Coherent Corp (COHR) 2014 Q4 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the Coherent fourth-quarter and year-end fiscal results conference call hosted by Coherent Incorporated. (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, Chris. Good afternoon, and thank you for joining us. 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 fourth quarter. Revenues for the quarter were $205.3 million, with corresponding pro forma earnings of $0.96 per diluted share. Although revenues were at the low end of our guidance range, we exceeded our earnings expectations mainly due to lower operating expenses and a 1 million favorable exchange rate impact included in other income.

We ended the quarter with a strong cash balance of $318.3 million, reflecting a quarterly cash flow from operations of $26.5 million. Our pro forma EBITDA percent for the quarter was 18.6% and compares to 15.8% last quarter.

Net sales for the fourth quarter of $205.3 million increased $8.8 million, or 4.5%, sequentially and declined $7.8 million, or 3.7%, compared to the same quarter a year ago.

Year-to-date revenues of $794.6 million declined 1.9% compared to the previous fiscal year. Our shippable backlog at the end of September, defined as shippable within the next 12 months, is approximately $320 million, including $136 million, or 41%, flat-panel display shippable bookings. The comparable shippable backlog at the end of last year was approximately $286 million, of which $80 million, or 28%, related to flat-panel display applications.

Geographically on a year-to-date basis, Asia accounted for 49% of the Company's revenues, US 26%, Europe 19%, and the rest of the world 6%. Asia includes two territories with revenues greater than 10%; South Korea and Japan represents 21% and 16% of fiscal 2014 revenues, respectively.

Service revenues for the fourth quarter were $57 million, unchanged from last quarter. Flat-panel display service revenues decreased about $1 million sequentially, which reflects our previous guidance of lower utilization rates.

Fiscal 2014 total service revenues increased to almost $234 million, or 29% of sales, compared to $208 million last fiscal year. And flat-panel display service revenues grew about 24% year over year.

We had one customer in South Korea who contributed more than 10% of the Company's fourth-quarter and year-to-date revenues. With respect to the fourth-quarter revenues by major market applications, we saw a high single-digit sequential increase in microelectronics, smaller increases in our materials processing and scientific markets, and a slight decrease in the OEM component and instrumentation markets. Microelectronics revenues grew 8% sequentially, mainly due to an increase in the flat-panel display set markets primarily as a result of a large shipment to China for Sapphire color glass processing.

Advanced packaging revenues also increased sequentially. However, we are comparing to one of the lowest quarters in recent history. API revenues remain at lower levels when comparing to prior-year run rates, as is the drilling market recovery has been slower than originally anticipated.

Semiconductor revenues declined sequentially and reflect a softer environment for this market. For the full fiscal year, the largest year-over-year percentage change was in the OEM components and instrumentation market. Our revenue in this market grew 13%, which is primarily the result of success in a wide range of medical applications including ophthalmology, aesthetic surgical, and dental. These increases were more than offset by lower microelectronics revenues as a result of less flat-panel display system revenues due to the timing of customer demand and lower advanced packaging revenue due to market softness, partially offset by higher flat-panel service revenues and higher semiconductor business.

The Company sales by major market application for the quarter is as follows: scientific, $29.1 million; microelectronics, $102.9 million; material processing, $31.9 million; OEM components and instrumentation, $41.4 million, for a total of $205.3 million.

The fourth-quarter pro forma gross profit was $83.1 million, or 40.5% of sales, which is in line with our guidance. The sequential increase of 160 basis points was mainly the result of a more favorable mix and higher volume. Pro forma peers expenses were 25.4% of sales, compared to a guidance of 25.5% to 26% of sales. Fourth-quarter expenses were unchanged from last quarter and continue to be lower than the first half run rate due to higher customer reimbursements for certain development projects and lower variable compensation.

Our cash and cash equivalents balance for the quarter was $318.3 million, which represents an increase of $15 million compared to last quarter and $68.2 million compared to the previous fiscal year end. Approximately $201 million, or 63% of the cash balance, is held internationally, mainly in Europe.

Cash flow from operations for the fourth quarter was $26.5 million, bringing be year to date to approximately $91 million. Days sales outstanding for the quarter remains at 60 days compared to last quarter, and inventory turns improved sequentially from 2.7 to 2.9 turns.

Capital spending for the quarter was $5.5 million, or 2.7% of sales, and year-to-date spending was $23.4 million, or 2.9% of sales.

