Coherent Corp (COHR) 2015 Q2 法說會逐字稿

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

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

Thanks, Eric. 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 Form 10-K, 10-Q and 8-K as applicable and as filed from time to time by the Company.

A 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 review the financial highlights of our second fiscal quarter.

Our second quarter results exceeded consensus with revenues of $203.7 million and corresponding pro forma earnings of $0.94 per diluted share. The second quarter reflects the benefits of a lower effective tax rate as a result of a more favorable distribution of profits across various jurisdictions impacting the quarter positively by approximately $0.04 per diluted share. In addition, foreign exchange gains included in other income contributed $0.03 per diluted share. We ended the quarter with a cash balance of $344.4 million reflecting a quarterly cash flow from operations of $49 million. Our pro forma EBITDA percent for the quarter was 17.6% and compares to 18.7% last quarter.

Net sales for the second quarter of $203.7 million increased $4.5 million or 2.3% compared to the same quarter a year ago and increased $3.1 million or 1.5% sequentially. Our book-to-bill ratio for the quarter was 1.08. The second quarter's ending shippable backlog, defined as shippable within the next 12 months, is approximately $315 million including $116 million or 37% flat panel display shippable bookings. The comparable shippable backlog at the end of last quarter was approximately $296 million including $102 million or 34% flat panel display shippable bookings. Geographically, Asia accounted for 53% of the Company's revenues; US, 26%; Europe, 16%; and rest of the world, 5%.

Service revenues for the second quarter were almost $66 million and represent a record for the Company. This represents an increase of $10.6 million compared to the first quarter, of which approximately 70% is related to the replacement parts for the Excimer annealing systems. This increase exceeded our expectations as we benefited from a rapid step up in system utilization from our flat panel display customers. Total service revenues represented about 32% of the total Company revenues. Similar to the first quarter, we had one customer in South Korea, who contributed more than 10% of the Company's second quarter revenue. And this includes the shipment of our second Triple Vyper Linebeam 1500 ELA system.

With respect to revenues by major market application compared to last quarter, all markets with the exception of scientific realized single digit growth rates ranging from 2% to 7%. Revenues in the OEM components and instrumentation market grew approximately 6.5% as a result of continued strong ophthalmic and aesthetic application revenues, as well as higher bioinstrumentation sales. Microelectronics revenue growth of approximately 2.5% or $2.5 million was driven by higher revenues for semiconductor applications. Materials processing market revenues grew 2.1% mainly from Asian and US customers. And our scientific revenues declined 8.5% sequentially due to weakness in Europe, partially offset by strength in Asia.

Company's sales by major market application for the second quarter are as follows. Scientific, $28.6 million; microelectronics, $101.8 million; material processing, $29.3 million; OEM components and instrumentation, $44 million for a total of $203.7 million.

The second quarter pro forma gross profit, excluding stock compensation and intangible amortization, was $85.4 million or 41.9% of sales, which is at the mid-point of our guidance range. The sequential decrease of 20 basis points is the result of the net impact of several factors. Our CLC segment revenues were higher as a percent of the total Company revenues and CLC margins are lower than the SLS segment margins. This unfavorable segment mix and the unfavorable impact of product mix and volume changes in some business units were partially offset by the benefit of higher service revenues and the net benefit of foreign currency fluctuations versus the dollar.

Pro forma period expenses were 27.7% of sales compared to a guidance of 27.5% to 28% of sales which is in line with our prior estimates.

Our cash and cash equivalent balance for the quarter was $344.4 million which represents an increase of $21.5 million compared to last quarter. We have completed our previously authorized stock repurchase program of $25 million. The second quarter reflects the repurchase of approximately 134,000 shares for $7.7 million. Under the completed program, we repurchased approximately 434,000 shares. No purchases have been made under the $25 million stock repurchase program that was approved during the second quarter of this fiscal year.

Of the $344.4 million cash, 77% is denominated in US dollars. Approximately $259 million or 75% of the cash balance is held internationally, mainly in Europe. Cash flow from operations for the second quarter was very strong at $49 million reflecting a sequential improvement in accounts receivable DSO from 59 to 55 days, an increase in inventory turns from 2.9 to 3.1, coupled with higher liabilities for inventory purchases that occurred late in the quarter and the build-up of the first half variable compensation charge which will be paid during the third quarter. Capital spending for the quarter was $7.1 million or 3.5% of sales, bringing the year to date spending to $12.2 million or 3% of sales.

