Coherent Corp (COHR) 2012 Q3 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the Coherent Q3 2012 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 answer session. (Operator Instructions). As a reminder, this call is being recorded. I'd now like to introduce Ms. Leen Simonet, Executive Vice President and Chief Financial Officer. You may begin your conference.

Good afternoon, and welcome to Coherent's third fiscal quarter conference call. On today's call, I will provide financial information, and John Ambroseo, 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 [typical] accounting policies 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 the historical bookings and sales by markets, 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 third quarter. In summary, we're very pleased with our accomplishments, and our financial results. Strong bookings for the quarter, of $218.9 million, led to a record backlog of $369.4 million. As John will explain later during the call, the solid bookings performance was dominated by sizable flat panel display and anneal system bookings.

Revenues for the quarter were $196.4 million, with corresponding pro forma earnings of $0.83 per diluted share. The tax rate for the quarter was lower than originally projected, primarily due to a more favorable mix of foreign income at lower tax rates. The pro forma EBITDA percentage for the quarter increased to 18.9% from 17.3% last quarter. Net sales for the third quarter grew 1.6% sequentially, and declined 6.9% compared to the same quarter a year ago, which was a record revenue quarter for the company.

We saw solid performance and sequential increases in the microelectronics and material processing markets, and sequential declines in the scientific and OEM components and instrumentation markets. Both the scientific and instrumentation markets are subject to funding reductions and uncertainties, which have negatively impacted the customers or the rates. We continue to see weakness in the advance package markets, but our remarkable successes in the flat panel display market more than offsets this shortfall.

Our microelectronics revenues continue to make up almost half of the company's revenue. The shippable backlog for flat panel display applications has grown significantly and represents now about 50% of the total reported backlog. As a reminder, our systems backlog is shippable within the next 12 months.

Geographically, on a trailing 12-month basis, Asia accounted for 48% of the total company's revenues, U.S. 24%, Europe 21%, and the rest of the world 7%, which is basically unchanged from last quarter. The company's sales by market application for the third quarter are as follows. Scientific, $35.1 million, microelectronics, $97.2 million, material processing, $28.4 million, OEM components and instrumentation, $35.7 million, for a total of $196.4 million. The third quarter gross profits, excluding stock compensation charges, was $80.8 million, or 41.1% of sales, and compares to 40.4% last quarter.

Sequential increase of 70 basis points is in line with our previous guidance. As indicated during our last conference call, we estimate that our gross profit percentage, in the fourth quarter, will improve approximately 50 to 100 basis points compared to the third quarter. This increase will be mainly driven by higher utilization of our Korea refurbishment facility, and higher revenues in the Excimer business unit, partly offset by lower volumes in some of our businesses and markets.

Our operating expenses reflect good cost controls across the board, and rolled up slightly better as a percentage of sales compared to last quarter's guidance. Our cash and cash equivalents balance for the quarter was $210 million, compared to $250 million last quarter. During the quarter, we repurchased 92,700 shares at a cost of $4.3 million, which completed the previously approved stock repurchase program.

Cash flows from operations for the third quarter was approximately $11 million, and capital spending was $10.9 million, bringing the fiscal year-to-date capital spending to 5.2% of sales. The higher capital spending reflects the company's investments in facilities and equipment to support the increasing demands and solid base of Excimer annealing systems.

The company's inventory balance at the end of the quarter increased about $3 million compared to last quarter, and consists primarily of additional raw materials and work in progress for the flat panel display business. Inventory turns remained at 2.9, unchanged from last quarter.

Accounts receivable DSO stood at 65 days, and increased 6 days compared to last quarter, largely the result of unfavorable revenue linearity during the quarter. We shipped our first Gen 8 annealing system during the last month of the quarter. And depending on the timing of shipments, and the number of units shipped, these higher ASP [systems] can result in future quarterly DSO fluctuations.

Let me give you the guidance for the fourth quarter. We expect our fourth quarter revenue to be in the range $193 million to $196 million. The pro forma gross profit percentage for the fourth quarter is expected to be in the range of 41.5% to 42% of sales. And we project our pro forma period expenses to be in the range of 26% to 27% of sales, and this is inclusive of $1.4 million intangible amortization costs.

