Coherent Corp (COHR) 2016 Q1 法說會逐字稿

Good day, ladies and gentlemen, and welcome to Coherent's first fiscal-quarter 2016 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.

Thank you, Shannon. 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 start by giving the financial highlights of the quarter. We are delighted with our first-quarter earnings reports, as many of our metrics turned very positive. Our first-quarter bookings of $273 million is a record for the Company and was primarily driven by record flat-panel display bookings. John will comment on this later during the call.

Revenues for the quarter were $190.3 million with corresponding pro forma earnings of $0.99 per diluted share. Although revenues were slightly below the low end of our guidance, earnings came in strong and are above guidance and consensus.

The first-quarter earnings were positively impacted by a favorable product mix, leading to a 45.1% pro forma gross margin. As a result, our pro forma EBITDA percent for the quarter was 21.3%, which is approximately the midpoint of our long-term goal of 19% to 23%. In addition, the tax rate is below guidance, which is primarily the result of the permanent reinstatement of the federal R&D tax credit.

Net sales for the first quarter of $190.3 million decreased $19.3 million or 9% sequential. In general, this decline can be attributed to our historically shorter first fiscal quarter, coupled with the impact of the timing of shipping larger Linebeam systems for the flat-panel display market, and an overall via drilling market downturn. In addition, the economic slowdown in China impacted our materials processing and medical markets revenue.

Revenue decreased $10.3 million or 5% compared to the same quarter a year ago. And as a reminder, the first quarter of fiscal 2015 included our largest format Linebeam system. Our total backlog of $403 million is also a record for the Company.

The shippable backlog at the end of the first fiscal quarter, defined as shippable within the next 12 months, is approximately $370 million, including $169 million or approximately 46% flat-panel display shippable bookings. The comparable shipping backlog at the end of fiscal 2015 was $309.5 million, of which $100 million or 32% related to flat-panel display applications.

Geographically for the first quarter, Asia accounted for 51% of the Company's revenues; US 27%; Europe 17%; and the rest of the world 5%. Asia includes two territories with revenues greater than 10%. Japan and South Korea represent 25% and 15% of the first fiscal-quarter revenues, respectively.

Service revenues for the first quarter were approximately $57.5 million or 30% of sales and represent 4.4% growth compared to the same quarter last year and declined 10% compared to a very strong fourth quarter. The first-quarter flat-panel display service revenues increased approximately 20% compared to the same quarter last year, and decreased approximately 9% sequentially. We had two customers, one in Japan and one in South Korea, both integrators to large flat-panel display manufacturers, who each contributed more than 10% of the Company's first-quarter revenues.

The first-quarter pro forma gross profit, excluding stock compensation charges and intangible amortization, was $85.9 million or 45.1% of sales, which compares to 44.6% last quarter. As mentioned before, the sequential increase of 50 basis points was mainly the result of a favorable product mix and also lower other manufacturing charges.

Period expenses, excluding stock compensation charges, were 27.7% compared to a guidance of 27.5% to 28%. Expense levels are similar to the previous quarter. Our cash and short-term investments balance for the quarter was $336 million, which represents an increase of $10.7 million compared to last quarter. During the quarter, we tapped into our domestic line of credit and ended the quarter with $5 million of short-term borrowings.

At the end of the first quarter, our international cash was approximately $294 million or 87% of the total cash and investments balance. About 77% of the total cash is denominated in dollars.

Cash flow for the quarter was $14 million. Working capital metrics worsened compared to the previous quarter, negatively impacting the cash flow from operations. Accounts receivable DSOs stood at 68 days compared to 61 days last quarter, mainly due to timing of shipping several flat-panel display systems towards the end of the quarter. We will continue to see fluctuations in our DSO based on the timing of these shipments during a quarter.

Inventory turns declined from 3 last quarter to 2.7 turns this quarter, as we are increasing our work-in-process levels to support the flat-panel display demand ramp up. Capital spending for the quarter was $4.8 million or 2.5% of sales.

Let me move onto the guidance for the second quarter. We project our second fiscal 2016 quarter revenue to range from $195 million to $200 million. The impact of the significant increase in the flat-panel display backlog, coupled with follow-on orders received in January, will positively impact our fiscal 2016 second half in future revenues, but not yet the second-quarter revenues.

