Coherent Corp (COHR) 2016 Q3 法說會逐字稿

Good day, ladies and gentlemen, and welcome to Coherent's third quarter fiscal 2016 financial results conference call hosted by Coherent, Inc. (Operator Instructions) As a reminder, this call is being recorded.

I would now like to introduce Bret DiMarco, Executive Vice President and General Counsel. You may begin your conference.

Thank you, and welcome to today's conference call to discuss Coherent's third fiscal quarter financial results.

I would like to remind everyone that some information provided during this call may include forward-looking statements including, without limitation, statements about Coherent's future events, bookings, anticipated financial results, financial guidance, the expected completion and timing of the recently announced ROFIN-SINAR transaction, and the expected benefits and other information related to the transaction.

These forward-looking statements may contain such words as expects, will, anticipates, or intends. These forward-looking statements are only predictions, and are subject to risks, uncertainties, and assumptions that are difficult to predict and may cause actual results to vary significantly. Factors that could cause actual results to differ materially include the risks associated with demand for our products; our ability to convert bookings into revenue; worldwide and regional economic conditions; the risk that the proposed transaction may not be completed in a timely manner, or at all; as well as the challenges and costs of closing, integrating, and achieving anticipated synergies.

These and other risks are set forth in more detail in Coherent's periodic SEC filings including our most recent Form 10-K, Form 10-Q, and Forms 8-K. These forward-looking statements reflect beliefs, estimates, and predictions as of today, and Coherent expressly assumes no obligation to update any such forward-looking statements.

I will now turn the call over to John Ambroseo, Coherent's President and Chief Executive Officer.

Thanks, Bret. Good afternoon, everyone, and welcome to our third fiscal quarter conference call. As you have seen from today's earnings release, Coherent posted solid numbers. We are executing well on numerous critical path items and are well positioned for a strong finish to a record-setting year and an even better fiscal 2017.

In order to fully capitalize on our 2017 opportunities our excimer production expansion needs to be completed and we have to secure wins beyond FPD annealing. Both are well underway. We expect a facility expansion in Germany and the capacity additions in Richmond to be completed on time.

The order book also looks very good. Bookings of $390.8 million was the second highest total in Coherent's history. On a comparative basis, orders increased 121.2% versus the prior year period and decreased 21.3% against the all time records set during the previous quarter. The book-to-bill for the third quarter was 1.79.

Scientific orders of $25.5 million decreased 4.1% sequentially and 12.3% compared to the prior year period. The year-over-year swing is partially due to the timing of orders in Europe and Asia where customers are awaiting the delivery of committed funding. Application trends remain focused on biological imaging and ultrafast applications. Interest in our newer imaging products, including Monaco and Fidelity, is rising due to the unique capabilities that these lasers offer. Our Astrella platform is doing very well within the ultrafast research community due to its ease of use, performance and reliability. And I can't emphasize the reliability aspect enough.

Customers are taking note of the enhancements made by incorporating HALT and HASS testing of our research products. We are confident that this will further improve users experience while reducing our warranty expenses. Instrumentation and OEM component orders of $43.8 million decreased 25.5% against record setting orders in the previous quarter and were up 42.3% versus the prior year period. The sequential change is due to the timing of large orders from medical OEMs.

We are expanding our global customer base in bio-instrumentation with key wins for lasers and subsystems in flow cytometry. The legacy base is also performing well which suggests an expanding market rather than market share shifts. This is consistent with increased biomedical research funding as well as higher penetration and clinical applications.

Following an exceptional performance last quarter, the medical OEM market also performed well with strength in ophthalmic procedures or products for cataract and photo coagulation therapies. Eye treatments are likely an ongoing theme due to an aging and expanding middle class globally leading to an increase in age related issues and greater access to care.

Microelectronics orders of $283.6 million decreased 22.9% from the all-time-high set in the prior quarter and rose 212.4% compared to the prior year period. Total third quarter FPD orders exceeded $240 million inclusive of service and a single order for systems in excess of $100 million. New system demand covered Linebeam 750s, 1000 and 1500s and is tied predominately to flexible OLEDs. The pipeline for the next round of FPD annealing orders is developing as customers refine their market share assumptions and larger format displays gain traction.

