Coherent Corp (COHR) 2014 Q1 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the Coherent first fiscal quarter results conference call posted by Coherent, Inc. At this time, all participants are in a listen-only mode. At the conclusion of our prepared remarks, we will conduct a question and answer session.

(Operator Instructions)

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, Derrick. Good afternoon, and welcome to Coherent's first 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, including the 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 and trended GAAP and non-GAAP supplemental financial information will be posted on the Coherent Investor Relations website. A replay of this webcast will also be made available for approximately 90 days following the call.

Let me first give you the highlights of the quarter. Bookings for the quarter were $201.5 million, resulting in a book-to-bill of 1.04. Revenues for the quarter were $193.6 million, with corresponding pro forma earnings of $0.68 per diluted share. Earnings per share were below our expectations, primarily due to lower-than-expected revenues and higher-than-usual unrealized currency exchange losses.

Revenues are at the lower end of our guidance, primarily due to softness in the advanced packaging market. Not withstanding the lower-than-expected revenue, our gross profit percentage was slightly above guidance and had increased consecutively for the past three quarters. As indicated in prior conference calls, we expect this promising trend to continue.

Cash generation is another part of this highlight. We ended the quarter with a cash balance of $274 million, reflecting a quarterly cash flow from operations of approximately $29 million. Our pro forma EBITDA percent for the quarter was 16.4% and compares to 18.1% the same quarter a year ago. Net sales for the first quarter declined $19.6 million or 9.2% sequentially, and increased $10.4 million or 5.7% compared to the same quarter a year ago.

The backlog shippable within 12 months at the end of December was $286 million, unchanged from the prior quarter. Flat panel display applications backlog is approximately $73 million or 25% of the total. None of these numbers reflect the large $100 million-plus flat panel display order we highlighted in the press release. Those orders will be part of the second-quarter bookings and backlog.

Geographically on a trailing 12-month basis, Asia accounted for 51% of the Company's revenue, US 23%, Europe 19%, and the rest of the world 7%. Similar to FY13, we had one customer in South Korea who contributed more than 10% of the Company's first-quarter revenues. With respect to the first-quarter revenues by major market applications, we achieved double-digit sequential growth of approximately 10% and 12% in scientific and OEM components and instrumentation markets, respectively. Scientific benefited from strength in Europe while the growth of OEM components and Instrumentation was a result of strong revenues in our newer medical applications, such as cataract surgery and dental treatment, as well as continued successes in the bio instrumentation market.

The microelectronics sequential decline of 20% is mainly impacted by the timing of excimer annealing system shipments, and as mentioned earlier, some softness in the advanced packaging market. These declines were partially offset by a robust performance in our semiconductor submarkets. Materials processing sequentially declined 12%, which is not an unusual pattern based on historical revenue comparison of our fourth to first fiscal quarters. When compared to the first-quarter of last year, materials processing grew 5.5%.

Service revenues for the quarter were $60 million or 31% of sales, and compared to $64 million last quarter and $43 million a year ago. About 70% of the year-over-year service revenue growth originated from flat panel annealing tube replacements. On a trailing 12-month basis, service revenues represented 27% of the total Company's revenues.

The sales on major market applications are as follows: scientific, $33.3 million; microelectronics, $92.3 million; materials processing, $28 million; OEM components and instrumentation, $40 million; for a total of $193.6 million. The first-quarter pro forma gross profit excluding $0.5 million stock compensation charges, and $1.5 million in tangible amortization, was $79.6 million or 41.1% of sales, an increase of 30 basis points from the 40.8% we recorded last quarter. The increase is due to a favorable product mix primarily in the microelectronics market, partially offset by the negative impact from lower volumes and a stronger euro.

Our total pro forma operating expenses were 29.2% of sales or 28.1%, excluding the impact of an increase in our employee deferred compensation plan liability, which resulted from exceptional investment returns last quarter. An offset in income to this charge is included in other income, so the net impact to the Company is insignificant. The period expenses ratio of 28.1% is slightly above the high end of our guidance, mainly due to the lower revenues and some nominal higher spending compared to last quarter.

Other income and expenses include larger than usual currency exchange losses, offset by the benefits of the aforementioned employee deferred compensation plans. Unrealized exchange losses amounted to $1.6 million, and reduced our earnings by approximately $0.05 per diluted share.