We forecast the second-quarter pro forma gross profit percentage to be in the range from 43.5% to 44% of sales, a considerable pick up from last year, but slightly below this quarter's results, mainly due to a less favorable mix. We anticipate the second-quarter pro forma period expenses to be approximately 27.5% to 28% of sales, a similar ratio to the quarter we just completed. Other income and expense is estimated to be immaterial. We do not include transaction gains and losses related to future changes in foreign exchange rates in our guidance.

We project our pro forma tax rate to be approximately 27% for the fiscal year. We forecast our full fiscal 2016 capital spending to be approximately $45 million. This includes projects that were postponed from fiscal 2015 into fiscal 2016 as well as additional building expansion improvement projects.

In addition, based on the recent inflow and anticipated future bookings for ELA tools, we are increasing our excimer system manufacturing capacity in Germany and the optics application capacity in the US. We are assuming weighted outstanding shares of 24.4 million for the second quarter.

Before turning over the call to John, I want to thank John in particular and the entire Coherent organization for the opportunity of working for the past 16 years at Coherent, a company I consider to be remarkable, with talented people and a bright future. The best departure gift has to be the bookings record and projected new bookings record for the second quarter. Thank you.

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

Thanks, Leen. Good afternoon, everyone, and welcome to our first fiscal quarter conference call. There are several key -- or several positive takeaways from the first quarter. A favorable product mix led to higher gross margins and when combined with disciplined spending, it led to solid earnings despite revenue headwinds related to China.

Our predictions about an impending OLED investment cycle panned out, leading to very strong bookings. I will discuss our outlook for FPD in a few moments.

We posted record-setting bookings of $273 million in the first fiscal quarter, representing an increase of 32.9% sequentially and 68% compared to the prior-year period. The book to bill for the first quarter was 1.43.

While it is tempting to end my prepared remarks here, let me provide some color on our end markets. Scientific orders of $33.7 million increased 0.6% sequentially and declined 3% compared to the prior-year period. Demand for amplified ultrafast systems, including the Astrella, Libra, and Legend series remain strong across all regions.

The biological imaging market is the other key contributor to scientific bookings and we saw market share growth in Japan due to the Chameleon Discovery being qualified with a major microscope vendor. We're also seeing a shift from traditional microscope companies to smaller players that specialize in neuroscience solutions. On a geographic basis, China was a standout, as institutions spent the remaining funds in the last quarter of the country's prior five-year plan.

Instrumentation and OEM orders of $30 million decreased 27.4% sequentially and 4.9% versus the prior-year period. The large sequential swing is primarily a result of order timing in the instrumentation business, with a smaller macro effect in the medical OEM market. Bioinstrumentation customers remain bullish on their opportunities in personalized medicine, especially for age-related chronic diseases and the fight against global epidemics. This is driving growth in dedicated tabletop instruments.

Our customers are racing on two fronts, expanding their bioassay or reagent portfolio and introducing dedicated tools to support testing. We are being asked to accelerate the latter through the development of multi-wavelength plug-and-play light engines based upon our OBIS and BioRay platforms. When combined with a potential in genomics, the future of our instrumentation business looks solid.

The medical OEMs market experienced some mild headwinds from inventory management tied to concerns about China. I don't want to seem dismissive of the near-term trend, but the headline stories are still all about cataract treatment and dental procedures. Testing of our Monaco laser for cataracts is going well and our position for next-generation tools is strengthening.

Within the dental market, reviews for the CO2-based procedure are positive, and from our vantage point, widespread adoption seems increasingly likely. Microelectronics orders of $188.9 million rose 94% sequentially and 167 -- I'm sorry. 161.7% compared to the prior-year period.

The first wave of orders for large-format Linebeam systems to be used in OLED production accounted for the booking increase. The second wave has already arrived in the current quarter with an order well in excess of $150 million. There are a significant number of orders pending for the balance of the second quarter and for the remainder of fiscal 2016.

The systems are a mix of Twin Vyper Linebeam 1000s and Triple Vyper Linebeam 1500s. In order to meet our delivery commitments, we are expanding our footprint in Gottingen, Germany, and adding optics fabrication capacity at our site in Richmond, California.

Given the competitive environment amongst the end customers, we are not at liberty to disclose the order mix or delivery schedule. We can tell you that deliveries begin in the June quarter and run through calendar 2017. We have also run projections on the long-term service needs and believe we have ample space in our existing refurbishment centers to meet demand.