Let me now give you the guidance for the third quarter.

Our current outlook for the third quarter revenue ranges from $190 million to $210 million and is inclusive of our third Triple Vyper Linebeam 1500 ELA system, which we pulled in from the fourth quarter based on customer requests. In addition, we are adjusting the full fiscal 2015 revenue to be in the range of $820 million to $830 million reflecting foreign exchange headwinds and a customer process change in one of our previously forecasted bookings for a consumer electronics application.

We project the third quarter pro forma gross profit percentage to be in the range of 41.5% to 42.5% of sales, and as a reminder, this excludes intangible amortization and stock compensation costs. And we anticipate the [second quarter] pro forma period expenses to be approximately 27% to 28% of sales and again the guidance excludes intangible amortization and stock compensation cost.

Other income and expense is estimated to be immaterial. We do not include transaction gain or losses related to future changes in the foreign exchange rate in our guidance. We project our pro forma tax rate to be approximately 26% for the fiscal year and we continue to forecast our full fiscal 2015 capital spending to be approximately 3.5% of sales. We are assuming weighted outstanding shares for the third quarter of approximately 25 million.

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

Thanks, Leen. Good afternoon, everyone and welcome to our second fiscal quarter conference call.

Consistent with our outlook from last quarter's earnings call, the demand environment improved in many of our commercial markets during our second fiscal quarter. Bioinstrumentation and medical OEM rode improving customer sentiment to deliver the biggest gains. We received new system and higher service orders in FPD. Via drilling continued to make steady progress. Our financial results were in good order, including lower accounts receivable DSOs and higher cash.

Second quarter bookings of $220.6 million increased 35.7% sequentially and declined 15.8% compared to the prior-year period, which included a $100 million order for ELA equipment. The book-to-bill for the second quarter was 1.08. Scientific orders of $26.4 million was seasonally down 23.9% sequentially and up 6.4% compared to the prior year period. Demand for our Ultrafast amplifiers used in chemistry and physics research continued to improve during the second quarter. Much of the business is for our Astrella product line.

Within biological imaging, the Chameleon Discovery is being well received, given its industry leading performance, which is applicable to traditional region-based imaging as well as CARS microscopy. CARS which is an acronym for Coherent anti-Stokes Raman Spectroscopy is a reagent or label-free imaging technique. It has applicability in several areas including cancer detection.

Asia did very well with contributions from Korea, China and India. Japan also showed signs of life after a prolonged period of sluggishness. The US and Europe were lower on a sequential basis. We believe the change in the US is mostly timing of orders. Europe may be funding or exchange rate related. We'll need more data to confirm either issue.

Record instrumentation and OEM components orders of $57 million increased 80.5% sequentially and 51.2% versus the prior year period. Order timing and share gains led to higher bookings in bioinstrumentation and medical OEM accounts. Multiple flow cytometry customers placed orders to cover longer-term demand, suggesting growing confidence in their business prospects. The microscopy and DNA sequencing submarkets were in line with our expectations.

Medical OEM bookings were very strong. Non-LASIK, ophthalmic demand was robust with key orders for cataract and photocoagulation products. Dental lasers also enjoyed very strong demand as the procedure is gaining adoption. Aesthetic products continue to benefit from a growing home treatment market throughout the US, Europe and parts of Asia. Orders for medical fiber consumables were well ahead of forecast. Defense applications were up dramatically on a percentage basis from a single order for fiber used in passive sonar for submarines. It's not large dollars, but it is incredibly cool.

Microelectronics orders of $105.4 million increased 46% sequentially and declined 38.6% compared to the record-setting performance in the prior year period. The semiconductor market is generating very good service revenue, which is consistent with current utilization rates. By contrast, CapEx investments have been muted despite continued growth in bit and device output due in part to yield and process enhancements. The near-term outlook is likely to remain sluggish given the recent CapEx reduction announcements by TSMC and Intel. This will modestly limit growth within our microelectronics business for the remainder of fiscal 2015.

Via drilling demand improved noticeably during the second quarter including multiple volume orders for the Diamond J-Series Hornet. The Hornet is our latest incarnation of CO2 technology. It offers users' unique performance and design attributes that provide high throughput and lower total tool cost. The combination resonates well with customers and we are optimistic that the Hornet will unlock a series of new opportunities over the coming quarters for 60 plus micron hole sizes.

