it's pretty clear to us that they're not ready for this year, and therefore if somebody wants to be shipping OLED televisions the alternative that they have is to use LTPS.

Okay, so that's helpful. So, the way to think about it, I guess, in simplistic terms is that smartphone and tablet markets, they're still very much laser annealing --

Correct.

-- sweet spot, and penetration there still probably sub-30%, and then right now it just sounds like the TV market's gravy, at least in the near term, and the future remains to be seen.

Yes, so the only change that I would make to your comment is if you're talking about smartphones as a percentage or you're talking about LTPS as a percentage of the entire handset market, then your 30% number is probably in the right range. If you're talking about a percentage of smartphones, it's likely a higher number.

Great. Thank you. That's helpful.

Sure.

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

Thank you. We'd like to thank everybody for their participation today, and we certainly look forward to following up with you after our Q3 results. Thanks.

Thank you, sir, and thank you for participation in today's earnings teleconference. You may now disconnect. Have a great day.