Moving onto the balance sheet. Our cash and cash equivalents balance for the quarter was $274 million, compared to $250 million for the prior quarter. Approximately $181 million or 66% of the cash balance is held internationally with the majority positioned in Europe. Cash flow from operations for the first quarter was about $29 million, and was mainly driven by another meaningful improvement in our accounts receivable day sales outstanding. This improvement was primarily the result of better shipment linearity during the quarter.

Day sales outstanding declined to 54 days from 58 last quarter, and 62 days a year ago. Inventory turns on the other hand declined to 2.7 from 3 at the end of FY13, which is mainly due to a buildup of service inventory to support a growing installed base. When compared to the same quarter last year, inventory turns improved from 2.5. Capital spending for the quarter was $6.8 million, or 3.5% of sales.

I will now give you the guidance for our second quarter. We expect our second fiscal quarter revenues to increase to a range of $196 million to $203 million, or 1% to 5% growth when compared to the first fiscal quarter. This growth takes into account a continued sluggish demand in advanced packaging. With respect to the pro forma gross profits percentage, we expect further expansion and we're guiding to a range of 41% to 42%. As a reminder, the pro forma guidance excludes intangible amortization of $1.5 million and stock compensation costs of approximately $0.5 million.

We project that pro forma period expenses to be approximately 28% of sales. And again, this excludes intangible amortization estimated at $0.9 million and stock compensation costs of approximately $4 million. We are assuming a pro forma tax rate of 28% for the remainder of the year, and we continue to project our full FY14 capital spending to be approximately 4% to 4.5% of sales. We are also assuming a weighted outstanding shares number of 25.2 million for the second quarter. I will now turn over the call to John Ambroseo, our President and CEO.

Thanks Leen. Good afternoon everyone and welcome to our first fiscal quarter conference call. There's no question that our first-quarter revenues and earnings were lackluster. Bookings however, painted an attractive long-term picture. Numerous commercial customers across various markets have locked in deliveries over upcoming quarters. For Coherent, securing these longer-term orders should help us further improve our gross margin and sustain our strong cash generation. The scientific market has shaken off some of the effects of sequestration, and appears to be reverting to its traditional global GDP plus or minus model.

First-quarter bookings of $201.5 million increased 0.6% sequentially and 14.5% compared to the prior-year period. The book-to-bill for first quarter was 1.04. (technical difficulties)

Ladies and gentlemen, please bear with us as we are experiencing technical difficulties.

Let me restart from the beginning of the scientific orders section. Scientific orders in the first quarter were $38.1 million, up 11.4% sequentially and 4.8% versus the prior-year period. The imaging market remains robust with orders near the highs set during the ARRA stimulus period. This is consistent with brain function research projects in the US and Europe that I mentioned in previous conference calls. The long-term trend has supported considerable growth in our Chameleon product portfolio and we're about to ship our 2,000th laser system, making it our most successful scientific product.

Bookings for amplifiers and excimer lasers were higher than our expectations. Orders for applied physics and materials processing research in Asia, especially China, were stronger than expected. Demand from applied physics research in Germany and France was equally impressive, resulting in the best quarterly bookings in Europe in the past two years. The only area of disappointment was Japan. We have not seen any appreciable effect from the stem cell stimulus package. It is possible the money is being directed into other technologies or towards Japanese vendors.

Our outlook for the scientific market in 2014 improved modestly with the passage of the Ryan-Murray budget bill. Funding was restored to a number of agencies, including the NIH and the NSF, two of the largest underwriters of scientific research in the US. We estimate that spending could increase by 3% to 5% in the US market.

We are introducing several new products at the upcoming Photonics West Tradeshow at San Francisco's Moscone Center. These products will offer researchers new capabilities. They have been designed and will be manufactured using HALT and HASS protocols, which may be the first time these methods have been applied to research lasers. We have done this to support the continuing evolution of the scientific market from being widget-oriented to results-driven.

Instrumentation and OEM component orders of $54 million were up 24% sequentially and 60.1% versus the prior-year period. Several factors influenced the outstanding bookings performance. Customer sentiment in the bio-instrumentation space improved due to higher clinical adoption and relief provided by the Ryan-Murray bill. This led to longer-term orders for systems and subsystems. We also saw further penetration and market share gains of our oldest platform in this space.

Within the medical OEM area, orders for ophthalmic applications were very strong. We received a long-term oder for ExciStar excimer lasers used in LASIK. We booked a record order for Staccato lasers used in cataract surgery. We also had a key design win for high-power OPS lasers in photocoagulation. The win was accompanied by the initial volume order.