Let me move on to the guidance for the first quarter of fiscal 2015. As a reminder, our first fiscal quarter is typically a short quarter due to the many holidays. Looking at Coherent's prior 10 years of actuals, excluding a couple of recovery years, our first-quarter revenues generally range 2% to 12% below the fourth quarter of the prior fiscal year. Our current outlook for the first-quarter revenue ranges from $190 million to $200 million, representing a sequential decrease ranging from 2.5% to 7.5%. The guidance is inclusive of our first triple VYPER/LineBeam 1500 flat-panel display system, which is currently scheduled to ship at the end of first quarter.

So as this is the first of the systems, there is always a possibility that shipment could slip into the beginning of the second quarter.

During the fourth quarter, we shipped a twin VYPER/LineBeam 1300 system, which clears the last of the backlog related to this version.

In addition, the first-quarter guidance reflects the following assumptions. First, a delay in the follow-on order for the Sapphire processing order that we fulfilled in the fourth quarter. Second, a flat-panel system utilization rate consistent with the fourth-quarter run rate. And third, no recovery yet of the advanced packaging market.

We project the first-quarter pro forma gross profit percentage to be similar to the fourth quarter in the range of 40% to 41%. We believe that this favorable impact of the recently weakened euro against the dollar will be offset by the negative impact of lower volumes. As a reminder, the guidance excludes intangible amortization of stock compensation costs.

We anticipate the first-quarter pro forma [pured] expenses to increase to approximately 27% to 27.5% of sales mainly as a result of the lower revenues, higher compensation costs, and lower customer reimbursement for certain development projects. Again, the guidance excludes intangible amortization and stock compensation costs.

Other income and expenses estimated to be immaterial. We do not include gains or losses related to future changes in the foreign exchange rates in our guidance. We project our pro forma tax rates to be in the range of 27% to 28% for the fiscal year, and this reflects the assumption that the federal R&D tax credit will not be reinstated during this fiscal year.

We forecast our full fiscal 2015 capital spending to be approximately 4% of sales, and we are assuming weighted outstanding shares of $25.3 million for the first quarter.

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

Thanks, Leen. Good afternoon, everyone, and welcome to our fourth fiscal quarter conference call. The economic news coming out of China and Europe has raised many questions about how these economies affect the global photonics industry. Slowing growth in China does not have a uniform effect upon the laser marketplace. Markets, applications or technologies that enjoy central or regional government support tend to be more immune to macroeconomic pressure. For example, high-definition LCD or OLED panels for mobile, OLED for lighting, biotech, environmentally friendly manufacturing technologies, and university-led scientific research are supported by either or both levels of government and have maintained a bullish outlook.

The general manufacturing market is feeling a pinch, and small companies are feeling it disproportionately, citing fewer overall opportunities, more aggressive behavior from established competitors and concerns about their survivability from end users. None of this would cause us to materially change our mid-term outlook, and accelerate technology investment could drive some upside.

Europe is mixed. The combination of slow growth and the pure deflation has caused commercial customers to be very cautious. The bright spot in the commercial markets is medical OEM, where several European companies are among the worldwide leaders for vision correction and disease management of the eyes. Scientific research funding is being directed to more successful research groups and/or into larger euro zone projects such as the human brain project, the extreme light infrastructure project, and the graphene flagship program.

These large programs may create infrastructure dollars, but how much it will benefit the photonics industry is unclear. The best opportunities reside within ELI. Net net, our near-term projections for Europe remain unchanged, and we recognize there is downside risk.

Fourth quarter bookings of $182.7 million decreased 25.3% sequentially and 8.8% compared to the prior-year period. The book to bill for the fourth quarter with 0.89. Scientific orders in the fourth quarter of $34 million were up 17.9% sequentially and down 0.8% compared to the prior-year period. The overall scientific market is stable, although there are several underlying trends.

The US market delivered a typically strong performance in the fourth quarter and anchored worldwide bookings. China and Korea maintain their high investment rate across multiple applications as opposed to Europe and Japan, which both lagged. Some of the performance in the latter geographies can be called timing issues, but a closer look points to funding initiatives and program philosophy.