The push for further package miniaturization may lead to hole sizes as small as 25 microns. Current CO2 technology will have to be augmented with other laser sources to cover the combination of hole sizes and substrate materials contemplated by electronics manufacturers. We have been working with customers to explore possible solutions with several existing and future products. One of these is particularly intriguing since it supports smaller hole sizes, provides sufficient throughput and would sell at an enabling price point. We plan to launch this new system at Lasers Munich.

A good portion of the sequential increase in bookings came from our flat panel display business. We received a number of Vyper Linebeam 750 orders, which are likely earmarked for LTPS LCD production. Service bookings also increased. As Leen mentioned, we delivered the second [Triple Vyper Linebeam 1500] system during the March quarter.

The customer has requested that we pull in the third unit from September to the June quarter. This is a non-trivial request that requires expediting some of the large Linebeam optics and reallocating production labor and space. We believe we can get it done, but it is going to be very tight. We are including the $20 million system revenue in our guidance, but the range is wider than usual. Peering into our crystal ball, we expect meaningful ELA orders over the next few quarters with the peak coming in our Q4 or Q1 of fiscal 2016.

We are engaged in a large number of products using short pulse lasers for consumer electronics packaging. As we previously discussed, these are digital opportunities that entail rapid fulfillment. Our second half plan, including one such opportunity for approximately $10 million. Unfortunately, the end customer decided to stick with their current process and re-use existing equipment. It will be difficult to accelerate other projects to replace the revenue prior to the end of fiscal 2015 and we have adjusted our outlook accordingly.

Materials processing orders of $31.6 million were up 32% sequentially and 15.4% versus the prior year period. Several applications contributed to second quarter bookings, there was a significant uptick in laser marking demand that fueled orders for CO2 short-pulse and diode lasers. The CO2 and short pulse lasers are used directly while the diode lasers are used as OEM pump lasers. Most of this activity are originated in China, following the local New Year's holiday. Orders for high-power, Diamond E-1000 CO2 lasers for use in the converting and cutting of organics came in strong and several other similarly sized opportunities are in the pipeline.

We also booked a low seven-figure order for additive manufacturing using CO2 lasers. And additive manufacturing is drawing on a wide range of solutions from us that also includes UV and direct diode lasers. We will release our next-generation fiber laser platform at Lasers Munich in late June. We believe the combination of enhanced performance, packaging and serviceability will allow us to be more competitive in the fiber laser space.

We are encouraged by customer sentiment and application engagement across our commercial markets. We're in an all-hands-on-deck situation to deliver the third Linebeam 1500 system well ahead of the original commit date and no effort will be spared.

There are two upcoming trade shows, CLEO in San Jose during the week of March 12 and Laser Munich during the week of June 22. We are introducing a number of new products during those shows. Please watch for separate announcements regarding investor tours at each venue.

We'll be presenting at the CJS conference in July and look forward to seeing some of you there. We also plan to participate in the Needham Industrial Conference in early August. Both conferences will take place in New York City.

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

(Operator Instructions) Larry Solow, CJS Securities.

John, just to reaffirm on the change in customer processes, you said there was about $10 million in sales that you had expected to occur in fiscal 2015, is it fair to say the rest of the difference is currency?

That is correct.

Okay. And assuming that normal holds true on the rest of the difference, you should be at least move a point on the bottom line and perhaps even a positive -- modest positive? Look at gross margins, the temporary mix issue, is that something that, since it is pretty small. Anyhow, but is that something you expect to continue or would you expect that to revert back next couple of quarters?

I think we guided 42.5%, the midpoint would put it just a touch over where we are right now. Projecting the exact mix is always a tricky thing to do at the beginning of a quarter. But we don't expect to see any large changes from what we've seen last quarter.

And it sounds like you're building some recovery now in API. It sounds like trends are indeed turning like you had expected. Just remind us, is that -- I know those margins have been depressed, but I thought it's a pretty levered business on an operating basis, so it should -- it could rebound, margin should improve as that sales come back in that business, is that correct?

It has disproportionately hit one business unit as we've mentioned a few times in the past, and after we convert these recent orders into sales, yes, it should help the margins within that business unit.

Okay, lastly just -- can you give us an update just on the competitive landscape, LTPS and OLED, any change, on that front, it sounds like most of the orders you've been getting are for LTPS LCD, is that correct?