Microelectronics orders of $80.5 million decreased 16.8% sequentially, and increased 1.8% compared to the prior-year period. Semicap orders improved modestly from a very strong fourth quarter and are nearly 50% higher than the prior-year period. This is consistent with market expectations, the overall semiconductor capital equipment market in 2014.

Many orders were largely for sub-28-nanometer applications. We also entered into development contract with a major OEM targeting inspection and metrology applications down to 14 nanometers. This is the first step in securing our leadership position for several generations of deployment.

Despite the uptick in semicap demand, advanced packaging for circuit boards remained sluggish. It is possible this is a result of uncertainty created by an ownership change at a major integrator. However, it is more likely the result of a capacity overbuild since demand has been slowed from lasers serving several applications in this space. It may take between one to three quarters for capacity to undergo a correction.

In contrast to the PCB market, interest in IC packaging is increasing. This application will rely upon short-pulse lasers such as our Hyper Rapid laser system. We received an initial order from a major IC packaging system integrator.

We have recently received orders of $101.4 million for annealing laser system. The orders consist of two different ELA platforms. Line Beam 750s, and a new configuration derived from the Line Beam 1300. A number of the 750s will fill open slots in the second half of FY14. The balance of the 750s will ship in 2015. The exact numbers will be reflected in our upcoming orderly guidance.

During the rollout of the Line Beam 1300, customers identified an unexpected benefit that supported higher pixel per inch, or PPI density. Working in conjunction with them, we have outlined a path to exploit this benefit further while increasing throughput by increasing the laser power and modifying the optical delivery system. We expect to make the initial shipment of this new system in the first half of 2015. The unit ASP is approximately $20 million and the service events, based on today's approach, will be approximately $750,000. There are several of these new systems included in the $101.4 million order.

There has been a very intriguing transaction in the strengthened glass market, Corning has acquired part of InnoLas, a system integrator with significant experience in glass cutting. It is reasonable to assume this deal is intended to accelerate the adoption of strengthened glass through better process flow. With respect to our business, we booked a multi-unit order for Hyper Rapid (technical difficulty)strengthened glass cutting. This is our first production deployment in this field.

Materials processing orders of $28.8 million were up 11.9% sequentially, and 7.6% versus the prior-year period. Bookings increased to growth in kilowatt-class products. We received orders from multiple customers for the HighLight FL1000 Fiber Laser and most of these customers are engaged in metal cutting in China. The Diamond E1000 CO2 laser also performed well with Japanese and Korean cutting tool manufacturers.

Customers continue to evaluate our three-kilowatt laser prototype. The general conclusions are the device delivers cutting speed and quality consistent with other lasers for low-reflectivity materials and outperforms on high-reflectivity materials. We attribute the latter to our laser architecture that minimizes optical feedback.

There has been constructive feedback regarding the configuration and capabilities of a production device. We will continue to work with customers to learn more about how to optimize the final design. In one case, the customer has decided to pursue what I can only describe as a component-level strategy for cost and brand management. We don't think this will be an approach mimicked by others but it certainly deserves to be watched.

Additive manufacturing remains a hot topic. We have been receiving orders for a range of different lasers from UV through CO2, supporting different processes and materials. We have also gained traction in automotive and aerospace manufacturing for processing carbon fiber-reinforced polymers, or CFRPs.

The materials processing market has enjoyed consistent growth for several years with China playing a pivotal role. Recent economic data out of China imply a slower growth, which should raise a cautionary flag for materials processing. Input from customers in China is somewhat mixed. The larger players have seen their growth slow over the last several months. The small players have a more optimistic view, but their businesses can swing widely on a small number of orders. When we consolidate all current inputs, we conclude that 2014 will be slower for materials processing in China compared to 2013.

Given the number of positive market developments and the strength of our product pipeline, we believe the Business will build momentum throughout FY14 and into FY15. Any uptick in China or a rebound in advanced packaging should add to the momentum. We are presenting at the Stifel Technology Conference in San Francisco on February 11, and the Sidoti Conference in New York on March 18. I will now turn the call back over to Derrick for the Q&A session.

(Operator Instructions)

Our first question will come from Jiwon Lee from Sidoti & Co.

Thank you and good afternoon.

Good afternoon Jiwon.