In Japan, life sciences funding is outpacing physical sciences. This is consistent with policy statement of life sciences spending has been essentially flat for most of fiscal 2014. The EU and the US both launched major programs that study the human brain. The US brain project is trying to develop a deeper understanding of how the brain works through the study of clusters of hundreds of thousands of neurons. This involves many experimental techniques including laser imaging. The project is gaining momentum, and there is hope for a two- or three-fold expansion of the current annual $100 million operating budget. This would enable the development of novel techniques to advance the studies.

Europe's human brain project is attempting to create a large-scale map of the neural network -- think of it as a road atlas of the brain -- through computational analysis, which has disenfranchised many experimental neuroscientists. We do not anticipate any significant funding changes for fiscal 2015. We will be focusing on market share gains for our industrial scientific product strategy as well as the introduction of several new offerings.

Instrumentation and OEM component orders of $40 million decreased 26.9% sequentially and 8.2% versus the prior-year period. The sequential swing was due to the timing of large orders in the medical OEM market. Bioinstrumentation orders were up modestly on a sequential basis, with customers in flow cytometry and DNA sequencing fine tuning their inventory positions. Medical OEM accounts are seeing steady to improving demand. This is especially true in the ophthalmic space for vision correction and disease management.

Microelectronics orders up $77.9 million decreased 37% sequentially and 19.6% compared to the prior-year period. While demand from the semiconductor market -- semiconductor CapEx market remains strong, we have seen some significant swings over the last quarter -- two quarters due to the timing of large service contracts. This was again evident in the fourth quarter, as orders reflected lower service bookings. According to semi's worldwide forecast in August of 2014, the near-term outlook through 2015 is robust, with projected capital investments reaching record levels of $42 billion.

While contrarian views have also been voiced suggesting a cyclical downturn, capital investment announcements for leading nodes from Intel and Samsung, coupled with the march towards 3-D memory, seems to favor the bulls. We are very well positioned at the leading edge and should benefit from any investments there.

The swing vote as always will be utilization rates for legacy nodes as they drive service demand and capacity expansion.

The advanced packaging market is following trends in consumer electronics. PC vendors in the supply chains for Apple and Chinese handset manufacturers have reported high utilization rates, which has led to modest order improvement for packaging lasers in the fourth quarter. This is a welcome development, but other factors are more important.

Inventory levels at key OEMs are reaching very low levels. This should stimulate orders in the second or third fiscal quarter. We have also rolled out two new platforms at the recent Taiwan PCCA printed circuit board show. The AVIA NX represents a price-performance breakthrough and should enable market share gains in AVIA drilling and silicon, flex circuit packaging, and other emerging applications. We also launched a new CO2 laser platform called the HORNET, which has specific performance and design attributes for the AVIA drilling market. The HORNET allows integrators to eliminate acousto-optic modulators from the designs, saving significant costs and increasing available laser power and tool throughput.

Shifting fortunes in the mobile industry have influenced the SPD marketplace. Apple's huge success with the iPhone 6 launch and share gains with Chinese smart phone manufacturers have led to increased demand for LTPS LCD displays. Samsung's recent earnings announcement suggests that it has experienced share loss as a consequence. So what does this mean for customers and for Coherent?

There are multiple vendors for LTPS LCD panels, and price competition is fierce. We have heard that year-over-year price erosion is in the range of 30%. The mix shift from OLED to LCD affects service revenue since OLED has a tighter process window and requires more frequent LTU replacements.

Given these dynamics, customers are inquiring about LineBeam systems larger than 750 millimeters that reduce the panel -- the cost per panel. We have also worked with our vendors to extend the lifetime of certain high-cost components in the LDU. This reduces cost for customers and revenue for Coherent by $10 million per year, with no impact to gross margin percentage.

With respect to moving from an event basis to contract model to ELA service, the rate of evolution manufacturing environments is still high, and neither the customer nor Coherent is in a position to agree on measurable performance criteria for this new service model.

During the fourth quarter, we completed delivery of approximately $10 million of lasers used for Sapphire processing. We had expected to receive a follow-on order of similar size. Delays in the release of the end product have postponed that order. We do not believe the availability of Sapphire is to blame since it is available from multiple vendors. We are in regular contact with our OEM integrators and can respond spontaneously to delivery requirements.

Materials processing orders of $30.9 million were down 17.5% sequentially and increased 20.2% versus the prior-year period.

