Coherent Corp (COHR) 2014 Q3 法說會逐字稿

Presentation

Good day, ladies and gentlemen, and welcome to the Coherent Third Fiscal Quarter Results Conference Call hosted by Coherent, Inc. (Operator instructions.)

As a reminder, this call is being recorded. I would now like to introduce Ms. Leen Simonet, EVP and CFO. You may begin your conference.

Thank you, Victoria. Good afternoon, and welcome to Coherent's third 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 give you the financial highlights of the third quarter. Bookings for the quarter were $244.5 million, resulting in a record backlog of $402 million, of which approximately 86%, or $344 million, is shippable during the next 12 months.

Revenues for the quarter were $196.5 million, with corresponding pro forma earnings of $0.73 per diluted shares. Revenues fell short of our guidance primarily due to the timing of revenue recognition against the sapphire glass processing order we discussed on our last conference call.

Originally, we anticipated approximately $3 million revenue against this order in the third quarter, but instead, due to a delay in process qualification of the customer's tool, we began recognizing revenue in the beginning of our fourth quarter.

We ended the quarter with a cash balance of $303.3 million, reflecting a quarterly cash flow from operations of approximately $20 million. Our pro forma EBITDA percent for the quarter was 15.8% and compares to 17.7% last quarter and 17.3% the same quarter a year ago.

Net sales for the third quarter declined $2.7 million, or 1.4% sequentially, and declined $11.7 million, or 8.1% compared to our record third quarter a year ago. Our shippable backlog of $344 million includes $153 million, or 45% flat panel display orders. Geographically, on a trailing 12-month basis, Asia accounted for 50% of the Company's revenues, US 25%, Europe 19%, and the rest of the world 6%.

Service revenues for the third quarter were $57 million, or 29% of sales, and compared to $60 million last quarter and $52.6 million a year ago. Although flat panel display service revenues grew about 17% year-over-year, sequentially we saw a decline due to a lower than expected tool utilization during the third quarter. On a trailing 12-month basis, service revenues represented 30% of the total Company revenues.

Similar to last quarter, we had one customer in South Korea who contributed more than 10% of the Company's third quarter and year-to-date revenues. With respect to the third quarter revenues by major market applications, sequential declines in the scientific and OEM components and instrumentation markets were partially offset by growth in the materials processing market.

Microelectronics revenues were unchanged from last quarter. Within microelectronics, advanced packaging revenues remained disappointing, while semiconductor and flat panel display revenues continued to be strong.

The sequential double-digit growth in materials processing occurred primarily in the United States and involved many different applications and technologies. Within the OEM components and instrumentation market, we experienced a mix shift towards the medical submarket, which posted another record revenue quarter.

The sales by major market applications are as follows - scientific $28.0 million, microelectronics $94.9 million, material processing $31.0 million, OEM components & instrumentation $42.6 million, for a total of $196.5 million.

The third quarter pro forma gross profit, excluding stock compensation and intangibles amortization, was $76.4 million, or 38.9% of sales, which is about 200 basis points below our guidance. The shortfall is primarily due to negative mix within business units, as well as between business units, a revenue shortfall at accretive margins, one-off lower pricing on certain products and, to a lesser extent, volume pricing.

The unexpected mix issues are primarily related to lower service revenues and lower bio-instrumentation revenues, and, as we communicated before, both have typically higher than company average gross margins. The one-off lower pricing includes a systems upgrade and a demo Vyper unit sold to flat panel display customers at favorable pricing to support the development of future business.

The impact of the lower gross profit percentage was to a large extent offset by lower operating expenses. Our total pro forma operating expenses were 26.6% of sales compared to a guidance of 27% to 27.5% of sales. The majority of the savings resulted from lower variable compensation.

Moving on to the balance sheet, our cash and cash equivalents balance for the quarter was $303 million, which represents an increase of $19.8 million compared to last quarter. Approximately $197 million, or 65% of the cash balance, is held internationally, mainly in Europe. Cash flow from operations for the third quarter was about $20 million, bringing the year-to-date to approximately $64 million.

Days sales outstanding for the quarter decreased to 60 days from 62 days last quarter, primarily as a result of more favorable sales linearity. Inventory turns were unchanged at 2.7 turns when compared to last quarter, and the inventory balance increased approximately $3 million, which was in line with our expectations. Capital spending for the quarter was $3.9 million, or 2% of sales, and year-to-date spending is $17.9 million, or 3% of sales.