The correlation between semiconductor inventories and fab utilization rates was evident in the December quarter. Inventories rose and utilization dipped. We saw a predictable response in our service business skewed towards legacy nodes, but new system orders improved for a second consecutive quarter. We think these orders are linked to specific expansions rather than signaling the start of a broader cycle. The API market is mirroring the semi market and also awaits a stimulus from new device architectures.

Materials processing orders of $20.4 million were down 38.6% sequentially and 15.1% versus the prior-year period. Bookings were adversely affected by the timing of certain orders, a slowdown in China, and seasonality. We have been working on a number of projects for marking new materials and expected orders in the Q1 or Q2 time frame. These orders have slid as final details of the process window and tool configuration have been finalized.

As I reported last quarter, China was stable in fiscal 2015, but the market softened in the first quarter and inventories have been trimmed accordingly. Customers are citing volatility of the Chinese stock market and the ensuing hit to consumer confidence as the main culprit.

There is some additional contribution from the devaluation of the yuan that have made imports more expensive. This has more of an effect upon the low end of the laser market, where local alternatives are available. It is less of an issue at the higher performance levels. Overall, our outlook for China in fiscal 2016 is neutral, with specific projects offsetting market uncertainty.

We are scheduled to begin deliveries of our second-generation fiber laser platform this quarter. This is an important step towards validating our platform and building a position in the market. So stay tuned.

We have a tremendous opportunity in front of us in the FPD business. It will lead to an inflection in revenue and healthy gross margins. Both are essential to achieving and possibly exceeding the high end of our long-term pro forma EBITDA goals and we see the potential for this to occur in fiscal 2017.

Before we move to Q&A, I would like to provide an update on our CFO search. We are in the final stage of the process and expect to make an announcement within 10 days. To ensure there is no gap, Leen has agreed to remain our CFO until February 15.

That is the easy part. Describing what Leen has meant to Coherent and to me is considerably more difficult, but a baseball analogy comes to mind. She is a five-tool player. She is smart, exercises excellent judgment, is as ethical as they come, is very conscientious, and exudes gravitas. She has made us better simply by being around.

On a more personal note, I want to thank her for being an outstanding business partner for the last 16 years. And on behalf of everyone at Coherent, I want to wish her continued success and much happiness.

I will now turn the call back over to Shannon for the Q&A session.

(Operator Instructions) Larry Solow, CJS Securities.

First of all, Leen, congratulations and good luck. Best wishes to you. We will still talk again. I will get you in there before the next two weeks. So we will chat again.

Yes. Thank you, Larry.

You're welcome. Just quickly on the gross margin. A nice little sequential rise and I know you had expected growth actually come in a little bit. So it was really like a 200 BP beat relative to guidance. Is that basically all the mix? Is that essentially it?

The answer is, yes, there was improved mix within service and then improved mix within FPD systems.

Okay.

And we had lower manufacturing costs as well.

Right. I know you have driven more on [C costs] down and whatnot. I guess that seems sustainable. So clearly, you have done a nice job in gross margins. And then it sounds like you're singling as you look out flat-panel displays generally a better mix.

And I assume service revenue will probably be sustainable at these levels, if not higher, as a percentage of revenue. Is that fair to say? I mean, does this 30% number in the next couple years, could that grow considerably as flat-panel display really accelerates.

Well, Larry, I think you have to bear in mind that we have -- we already have a considerable backlog in FPD systems. We have already booked a very big order this quarter with a fair amount more to come. And the time frame that we have to make all of these deliveries, I talked about being from the June quarter this year through 2017.

So there is going to be a lot of FPD systems, higher than we have run the last few years. And when you take that into account, I think the service mix as a percentage of a whole probably goes down because it is going to be overwhelmed, at least in the short term, by system deliveries. But we do anticipate that those systems themselves will carry good gross margins.

Got it. And the fact that you -- because it sounds like you are committed to at least making all the orders that you have gotten to date and maybe for even -- at least in Q2 as well -- delivered out by the end of 2017 or calendar 2017. Is there a potential that there is manufacturing issues or some type of inefficiencies because you have to sort of squeeze more in than you're normally used to? Sort of a high-class problem, but is that a potential issue?

So there is no doubt that this is a significant ramp. And as I mentioned, we are making investments in Gottingen and in Richmond to accommodate the acceleration of the schedule. And what the customers -- the end customers want and the integrators want is for a fairly tight delivery schedule. And we have built a schedule or we have built the capacity to handle that and we have made certain assumptions in building that capacity of what orders are coming and potentially what the mix of those orders is going to look like.

