Coherent Corp (COHR) 2014 Q2 法說會逐字稿

Welcome to the Coherent second fiscal-quarter results conference call hosted by Coherent Incorporated. At this time, all participants are in 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, Regina.

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 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 financial highlights of the second quarter. Our bookings of $261.8 million were the highest of all time, and include the large flat-panel display systems order we announced in January during our conference call. Roughly 60% of this order is included in our shippable backlog within the next 12 months.

Revenues for the quarter were $199.2 million, with corresponding pro forma earnings of $0.82 per diluted share, representing a growth of 19% on a sequential revenue growth of 3%. We ended the quarter with a cash balance of $283.5 million, reflecting a quarterly cash flow from operations of approximately $16 million. Our pro forma EBITDA percent for the quarter was 17.7% and compares to 16.4% last quarter, and 17% the same quarter a year ago.

Net sales for the second quarter increased $5.7 million or 2.9% sequentially and declined $800,000 or 0.4%, compared to the same quarter a year ago. Our backlog shippable within 12 months at the end of the second quarter was $308.5 million, and flat panel display applications backlog is approximately $117.3 million, or 38% of the total. Geographically on a trailing 12-month basis Asia accounted for 50% of the Company's revenues, US 24%, Europe 19%, and the rest of the world 7%.

Similar to last quarter, we had one customer in South Korea and integrated to a large flat panel display manufacturer who contributed more than 10% of the Company's second-quarter revenue. With respect to the revenue by major market application, we achieved double-digit sequential growth of approximately 15% in the OEM components and instrumentation market, showing equally strong growth in bio instrumentation and medical application.

Medical posted a record revenue quarter and continues to benefit from growth in new applications, in part resulting from the Lumera acquisition. Microelectronics grew 2.4% sequentially. The increase in flat panel display business was partially offset by a revenue decline in advanced packaging due to continued market softness. Materials Processing revenues are similar to last quarter and Scientific revenues declined 6.5% sequentially, mostly due to softness in the US and Europe, partially offset by strength in Asia.

Service revenues for the second quarter were $60 million or 30% of sales and compared to $60 million last quarter and $48 million a year ago. Flat panel display service revenues grew about 2% sequentially, and grew more than 50% compared to the same quarter last year. On a trailing 12-month basis, service revenues represented 29% of the total Company's revenues.

Revenue by market application are as follows: Scientific 31.1, microelectronics 94.5, materials processing 27.6, OEM components and instrumentation 46 for a total of $192.2 million -- $199.2 million. The second-quarter pro forma gross profit, excluding $600,000 stock compensation charges and $1.5 million intangible amortization, was $82.8 million or 41.6% of sales, an increase of 50 basis points from the 41.1% we recorded last quarter and also marking the fourth consecutive quarter of pro forma gross profit increases.

The sequential increase is primarily due to lower product costs in several of our business units. Going forward, we project the gross profit to decline in the third quarter, primarily due to a negative product mix. However, for the fourth quarter, we forecast another step-up from the 41.6 we just recorded.

Our total pro forma operating expenses were 28% of sales, which is in line with our guidance provided during last quarter's conference call. Our cash and cash equivalents balance for the quarter was $283.5 million, which represents an increase of $9.8 million compared to last quarter.

Approximately $187 million, or 66%, of the cash balance is held internationally, primarily in Europe. Cash flow from operations for the second quarter was about $16 million, bringing the year to date to approximately $44 million.

Days sales outstanding for the quarter increased to 62 from 54 days last quarter, and approximately half of the increase is due to less favorable sales linearity. The remaining increase is primarily the result of changes in our regional sales mix.

Inventory turns were unchanged at 2.7 turns when compared to last quarter. The sequential inventory balance increase of $5.5 million related entirely to the triple VYPER order we received in January. Due to the long manufacturing cycle times for these systems, the inventory buildup typically starts about nine months prior to shipment. Capital spending was $7.2 million for the quarter and $14 million year to date, both were 3.6% of sales.

Let me give you a recap of our guidance. We expect our third fiscal-quarter revenue to be in the range of $197 million to $205 million.

As John indicated in our press release, several of the large bookings will start generating revenues in the fourth quarter, resulting in our third-quarter revenues to be similar to the second quarter. We anticipate our fourth-quarter revenues, however, to increase approximately 10%, compared to the second quarter we just reported.

We project the third-quarter pro forma gross profit to be approximately 41%, slightly down from the second quarter, due to a more negative product mix. However, we currently project a pro forma gross profit of approximately 42% for the fourth quarter. As a reminder, the quarterly guidance excludes intangible amortization of $1.5 million and stock compensation costs estimated at $500,000.

