Coherent Corp (COHR) 2015 Q1 法說會逐字稿

Good day, ladies and gentlemen and welcome to Coherent's First Fiscal Quarter Results Conference Call hosted by Coherent Incorporated. At this time, all participants are in a listen-only mode. At the conclusion of our prepared remarks, we will conduct a question-and-answer session. (Operator Instructions). As a reminder, this call is being recorded.

I would now like to introduce Ms. Lene Simonet, Executive Vice President and Chief Financial Officer. You may begin your conference.

Thank you, Katina. Good afternoon, everyone 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 our first fiscal quarter. We delivered strong financial performance with revenues and pro forma earnings above expectations and guidance. Revenues for the quarter were $200.6 million with corresponding pro forma earnings of $0.87 per diluted share. We ended the quarter with a cash balance of $323 million, reflecting a quarterly cash flow from operations of $31 million and cash used for stock repurchases of approximately $17 million. Our pro forma EBITDA percent for the quarter was 18.7% and compares to 18.6% last quarter and 16.4% a year ago. Net sales for the first quarter of $200.6 million, increased $7.1 million or 3.6% compared to the same quarter a year ago and decreased $4.7 million or 2.3% sequentially, which is consistent with our historical seasonality from the fourth to the first quarter.

Our first quarter ending shippable backlog, defined as shippable within the next 12 months, is approximately $296 million including $102 million or 34% flat panel display shippable bookings. The comparable shippable backlog at the end of the same quarter last year was approximately $281 million, of which $73 million or 26% related to flat panel display applications. Geographically, Asia accounted for 51% of the Company's revenues, US 27%, Europe 17% and the rest of the world, 5%. Service revenues for the first quarter were $55 million representing a decline of $2 million, compared to the fourth quarter. This decline is in line with the guidance we provided last quarter. At that time, we highlighted that the first fiscal quarter flat panel system utilization rates would be consistent with the first quarter run rate and that the cost of ownership reduction we introduced to the customer would result in lower quarterly service revenues of approximately $2 million to $2.5 million.

Total service revenues represented about 27% of the total Company's revenue. We had one customer in South Korea who contributed more than 10% of the Company's first quarter revenues, and this includes the shipment of our first Tri-Vyper Linebeam 1500 ELA system. With respect to revenues by major market application compared to the same quarter a year ago, all markets with the exception of scientific realized single-digit growth rates ranging from 3% to 8%. Microelectronics' growth of approximately 8% or $7 million was driven by higher revenues for flat panel display applications. Revenues in the OEM components and instrumentation market grew approximately 3% as a result of continued strong medical application revenues. Although the scientific revenues declined year-over-year, the first quarter results met our internal expectations.

The decline of $2 million in European scientific revenues is partially the result of a tough comparison to Europe's strongest scientific revenue quarter last year. Company's sales by major market application are as follows. Scientific, $31.2 million; microelectronics, $99.3 million; materials processing, $28.8 million; and OEM components and instrumentation, $41.3 million for a total of $200.6 million. The first quarter pro forma gross profit was $84.4 million or 42.1% of sales, which is slightly above the high end of our guidance. The sequential increase of 160 basis points was primarily the result of a more favorable product mix, reflecting the net benefits of foreign currency fluctuations versus the dollar, coupled with lower other costs resulting from improved inventory management and fewer warranty events. Pro forma period expenses were 26.7% of sales compared to a guidance of 27% to 27.5% of sales.

Expenses were consistent with our estimates; the percentage improved due to higher than forecasted revenues. Our cash and cash equivalents balance for the quarter was $323 million, which represents an increase of $4.7 million compared to last quarter. We have completed our previously authorized stock repurchase program of $25 million. The December ending cash balance reflects the repurchase of approximately 300,000 shares for $17.3 million and the remaining $7.7 million of stock repurchased in January will be reflected in the second quarter financials. Under the completed program, we repurchased approximately 434,000 shares. The Board of Directors has authorized an additional stock buyback program to acquire up to $25 million of the Company's outstanding stock through January 31, 2016. Approximately $223 million or 70% of the cash balance is held internationally, mainly in Europe.