Do things happen along the way? Sure. Have we built all of these systems already? Meaning this type of system? Yes, we have shipped Linebeam 1500s. And yes, we have shipped Linebeam 1000s. So we know how to make them, but we have to make a lot more of them in a very compressed period of time.

Right. Okay. So it sounds like you're up for the challenge. In terms of other period expenses, obviously you have done a nice job. Those were certainly lower than expected as a percentage of revenue, even though there was some -- a little bit less revenue.

Seems like that this lower level is sustainable, I guess, as revenues rise. Maybe there is a modest amount of variable expense. Or could those expenses rise more as revenues rise? Will they need --

Larry, it is important to remember that the first quarter was a very short quarter. We have lots of holidays and so there is a lot of (inaudible) spending, reductions that come with it. So when we move on, it will no longer be a shorter quarter. So expenses will go up. And I gave a guidance -- the guidance was a similar [percentage] as a percent of revenue, meaning the dollar numbers will go up.

Right. Okay. Fair enough. John, just last question and then I will move on. On the dental opportunity, you mentioned increasingly likely for widespread adoption. Can you -- I know there isn't an exact number out there, but sort of ballpark what the size of that market could be or contributions for you guys?

I can't today because the lead customer here is still developing the market. But if we look at the number -- if you look at it sort of in terms of sockets, if you will, and you consider every dentist is a potential socket, I think there are 186,000 practicing dentists in the US. And obviously a much larger number worldwide.

And as the system gets qualified -- not qualified, but approved for deployment in other territories, obviously the size of that addressable market just keeps going up.

Got it. Okay. And I just knowing from experience from another company I used to cover in fiber lasers, I know the dental market is sometimes not that easy to crack, right. It takes a little while to sort of get the ramp of this type of thing. Or does it sound like something could be in a couple years versus a 10-year period in terms of adoption?

I think your statement is a fair one, and I would broaden it to say the medical market in general, the adoption can be slow. If we look at the early data here, it is actually pretty encouraging. And I think that really speaks to the efficacy of this device and the patients' reaction to it.

Normally, for the dental market, at least as I understand it, you have to get people that are in dental school accustomed to or comfortable with the technology. And then as they move into practice, they take it with them. I think they have seen a different trend with this product.

And maybe because the market has had a number of these kinds of systems in the past that really haven't delivered on the full potential of what is going out there today. So maybe it paved the road a little bit and the opportunity for a superior solution is panning out.

Jim Ricchiuti, Needham & Company.

Leen, I want to wish you the best of luck. Congrats. And just moving to the question -- John, can you say whether any of these OLED-related bookings are going to end up ultimately going to customers outside of Korea?

I would have to think that -- I'm sorry. So let me just make sure I understand the question. The OLEDs that are produced are going to customers outside of Korea. That is the question?

No. The question -- maybe I wasn't clear. I apologize. In other words, the bookings for the equipment orders that you have for OLED applications. From what you can see and what you know, in your backlog are any of these going to end customers that are outside of Korea -- the end customer? I'm trying to get --

Yes. So the answer is yes. The end-customer group includes Korean panel manufacturers, Japanese panel manufacturers, and Chinese panel manufacturers.

Okay. Is the activity more pronounced -- putting aside Korea for a second, is the activity more pronounced in Japan or are you seeing similar levels of activity in China?

I can't provide that level of granularity.

Okay. Is there anything -- as we think about the service business and recognize that it is going to be awhile before these machines are installed and are operating, but is there -- are you anticipating any change in the pricing on the service side? Because you have made some agreements on pricing with, I believe, your Korean customers, but do you anticipate changes going forward?

I think the most likely change going forward is we will move more towards a contract model that has benefits for the end customer and for Coherent. And exactly when that cutover takes place, a little more difficult to project because we are going to be shipping -- the number of companies that have a desire to produce OLEDs is rising. And there is a lot of learning that they will do along the way, which I think will influence the whole service discussion.

Okay. Is there any way that you could help us understand the opportunity? You're talking about significant follow-on orders beyond what you received, I believe, what, in January? That $150 million of orders?

That is correct. That was a single order for $150 million. Well, I'm sorry. It was a single order for over $150 million.

Okay. The follow-on potential behind that, is there any way to size that?

You really want to spoil the surprise, Jim?

Well, some things change.