Stock compensation charges are estimated to be approximately $4.1 million, similar to last quarter. And we anticipate our non-operating gains or losses to be minimal. We are assuming a pro forma tax rate for the fourth quarter ranging from 32% to 33%. We estimate the diluted shares outstanding to be about 24.1 million. And we project a full-year capital spend to be 5% of sales. And we expect to return to historical spending levels next fiscal year.

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

Thanks, Leen. Good afternoon everyone, and welcome to our third fiscal quarter conference call. The third quarter unfolded pretty much as expected. Orders came in strong. Sales were at the high end of our guidance. And gross margin improved. Our ongoing emphasis on cost control contributed to a very respectable EPS performance. We also ended the quarter with a record backlog, thanks to our extraordinary market share in flat panel display manufacturing.

Third quarter bookings of $218.9 million were up 19.5% compared to the prior quarter, and were 4.2% lower than the prior year period. The book-to-bill for the third quarter was 1.11. Scientific orders in the third quarter were $27 million, down 9.7% sequentially, and 18.9% compared to the prior year period. Seasonality in Europe and Japan, combined with the timing of OEM orders for Chameleon lasers, led to the sequential booking decline. Orders for ultra-fast amplifiers, which include the recently launched Vitara oscillator, were similar to last quarter.

Product trends aside, funding is the most important issue in the research market. Stimulus funds in the U.S. and abroad have led to several years of record investments. It appears that U.S. funding for life sciences is reverting to pre-stimulus levels, while support for physics and chemistry research is flattish. Germany continues to invest in R&D, the balance of Europe is flat to slightly down. Japan is redirecting funds to the rebuilding effort, which could trim up to 5% from R&D initiatives. And China and India remain poised for double digit growth. The net effect is a return to plus or minus GDP growth for the scientific market.

Instrumentation and OEM component orders of $29.7 million were down 4.8% sequentially, and 30.3% versus the prior year period. The instrumentation market is seeing the same pressure as the scientific market from lower government spending on life sciences. This has led customers to tightly manage inventory, and rely on smaller batch orders, rather than semi-annual or annual orders. We believe we are maintaining market share based on the strength of our product portfolio, particularly the OBIS platform, which has become the standard for instrumentation lasers.

The medical OEM market continues to benefit from strong consumer demand for vision and aesthetic procedures in emerging markets. Historically, most of these opportunities came from clinical settings, but the number of home-based products is steadily rising, especially for hair reduction using semiconductor lasers.

Microelectronic orders of $135.2 million increased 46.8% sequentially, and 10.3% versus the prior year period. Semi-cap orders rose sequentially due to increased demand from inspection applications and stable service bookings. We also saw modest contributions from 450 millimeter tools. We expect the 450 millimeter market to create meaningful, longer term opportunities for our most advanced ultraviolet lasers.

Bookings for API applications improved modestly from the prior quarter, but are still well below historical levels. Gains in mobile packaging are being offset by weakness in PC applications, and we have not yet seen any positive impact from credit easing in China.

We received record orders from FPD customers in Japan, Korea and China -- these are end customers -- for our Viper Gen 5, 6 lasers and optics, as well as strong service orders. They will be used for LCD and [anneal] production. There are some follow on orders that should be placed within the next two quarters.

As Leen already mentioned, we shipped our first Gen 8 system in the June quarter. It is a truly impressive device that sets a new throughput standard for laser annealing tools. Additional Gen 8 shipments are scheduled over the next few quarters.

Materials processing orders of $27 million were down 9.6% sequentially, and 10.1% versus the prior year period. Material processing orders eased from our near record levels in Q2 as customers maintain a cautious posture. Marking and engraving led all applications with continued strong demand of UV lasers using consumer electronics manufacturing. Credit and converting orders were lower following a stellar showing in the prior quarter.

Bookings from our METABEAM work stations benefited from the introduction of a [interlocked] class product based on the E-1000 platform. And we will formally release our interlocked fiber laser in the current quarter. Customer testing is progressing well, and we expect first volume orders in fiscal 2013.