John, just wanted to go back and talk a little bit about your China comment. Did I hear you correctly that China will be down in 2014 versus 2013 because of the market that you are involved? Or because largely of the advanced packaging and the materials processing area?

My comments about China were related to materials processing. The slowdown that we saw in advanced packaging in the first quarter was actually across the region. It wasn't isolated to China.

Okay. Well that is helpful. And then on these $100 million orders that you received, is it clear to us that it is from a single customer or how many customers gave you this order?

It is from a single integrator but it will support multiple end users.

Okay. Great. Any idea what type of end product that supports?

I suspect that a portion of it will go into high-performance LCD, and a good portion of it will go into high-performance OLEDs.

Perfect. And then let's talk a little bit about the guidance, the advanced packaging being a little bit pressured. That is a pretty clear message. But what other type of revenue assumptions did you put into the guidance, please?

I'm not sure I completely understand the question. The guidance was certainly affected by our view on advanced packaging, which we don't expect to see a short-term recovery on. I think that was the largest portion of it.

In terms of, I guess your end market?

So the guidance reflects the softness in advanced packaging. Our outlook on the other markets is really unchanged.

Lastly, the carbon fiber comment was interesting. If you could think about a little bit of a longer-term view. Because it's still an unproven market, but there's a lot of interest out there. How do you see that for your lasers to develop this market?

Well based on earlier feedback from customers it looks like it's a pretty intriguing application set, and it is not related to a single process but multiple processes. I'm not sure that we are in position today to give you a long-term view on the market. But given the prevalence of carbon-reinforced polymers, it is certainly an area we want to be invested in, given the upside opportunity that it represents.

Perfect. I've got to step off right now but thank you.

Okay.

The next question is from the line of Patrick Newton, Stifel.

Good afternoon, John and Leen. John, congratulations on that ELA order. The magnitude definitely explains why you have been so comfortable the last couple of quarters.

Multiple questions to dovetail off of Jiwon on this. One is, could you help us understand the potential mix between LCD and OLED at the system integrator? Two, could you help us understand the unit mix between the 750 system and then the modified 1300 system? Three --

The mix between LCD and OLED doesn't take place at the integrator. That's an end-customer comment or an end-customer consideration.

We know where some of the equipment is bound for based on the configurations that we are going to be delivering. As far as the balance of it, it is not a fine enough line between the 750s with respect to LCD versus OLED that we can give you a mix, because the LTP has backlanes, where the excimer laser technology is applied is more or less indifferent to the frontplane.

But the 1300s are going to OLED? Is that correct?

Did we lose you, Patrick?

John, I'm still here. The 1300s, are they going to OLED? Can you hear me, John?

I can hear you now. Did you hear my answer?

I heard your answer on the 750s. I was asking is the 1300 systems, are those bound for OLED?

They [aren't] likely bound for OLED.

Okay. And then if we look at service event, you brought it up as being a $750,000 event per the $20 million system. Is that fair to say that there is three LDUs per advanced system or are those service events being somewhat discounted relative to prior generations?

As I mentioned, the $750,000 number was based on the assumption of today's approach. It is a safe bet that there are more lasers in this new system than there are in the current system.

Okay. Did you receive any flat panel display orders in the December quarter?

The December quarter, I believe we did but it was small numbers.

Okay. Can you quantify that? We're talking like sub-$10 million?

We are looking the number up now.

Okay. I will move to the next one while you're looking that up. Leen I wanted to make sure I heard you correctly that LDU service revenue was 77% of the $60 million in service revenue in the quarter, was that correct?

No, what I said was that 70% of the year-over-year growth came from the (inaudible).

Okay. And then, I guess also on the service-related revenue I'm back into a sequential decline going from about $65 million to $60 million. I'm curious is that just timing related to LUs, because one would think that we should be marching up as more and more LDUs come online? Or would that be more related to service revenue from the remainder of your microelectronics business?

Patrick, if you look at the last conference call results, we had talked about the fact that there was a significant bump in service revenues in the September quarter as a result of all these new cell phones that were being released that used LTPS displays.

We did not expect that number to be repeated, because the products had already been prepped and shipped. So the downturn I think is more of a reflection -- the quarter-to-quarter downturn is more of a reflection of the overshoot in September than any change in the underlying market.

Okay. That is great.

And then I guess, on the glass cutting side, you discussed receiving your first production orders in the quarter. Could you help us understand when we should be seeing that impact in the P&L.