We anticipate the third-quarter pro forma period expenses to be approximately 27% to 27.5% of sales, and again this excludes intangible amortization estimated at $900,000, and stock compensation costs of approximately $4 million. We are assuming a pro forma tax rate of 28% for the remainder of the year.

We project our full FY14 capital spending to be approximately 4% of sales, and we are assuming weighted outstanding shares of 25.1 million for the third quarter.

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.

There have been several key developments in the second and the beginning of our third fiscal quarters. We replenished our FPD backlog, scored a key win in Sapphire cutting, improved our position in the medical OEM arena, and landed additional OEMs in the materials processing market.

The short-term challenge for us is the timing of shipments, especially for high ASP systems, since our customer delivery requests are skewed towards our fourth fiscal quarter and into FY15. This leads to a flattish third quarter, but sets us up for a very solid fourth quarter and gives us a running start into FY15.

Second quarter bookings of $261.8 million increased 30% both sequentially and compared to the prior year period. The book-to-bill for the second quarter was 1.31.

Scientific orders in the second quarter of $24.9 million were down 34.8% sequentially and 14% versus the prior year period. The bookings results were in line with our expectations following very strong quarters over the previous two quarters. The mix between biological and imaging and applied sciences remains unchanged as does the regional mix.

During last quarter's call, I mentioned that we were introducing some new products designed and tested to HALT and HASS standards. The Astrella is a new single box ultrafast amplifier that delivers superior performance and reliability.

The Fidelity laser system is a new ultrafast fiber laser configured for a range of scientific and commercial applications. We expect this laser to be especially attractive for optogenetics research, where in a Fidelity laser could trigger a neural response and a Chameleon laser could image the response. Such techniques will be used in Europe's human brain project and the brain program in the US.

Instrumentation and OEM orders of $37.7 million were down 30.1% sequentially and 20.4% versus the prior period. Coming off outstanding orders in the prior quarter, bookings for medical OEM lasers were solid, thanks to improved customer confidence. Lasers for cataract treatment, aesthetic procedures, and consumables all contributed to second-quarter bookings.

The dental opportunity we've been engaged in is also gaining traction, and we can now identify the system integrator as VC backed Convergent Dental. We provide a specially configured nine micron laser for their Solea system.

Although bio instrumentation orders were lower following a record-setting performance last quarter, the outlook remains positive due to higher life sciences investment, particularly in Asia, market share gains for OBIS, and the planned wavelength and power expansion of our portfolio.

Record microelectronics orders of $171.8 million increased 113% sequentially and 89.3%, compared to the prior-year period. Orders of semi-cap applications were lower following two strong quarters. Inspection applications for 1X nanometer nodes have led demand growth over the past nine months.

Customer engagement remains high. The advanced packaging market remained weak due to a combination of capacity and inventory management. Based on information from multiple sources, we believe that orders will begin to pick up in the fourth quarter of FY14. We expect the order mix to be different from that prior to the slow down. Flex packaging relied on pulsed UV lasers should constitute a higher percentage of the market.

We have also been working on a dry ablation IC packaging technique to produce smaller features at lower cost than traditional wet etch lithography. This technique is producing promising results at a major chip manufacturer.

As discussed on last quarter's conference call, we received a record order for excimer laser annealing laser systems for LTPS processing. The bulk of this order, including the more advanced triple VYPER/Linebeam 1500s, will ship in FY15.

I'm also pleased to report that we have received another round of system orders in early Q3 from a different set of end users. These were for Linebeam 750 systems that will be making back planes for high-definition LCD mobile displays. Deliveries commence in Q4 2014 and will be completed in FY15 per the end user's requests.

We recently completed application development for Sapphire cutting that has led to a meaningful order for pulse lasers. This was a competitive situation against an established supplier. I want to commend our team for their exceptional work. We will begin shipping against this order later in Q3 and complete deliveries in Q4. If the initial installations meet expectations, we should receive a similarly sized follow-on order before the end of the current fiscal year.

Materials processing orders of $27.4 million were down 4.8% sequentially and 21.2% versus the prior-year period. The combination of slower growth and tighter inventory controls by customers in China resulted in lower overall materials processing bookings.

There were also a number of bright spots on the market. New environmental regulations limiting or prohibiting new installations of traditional plating technologies are increasing the prospects for laser cladding in China. Our Highlight direct diode system performs very well in cladding applications and is qualified with multiple vendors.