Our main emphasis, for the near term, will be execution against the sizable backlog and gross margin expansion. We'll continue to seek design wins across all markets, and introduce market-leading products. We have a very busy conference season coming up. We'll be presenting at the Needham Conference in New York City on August 7th, the CJS Conference in White Plains on August 13th, the Deutsche Bank Conference in Las Vegas on September 11th, and the Longbow Conference in New York on September 13th.

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

Thank you. We'll now begin the question and answer session. (Operator instructions). Jim Ricchiuti, Needham & Co.

Thank you. Good afternoon. John, can you comment about how much of this backlog, in the display area, will be converted, or shipped, over the next couple of quarters? Can you give us a sense how that might be flowing out?

Well our backlog is a 12-month statement. So, by definition, it's all shippable in the next four quarters. As far as what the breakdown is, it's going to vary a little bit depending on what we ship in any given quarter. Obviously with the ASP differences between Gen 5, 6 and Gen 8, that will have some fluctuation. And obviously the differences are millions of dollars per unit. But the 50% that Leen alluded to in her comments is shippable within 12 months.

Okay. And you noted the potential for some follow on business. Just given the magnitude of the orders you took in this quarter, is there any sense that you can -- range that you can give us, or indication as to what the follow-on business might look like here?

I don't think that it's a reasonable expectation to expect orders of the same magnitude in the current quarter. But if we look out over a longer term period, say the next four quarters, I wouldn't be surprised to see similar order volumes over that period of time. We have a pretty good idea of what customers want to put in place, by region, and more or less by product category, so I think that's probably a reasonable expectation.

And in terms of your confidence in being able to meet the production demands on this, it sounds like it's going to be somewhat challenging. Can you give us some comfort around your ability to ramp?

Well, we've made investments over the past year. You know, we've put a new facility in place in [Gottingen] to allow us to build some of these larger tools. And obviously we have the facility in Korea we're ramping up on the service side. So we believe the capacity the in place. There are some critical path items that we rely on, particularly on the optic side. We have multiple vendors for those optics. We believe that it's under control. So I don't think that we're going to miss delivery commitments by very much, if at all.

And the issue you had with just some of the equipment that you had in the field, and some modifications, can you give us a sense as to how that's playing out in terms of the improvement you're expecting, anticipating in gross margins?

Sure. We did -- we believe we've identified the critical issues, and we have fixes in place. Those are rolling out to the field as we speak. And we think that by the end of the first quarter, all of the equipment in the field will be current rev.

Great. Thank you.

Sure.

Mark Douglass, Longbow Research.

Hi. Good evening, John and Leen.

Hi, Mark.

Hi, Mark.

I would say the big to do here is the flat panel. The new orders, are they also the larger Excimer systems, or is it a mix of the different generations?

Well, as I said in -- last quarter we expected the mix to be primarily for Gen 5 and 6.

Okay.

These are -- they're Viper systems. And in fact, that's what the orders came in for.

Okay. But they're not the massive Gen 8?

They're not the massive Gen 8, but the Gen 5 and 6 actually have better margins than the Gen 8.

Okay. And that kind of leads to my next question. So they won't -- I assume you've learned a lot. They won't require as much on the fly R&D, as you've talked about the past few quarters, you know, as you're going --

So the Gen 5 and 6 is a more stable configuration. You know, the emphasis there is obviously driving cost down as much as we can, and cycle time improvements.

Okay.

So more or less blocking and tackling on those.

Okay. And then is it fair to say, with the book-to-bill being as high as it is, that we'll have some orders that get delivered here in the fourth quarter, but it looks like a lot of this is still really a fiscal '13. And certainly the recurring revenue that you would expect to get from a lot of these deliveries is really fiscal '13 at this point?

That's correct. In fact, you know, I think I've made the statement in prior quarters that since probably the second quarter of this year, fiscal '12 delivery stops were pretty much full. All of the orders that we received in the June quarter are shippable in '13. There may be -- maybe there's one that goes out in the fourth quarter, but I think they're all fiscal '13 scheduled.

Okay.

And as far as the service revenues, you know, as we've stated in the past, typically once a system is in production, not from the day it ships, but the day that it goes into production, and the warranty clock starts, it's typically about six months before they move into the service roll.