Let me give you the guidance for the fourth quarter. We expect our fourth fiscal quarter revenues to be in the range of $205 million to $213 million, representing a growth of 4% to 8% when compared to the previous quarter. We believe that the revenue delay in the third quarter has a knock-on effect on the fourth quarter as the anticipated sapphire glass processing following order may be delayed to the first quarter of fiscal 2015. The guidance also reflects flat panel display utilization rates consistent with the third quarter actuals.

We project the fourth quarter pro forma profit percentage to be in the range of 40% to 41% compared to 38.9% last quarter. The sequential increase is mainly the result of an improved mix and higher volumes. As a reminder, this excludes intangible amortization and stock compensation cost.

We anticipate the fourth quarter pro forma period expenses to be approximately 25.5% to 26% of sales. And again, this excludes intangible amortization and stock compensation costs. We are assuming a pro forma tax rate of 27% for the remainder of the year. We project our full fiscal 2014 capital spending to be approximately 3.5% of sales. And we are assuming weighted outstanding shares number of 25.2 million for the fourth quarter.

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 results were decidedly mixed, with lower earnings offset by very strong orders, especially in FPD and medical OEM. Combined with the opening backlog, these orders will improve the mix and increase volume in the current quarter and continue into fiscal 2015.

Third quarter bookings of $244.5 million decreased 6.6% following a record-setting prior quarter and increased by 29.2% compared to the third quarter of fiscal 2013. The book-to-bill for the third quarter was 1.24.

Scientific orders in the third quarter of $28.8 million were up 15.8% sequentially and flat compared to the prior year period. Orders rebounded on better demand in the US and Europe during the third quarter. The Japanese research market remains weak while the rest of Asia was in line with expectations. Roughly two-thirds of all orders were for ultrafast lasers used in biological imaging, applied physics, chemistry, and materials science.

Optogenetics is still among the hottest research topics. Western scientists have pioneered the field, but Asian researchers are joining the fray. This is driving the emergence of niche, high-performance imaging systems from a variety of start-up companies. This in turn is creating new requirements for laser sources used in these systems. Our next-generation lasers, due out in fiscal 2015, have a performance envelope that overlaps nicely with these requirements.

Record-setting instrumentation and OEM components orders of $54.7 million increased 44.9% sequentially and 71.7% versus the prior year period. We had exceptionally strong medical OEM orders in the third quarter.

One of our major LASIK customers placed a large, multi-year order. The cataract market was higher than forecast. Dental bookings were comfortably ahead of expectations, and demand for ophthalmic lasers was strong. These orders signal confidence in both patient-pay and insurance-covered procedures.

We expect continued growth for cataract and dental applications over the next few years and are developing new products in support of this. Within OEM instrumentation, flow cytometry and microscopy applications drove most of the bookings, which is consistent with trends over the past few years. Bookings were affected by new inventory management policies at one of our leading customers, but this should ultimately reduce volatility with this account.

The cytometry market is seeing an influx of products from Chinese manufacturers. Today their market share is small, but it could grow to 25% in the next three to five years as they broaden their reagent offerings, advance their cytometers, and address both the high-end and budget markets.

This is one of the reasons we developed the BioRay product, which offers performance advantages and a competitive cost of ownership compared to LEDs.

We are also pursuing interesting business in rapid DNA sequencing with our high-performance HOPS platform for use in a diverse range of applications from agriculture to cancer gene analysis. We expect deployment decisions will be made in calendar year 2015.

Microelectronics orders of $123.6 million decreased 28.1% following the record results last quarter and increased 40.1% compared to the prior year period. Semiconductor CapEx orders were up significantly due to strong service bookings. This is very consistent with high fab utilization rates reported by Gartner and others.

When one compares semiconductor device revenues with equipment and materials spending, it becomes quite clear that fabs are squeezing hard for yield and throughput. Analysts are predicting that this trend is unsustainable and will result in higher CapEx spending in calendar 2015, especially as 3D structures at 14 nanometers and below become more prevalent in logic and memory devices.

Continued delays in [EUD] deployment also help our semicap business since double-patterning requires roughly twice as many process steps, including inspection and metrology, than EUV. The advanced packaging market remains tight despite reasonably high utilization rates at major PCB makers.