Material processing orders were a record for a fourth quarter and show remarkable resiliency coming off an exceptional third quarter. We received volume orders from a variety of applications including short-pulse lasers for non-thermal processing, CO2 and pulse UV lasers for non-metal additive manufacturing, and semiconductor lasers for Chinese laser manufacturers. We have been targeting the first two areas, and we had anticipated positive results.

The growth of semiconductor laser sales in China is consistent with vertical integration at the low end of the marking and engraving market. We have seen a similar trend in low-power CO2 laser marking for several years.

Incidentally, this trend is not limited to China. US and European manufacturers have taken similar steps to maintain financial competitiveness.

Our efforts in the kilowatt space have been mixed. Our direct diode portfolio is at very high year-over-year growth due to partnerships with welding and cladding companies. Since the release of an updated product line, our laser manufacturing tool business has also had very high growth and is poised for more, with release of new products targeting the thin metal cutting market. These positive results are offset by disappointing ones in the fiber space, where we failed to reach our $10 million sales objective for fiscal 2014.

The time from design win to volume has been slower than expected, and it has taken longer than planned to launch the multi-kilowatt platform which addresses the sweet spot of the market. We are on track to release the higher-power products in fiscal 2015, likely in conjunction with a major show in Europe or China.

Looking back on fiscal 2014, I would offer the assessment that it was a solid year for financial performance. Fiscal 2015 is positioned to produce superior results. At present, the risk factors to fiscal 2015 are macroeconomic events in Europe and the timing of certain API orders within microelectronics.

We are maintaining good cash generation, as evidenced by our running total to $318 million. Our top priority for the cash is to acquire complementary revenue and technology. We are evaluating a range of M&A opportunities both large and small. In the event that these come to fruition, we will naturally provide an update as part of our regular quarterly calls or by other disclosure.

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

(Operator Instructions) Larry Solow, CJS Securities.

Thanks for that handful of color you gave. So it sounds like your commentary is maybe a little more cautious from where you were last quarter. I'm just trying to get a better pulse on it. I know you don't give a full-year, exact revenue outlook, but your book to bill was still, on a four-quarter [trunk] basis, over 1.1. So is it fair to say that you'll sort of reach -- hit your long-term type revenue outlook this year? Is that an obtainable figure?

I don't know that we gave a fixed long-term revenue outlook. I certainly am of the opinion that fiscal 2015, as I said just a couple of moments ago, will be superior to fiscal 2014 in terms of financial performance. We do have some moving parts, particularly in the microelectronics space. Some of those we see as more timing issues. Some of them are potentially structural changes in the way that the business is operated. So there are pros and cons to the outlook. But net net, we still maintain a positive outlook on 2015 while recognizing that there are some -- again, some macro risks. I think there's probably more macro risks in the European market than anywhere else at this point.

And in terms of just the flat-panel display and sort of a shift away from OLED to LCD, how long would that play out assuming this LCD, I guess, would have to go to the LTPS for you to get back to an even keel or benefit?

So if I can just correct a little bit there, Larry. The high-definition displays that are being used in the market, whether they are LCD based or OLED based, all utilize LTPS backplanes.

Okay.

So from a unit basis, it's six of one, half dozen of another.

Right.

The impact is felt more on the service side because to make OLED, the process is more sensitive and therefore drives a shorter or a narrower process window, which means that the two replacements are somewhat more frequent.

Right.

So the shift has more to do with service revenue than it does with new system demand, which is really a bellybutton sort of model. The more handsets that you make or the larger the handset display is, that's generally good for consumption of total capacity, whereas the service is much more sensitive to the mix of what the product output is.

Fair enough. Just a quick follow-up on that. Just so you -- on your service percentage revenue, it has obviously come in a little bit. I guess it's come down more on the flat-panel display and is being offset by some of the service revenue in your core semi-cap space. Is that sort of how to look at it?

It's come off a little bit in the flat-panel space. And, yes, most recently that has been offset by gains in semi. That's a correct statement. How that mix will vary over time, it would really be a reflection of what the utilization rates are in those different markets. It's harder for us to predict that on a quarter-by-quarter basis.

Understood. Just lastly, the buyer instrumentation, some quarterly timing and issues you had last quarter into this quarter. Has that -- do you have some better visibility on that? And as you look out into 2015, do you think that sort of normalizes?