John, can you update us on how you view the strengthened glass cutting market as far as an opportunity for Coherent? Or the number of units that you think that could represent on annual basis?

Sure. As far as when we are going to start shipping units, I suspect that we will have some shipments in the current quarter, with the balance going out over subsequent quarters. Typically, the integrators don't ship all the product to the end customer or end customers in one shot. They go in and get qualified. So this will be over a period of, I'm guessing, somewhere between two and three quarters.

As far as the opportunity, I don't think much has changed from our original projection. If you recall, a few conference calls back, I sized the market at 1,000 systems, 2,000 systems depending on the power level of the lasers. Nothing has really changed because that calculation was based on the number of square meters per month of glass that would be processed.

It is possible that you could look at the investment that Apple is making in thin sapphire and say, well could that be additive? The answer is probably not because that was part of the total calculation in glass area. So whether it's sapphire or strengthened glass, it doesn't change the numbers very much. So I think that 1,000 to 2,000 guesstimate is still right and it's early innings in this market.

Great. Did you happen to find that flat panel display order?

Systems were less than $10 million in the December quarter.

All right. Great. Thank you. Good luck.

The next question is from the line of Jim Ricchiuti, Needham.

Hi, good afternoon. John, just given the orders in flat panel and Leen, maybe you could answer this. How should we think of the mix of business as we rollout these orders over the next several quarters? Is there going to be a mix shift more towards microelectronics with heavy display focus?

If you go back to the comments that I may, and I'm assume you're talking about revenue, Jim.

Yes.

Some of these 750s that were just ordered will ship in the latter part of FY14. So there is not going to be an impact from that order this quarter, next quarter. Even in the fourth quarter, those are filling slots that we were anticipating filling anyway.

I think where you see the potential needle mover is when we start shipping these more advanced systems at $20 million a copy. Because if you think about the numbers, and you may recall from previous discussions, the 750s are anywhere from say $3.5 million to $4 million each depending on the exact configuration. So it's a pretty big step-up in ASPs from the 750 to this new system.

Got it. As we look at the ASPs and the size of these orders, can you help us at all in terms of how we should think about the margin profile on these systems, the 1300s? And again, I know you're not going to be specific about it, but is there anything that we should think about in terms of looking out as this large case of business begins to ship? How should we think about the impact on your overall margins?

Just to put a fine point on it, these are not 1300s. They are product derived from the 1300. I make that distinction because the 1300 configuration is more or less known in terms of its capabilities and its power profile, et cetera. This is a much beefier version.

Last year, when we were rolling out the 1300s, clearly we suffered some, because our estimates on what those 1300s were going to cost to manufacture were higher than what we projected when we first took the orders. We have learned from that mistake, and I think having built these 1300s already, we have a much clearer idea of what the new cost profile is going to look like. As a consequence, I think it is fair to assume that the 1500s will be at higher margins than the 1300s.

Okay, thanks. That is helpful.

John, just on the materials processing and the demand environment in China, are there any particular areas where you are more cautious outside of packaging on the microelectronics side? But just within the materials processing, where are you seeing some softness in China? Is it across the board?

I don't want to cast aspersions on any of our customers, but there's publicly available information on some of the larger integrators in China. When you go and look at it, it clearly shows a rollover in growth. Some of that, obviously, could be competitive pressure from these smaller players that are trying to eat into the market.

But we clearly see that overall demand growth and a shift from export growth to domestic consumption is taking place and is actually being favored by the government. That is going to have an influence as far as we can tell on what the materials processing market looks like.

And again, as I think I responded to an earlier question, API was more a regional issue than a China issue. We saw softness in API in the countries where PCB drilling -- or PCB manufacturing I should say, is prevalent. It was not specifically a China issue.

On the last point about API, there has been some consolidation in Japan. Is there any sense that some of that is impacting the overall demand?

It's certainly possible. But again, when you see it happening across regions, and then you start to dig in with customers and the end user as well as the integrator, the signals we are getting is that this is an overbuild that took place several quarters back. And they have to take the time to absorb that capacity before they go into another expansion mode.

The expansion mode is probably consistent with a string of new products that are anticipated for a June time frame. That is as far as we can piece together today.

Okay. Thank you.

Sure.

Your next question will be from the line of Mark Douglass, Longbow Research.

Hello, John and Leen.

Hello, Mark.

Probably a little colder than you are.