Industry experts have posited that overall slowing mobile growth rates, an increase in embedded capability, and a lack of unit volume transparency at Chinese handset manufacturers have led to a cautious capacity investment model. At a local level, customers are burning through inventory, which will necessitate some level of reordering in the second half of calendar 2014.

Orders for FPD annealing lasers were very healthy but lower than last quarter's all-time record. The new orders, comprised of Linebeam 750s, are destined for a different set of end customers whose primary emphasis is LTPS-backplanes for LCDs. The added capacity will support further SmartPhone share and expected growth in tablet penetration.

Given the interest for capacity beyond the existing backlog, we elected to deploy additional demo systems into the field to enable integrators to run test panels for prospective customers. The conversion rate has been historically high, and the outlook for new orders in calendar 2014 is currently strong.

We're making steady progress on the Linebeam 1500 and still forecast first shipments towards the end of calendar 2014 or early in calendar 2015. There has been little change to the competitive landscape for LTPS. IGZO is awaiting a breakthrough, although a couple of manufacturers announced a change in their IGZO recipe to the more complex top-gate structure.

We have reported a large order for sapphire cover glass processing. As Leen has already discussed, process issues slowed the acceptance of the laser-based tools. We provided engineering resources during our third quarter, and into our fiscal fourth quarter, to help the system integrator identify and overcome their tool design issues that prevented the tools from meeting throughput and yield requirements.

This led to the aforementioned revenue shortfall in Q3 and may delay the next volume order into Q1 of fiscal '15 as we complete the initial shipment. In the short to mid-term, the interest in this and similar processing techniques, combined with device manufacturers to use local integrators, creates a challenge. The integrators are very good at cost engineering and providing fast service support, but have limited experience with these types of processes. We have to provide greater process and tool design support to help them grow the market and consume more lasers.

Materials processing orders of $37.5 million were up 36.8% sequentially and down 7.1% versus the prior year period. We received a number of annual buys across the materials processing space, with much of it coming from outside of China. Marking and engraving applications were the biggest contributors to bookings and included record orders for short-pulse lasers from the automotive and tool industries.

Marking has traditionally been a monochromatic experience, but there has been long-term fascination with color marking. This usually involves photochemical manipulation of the bulk material to create an indelible mark in the material rather than a surface effect.

It's easy to imagine a broad range of uses, from customizing cell phone cases to branded dishware for airlines. Over the years, we have had a variety of dalliances with prospective color marking partners. Recently, we installed a HOPS-based marking system with a major automotive manufacturer for color marking of auto interiors. The results were described as exciting, and the first cars with color marking will be delivered to a professional sports team. Sadly, my request to have a car badged with a number two on a pinstripe background was rejected.

We have made further progress in high power lasers and systems. Several new OEMs have placed orders for kilowatt fiber lasers, including multiple volume customers in China and India.

We booked initial orders for new additive manufacturing customers in the US and Europe, and our new Meta 2C laser manufacturing workstation equipped with a Diamond J-3 laser has been a hit since its recent release. Additional Meta launches specifically targeting the metal cutting market are scheduled for later this year.

For the past few years, we've been sitting around an $800 million run rate due to a variety of puts and takes in the market. We have had excellent orders over the last two quarters and are positioned for solid growth beginning in the current quarter and extending into fiscal 2015. We expect this to result in record financial performance and excellent cash generation. We expect to deploy some of this cash towards accelerating revenue growth through M&A.

We'll be presenting at the Needham Industrial Conference next Thursday and look forward to seeing some of you there. And I'll now turn the call back over to Victoria for the Q&A session.

(Operator Instructions.) Larry Solow, CJS Securities.

Hi, good afternoon. I was wondering if you could just give a little more color on the drop in utilization on flat panel display lasers, and is there some disconnect between I guess the drop in usage at -- for current customers and the continued increase in demand for new lasers?

So, there are associated effects. The demand for new lasers is coming from a wide range of end customers. As we've talked about in the past, once those systems are installed, it's typically a couple of quarters before they hit the service ranks.

In the third quarter and looking at the fourth quarter, there was a major announcement from a big device manufacturer about their own business, which did have an impact on utilization rates within their fabs, and it's one of our biggest customers. So, that's where it comes from.