I think the demand in bioinstrumentation actually looks reasonably good. We did have some quarter timing issues over this past year predominantly due to some of the larger customers changing their inventory management practices. I think some of that -- I don't know if all of it, but at least some of that has washed out. I don't see anything sort of underlying in the instrumentation market that would suggest any kind of market weakness. I really think it's an inventory management issue.

Okay, great. Thank you.

Mark Douglass, Longbow Research.

John, so talk to me again on the LTPS on the shift. So you said it hasn't affect -- as far as whether or not it is OLED or LCD, you're still going to ship the unit to high-def. But looking at your -- the fact that you're chewing through your backlog and the orders are down, you didn't get follow-on orders. How do you look as far as orders for equipment?

I think you may be mixing metaphors there a little bit there, Mark. Maybe not, but let me try to clarify. Over the past several quarters, we've had substantial flat-panel orders. As you know, we report it on a regular basis.

Right.

We anticipate shipping that equipment over the next 12-plus months depending on exactly when the call-off is. The fact that we didn't get any orders, or significant orders, worthy of a call-out in the fourth quarter is not atypical because, as you know from our history, these things tend to come in big clumps.

Right, right.

The change, the delayed order was actually not flat-panel display, it was Sapphire processing. Just to make sure that I made myself clear. They are two different parts of the same market.

The Sapphire delay, we can tie to a delay in the launch of the ultimate end product from a consumer electronics company. We think that that is more of a timing issue than anything else. Obviously, we had -- we thought the order was going to come earlier, and that was an incorrect call on our part.

As far as the flat-panel, the ELA business, we will continue to add capacity into the marketplace. There seems to be a fairly significant appetite for this equipment. And even though there are some shifting market shares, the requirement to build larger screens and the requirement to drive the cost down on screens is actually pushing customers to figure out how to get even more efficiency out of these systems, which net net is good for us. The biggest short-term impact -- and, again, I think I'm saying this for at least the third time here -- is the shift that we started to predict a quarter ago when we were talking about utilization rates changing is really the shift that's taking place in the market between OLED-based displays and LCDs. Even though they both use LTPS, the LCD process is more forgiving and doesn't require tube replacements as quickly.

Right, right. I guess I wasn't thinking that there's a delay in your LTPS equipment orders. I was just curious, I know it's pretty lumpy. And for a while, we think there are going to be follow-on orders. They are still looking good. So you're still thinking that the runway is still really good. But right now you haven't received new orders, so you're going through your backlog. And right now, you'll be delivering on that backlog in fiscal 2015.

That is correct. We didn't -- as I said in response to Larry's question, we didn't do a callout on any specific ELA orders during the fourth quarter because we saw them as more a routine part of the business. We did receive systems orders, but they were more in line with what we would consider a normal run rate rather than these large clusters of orders.

Of the concerns I potentially have around the business, ELA is not one of them.

Right, right. We are just trying to determine what's going to happen in 2015. And if you have -- if you get more orders in the next quarter, what are the chances that any of those would actually ship in fiscal 2015? Pretty slim?

It will depend on what version is ordered. If it's a standard version, we could probably get stuff out before the end of fiscal 2015. If it is one of these large LineBeam systems where the optics are not -- I don't want to say in inventory because we don't really keep any of them in inventory. The lead times on them are (technical difficulty). Those would be harder to get out in fiscal 2015.

And the large VYPER system you anticipate shipping in the first quarter, you have another one to ship later in fiscal 2015. Correct? You had two really large (multiple speakers) --

We have at least one more to ship.

You had a few, I should say. You never quantified it, I guess.

Yes, that's correct.

On the materials processing, going back to there, you -- it sounded pretty mixed. And I missed what you were saying about the Chinese manufacturers and what was going on there. Do you mind repeating?

Sure. So in China, the market -- the short story is markets or applications that are enjoying government support, whether it's at the national level or regional level, they are continuing to move at pace. The general manufacturing environment has gotten a little bit tougher, which would be consistent with a slowing GDP in China.

What my comment was that the large manufacturers seem to be weathering that pressure a lot better than the small manufacturers. Because the small manufacturers, they are seeing a number of things. Obviously, the big guys want to maintain share, and they're becoming much more aggressive in a tightening market. Customers worry more in a tight market about whether these small guys can survive, which influences whether or not they get orders. There are dynamics that we see every time there's a slowdown in China.