We are beginning to see orders for other process steps at OLED production including short pulse lasers for film cutting and excimer lasers for laser liftoff. Semi CapEx spending is now expected to be flat for 2016. This reflects semi dependency on mobile devices and 2016 is viewed as a tick-tock year for mobile before a bevy of new smartphones in 2017. According to SEMI, Gartner and others this should drive mid-to-high single digit growth in semi CapEx spending for 2017. API is a similar story to semi although users are looking to replacing or upgrading existing tools as a means of lowering costs ahead of the change in hole size or materials.

Following a record performance in the second quarter, the materials processing orders of $37.9 million decreased 12.4% sequentially and increased 45.8% versus the prior year period. Third quarter bookings were robust following a record performance in the second quarter. We continue to see strength in metal cutting with a significant repeat order for aluminum cutting in consumer electronics. Demand for carbon dioxide lasers remains strong for mid and high powered lasers in converting, as well as low power lasers in marking.

We also had two notable orders for ultrafast laser processing, one for fuel injected nozzle drilling and the other for manufacturing diamond tool heads. Perhaps the most interesting aspect of the materials processing market was geographic distribution. China contributed in a meaningful way to several advanced applications but the core marketing and cutting markets were weak as the country deals with slowing economic -- I'm sorry, slowing domestic consumption and exports. Europe, by contrast, achieved all-time record materials processing bookings with a good portion headed to European end customers.

Since the last conference call we satisfied two closing conditions for the pending acquisition of ROFIN-SINAR. We have received US regulatory clearance and ROFIN shareholders approved the transaction. We partitioned the Brussels-based European Commission on Competition to handle the regulatory review for the EU rather than multiple filings in the member states. Our request was granted and the review process at the ECC is under way.

We anticipate closing the transaction in the fourth quarter of 2016 as previously communicated. We have made steady progress on integration planning and expect to hit the ground running after closing the deal. We will provide integration details following the close.

Our three priorities for the fourth quarter are managing the standalone revenue ramp, working through European regulatory clearance and continuing the integration planning. It is clearly a lot of work but the teams working on each of these are highly confident, dedicated and enthusiastic.

I will now turn the call over to Kevin Palatnik, Coherent's Executive Vice President and Chief Financial Officer.

Thanks, John. Today I will first summarize fiscal third quarter 2016 financial results then move to the outlook for Q4. I will discuss primarily non-GAAP financial results and ask that you refer to today's press release for a detailed description of our GAAP results as well as a reconciliation between GAAP and non-GAAP financial results. The non-GAAP adjustments relate primarily to stock-based compensation expense, amortization of intangible assets, acquisition expense and the related tax adjustments.

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. Fiscal third quarter 2016 financial results for the Company's key operating metrics were bookings of $390.8 million, total revenue of $218.8 million, non-GAAP gross margin of 44.2%, non-GAAP or adjusted EBITDA of 20.8% and non-GAAP EPS of $1.07.

John talked about our bookings for the quarter of approximately $391 million in detail so I'll move on to the P&L and balance sheet. Net sales for the fiscal third quarter of $218.8 million is a record for the Company. This is an increase of $18.9 million or approximately 9% sequentially. $18.7 million of Q3's sequential increase was in the microelectronics market primarily driven by FPD applications. Geographically, Asia accounted for 57% of the Company's revenues for the third quarter; the US, 23%; Europe, 15%; and rest of the world 5%.

Asia includes three territories with revenues greater than 10% of sales. Specifically, Japan, South Korea, and China represented 21%, 20% and 11% of third quarter revenues, respectively. Total backlog of $886 million at the end of third quarter is also a record for the Company. The shippable backlog, defined as shippable within the next 12 months, is approximately $565 million.

This includes $356 million or approximately 63% related to flat panel display applications. The comparable shippable backlog at the end of fiscal second quarter was $469 million of which $225 million or approximately 48% related to flat panel display applications. Other product and service revenues for the fiscal third quarter of 2016 were $65 million or approximately 30% of sales.