Cash flow from operations for the first quarter was strong at $31 million reflecting an improvement in working capital management, and capital spending for the quarter was $5.1 million or 2.6% of sales. Let me now give you the guidance for the second quarter. Our current outlook for the second quarter revenues ranges from $195 million to $205 million and is inclusive of our second Triple Vyper Linebeam 1500 system. In addition, we expect our second half revenues for fiscal 2015 to be approximately 10% higher as compared to the first half of the current fiscal year. We project the second quarter pro forma gross profit to be in the range of 41.5% to 42.5% of sales. And we anticipate the second quarter pro forma period expenses to increase to approximately 27% to 28% of sales, mainly as a result of lower customer reimbursements for certain development projects. Both of these exclude intangible amortization and stock compensation costs.

Other income and expense is estimated to be immaterial. We do not include gains and losses related to future changes in the foreign exchange rates in our guidance. We project our pro forma tax rate to be approximately 28% for the fiscal year and our fiscal 2015 capital spending is forecast to be approximately 3.5% of sales. We are assuming weighted outstanding shares for the second quarter of approximately $25 million.

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

Thanks, Lene. Good afternoon, everyone, and welcome to our first fiscal quarter conference call. Before I discuss markets and performance, I would like to pay tribute to Charles Townes, the co-inventor of the laser, who passed away the other day. I had the good fortune to meet Professor Townes a few years ago and I was struck by his humility and kindness. All of us in the photonics industry owe him thanks for enabling what we do. Our Q1 P&L results were solid due, in part, to higher revenue and lower warranty expense. Bookings were affected by the timing of certain OEM orders, and not by market demand or market share changes. Our regional view is unchanged with Asia trending higher, North America being neutral to positive and Europe looking neutral to slightly negative. Our outlook on Europe may change once we better understand how the recently announced ECB stimulus package will roll out.

First quarter bookings of $162.5 million decreased 11% sequentially and 19.3% compared to the prior year period. The book-to-bill for the first quarter was 0.81. Scientific orders of $38.4 million were up 2.4% sequentially and down 8.8% compared to the prior year period. While overall research funding remains flat, there were some notable market and regional factors during the most recent quarter. The increase in life sciences research in Asia is continuing and led to record Chameleon orders from the region. Combined with traditional physical sciences, Asia also produced record scientific orders. Activity was especially strong in China and Korea. North America and Europe were in line with expectations and Japan was modestly up. The biological imaging market continues to be the largest opportunity in the research market.

Our Chameleon product line is a workhorse in this area and we recently released the newest version at the Neuroscience Conference in November. The Chameleon Discovery is a different architecture than earlier titanium-sapphire based Chameleons. Discovery is an Ytterbium-based laser with a tunable optical parametric oscillator or OPO to provide very broad tuning with leading power performance. The combination allows investigators to target reagents and reactions not easily accessible with Ti:Sapphire. While we have offered OPOs with earlier versions of Chameleon, they were pass-throughs from a vendor. The unit paired with Discovery is a Coherent developed device, which is part of our longer-term strategy to reduce costs by owning key components and subsystems. Instrumentation and OEM component orders of $31.6 million were down 20.9% sequentially and 41.5% versus the prior year period.

The changes predominantly reflect the timing of large medical OEM orders, not easing of demand in either medical or instrumentation applications. Orders from the instrumentation market posted solid double-digit sequential growth. The growth was skewed towards emerging customers in China, North America and Europe for cytometry and sequencing. Medical OEM customers report stable to increasing demand. The latter could increase the re-order rate in the second half of the fiscal year. We have also launched a new product for the cataract market that supports a broader procedure window. This is relevant since research shows not all cataracts are created equal. The more stubborn variety occurs closer to the equator due to increased sun exposure. Being able to vary the laser performance, as our new product does, allows for process optimization.

Microelectronics orders of $72.2 million decreased 7.3% sequentially and 10.4% compared to the prior year period. As Lene already mentioned, we shipped the first Triple Vyper Linebeam 1500 system in December. The integration and testing of the system was the smoothest we have experienced for a first build. The unit was delivered to the end customer site and is undergoing production qualification. I want to congratulate our Excimer team and thank our vendors for exemplary work. We are planning to ship the second unit in the current quarter. The third and final unit from the original order is scheduled for Q4 of fiscal 2015 per the customer's request. Overall microelectronics orders reflected the timing of new FPD system orders and seasonally adjusted FPD service bookings.