We've been listening to lots of reports over the last couple of weeks in earnings season, and it seemed that many people, analysts in particular, were concerned about what's happening in China and Europe. So we thought we would short-circuit that and talk about it up front.

Sure. And then final question, so you are positioned for superior financial performance in fiscal 2015.

That's correct.

Does that mean higher margins? Higher EPS? Both?

It would suggest -- what I'm suggesting in that is that we expect revenue to go up and EPS to go up. I'm not going to go beyond that because there could be puts and takes in different lines. But we certainly think that 2015 is going to be higher in revenue and EPS.

Okay. Thank you for taking my questions.

Patrick Newton, Stifel.

Yes, John and Leen, just following up on that saying there's puts and takes in lines in fiscal 2015 versus 2014. What would preclude you from saying that gross margin should be higher? I would think that service revenue should continue to rise. You just saw FPD grow about 24% year over year. So I'm curious why you wouldn't say higher revenue, higher EPS and higher gross margin.

So Patrick, the overly simplistic answer is I don't want to put myself or the Company in a position where we are actually perceived to be giving full-year guidance. I can tell you that right now we see revenue being higher, we see EPS being higher. You could derive other assumptions from that. We're just not filling in those blanks right now.

All right, fair enough. And then on the service revenue side, just put up 24% year-over-year growth. Is that something that we would think, given just higher installation rates and pretty decent utilization irregardless of the shift between LCD versus OLED, that that should actually accelerate at a similar rate or maybe even a faster rate in fiscal year 2015? I'm sorry; that was specifically flat-panel display service revenue.

The thing that you have to remember in there is -- I'm going to be potentially confusing here. On a unit basis, your statement may be correct. But remember that we've also been able to eliminate a pretty high-cost component from the existing service model, which is going to drive customer costs down and our revenue down by about $8 million to $10 million. We see that as actually a positive development; not that the revenue is going down, but that we have been able to eliminate one of the fuses in the system which is beneficial for uptime and cost management.

So we would have to -- service revenues and ELA would have to grow by $8 million to $10 million just to stay flat with fiscal 2014 and then grow on top of that. So I'm going to be cautious in -- at least as where --from where we're sitting right now saying that ELA service revenue is going to be growing at any kind of accelerated rate.

Okay. And then on guidance you did say that there's going to be a LineBeam 1500 shipping in the quarter. At the midpoint, you are in essence guiding for revenue to be flat year over year. I'm curious if you would comment on an expectation on whether flat-panel display is going to be up or down year over year.

We have to pull a cheat sheet out here.

Just one second, Patrick. It will be up year over year.

Okay. And then on the -- I guess, John, on the mix of OLED versus LCD, could you help us understand a relative mix in your current install base and then what that mix looks like in your backlog?

So Patrick --

Just to give us a better understanding.

I understand why you're asking the question, and unfortunately I am not going to answer it. The reason is that we continue to view these things as pretty proprietary for the customer, particularly since there is one customer that has a commanding lead in OLED. And if we tell you what the install base looks like or what the shippable backlog looks like, we're basically taking a road map for their competitors, and it's not our place to do that.

I realize the frustration it causes for you guys and the challenges it causes for you guys, but I would point out that, had we given you numbers previously and we had updated them based on the changes that we were seeing in service revenue, people could've derived at least a portion of what was happening in the consumer electronics industry. It's not our place to be providing that kind of visibility into the market. And I apologize for that, but we really have to maintain customer confidence here.

Okay. And I guess on the order side, previously you have had pretty good visibility into large orders on the horizon for flat-panel display. Not necessarily perfect timing, but you've at least known when they've been out there to be had. I'm curious if you could comment on how the pipeline looks for material flat-panel orders over any timeframe; just any information you can give there.

I guess the way that I would answer that is we're involved in a range of conversations with customers, both end users as well as integrators, on what their specific requirements are for their coming investment rounds. Whether those are investments that have to be in place in 2015 or 2016, the outlook continues to be quite bullish.

Not to beat a dead horse, but if you just look at the change that's taken place in the iPhone format where the 5 was a 4-inch screen and the 6 is, I think, it's 4.7 and 5.2; I can't remember the exact dimensions. But you're looking at close to a 20% surface area increase on the low end and over a 30% increase on the high end. And if you produced the same amount of devices, it tells you that the amount of the surface area that you have to produce has gone up by 20% to 30%. Those are fairly large numbers which you don't absorb in existing capacity. And clearly the trend is towards these larger-format phones.