Okay. And then moving onto the OEM, the life science, and then the research, is it kind of the expectation that the next couple quarters you'd have some tougher comps there [basically just] going back to GDP growth? When do you think that those tougher comps roll off in fiscal '13? Is it first, second quarter, or is it maybe even later than that?

I would suspect that if we don't see a change in spending in the U.S., in other words, if there's not another stimulus package that hits, that we'll start to see the comps change probably in the first half of fiscal '13.

But the near term is still pretty challenging here?

I'm sorry?

The near term is still pretty challenging here, in the research and life science?

In the life sciences business, whether it shows up in the research market or whether it shows up in the instrumentation market, I believe that's a fair statement.

Okay. Thank you.

Sure.

Larry Solow, please go ahead.

Hi. Good afternoon.

Hey, Larry.

Hi, Larry.

Just to kind of review, and I think you've sort of summarized it, but just in terms of the customer sentiment. It sounds like, you know, when we spoke last quarter, things were, outside of the flat panel, were sort of improving across the board. But now it seems like there are more, you know, new external issues, whether the economy's gotten worse, the funding is tightening. You know, is that fair to say that customer sentiment, although it was looking on the upswing, when we spoke last time, maybe has sort of, you know, turned around a little bit, or not really improving?

I think the, you know, certainly the macroeconomic uncertainty is not helping.

Right.

And customers are hedging their position by keeping inventories low, and keeping orders small. We've seen this behavior numerous times in the past, and I'm sure we'll see it in the future as well.

Right.

In the U.S., the observation is that there's way too much partisan politics. You know, people should be focusing on improving the economy instead of just bashing each other. And unfortunately, it doesn't look like we're going to see any relief before the election.

Right. And particularly just, you know in the material processing, which I know is one of your small markets, but it seemed to be gangbusters last quarter, and not quite terrible this quarter, but certainly a lot less. Is that somewhat just timing? Am I looking too much into it, or any color you can add there?

Well, you know, a fluctuation of a $3 million, or thereabouts, in the grand scheme of things is not a big number. As a percentage of that market, obviously it comes up to about 10%. We do see customers in that space, again, being cautious. And I'd say that the primary market there, geographic market, is China.

And while it's gotten better, you know, you're reading all the same things that we are about China, that their growth numbers are not where they want them to be. So again, I think how the Chinese government responds on a stimulus basis will determine what that market does over the next 6 to 12 months.

And in terms of the advance packaging, and I know you're not -- it's not really your crystal ball -- you know, you're not (inaudible) not to get the crystal ball out for the near term, but is there, in terms of Samsung, Apple, anybody, you know, I mean I know there's expected launches of new phones over time, but something in the near term, the next six months, that could maybe, you know, where there's lull in that production, that could that turn that on or increase for you guys?

Well I think there are a few things. Obviously the new versions of the -- or the purported new versions of the iPhone and the iPad, as well as, I'm not sure what the intended launch of the Surface is from Microsoft, but those could all be positive things that influence the packaging market.

Got it. And then just -- I'm just switching gears a little bit. Your Excimer plant, the refurbishing facility, starts to open up. Is this something -- I mean now I guess you're not getting much of that recurring service fee on the Gen 5, 6s and Gen 8s you're selling. Is that something that will turn on slowly or can I sort of do the math on what we expect, you know, each unit, LDU, will sell for?

Well the unit -- you know, the service revenues today are actually reasonable levels, because we've installed so much equipment over time, and a lot of it has already migrated into the service ranks. Every unit that we ship, as I've mentioned in the past, has at least one service event per year, and currently those service events are about $250,000 each. So, you know, as you continue to propagate this forward, you're just building up that service annuity over time.

Right. Okay. Great, John. Thanks, I appreciate it.

Sure.

(Operator instructions). Patrick Newton, Stifel Nicolaus.

Yeah, good afternoon, John and Leen. Congratulations on the quarter.

Thank you, Patrick.

Thanks.

So a couple questions. One, John, an update on the LDU production, Korea, did you guys actually ship from Korea this quarter? And then, I guess as a follow on for Leen, how should we think about the gross margin impact as the volumes start ramping at Korea?

So we did make our first shipment from Korea as planned, or first shipments from Korea as planned. And I'll let Leen answer on the gross margin question. But, you know, at least from a capacity standpoint, it's progressing as we expected it to.