Volume for our recently released J-Series Diamond CO2 lasers is growing at a brisk pace. Planned expansion of the product line should further enhance the opportunity.

We've also signed up additional fiber laser OEMs in the US and Asia against an ever-increasing list of competitors. There were a number of new entrance displaying products or prototypes at the laser China show in Shanghai, including several domestic Chinese companies.

Statistically speaking, few of these devices will enjoy commercial success, but the raw numbers reinforce the need to be vertically integrated.

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

(Operator Instructions)

The first question today comes from the line of Jim Ricchiuti with Needham & Company.

I was wondering if you could size this second order that you received in the FPD area.

It was comfortably into the eight figures, Jim. I can't give you a more exact number than that.

Okay. And just given all of the activity in this area for you, I'm wondering if you can help us in terms of how we can think about the portion of revenues that are going to be coming from FPD in the second half of the year. And how we should think about FY15 just given some of the unusual order activity you are seeing?

I don't think that the second half of FY14 is going to be substantially different from the first half of FY14 as far as FPD revenues go. There may be some variation, but within the normal band of variation.

Clearly in 2015 FPD is going to play a larger role because we will be shipping the line beam 1500s. And, as I said previously, these things sold or have ASPs of about $20 million a piece, so each one of them is a needle mover.

John, any sense as to when we might see revenue from that tool, that system, in FY15?

We're scheduled to start shipping them in the first half, and I think if we could ship one in the first quarter the customer would be delighted, and we're certainly working towards that goal. There are still a number of steps, obviously, with materials and other things that we're working on to make that happen. But the plan is to essentially knock one out a quarter until we complete this first round.

Okay, thanks a lot.

Sure.

Your next question is from the line of Larry Solow with CJS Securities.

Hi, good afternoon. John, I wonder if you could just, the microelectronics orders obviously were very good, but outside of that would you characterize the pretty sizable drops at least year-over-year across the other verticals as mostly timing related, or if you could perhaps just briefly go through each of the other three verticals? And materials processing maybe for starters? That sounds like there's some more negative commentary around it versus --

The materials processing marketing I had raised the flag last quarter that we saw softness in China which was a large market for materials processing. Some of that came to fruition, although the -- I have to open my page here and look at the exact number again. The drop on a sequential basis in orders was nominal at about 5%, 4.8% and obviously was a much larger drop year-over-year.

I do think that that's predominantly due to softness in the market. I don't believe that it is competitive pressure. As we've talked to customers and to competitors in the space, we've heard sort of similar stories.

With respect to the orders in instrumentation, there I would say it's largely timing because we've fallen into this pattern where customers are placing large annual or semiannual orders, they come in, sometimes they aggregate, sometimes they don't. The vector on that market I think is generally pretty positive, however, the sales vector.

And for -- to round out the picture for scientific, I would say that we had a pretty good Q4 at Coherent and a surprisingly good Q1, so the fact that there's a bit of a lull in the second quarter is not a shock simply because there's a funding cycle that you go into. When you pull in orders you don't immediately create the opportunity to pull in more orders if the underlying funding hasn't hit yet.

Okay. And then just a couple quickly. You mentioned I think briefly the cataract opportunity. Any more color on that?

It's picking up nicely. The three areas in the medical space that we've been spending some time on, obviously building out cataract and good traction there, bringing some new solutions to the marketplace.

This dental opportunity is pretty interesting. I got to see the -- a demo of the thing working and listened to some patient testimonials. It was impressive that even children claim it's a pain-free procedure which is somewhat hard to believe, but I take them at face value.

And then the team has also been working for quite some time on developing consumables for lithotripsy. We have been booking and shipping record numbers of those and unlike other products that we sell, those things are one and done. They're a consumable, used on a patient, thrown away, next procedure uses a new one. So, that's grown at a reasonably steady pace.

Okay. And Just lastly on the FPD, sort of the delay or the most of the delivery occurring in Q4 into 2015, is that customer requests or is --?

Larry, the beginning of your question broke up, if you could --.

Sure. Sure. The delivery schedule for the majority of the flat panel display orders mostly Q4 or skewed into 2015. Is that a combination of customer requests and manufacturing supply -- can you hear me? Hello?

Regina?

I'm sorry, yes?

Can you hear me?

You're back.

Okay. Just real quick, on FPD, the delivery timeline, is that a combination of customer requests and just manufacturing capacity constraints, or is it more one or the other?

I'd say on the 750's it's all tied to customer requests. We're going to deliver these things when they've asked us to deliver them. The supply chain for the 750 is well developed.