So the long-term drivers continue to be increased use of high-definition-enabled handsets, increased diagonal as far as it goes for the handset side. And then to the extent that you start to get penetration into tablets, that would be the second layer of growth.

We continue to have a pretty bullish outlook on ELA. Going back to Mark Douglass's question, how much of that -- how much incremental demand we could fulfill in 2015 beyond what's already in the backlog will really be dependent on mix. But as orders come in in 2015, and those orders will be coming in, I suspect that we'll start to populate fiscal 2016 pretty quickly here.

Okay. And then just last one for me, John, is that for fiber laser revenue in fiscal year 2015. And anything specific that needs to happen to hit that target like having these multi-kilowatt lasers be out and be the large contributor?

I think the -- I have to say that I've switched my goal mindset. Right now, the most important thing is for us to finalize these packages and get them into the hands of customers. How much revenue it drives will really depend on whether it's an early or mid or a late 2015 launch. I have not set specific revenue goals with the team. The success factor right now is getting these things launched and qualified with vendors.

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

Sure.

Jim Ricchiuti, Needham & Company.

John, if we look at the 25% or so of your revenues that you get from Europe, which verticals are you most cautious about? It sounds like the components instrumentation is holding up pretty well. Is it scientific and government and maybe the materials processing where you're a little more cautious about Europe?

You know, Jim, I would actually dice it differently. I would say that the commercial side of the business is probably a bigger question mark than the research end. There will be undoubtedly shifts here and there on how research dollars are allocated, but probably not meaningful shifts.

And to the extent that European governments don't dramatically reduce scientific funding, and as of today there's not an indication that that's a probability, I think science is fine -- or scientific research is fine. And only instrumentation to the extent that it's going into medical OEM also seems to be reasonably immune at this juncture.

Because a lot of these European companies, as I said in my prepared remarks, are global leaders in things like refractive surgery, cataract surgery and disease management, whether it's photocoagulation or photo disruption, et cetera. And many of the end markets for those products are outside Europe as well, so they benefit from continued investment.

I think the challenge, I think it's probably in the materials processing market in Europe where local companies will probably take a more conservative outlook as time goes on, particularly if there's not relief -- signs of relief on the macroeconomic end.

When you look at GDP growth rates in Europe right now, Germany is hanging in there, I think, 1.5%. France is between 0% and 1%. Italy is negative 0.4% to plus 1%. These are not numbers that set the world or the region on fire. And the risk of deflation casting a shadow over all of this -- I mean, if there's a concern, that's where it comes from.

So to simplify the answer, I would say that the commercial market for the materials processing is probably a risk area, and the other markets are likely to continue on a pace similar to where they are on today.

And the tone of the business in the materials processing that you are seeing in the past month or so, how would you characterize it in Europe?

So Europe contributes a portion of our materials processing business. Obviously, our practice is much more dependent on how things are going in Asia and the US. But I'd say that the comment that customers are being cautious is probably accurate. The first thing that they typically do is move away from long-term orders and go to short-term orders. And then they try to push their inventory levels down as low as they can and shift as much of the inventory burden as they can to their vendors. We've seen this song and dance before. It's not exactly new. The question is is this a short-term reaction to the news, or is this a longer-term trend. My crystal ball is not good enough to answer that.

Got it. One final question for me just with respect to China. Some companies have been talking about some softening in China as a result of the anti-corruption crackdown or investigations that are going on. It sounds like your scientific and government-related business, though, in China has held up reasonably well. So it doesn't sound like you're seeing it. Is that fair to say?

I would say that we are not seeing it certainly nowhere near the extent that other companies have talked about. But I also attribute that to, quite frankly, good training on the part of all the people that I work with to make our colleagues understand what acceptable business practices are. It's hard for me to get from point A to point B on some of this stuff if you're living by the rules.

Just from a broader demand standpoint, you haven't really seen any (inaudible) just cautious part of customers?

As I said, on the scientific side, which is primarily government funded, it's continued strong investment across multiple end markets. Whether it's physical sciences, whether it's biotech, we are seeing continued good traction there.

And then in areas -- in commercial areas where there are big government sponsorship programs like mobile, flat-panel, like OLED lighting, I'm repeating my prepared comments in some regards here, that's continuing to crank along.