Leen, can you discuss SG&A? There's a market step-up in the quarter and even in the guide. Well I guess I assume SG&A, you mentioned 20% OpEx. It seems to be above the trend you had coming out of 2013, a big step-up in the first quarter 2014. Can you discuss a little more as to where these expenses are going, and are they going to rolloff by the end of 2014, or your expectations there?

Our expenses for the first quarter were nominally higher than fourth quarter. I think the reason that the ratio is so high is because the revenue came down. Remember, in the fourth quarter we had revenue of $213 million. I believe on an apples-to-apples basis, the expenses grew $500,000 when you compare Q4 to Q1.

With respect to Q2, I guided a little less because revenue was higher. So there's not that much movement in the absolute spending number from quarter to quarter. If you discount, of course -- if you eliminate the impact of the compensation plans.

Right, but even with that, I guess I got a looks like a $3 million difference from 4Q to 1Q in SG&A.

There was definitely -- on a pro forma basis, it's not Mark. You need to take out $2.1 million expenses that are associated with the deferred compensation plan, whereas we had a credit in the fourth quarter. So the net change from Q4 to Q1 due to the deferred compensation plan, and this relates to the investment returns, is more than $2.5 million, it is about $2.5 million. Which leads then to $500,000 which is the absolute impact of the increase, and there's a variety of many, many different components at play.

So that's just one example, in Q1 we always have higher audit fees because that's how the fiscal year ends. So a lot of these fees happen in the first quarter. That's just an example of why Q1 is higher than Q4.

Okay.

We have the same headcount. No increase in headcount in Q1 versus the fourth quarter.

Okay. Thank you.

John, looking at the fiber laser, can you say again, you had multiple one-kilowatt orders, but your multiple kilowatt laser is still undergoing testing? Is that correct?

That is correct.

How much longer is that going to undergo testing before you start shipping for revenues?

I don't have a good release date for you at this moment. There is some more work that we want to do before we finalize the design. Once the design is finalized, it is typically a quarter or two to roll it out after that.

So we do have some testing that we do want to complete. As soon as that is done we will give you a date. I don't have better information than that at this point.

Okay. Back to the hot topic of flat panel. So very large order to one integrator. I assume there are other integrators involved here. Other potential orders from other integrators you can get coming down the pike?

That is correct.

Okay.

I wasn't sure what the question was. Yes, there are other integrators and we have sold to them in the past, and we anticipate selling to them in the future. Exactly when they're going to place orders, we don't guide to that level of specificity.

Well right. I was just wondering if there were other integrators that you can be selling to that are in the market.

Absolutely. There are two primary integrators that I think are well known. And then there is a smaller integrator that is linked to a specific end manufacturer. We have been selling to all of them. In this particular instance, one of the integrators secured some substantial business and that resulted in a substantial order for us.

Okay. Great. I will just stop there. Thanks.

Okay.

Next call from Larry Solow, CJS Securities.

Good afternoon. A couple of follow-ups.

John, the advanced packaging market was showing some recovery last couple of quarters and I know you have to go a few quarters back, but the issues were sort of the overbuild in capacity. Is it also potentially a function that these guys underestimated what the overbuild was and they started ordering and then they stopped? Or any color there would be great.

Larry, I will answer that question in two different ways. I suspect that some of the integrators -- well not integrators -- I suspect some of the end customers were anticipating securing orders from various device manufacturers and there may have been double counting. Different integrators both assuming they were going to win business, and then only one of them did -- or not integrators but packaging houses. I suspect that led to some of it.

As far as Coherent goes, quite frankly, we pride ourselves on having pretty good market intelligence. And we didn't see this one coming. That is highly disappointing. It created a hole in the first quarter and it's creating a hole in the second quarter.

No one here is happy about that, but we think we have our arms around the situation and understand it. We should've had that understanding a little bit sooner.

Right. And that seems like some of the bigger hole in Q2, I'm just trying to size up that compared to the other negative or change in tone from the last couple of quarters on the materials processing in China. If China is down year-over-year in materials processing, does that -- how does that -- I assume that jeopardizes your long-term 10% to 15% growth in this fiscal year. Is that fair to say?

I think it is too early to jump to that conclusion. Because remember we are also adding new products that sell all around the world, not just in China.

Okay.

My cautionary tale is around China, and I know that there are lots of opinions from the highly positive to the highly negative that are circulating about what is going to happen in China. I am sharing our view based on our most current look under the covers, so to speak.