The original delivery commitments that we made on the 1500s are still intact and they were tied to the time would it take us to order and have fabricated the new lens components for that system. So, nothing has changed there. We told the customer they should expect them the beginning of fiscal -- our FY15 at the earliest date, and there could be some slippage if we experience any delays in the optics.

Right now, it appears that we're tracking on time, but we're still six months away from having everything together to test the system. So, we're taking -- just injecting a small amount of caution into that because we've got some history in rolling out new products and we know that sometimes you don't hit every date exactly on the head.

Right. Right. Okay.

But they're going to hit in 2015 and, as I said, I think in response to Jim Ricchiuti's question, these are needle movers. Every one of these things is a needle mover given the ASP.

Right. Is it still predominantly handsets and smartphones?

It is going to be all mobile.

Okay. Got you. That's what I thought. Okay. Great. Thanks, John. I appreciate it.

Sure, Larry.

We have on the line now Patrick Newton with Stifel Nicolaus, if you'd like to ask a question.

All right. John, I guess I'll take a swag at it. Can you hear me?

Yes, we can.

One is can you elaborate on the Sapphire when you commented on it in your prepared remarks? I'd love to hear what drove your solution being selected in this competitive bake-off that you alluded to. If you could help us understand order size. Then the potential size of a follow-on order relative to the initial order?

Sure. The answer as to why we were able to get in on that business is pretty simple. We were able to ship the customer a prototype of a soon-to-be released laser and the performance that they witnessed from that prototype was far better than anything they had seen. They claim it not only cut faster but cut with better edge quality, and as a consequence we won an order.

I can't tell you the exact number, because they prefer that we don't give out unit numbers and whatnot, but I can tell you that it was a low 8-figure order. And if a follow-on comes, if everything works out accordingly, we would expect an additional low 8-figure order sometime before the end of the fiscal year.

And this is all coming from the Lumera IP?

It was test lasers.

Okay. Perfect. In your prepared remarks you also discussed the expectation for some mix shift in API once growth returns in that business. And I'm curious if there's any impact to your anticipated margin mix because of this mix shift?

Additional revenue will certainly help across the board. The mix -- the kinds of products that I alluded to, particularly UV products, these typically carry reasonable gross margins. And we've factored some of that into the comment of what we expect the gross margin to be in the fourth quarter. So, in answer to your question, yes, we think it's going to help, and, yes, we've factored it into our outlook.

And, Leen, what percentage of your service mix do LDUs currently represent?

What percentage of the service mix do LDUs currently represent?

I don't think we've ever disclosed what our flat panel display service revenue is. It is a significant portion. I mean, it's a sizable portion of the total revenue, but we have not disclosed that yet.

Worth a try.

The growth has been good and I gave you kind of the trend line.

That's fair enough. It's worth a try, Leen. John, one last one. You had a competitor that announced kind of a new entry into the UV market of photonics west. I'm just curious if you're seeing any changes in market dynamics from competition pricing or behavioral perspective as a result?

A new competitor entering the UV market. That's not exactly a unique experience, Patrick. No, we haven't seen much change. What customers are looking for in that space in general is high throughput, better yields, better overall cost of ownership, and I think Coherent, along with several other companies, are trying to deliver products that satisfy those conditions. And at least in the most recent quarter, we seem to have done as good a job and perhaps a better job than any in doing that.

Great. Thank you for taking my questions.

Sure.

Your next question is from the line of Jiwon Lee with Sidoti & Company.

Thank you and good afternoon. John, I wonder if you could try to size the potential market for you between glass and Sapphire cutting?

Jiwon, I'm sorry. You're breaking up on our end. If you could repeat the question.

Sorry. Can you hear me better now?

Ms. Lee, if would you like to state your question again, and then maybe I can try to relay it to them. It seems like they're having some audio problems on that end.

Regina, could you please relay if they could size the potential market for themselves between glass and Sapphire cutting.

Ms. Lee would like to know if you can size the potential -- what was the rest of it? I'm so sorry.

Potential market size for them between glass and Sapphire cutting.

The potential market size between glass and Sapphire cutting. Were you able to hear that?

I think the question is the market potential and/or the difference between glass and sapphire cutting. Is that correct?

Yes.

Yes.

Ladies and gentlemen, if you can hear me, I apologize these technical difficulties obviously very frustrating for everyone involved. Rather than continue getting -- having people frustrated, if any of the analysts have questions, please contact Leen and we'll do our best to answer those. And we will do everything possible to make sure that this doesn't get repeated at a future conference call. Thanks very much for your time, and have a good day.