Okay. So, fair to say that some of the larger, or a piece of the new orders, and the most recent order and some orders this quarter, and some of your pending orders may be coming outside that large customer, or that indirect sale?

The orders this quarter were all from outside that customer, and a portion of the orders that we booked last quarter were also outside that customer. And I think we had announced -- at least last quarter we said it was for a number of end customers through a single integrator. This quarter, it's a different set of end customers than the prior quarter.

Got you. And you certainly have a nice increase in gross margin expectations q-over-q, but I think that is both -- obviously a little bit below your -- you had given Q4 guidance on your last call already. Do you expect that -- with your crystal ball out there, this utilization rates, do you think that this could kind of sit around this number for the next few quarters, or was it a temporary phenomenon?

A good question Larry. It's always difficult to forecast exactly what's going to happen because there are series of new products that are constantly being introduced in the mobile space. Any one of those could drive further or higher utilization rates almost spontaneously. It's also difficult to determine how much of this -- calling it a knee-jerk reaction is not fair to the end user, but how much of this was also driven by short-term financial pressures.

I can't answer either of those because I'm obviously not inside the customer's planning sessions. But, from what we've seen over the long term with them, and there have been perturbations in the past in their utilization rates, these have historically been short-term, but I can't guarantee that it's a single quarter or couple of quarters. We simply don't know.

Got you. And just for the clarification, the Sapphire order, the $3 million, or that was just the piece of an original order you referred last quarter. Is that correct?

That is correct.

Okay. And you had initially expected, I guess, some follow-on sales in Q4, which [doesn't sound like they'll occur till] maybe Q1?

Yes. What we had expected when we reported last time, we had the order -- the initial order in hand, we were delivering against that order, and we expected to have completed those deliveries at a certain point this quarter. A follow-on order would come that would drive further deliveries in the fourth quarter.

The delay in the acceptance of the tools pushed revenue from Q3 into Q4 and is also pushed the installation of the remaining tools so that -- as Leen described it I think quite aptly is a knock-on effect.

Right.

So, we're not anticipating getting that follow-on order in time to have any meaningful revenue impact in this quarter. It could happen that the order comes late in the quarter, but it's not going to come soon enough for us to drive the big revenue number.

Got it. Understood. Thanks, John.

Sure.

Mark Douglass, Longbow Research.

Good afternoon, John and Leen.

Hey, Mark.

Hi, Mark.

John, going back to the Q4 guidance--.

--Mark, if you could speak up a little bit, you're coming across kind of quiet.

How about this? This better?

A little bit better. Thank you.

A little bit better. Going to the 4Q guidance, I believe last time you talked about being higher by 10% versus 2Q. Seems it's a little lower than what you expected. Is that due solely to Sapphire? Are there other items involved, like advanced packaging, just isn't rebounding like you thought it would?

A piece of it is service. As we've already talked about utilization rates, we expect them to be lower this quarter, and part of it is Sapphire, as well. Those are probably in stack order, the two biggest impacts.

Service is the biggest?

Service followed by Sapphire.

Followed by Sapphire, okay. And then, speaking of -- with API, you said it's tied -- the [brink] your inventory. Is it still playing out relative to what you thought last quarter, or is it pushed out a little more?

So, we talked about that we expected orders to start to rebound in the second half of the year. We still expect them to rebound. The magnitude is obviously the big question, but the order rate has been so low in the first half that any orders are, quite frankly, positive, positive impact.

But, you've not really had any orders at this point?

We had orders, but they were low.

Low, lower, okay. And then, I'll ask one more question on -- so you're getting some good traction here in you said China and India on your--?

--Yes, the most recent orders, yes--.

--the one-kilowatt fiber. Are you out yet with a multi-kilowatt yet?

No, that's still scheduled for next year.

Next fiscal year or calendar? Okay.

Well, next--.

--Next--.

--I would -- yes, I would say calendar, because fiscal would mean a release late this year, and that's probably not going to happen.

Okay. Thank you.

Yes.

Jim Ricchiuti, Needham & Company.

Yeah, just had a follow-up question on the Sapphire portion of the business. John, how comfortable are you as you see the initial installation go through about the follow-on business coming through?

I would say pretty confident. The results have been impressive. They've been harder to get to, again mostly because we were working with our OEM integrator to overcome process and yield issues.