The drivers for FPD are unchanged and include higher smartphone share, large screen sizes, lower display unit cost, and the emergence of flexible displays. We believe these factors favor larger format annealing systems in excess of 1 meter. Flexible displays have enabled wearable devices and may be poised for a role in the automotive applications. One of the themes at this year's CES was the connected car. Digital instrument panels would seem to be an ideal fit for flexible displays. The bulls and bears have different opinions on the semi-cap spending environment for 2015. SEMI projects a record setting year for CapEx investments, citing over 200 projects around the world. China is vying to become the world's largest semiconductor manufacturer by utilizing up to $170 billion in government support. And if enacted, this could drive a 20% CAGR through 2020 for China's semiconductor industry.

Bears point out that price pressure is high, especially in mobile components, and this makes CapEx expensive. While we have seen a very modest increase in orders, we are starting to receive longer-term scheduling inquiries. These inquiries have historically correlated with an upturn, but it is too early to implement a manufacturing ramp. API orders increased slightly on a sequential basis and we expect bookings to increase over the course of fiscal 2015. We have broadened our customer set in microvia applications with greater emphasis on Chinese and Korean integrators. We believe this strategy will be beneficial in areas like a flip-chip packaging. The laser direct imaging market has posted good utilization numbers supporting service demand, slow capacity expansion and a shift to UV diode based imagers for the lower end of the market.

Micromaterials processing using short pulse lasers is the most dynamic part of microelectronics. Much of the business is tied to consumer electronics, predominantly mobile devices and is very project driven. We are actively engaged in a number of products where our newer products like the Rapid NX, Avia NX and Monaco offer process and performance advantages for the customer. Materials Processing orders of $24 million were down 22.5% sequentially and 16.8% versus the prior year period. Bookings were lower following an exceptionally strong fourth quarter as well as exhibiting some seasonal effects. Nonetheless, demand for our new J-Series CO2 lasers was very strong, posting high sequential and year-over-year growth. We also released a redesigned laser manufacturing workstation, the META 10C, equipped with a kilowatt CO2 laser for the job shop market.

Customer response has been positive. The metal cutting market is very active and at Fabtech, some of the larger integrators were showing early homegrown fiber lasers or discussing plans to introduce them. This is driven by the twin desires of differentiation and cost control. If successful, the trend will drive more top down and bottom up vertical integration consistent with earlier views. The numbers for additive manufacturing are also showing positive trends. For us, this is manifested as orders for CO2 and UV lasers in polymer processes. It also appears to be driving demand for mid-power meaning 500 watts to a kilowatt fiber lasers and direct diode systems. I'd like to share our outlook on the balance of fiscal 2015. We are working on a large number of OEM opportunities, including new FPD orders.

We expect a significant booking step-up over Q1 as these opportunities convert into orders, some of which will be shippable in the current fiscal year. Based upon these projections and combined with our current backlog, second half revenue for fiscal 2015 should be approximately 10% higher as compared to the first half of the fiscal year. We continue to do a very good job generating cash and we are particularly pleased with seasonally low receivables and an inventory reduction. As Lene already mentioned, we deployed part of that cash to complete our outstanding $25 million buyback and to place a fresh $25 million authorization. Including the completed buyback, Coherent has returned over $420 million to shareholders since 2008. We are also evaluating a number of strategic M&A deals. We're presenting at the Stifel Technology Conference in San Francisco on Monday, February 9 and we're also hosting tours with several analysts at Photonics West.

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

(Operator Instructions) Patrick Newton, Stifel Nicolaus.

So, I guess first of all I'd love you to elaborate on that second half guidance for 10% growth relative to the first half. If you could, just give us a little bit more detail about what drives the confidence in the second half of the year and is this from the stated strength in FPD and the backlog that you already have or is there certain geographies or other segments that could contribute to this growth?

The confidence in that number comes not only from the fact that we do have a pretty healthy backlog, but as I mentioned in my prepared remarks, we are working on a fairly large number of commercial orders and we have pretty good lines of sight to bring those orders in and they'll convert into revenue, some of it will convert into revenue in the second half and some of it will convert into revenue in 2016. So, it is sort of the traditional bottoms-up and tops-down process that we go through when we're looking at future performance.

And I think in the past you talked to depending on the type of FPD system that's ordered that certain deliveries would already as of last quarter push into fiscal year 2016 and some you could backfill and capitalize on. And it sounds like I guess is a decent amount of this 10% growth reliant on you obtaining new orders or is a good chunk of it already in your backlog?

A good chunk of it is in the backlog. There are probably a couple of slots and I don't know the exact number, to be honest, Patrick. But there are probably a couple of slots or thereabouts that are available for deliveries this year and we anticipate having the orders in hand to fulfill those assuming the customer wants them delivered this year and not next.