I'm sorry. I am being flippant. We have a pretty good line of sight. I would like to have the orders in place and I know the configurations and everything else before disclosing the number. But it is a pretty healthy number. And I am not going to go further than that at this point.

Fair enough. Congrats. Thanks a lot.

Mark Miller, Benchmark Company.

I also would like to extend my congratulations on your results and your orders. They are certainly impressive, and also the best to Leen. Real quick, because I got another call I got to jump on. In terms of the -- you had mentioned I think at a recent conference another major opportunity for carbon monoxide lasers for via drilling. When do you see that starting to ramp? Is that more of a second half?

I think the CO opportunity in via drilling is probably not a second-half event in terms of volume. We will probably continue to sell development units for people to work on processes. But the via market right now is, like the semi market, is experiencing some turbulence. And I think there is going to be a cautious investment environment for API probably for the rest of this fiscal year.

Okay. And just finally, because I have got to jump, you said China was neutral. I assume scientific you said was healthy and strong, but it is being offset by weakness in industrial material processing. Is there anything else there?

So my comment about China being neutral was more a forward-looking statement for fiscal 2016. And the way to think about this, Mark, is overall, China for us is likely to be neutral. The core materials processing space is currently challenged because of all the uncertainty and with exchange rates and concerns about consumer confidence, the things I talked about during my prepared remarks.

What will offset it for us is there are some specific opportunities within the materials processing and specifically marking opportunities that we think are interesting. And we are looking at some market share capture in other areas, which will make it neutral for us.

So it is really -- it is not that the market is neutral -- and I am sorry I am going long-winded. I am repeating myself. It is not that the market is neutral. We have offsets that allow our business to be neutral.

Thank you. And again, congratulations and good luck to Leen.

Thank you, Mark.

Joan Tong, Sidoti & Company.

My question is again going back to that flat-panel display business. And I think, John, you have mentioned in the past there is so many couple different ways that clients can go about with this OLED opportunity. They can sort of like reuse, if they choose to, some of those older, lower format or smaller format Linebeam.

And it seems like the order inflow is really kind of coming in at the higher level. So can we comfortably assume that clients are not doing that and they are buying new laser for this?

I think there are two things happening here, Joan. The first is I think it is difficult for them to shift capacity from LCD to OLED at this point. If all things were equal, shifting that capacity, the OLED demand is going to ramp over the next few years, but they still have LCD orders that they have to satisfy.

The second consideration is that while the core tool is identical for OLED and LCD, for the higher density OLEDs -- and when I speak to density, I mean pixels per inch -- the manufacturers seem to get a better result on the larger format systems. So the Twin or Triple Vyper systems, which are typically 1 meter and above.

To put it the other way, using a Linebeam 750, I don't think they can actually make the product that they can make with 1000 or a 1500. So that is what is driving this wave.

Could we foresee something well in the future where they start converting older machines to the higher density displays? The answer is yes. But from what we know today, you would have to retire two Linebeam 750s for every OLED -- at least two Linebeam 750s or maybe three Linebeam 750s and harvest those lasers, but you would still need a completely new optical system. So all the orders that we are receiving now and what we anticipate receiving for the balance of 2016 will be new hardware.

Okay. I see. And then John, you said last quarter you wouldn't be able to provide guidance for 2016. If I missed that, I apologize, but I don't think you actually provide guidance for 2016. And you kind of alluded to, hey, you don't want to disclose too much for competitive purposes on your client time base.

So I just want to see maybe directionally -- obviously it looks like it is going to be up, given all the puts and takes. Can you just give a little bit more color how we should think about 2016 as a whole year? How we should think about how revenue progressing as well as the full-year revenue growth?

So I guess the way that I would look at it, Joan, is to reiterate what you said, there are puts and takes. Obviously FPD is a big positive. Things like China, et cetera, represent a bit of an unknown as we go forward.

If I had to give you some directionality, we would view 2016 as being above the consensus numbers that are out there today. How much above it, I think we will have a better view in the next conference call.

Okay. And then again, I might have missed that. I am just wondering: have you talked about what is the total booking so far for this OLED opportunity? I think it started end of December quarter -- I'm sorry; in the September quarter. And can you just disclose that or you might have done that already.

We didn't disclose it and we can't disclose it. We can tell you what the value of orders are, but we can't do a breakdown of LCD versus OLED capacity for the reasons that I already highlighted.

Patrick Newton, Stifel.

Thanks for taking my questions. Leen, again, congratulations and it has been a pleasure working with you.

Thank you, Patrick.