For LTPS and it's a mix of end application, whether it's LCD or OLED. The orders that we receive -- the system orders that we receive during the March quarter we believe are for LCD production.

Jim Ricchiuti, Needham & Company.

John, just a follow-up to that, the last questions on the display portion of the business. I think in the last call you alluded to anticipating some orders, order activity in China, was that included in some of the bookings or is that -- are these orders that you're expecting later in the fiscal year?

The orders that came in in March, I believe, were for Chinese manufacturers and the orders that will come in between now and in the end of fiscal 2015 and potentially into the early fiscal 2016 will be a mix of China, Japan and Korea.

Okay. And so you're assuming I guess later in a year a pickup in order activity related to OLED in addition to what your ongoing activity that you're seeing in LCD?

I'm being hesitant because I'm not sure that I -- it's my place to discuss exactly what the end product mix is. But we would expect OLED capacity to expand not only for the mobile market where it's had the biggest impact thus far, but potentially also for the automotive market.

Okay and you mentioned Japan, is that something new, I don't recall you hearing -- hearing you talk about a great deal of investment in this area from Japan of late. Is this something or maybe I missed it, is that a pick-up that you're seeing there?

I'd say it's more of business as usual. We don't define every order that we get geographically and there have been orders from time to time out of Japan, the bigger orders have obviously come from Korea and more recently from China, but I would categorize this as more common than not.

Okay and then just finally on the service revenue side of the business, you clearly saw a nice pick up there related to the display business. Is that something that you would expect would grow sequentially as you go through the year just given what your understanding is of the utilization rates out there?

I'm trying to think how to frame this, Jim. One correlation is the number of sockets out there, probably the more important correlation is what overall utilization looks like and there certainly are signals that utilization is improving, whether it's going to improve in one area or one product or broadly is more difficult to determine. As we mentioned in our prepared remarks, the step-up from Q1 to Q2 we think is closely related to the launch of some new mobile products that drove demand and those have always been strong correlators.

Patrick Newton, Stifel.

I guess just sticking to that service revenue question, I believe you said 70% of the sequential growth was LDU related with the remaining 30% still relatively impressive. I'm curious if you could dive into what parts of your business were driving the other 30% of that growth?

It's basically all microelectronics, Patrick. Most of it is microelectronics because we also have service that is linked to the semiconductor applications.

And then any particular semiconductor application that you can point to though?

Most of our deployed products is inspection and metrology. And as I mentioned in this call and previous calls, utilization rates within semi remained very high and that has that full service along for us. So there is not a great surprise there. At least for us, it wasn't a great surprise. The more frustrating piece of the semi market has been sort of the sluggish nature of the CapEx market.

Okay, that's helpful. And I guess just drilling down on the gross margin, then you gave several reasons for the sequential downtick. But could you walk us through, again, some of the puts and takes? I'm just curious perhaps I thought service margin was better than it is or even some of the API commentary would seem to bode well for our gross margin. So can you please walk us through some the puts and takes again as to why that was sequentially pressured?

Indeed the service margins contributed positively to the gross margins to the overall Company margins, but that was offset by the unfavorable impact of having a higher percent of CLC business versus SLS business. So it was actually not visible and in the net benefit of our currency, which is the net benefit of the euro weakening offset by the unfavorable benefit of the Japan yen weakening was offset by the lower volumes in certain of our business units and then a couple of mix changes as well.

Okay, that's great. And then John just jumping back to the flat panel display and the visibility into good order demand that you think should peak in either fiscal fourth quarter or fiscal first quarter of 2016. I'm curious if there is any specific version of the Linebeam or geography that's providing you that healthy visibility and then assuming these orders come in as planned. Can you help us understand the relative, I guess, timing of shipments or how far the bookings are into the future at this point?

So geographically, it's going to be the three countries that we've been talking about, Korea, China and Japan. From the standpoint of product mix, it will probably be skewed towards Linebeam 750s because more customers have experience with the 750 and they're working in Gen 4 fabs. We do expect to see some business for larger systems and at this point, it will depend a little bit on timing and which customers order and whether those are 1000s which is a derivative of a 1300 or a 1500, but there will be some mix and right now, I can't tell you exactly what the mix is going to be because these are ongoing discussions with the end customers. And Patrick, I'm sorry, there was a third part of your question, it has slipped my mind already.