Okay. And then on the service revenue, you talked last quarter about removing some costs and then we saw the stepdown as anticipated here. Should we see this as an absolute bottom for service revenue and should it start to march up from current levels as the quarter now fully reflects the impacts you discussed previously?

So to the extent that our service revenues are dominated I think is the right way to put it by FPD, historically as we look at the demand profile for FPD service, it typically troughs in the December quarter. Now having said that, bear in mind that we've only been doing FPD service for not even a handful of years here so it's a relatively small data set, but it is consistent with the idea that production for mobile devices sort of peaks before the holiday shopping season and then begins to tail off so that story would be sub-consistent. I can never say with absolute certainty that it's a trough, but given historical trends, it's not an unreasonable assumption.

Okay. And then I guess based on utilization, some of your comments around API were actually quite positive and it sounds like you feel like there should be a rebound in the coming quarters. I'm curious if you could talk a little bit about a magnitude of rebound in this business and how much of that is baked into the second half commentary? And then Lene, can you help us understand the margin profile of API relative to the corporate average?

So, it's a little bit early for me to be giving predictions as to exactly to what extent API is going to rebound. As I've said in prior calls, we felt that it was a Q2, Q3 event for orders to start to recover. We've seen some indication of that. We have not baked in any sort of extraordinary rebound in API as part of that 10% prediction.

And on the margin?

The recent margin for API is below the Company average because the volume was so low as we've talked about that before. As volume picks up, that should improve. But it is below the Company average today.

Okay. And then I guess last one from me is on the Sapphire side, it seems like that product that was delayed now has an official launch date. Could you just comment on the amount of revenue you recognized so far based on that product? Do you still have the same confidence and the ability to ship follow-on orders? And more broadly speaking, could you just touch base on cutting in general, that seems to be something the market's really excited about and how you view that as an opportunity in fiscal year 2015?

So, the first comment is that you've drawn up a correlation that I can't confirm or deny regarding what end product these things are being used for. Having said that, I think we mentioned that we shipped about $10 million worth of product into this application or into Sapphire cutting already and that was completed, if memory serves, I think in Q4. And I had mentioned at the time that we thought there could be a follow-on order of similar magnitude. Those views are largely unchanged. Do we have the ability to ramp? The answer is yes, we did it last fiscal year; we could certainly do it again. And as is usually the case with these consumer electronics applications, an order is placed and delivery has to be fulfilled very, very quickly. It's not like say the semiconductor industry where there are cycles that you can look at. In our laser parlance, this is sort of a personal thing. You get an order, you fulfill it, you move on to the next one. That's the expectation of the customer.

And then any timing aspects? You seem confident it is coming, but is that baked in the March quarter guidance or is that part of the second half story?

Patrick, I can't comment on when we expect to receive a specific order from a specific customer, I'm sorry.

Okay. Thank you. Good luck.

Jim Ricchiuti, Needham & Company.

John, I wonder if you can comment on as you look at the FPD business, sounds like you're anticipating additional follow-on business in the second half, does that include follow-on orders for the Triple Vyper?

The orders that we're looking at right now are for the smaller format versions of the system. A lot of that business is actually headed or a lot of those systems are actually headed to China where the domestic display market is growing pretty rapidly. I think when we launched the Triple Vyper, we mentioned that there was a modest exclusivity period around it, which is still in place.

Okay. And just since you have given us some broad guidance as to how to think of the second half of the year. I wonder if you can comment or maybe provide some color on the other market verticals in the second half. Sounds like you see some pickup in the OEM portion of the business, is that fair to say?

The way things are trending right now, clearly we think that microelectronics is going to have a strong demand profile going forward. My commentary around the OEM components and instrumentation space is as much tied to demand in the medical OEM market where customers are reporting a pretty good demand or a pretty good pull from end markets. Historically what has happened in that market is customers place large blanket orders and they [fall] off over a period of time, their burden rates are probably a little bit higher than they had anticipated which would correlate with earlier reorder points and we're augmenting that by bringing out some new products, which we think are of particular interest to customers. The one market where I think that we're more at the mercy of sort of general funding is scientific, but that's been true historically.

Okay. And Lene, I wondered if you can comment on this. As we see the microelectronics business outlook brightening in the second half of the year, can you talk a little bit about maybe the impact on gross margins in the second half of the year? How we might think about gross margins?

As you know, the microelectronics and OEM components and instrumentation are the businesses where we have typically above Company average. And I believe that with the higher volume, we'll see a better flowthrough and that should be positive for the margins.