But yes, in the gross guidance the 50 to 100 basis points does include, the first largest items there is the overhead absorption, the utilization of that plant. So we're stepping up production in Q4. That's not yet maximum production. But clearly we'll give more information as we move through the next couple of quarters, but the largest improvement of our profits is contributed to Korea.

Okay. And then I guess another kind of gross margin question. If we look at your Excimer system yields, relative to your long-term targets, and now that you've identified the critical issues, and I think you said by the end of 1Q that all the yield issues will pretty much be fixed. Should we expect a tailwind to gross margin, between that and the Korean plant, regardless of how API trends from current levels?

Well as I mentioned in my comments, and I think more than once, we are anticipating gross margin expansion as we move forward here in the near term. Obviously, as Leen already mentioned, absorption, overhead absorption from the Korean facility is part of that. And we do have expectations that the margins on the Excimer products, in general, will be going up, as we get our costs under control, as we get cycle times coming down, as you gain more experience. So yes, all of those things contribute to it.

In terms of an offset against API, you know API is at a pretty low level already. I'm not sure if there's much downside in the API market from where we are today.

Okay, that's helpful. And then I guess, John, on the fiber laser platform thing, so the update. And, I guess, as far as moving beyond evaluation units, and as you start your ramp in, I believe was that fiscal '13 or calendar '13?

Fiscal '13.

Okay, so as you --

When we expect first volume orders.

Okay. So could you, perhaps, help us think about how you anticipate that ramping? Do you have any kind of revenue target for the fiscal year?

I'd say it's a little bit early for us to be discussing revenue targets for a product that is just getting released. Perhaps we can do an update sort of 1Q, 2Q of '13.

All right. And I guess just a last question for Leen. On the OPEX at 26%, 27% of revenue, is that kind of the new norm, and should we potentially see that creep lower as the investments have already been made and the revenue begins to ramp?

Yeah, we've always said that there was maybe a little room left in the period expenses. We guided revenue flattish, so you won't see any in the fourth quarter. So it depends really on the revenue mix. But the highest improvement to the EBITDA really has to come from the gross margin, not from period expenses.

Great. Thank you for taking my questions.

Mark Miller, please go ahead.

John, I'm just wondering how you're going to differentiate yourself in the fiber laser space. Is it going to be through technology, service cost, operational cost, et cetera?

Well we are taking a different technological approach than what most people are doing. We are also -- we've also designed a product to be an OEM module approach, rather than a one-box design, so the customer has to buy everything. We're trying to give the customers flexibility to buy the components that they need, and not duplicate what they already have.

And as far as service, you know, while the expectation is that these things will be long-lived, from time to time they will require service, and the product is designed to be field serviceable. Which, we've heard from multiple customers, that have either had demos with the laser or have knowledge of the laser, that they see that as an advantage so that the service responsibility can be returned to the OEM. And we think it's compelling arguments. Obviously the market has to determine whether or not they have value, and we should know that within the fiscal year.

Within the last week, two key areas. Apple came in light on iPhone sales. Toshiba, which is the number two manufacturer of flash storage, said it's cutting production 30%. What are the implications for you?

So, on the Apple side, it's not -- I mean I'm not an analyst, but I think one of the challenges that Apple faces is that there's such high expectations for the new products coming out later this year, and the iPhone 5, and then the new iPad. It's not clear to me how much that has cannibalized current sales. If I were in the market for a phone or for an Apple product, I'd probably be inclined to wait at this point. Again, I don't know if that's a widespread thing. But certainly as they introduce new products, as we've seen historically, that's been a good thing for us because they've added new capacity.

As far as the memory side of the business, yes, it has some impact, but it really depends on what nodes are being affected. You know, right now our semi-cap business is driven not only by the service side of the business, which is utilization rate, but also capacity expansion and new capabilities. So a lot of our new systems are for 2X nanometer nodes. That should be relatively unaffected by the memory market. Utilization, if factory utilization goes down, that will have some impact on the service business. It's difficult for me to tell you exactly what that's worth for one customer.

Thank you.

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.

I would like to thank everybody for your participation today. And for the investors that are attending one of these conferences, we look forward to seeing you there. Thanks very much.