Just actual delivery dates. I think previously you talked about being booked [and made] through the September timeframe?

I think we're pretty much scheduled through the end of September at this point. Most of these orders, particularly I think placed in the fourth quarter as we're anticipating, these are 2016 revenue.

Okay. And then I guess just lastly, just trying to understand the guidance, if we take the $825 million midpoint and take the midpoint of your June outlook that backs into an implicit September of about $221 million, the June quarter, as you said includes that $20 million Linebeam 1500, so normalizing and the September quarter does not. So if I normalize, you're going from a $180 million June guide to a $221 million September.

Can you help us understand what gives you confidence in a $40 million sequential uptick?

I'm sorry, Patrick, $180 million.

So $200 million is the midpoint of your guidance if I pull out the Linebeam 1500 because there is not going to be one in -- there is one baked into June, but not September. So if I normalize it, your underlying business sans the Linebeam 1500 would be $180 million and that was stepping up to $221 million. So about a $40 million delta sequentially, and what's driving that confidence in that uptick?

So, Patrick, we've been asked to pull in the 1500 and it appears we're able to do that. There are other systems that we would have shipped during the quarter that have to slide out because of limitations in terms of space and manpower availability, and those systems will ship in the fourth quarter. So it's not taking a $20 million shipment out and not replacing it with other ELA business. There is a swap going on between Q3 and Q4.

Great. That was the explanation I was hoping for. Thank you for taking my questions. Good luck.

Sure.

Mark Douglass, Longbow Research.

In the quarter, Leen, what was the currency effect in the quarter, whether dollars or year-over-year percentage growth on sales?

It was about unfavorable $3.5 million.

$3.5 million. Okay and your (multiple speakers).

Mark, this is sequential right from Q1 to Q2.

Okay from 1Q to 2Q. So, it's safe to say, be a little bit more of negative currency in the 3Q thinking your guidance?

No, because the guidance of the difference between $10 million and $15 million was let's say, the $5 million was currencies for two quarters.

Two quarters, right.

That was for the second half.

Right. Okay, John will you derive much benefit from the [much valued] 15-unit EUV order in the US?

There is probably some test and measurement equipment that we'll -- we'll go to support that, but I don't think it's a large number.

Okay. I think gives the sense of being real material for you. Okay, looking at the Vyper getting pulled-in and you haven't worked really diligently getting that done, I know it's a huge effort. Did you bake into your guidance some conservatism there on the gross margin line just for potential for some [I don't know for expedited] shipping or I don't know, services, things like that?

Not at this point, no.

Okay, fair enough. That is all the questions, oh, no wait, you mentioned share gains in the OEM instrumentation, was that in -- those in flow cytometry or where was that again?

It was in flow -- it was and it was in medical OEM for both coagulators and cataract.

Okay. What's driving the share gains, is it just pretty much your technology, the price?

We've been working with a number of our OEMs for a while to displace places that they were buying from other vendors, and it was simply a matter of developing the technology and getting it qualified. Once that happened, they were more than happy to make the switch, especially in the cytometry space where we're now providing these multi-color modules to customers, so they get a fully integrated package from us that drops into their system.

And in the medical OEM space, we've been working very hard on some new technologies that are and those efforts are bearing fruit. So it was not price driven, it was solution driven.

Great. And then just one final question, a $10 million opportunity dropped off, it's unlikely that ever comes back, do you think the customer is --?

I don't think it comes back for this generation of the end customers' product because it would be very unusual for them to change manufacturing processes in the middle of a production run, I mean historically that's not the way it works. So we were well down the path, we thought that the business was coming and fairly late in the game, the customer -- the end customer decided to stick with an existing process and re-use existing hardware, disappointing, but it happens.

Yes. When is the next refresh, does this customer do it every year or is it more like a two-year cycle?

No. The refresh is here tend to come sort of six to nine months.

Okay. So the potential you can convince them into it, talk them into it in fiscal 2016, may be?

There is certainly time to work on the process with them. But as I said, I don't think that we were -- I don't think that this recovers for fiscal 2015, that would be an unusually quick recovery.

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 or closing remarks.

Thank you, Eric. And again, we appreciate everybody's time. We look forward to seeing you at some of these trade shows or the upcoming conferences that we're going to be attending. Thank you.

Ladies and gentlemen, this concludes today's conference call. You may now disconnect.