So John, you have been very clear for a significant period of time that you would not make capacity additions to FPD unless you had very good view into the sustainability of demand. And clearly you're talking about this wave of orders coming filling through 2017. So obviously, you have that -- you appear to have that visibility in order for you to add capacity.

So my question is could you help us and the investor community understand what percentage increase in footprints or potential unit outputs or revenue growth you are putting in from a capacity perspective? It is just very difficult to quantify or to digest just how big this opportunity could be.

While I like the way that you asked the question, Patrick, no, we're not going to disclose those details. Giving you an indication of how many units we are going to ship, it is very easy for anybody -- any manufacturer in that space to calculate how much capacity is going into place. And it is not our job to do that.

I know that the investment community is very interested in that from the standpoint of how it is going to affect Coherent, but we have an obligation to protect the proprietary interest of the customers here. And I realize that may be frustrating, but it is the way it has got to be.

The amount of space that we are actually adding is sort of nominal, the overall footprint. Building these very large Linebeam systems and the amount of station time that they require, we are adding some bus terminals, I guess, because I have often described these things as the size of a city bus. And in Richmond, we are actually not adding any physical space. We are adding additional tooling. So these are nominal investments to support the delivery commitments that we have made to the customers.

It was worth a try. And then I guess sticking on the --

I understand.

Sticking on the FPD line of thought, you've made it clear that mobility is a key demand driver historically. But I am curious: you had some comments to an earlier question that there is a rising appetite for OLED across multiple panel makers and clearly across multiple geographies.

So I am curious do you have any thoughts at all on the potential for your solutions to be used for TVs longer term? Is that still very much a wish, but not likely reality or has there been any change on that front?

So if I had to rank the opportunities, clearly mobile solutions is the priority in the near term. There have been a number of devices, including laptops, that have been released recently using OLED displays. And we believe those are LTPS-based displays, so they would have been made with our equipment.

But if you look at the evolution, TV is possible. I would probably put automotive ahead of TV in terms of the opportunity timeline because there are a number of manufacturers who are demonstrating concept cars that have OLED displays in them. And they can be used for a number of different things, whether it is the instrument cluster, whether it is the information center, which is typically the center console.

Even in the longer term, you could imagine having a heads-up display -- a transparent heads-up display that is made with an OLED device. And if you really go far out and think about autonomous vehicles, you could use a flexible OLED to cover the entire windscreen and turn it into an information center for the passengers.

Those opportunities seem to resonate more because they are based on flexible displays and have a pretty high value-add. In the TV market, I think the challenge is still going to be all the competition amongst different types of television displays, whether it is LCD with quantum dot enhancement or OLEDs.

The difference for the average viewer versus the price points -- I don't know if OLEDs are at an enabling price point yet, despite how much the cost per unit has come down.

Okay. Fair enough. And then I guess with 1Q results and if I take the midpoint of 2Q guidance, both represent year-over-year declines. Yet you are saying that as we sit here today and with the FPD opportunity, revenue growth should exceed consensus expectations, which I am showing is about 8% growth year over year. Would it be fair to say that that inflection has to occur in the 3Q time frame in order to just kind of make all those stars align?

It is going to be 3Q, 4Q. And that is when we start shipping these big FPD systems.

Okay. And then last one is for Leen. Just focusing on the gross margin side, I think that was the highest level of gross profit since -- or I'm sorry; gross margin since December of 2010. And then the guidance points to very nice expansion year over year.

Could you discuss the sustainability of the margin at the elevated levels? And you said that mix was the biggest contributor in the current quarter, but any specific products that you can -- or end markets that you can elaborate on that are driving what could be a sustainably elevated and gross margin?

Well, Patrick, the one that really contributes the most to the 45% we had was basically a favorable service mix and a favorable flat-panel display mix. The reason it came down in Q2 is because we don't have that same mix. In the third and the fourth quarter, as John said, we are going to ship more flat-panel display systems and that should help get back to what we had in the first quarter.

And you always have to be cautious. I know it was John or someone else said there may be -- we have to deliver a lot in a short period of time and these are well-known systems to us. But I would say it is sustainable in the shorter term. And when I say shorter term, meaning fulfilling those larger systems that we have on hand right now.

Great. Thank you for taking my questions. Again, Leen, best of luck in the future.

Thank you.

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, Shannon. Thank you, everyone, for participating in today's call. And again, I want to wish Leen the very best. Have a good day.

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