Other product revenue consists of spare parts related accessories and other consumable products and was 24% of sales representing growth of 13% compared to last quarter. Revenue from services and service agreements were approximately 6% of sales, virtually flat sequentially. We also had two customers, one in Japan and one in South Korea, both integrators to large flat panel display manufacturers, that contributed more than 10% of the Company's fiscal third quarter revenues.

Fiscal third quarter non-GAAP gross profit, excluding stock based compensation charges and intangible amortization, was $96.7 million. At 44.2% of sales for the quarter, non-GAAP gross margin came in at the high end of the guided range. As stated in last quarter's call, the sequential decrease of non-GAAP gross margin was mainly the result of inefficiencies related to the manufacturing ramp up in flat panel display systems. Non-GAAP operating margin was 16.9% for fiscal third quarter, higher than the midpoint of guidance for Q3. Adjusted EBITDA was 20.8% in fiscal Q3.

Once again, this is approximately the midpoint of our longer term goal of 19% to 23%. Turning to the balance sheet; cash and cash equivalents and short-term investments was $374 million at the end of fiscal Q3, an increase of approximately $13 million compared to the end of last quarter. International cash, primarily in Europe, was $324 million or approximately 87% of the total cash and investment balance. About 76% of the total cash and short-term investments is denominated in dollars. We ended the quarter with $20 million of short-term borrowings.

Accounts receivable DSO was 62 days, an improvement of 6 days. And as I mentioned last quarter, we expect to see fluctuations in our DSO based on the timing of our larger flat panel display system shipments during future quarters. The net inventory balance at the end of the third quarter was approximately $200 million. This is a sequential increase of $21 million and was primarily due to increased WIP levels to support the flat panel display demand ramp up. Capital spending for the quarter was $12.1 million or 5.5% of sales.

Now I will turn to the outlook for fiscal fourth quarter of 2016. As was stated in our Q1 and Q2 earnings call the impact of the significant increase in the flat panel display backlog would positively impact the second half of fiscal 2016 and future revenues. We also said that this impact was more significantly skewed to our fourth and future quarters than to Q3. Given expected shipments for Q4 we now have the visibility to guide fiscal Q4 revenues.

We expect fiscal Q4 revenue to be in the range of $235 million to $245 million. We expect fiscal fourth quarter non-GAAP gross margin to be in the range of 45% to 47%. Non-GAAP gross margin excludes intangibles amortization of $1.3 million and stock compensation costs estimated at $600,000. Non-GAAP operating margin for fiscal fourth quarter is expected to be in the range of 22% to 24%. This excludes intangibles amortization estimated at a total of $1.8 million and stock compensation expense of a total of approximately $5.3 million.

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 outlook. Similar to Q3, we expect our non-GAAP tax rate for Q4 to be in the range of approximately 29% to 31%. And finally, we're assuming weighted outstanding shares of 24.5 million for the fourth quarter.

With regard to our participation at upcoming conferences, we will be presenting at Needham's Industrial Technology Conference on August 4 in New York and the Deutsche Bank Technology Conference in Las Vegas on September 14.

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

(Operator Instructions) Our first question is from the line of Patrick Newton with Stifel.

Congratulations on the very solid results. I just wanted to jump right in on the flat panel display business and I guess given the greater than $100 million order in the quarter, and also, John, your historical accuracy in calling other major orders are having visibility, could you speak to what you see on the major order front and I guess I will leave that one there.

Sure. So we were engaged in conversations with a number of panel manufacturers, obviously the same integrators that we have always been working with on their next set or the next round of orders. We have visibility that these things are probably in the six to 12 month time frame. It's a little bit early to tell you what the mix looks like and the dollar amount, but certainly we have a line of sight to that.

Great. And then I guess in your prepared remarks you spoke to some larger format discussions with customers. I'm curious if that is focused on tablets, laptops or some other product or end market.

I think the natural evolution will be a step-up in size not a leap in size.

Great. And then I guess on the service revenue side given the level of orders, the backlog and kind of the visibility into this next round of orders, are there any updated thoughts on the potential of moving to contractual arrangements for the service business versus the current pay-by-the-drink model.