Okay. Thank you very much.

Mark Douglass, Longbow Research.

So looking at second half guidance again, looks like we are looking at high single-digit year-over-year growth. Is that fair to characterize it that way?

I don't know if you quite get there to high single-digits.

At least mid?

I guess it's what your definition of high is. But take the guidance that Lene gave for the second quarter, add it to the performance of the first quarter, and add 10%. I mean it will tell you pretty much how we're thinking about the year.

So based on that, I guess you're going to say it's mixed, but do you look at it as far as incremental margins on every dollar sold year-over-year basis how that flows through to EPS or at least the operating income line?

I think we're holding to the number we've given in prior sessions. We typically on average see approximately a 30% flowthrough to the operating income.

Okay. And John, with shipments of the 1500 in second quarter and then you have another one in fourth quarter, right?

That's correct.

As we're modeling, there's going to be a little bit of a [hold] in the third quarter, is that fair to say?

Well, there will be a 1500 shipment in the third quarter.

Right. So, there'll be revenue I mean these things are pretty big revenue (inaudible), right?

They are IASP units, you're correct. But we're not modeling that the full benefit comes in the fourth quarter.

Okay. And then on scientific, can you run through your expectations on scientific again? What are you thinking over the next year? Sounds like Asia is still going to be pretty good for you, Europe maybe not so much, and then the US maybe some growth or what are you thinking on scientific again?

Historically scientific has been a global GDP plus or minus kind of business. I don't think anything exists today that would change that view other than the fact that when we had ORRA in the US and we're going back now, whatever it is, five or six years when it was enacted; there was a substantial amount of money that flowed into scientific research as part of ORRA. I don't know enough about how the ECB Stimulus Package is going to roll out and whether we would see any benefit flowing into scientific research coffers around Europe. There's just a lack of information right now. But I think looking at this as a GDP plus or minus kind of market is a consistent view.

Isn't there a rather large laser program that at least they're trying to roll out in the EU?

Well, there are few. There's the extreme light source initiative and then there is the brain research program. As I've commented on in previous conference calls, the brain program that they're running in Europe seems to be more computational than experimental so the amount of opportunity, if you will, in our space is probably less than the US brain program, the corresponding effort here which seems to be much more experimental than computational. As far as the extreme light initiative, there are a bunch of countries that are involved in it, much of the money that we've seen so far has been for infrastructure not necessarily for lasers. But going beyond that, the kinds of lasers that they're going to use in this, at least my limited understanding, probably are more custom component level designs where researchers are putting these things together. So there's probably some opportunity, I don't think it represents a game-changing opportunity for the laser industry.

Okay. Thank you.

Mark Miller, Noble Financial Capital Markets.

Just was wondering if you saw any foreign currency headwinds last quarter or expect any this quarter from the weakening of the euro?

My best estimate is that of the 160 basis point improvement quarter-on-quarter, about a third of that say 50 basis points was benefit from currency. With respect going forward, it's hard to know because we're just early in the quarter and the currency rates fluctuate so quickly, I can hardly give you an estimate. But at today's rates, it would be slightly more beneficial on gross margin. We have a negative spectrum revenue, we have a positive impact on gross margins and a positive impact on expenses.

Any more color you can give us on what's going on with fiber laser, any quoting activity there? Just you made some improvements and I'm just wondering what's going on with fiber?

We are on track as I mentioned last quarter, we're doing the second gen release this year. Not at a point where I want to make a final commitment on a release date, but the program is proceeding as planned right now.

And then finally from me, sounds like China remained strong as the quarter went on. Did you see any tail off, but it doesn't appear that from your comments? It seems China --.

I made some comments last quarter and I guess I'll reiterate some of those now. The overall growth rate in China has come down again. I think the current projection may be somewhere around 7% although I maybe a week or two out of date. We are benefiting from the fact that we are tied to programs funded by the Chinese government so this display initiative for example has captured a lot of investment. The same would be true, my comments around the semiconductor industry where China aspires to be the largest semiconductor manufacturer in the world, that will drive an awful lot of investment if they follow through on it. So with China, you have to be tied to the right wagons if you will and right now, we have pretty good alignment.

Thank you.

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

Thank you, Katina. Again, we appreciate everybody's participation and we look forward to seeing some or most of you I guess over the next couple of weeks either at the conference or at Photonics West. Thanks.

Thank you for participating in today's conference. You may now disconnect.