But, in terms of meeting -- the lasers continue -- have been and continue to meet performance specifications, and the systems that we've already delivered are in production so they're turning out end product, the results of which, as far as I'm aware, and I'm obviously pretty close to this one, have been quite good.

We know what kind of numbers they can turn out per tool approximately, and we know that they don't have enough tools out there to meet the total capacity expectation. So, I think it's a matter of when, not if.

Okay. I understand there are a lot of moving parts to gross margins as we get past the current quarter. But, obviously with the backlog that you've got and as you look out into fiscal '15, what are some of the puts and takes that we need to really think about in terms of whether we can see some meaningful gross margin improvement?

Again, a very appropriate question. I think, as we look at it, we can break it down by market and product, and we know that the mix of the backlog is a more favorable mix than what we shipped this quarter. And as a consequence, if everything holds, the gross margin should improve as a consequence of that. Certainly sitting in the high 30s that we did this most recent quarter is not appropriate for our business and far from acceptable.

Okay. Thanks a lot.

Sure.

Patrick Newton, Stifel Nicolaus.

Yes. John and Leen, thank you for taking my questions. I guess several fiber laser questions. One is last quarter you discussed about signing up new fiber laser OEMs in China and the US, and today you talked about some volume orders in China and India. I'm just curious if you can update us on your current fiber laser customer count and also help us understand what qualifies as a volume order for you.

The actual number of customers I would guess is tens of customers at this point. I don't know the exact number, Patrick. As far as what qualifies for volume, I don't know that I'm actually comfortable answering that question. So, I'm going to punt on it.

Okay. I won't drill too on that one. I guess previously you talked about achieving a $10 million kind of fiber laser revenue target in fiscal year '14. Could you update us on progress towards achieving that?

We're not going to make the $10 million. A lot -- where we end up will depend on how much we ship this quarter obviously, but we're going to miss that number.

Is there any kind of thought process on where fiscal '15 could shake up?

We're in the midst of doing our annual operating plan for '15, so we're just doing a first look at projections. I would encourage you to re-ask the question next quarter, and perhaps I'll be able to provide you better color.

Got it. That's a deal. I guess shifting to the flat panel display, if we look into the timing of the line being 1,500 shipments, you reiterated kind of that December or March 1 shipment outlook. So, I assume that you've made progress on working through your [lens] component challenge. Is that a fair assumption? And then, once that first shipment goes, are you still on pace to kind of hit a once a quarter [case]?

I think that's indeed the case. As far as the progress we made, progress has actually been quite good. Right now, things are aligning, as I said, for late this year, the beginning of '15. That first shipment always is going to have a little bit of uncertainty because we know that there are things that we'll learn as we're readying that first unit for shipment.

So, it could be that we get one out in Q1 and one out in Q2, and then the following quarters. It could be that two go in Q2, one at the very beginning and one towards the end of Q2. But, I think the timing of the first one is variable. The timing for the follow-on units is going to be less variable.

Okay. And then, you talked about the drop in flat panel display utilization. If we think about it from an LDU perspective, is the average LDU cadence now, if you kind of look across your installed based, is it more towards a year? Is it greater than a year? Is there any type of average you can provide us?

When you say more, you mean the rate at which an LDU get replaced?

Correct.

Okay.

I'm assuming that tied directly to utilization.

It is. Well, it's actually tied to utilization. It's also tied to what is being manufactured, because the process window for all the backplanes versus LCD backplanes is different, and OLED backplanes are much more demanding. So, the tubes are swapped out more frequently. LCDs, it's at least a once-a-year event. For OLEDs, it can be higher than that.

Okay. And then, last one from me, it's for Leen. I guess your period expenses, if I heard your guidance correctly, you're guiding to 25.5% to 26% of sales, which is kind of lower than the trend line we've seen over the last two to three years. And I'm wondering if there's any specific dynamics, or were there any R&D projects that have been completed or that are impacting this guidance?

There are probably two main reasons. One is, as I mentioned, there's lower variable compensation in these numbers. And secondly, we have somewhat higher R&D project reimbursement, which lowers the cost.

Great. Thank you for taking my questions. Good luck.

Thanks.

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 closing remarks.

Thank you, everyone, for participating in today's call, and we look forward to talking to you again in about three months.

Again, thank you for your participation. This concludes today's call. You may now disconnect.