Okay. The cataract order, is that your first sort of significant order in this? And can you give us an update on where you stand there, are you in trials or are there other customers?

It's certainly the largest order we've received thus far, and I guess by definition then is the most significant order that we have received. Others have come in in the past. We think it highlights the fact that this is an early-stage growing market and one that we anticipate participating in.

Okay. Any update -- just coming out of the Consumer Electronics Conference and I think there was some decent buzz around OLED and televisions. I imagine most of these orders are still mostly handsets and tablets. Any update or thoughts on where we stand there? Or is it pretty much status quo?

From CES, I think there was a lot of emphasis on wearable devices and not just smartphone technology, but lots of different wearable devices, monitors of different sorts, et cetera. There was probably more chatter around 4K because the price to performance ratio is improving there. For OLED, the price to performance is still unfavorable.

As I think I may have mentioned previously, our outlook is that this is still a market that is a few years out till it hits the price parity with today's technology. But it does appear that the manufacturers remain fully committed to it and that is pretty interesting.

Okay. Lastly on gross margins, which have been ticking up for the last few quarters. It sounds like, at least, over the next quarter they're going to continue to go up. Do you expect this trend to continue, assuming you get some topline growth?

Yes, I know that we had some technical difficulties when I first started my prepared remarks. I'm not sure if the audience heard my opening statement.

But we do look at this pickup in commercial activity as being a positive one because it should allow us to continue to expand gross margins and it should result in sustained strong cash flow. We believe those things are on course to happen. And now we have to go and execute.

Okay. And just lastly on scientific, it sounds like a little more positive after a couple of negative years. Fair to say at least we've reached a period of some stability here?

I think that's a fair way to describe it. Certainly, the relief provided by the Ryan-Murray bill in the US has restored some funding to these agencies. There has been some other stuff that has happened to help the agencies' funding levels. It probably doesn't get worse.

It could be as I said in my comments on the scientific market, maybe 3% to 5% higher spending in the US. How that flows into various markets or into individual manufacturers remains to be seen. But I think the trend statement is a positive one.

Okay. Great. Thank you very much.

Sure thing.

We have a follow-up question from the line of Patrick Newton with Stifel.

John, just a follow-up on that gross margin question, maybe asked slightly differently. Even assuming a flat revenue type of basis given the improving services as a percentage of revenue, and like you said the consumer side, we could anticipate this trend to go up and to the right, because it's not revenue dependent, I guess is my question?

It's always revenue and mixed dependent, always. If you are going to ask a question around a particular set of criteria, we can answer it.

If you're asking if the mix shifts on flat panel to these more advanced systems from what we have today and everything else remains the same, is the gross margin better? The answer is, probably. But there's a lot of underlying business.

I'm not trying to dodge the question, I'm just telling you there's a lot of moving pieces here. Revenue and mix are always important as it pertains to gross margin. But our view is that given the trajectory we are on in terms of bookings and backlog, demand profiles, and the revenue, the product mix we see today, yes we are comfortable that gross margins continue to expand.

Great. And then on the flat-panel display side given the current orders you have in hand, can you help us understand how our --

If you're about to ask me when the next one is coming --

No, I wasn't going there at all. The question was given that order in hand, how far is your capacity utilization pushed into FY15 or how far are you booked at this point?

Well if we assume that this entire order ships or I should say the balance of the order ships in 2015, we will still have some capacity available to us. Again, it's going to be dependent on mix because the bigger the system, the more it takes to manufacture. Testing tends to be a little longer on the higher-performance systems than on the lower-performance systems. If it comes down to a point where we need to add capacity, it is relatively straightforward to add in this area because it is literally just floor space.

As you sit here today, do you anticipate that you're going to have to add capacity in FY15?

Again, it will be mix dependent. We are not full to 2015 in terms of commitments. And as that happens we will be able to make the determination. I'm going to stress again if we have to add floor space, it is not a big deal.

Okay, thank you, John.

Sure.

At this time we have no further questions in the queue. I will turn the call back to John Ambroseo for any closing remarks.

Thank you Derrick. I'd like to thank everyone for participating. Clearly, we've got some pretty good news here on the order front, and we are looking forward to continued growth in FY14 and into FY15. We will speak to you again in a few months.

Ladies and gentlemen, that concludes today's conference. We thank you for your participation. You may now disconnect. Have a great day.