If we see pressure anywhere in China, it is in the general materials processing market. And, again, it's disproportionately shifted to smaller companies who have - who are in a greater risk position in any kind of contraction scenario.

Okay. I'll slip one more in, John.

Sure.

Is your acquisition pipeline and the targets that you're looking at, would you characterize it as more active today versus, say, a year ago? Or evaluation is an issue out there?

You know, we're constantly going through evaluation. Sometimes that evaluation is an internal process that never reaches a potential target. Sometimes it's an engagement with the potential target. It varies. I don't know that I would necessarily call it more active. And as far as valuations go, yes, I guess in general people see a strong market as a reason to ask for more money. But there also has to be discipline on the part of the buyer to figure out what the right valuation is for the business. And either you can come up with the right number or you can't. And the right number, of course, is defined as one that satisfies both parties.

Okay. Thanks a lot.

Mark Miller, Noble Financial Capital Markets.

I'd like to follow up on Jim's question. Would you say your sales and bookings in China were up sequentially year over year?

I'm going to have to rely on Leen if she's got that data with her.

Our revenue was definitely up year over year for China. I don't have the bookings handy. I need to get back to you on that one.

What about sequentially? Were China sales also up?

Yes. Remember we shipped, as John alluded to, the $10 million order that we shipped in Q4, and that was in China.

That was a Sapphire system. Is that correct?

Sapphire processing; yes, that's correct.

Commenting on another trend, some of us heard in other meetings that -- in fact, we've heard this for some time and then more recently from one of your competitors. There's been an impact over the uncertainty of the ramp of three-dimensional chips, FinFETs and NAND flash. And like you said, we've seen that for some time in a couple of other equipment firms. But now one of your competitors said it also was starting to impact them. I'm just wondering, your semi business was strong, I believe you said. Are you seeing any effects of that, or are you just expecting it's going to rob Peter and pay Paul if it doesn't ship this quarter or (technical difficulty).

The second and third position flipped between either capacity expansion for legacy or investment in new technologies. We've heard similar things that there are delays in certain aspects. We don't see it, at least for our business, as having a material effect from one quarter to another.

Okay. I see in your notes you said the leading edge was basically not changed, unaffected. One hypothesis following that is the fact that if they can't get, say, 16/14 nanometer FinFETs ramped, that they're going to shift to 10-nanometer for that introduction, that mode. But they'll be expanding significant capacity in the legacy nodes. And, again, you said it's not a primary effect. But would that have any positive or negative impact on you?

Well, again, as I mentioned during this call and plenty of previous calls, legacy capacity is certainly a driver for our business. And the decision process varies from fab to fab in terms of what their (technical difficulty) obviously seen that before. I don't know if the timing is right to call that race. Given that it's election day, it seems like an appropriate turn of phrase. But it might be a little bit premature to say that the 14-nanometer technology is not going to work for those particular applications.

We've heard from you and, again, from another one of your competitors that you're starting to see significant additive sales for additive application manufacturing applications. Did it grow last quarter, and is it becoming significant? I think you were rather surprised that it showed up so strongly last quarter.

I don't know. I should know this, Mark, but I don't know if it grew quarter over quarter. The adoption that we are seeing of additive manufacturing I'd say has a good deal to do with the fact that there are environmental rules being put in place, having put in place, and continue to be put in place in various geographies, most notably China, which is driving customers to alternative manufacturing techniques. Electroplating, which is a very common technique, it is pretty hard right now to get a permit. In fact, it might be impossible to get a permit to put in a chemical -- a chemically-based electric plating factory in China. And one of the alternatives is using laser cladding as an alternative. That's creating market opportunities within our industry.

So even -- and this is why I tried to allude to the fact in China, if there's a government-sponsored program, whether it's a key investment area or whether it's an environmentally friendly manufacturing technology, that can create demand within our market. And that's generally a positive thing.

And finally -- I'm sorry; I just wanted to check on the service revenues this quarter. Is it $57 million, or do I have that wrong?

No, that's correct.

Thank you.

At this time, we have no further questions in the queue. I'll turn the call back over to John Ambroseo for any additional comments or closing remarks.

Thank you, Chris. We certainly appreciate everyone's time, and we look forward to catching up with you in a few months.

This concludes today's conference call. You may now disconnect.