We are, again, actively engaged. When that transition takes place we will let you know.

All right. Then last one for me, Kevin, is on the gross margin the guidance of 45% to 47% very impressive. As we think about how this flat panel hardware benefits the mix and then as service revenue benefits the mix, is there kind of an intermediate term gross margin that we should be thinking about for Coherent as you have kind of broken out of the historical range?

Patrick, I'm not going to go that far out in terms of outlook. I think one way to look at the guide at 45% to 47%, last quarter I mentioned that because we were bringing people on in terms of training for the ramp-up, we would take a one-time hit in terms of gross margin and we guided down. If we go back to the prior quarter and even back further, 45.1% non-GAAP, 45.3% in Q2 and now we're guiding 45% to 47%, call it the midpoint, it's a small step up at these larger format machines weighed in, bit in terms of 2017, I am just not prepared to go there yet.

Great. Congratulations again. Thank you for taking my questions.

Thank you.

Our next question is from the line of Joe Wittine with Longbow Research.

Thank you. With the seismic order flow year-to-date here, can you help us understand from a modeling perspective when you expect the peak of shipments to occur even -- either a single quarter or a few quarters or just qualitatively how you are looking at it?

Joe, it's Kevin. We haven't talked about peaks in terms of the flow-through to the P&L. What we have said is the record orders that we took in Q1, Q2 and now in Q3, if you look at the backlog, total backlog and what is shippable, the orders we took primarily in Q1-Q2 we will satisfy, ship, deliver in 2017. And then orders we took in-quarter go out into fiscal 2018, but in terms of skewing, we haven't disclosed anything like that.

Okay. Well that is somewhat helpful. Are you able to provide a total backlog along with that is kind of similar to last quarter's I think was a little north of $700 million including the beyond 12 months?

That's right. Last quarter it was $707 million for total backlog. This quarter was $886 million at the end of Q3.

Okay. And then shifting gears, materials processing. Talk a little more to the softening you saw in the core cutting and marking markets. How bad was it? When do you foresee a recovery? And if you could remind us of your mix within materials processing of CO2 versus non-CO2. Thanks.

I would say that the situation in the cutting and marking market is really unchanged. It has been soft for a number of quarters. And as I mentioned, we saw -- in China in particular -- we saw some very good activity and more advanced applications, predominantly around electronics packaging, core market I think it is where it's been. As far as what drives an inflection, it is the same challenges that China has been dealing with for many quarters now.

They need a step-up in domestic consumption. They need an investment policy that favors small businesses and those things haven't hit yet. I can't predict when that's going to happen, although those would be the drivers when they do occur. And as far as the mix between product lines, we have never disclosed that information.

Thanks. Then finally, I will step away here. Competitively speaking, the leading fiber laser competitor this quarter mentioned they are developing a traditional fiber offering that could address FPD annealing rather so curious on your take there and how you are positioned competitively? And I will step away. Thank you.

Sure, I guess the way that I would frame this is you have to look at it from an applications standpoint. The market -- or the application is not suffering because it doesn't have a lower cost laser option. It is tied to the performance of a particular type of laser that also drives very high throughput, high precision, high yield; it is high after high after high. While you can use other types of lasers to anneal a panel, and we have said this before, you cannot get the combination of outcomes that the excimer laser process produces.

And to reinforce that even further, this is very different than the metal cutting market where you had a legacy base that got replaced with a better light source, but it supported essentially the same process. That is a much easier transition than going in with a different light source that doesn't meet all the criteria and has to drive a new process. Being able to break that is pretty difficult. So, while I would fully expect people to pine for this opportunity, it is going to take a lot more than just a lower cost laser to break into it.

Our next question is from the line of Larry Solow with CJS Securities.

John, just wonder if you could just help me just a little more color just better frame the conversion from LTPS-LCD to OLED going to 80/20 by 2019. Sounds like the majority of these orders, if not all of them, are still going towards that and is that -- does the acceleration orders start slowing down eventually just in terms of that part of it?

So, Larry, virtually everything that we have booked through Q3 is supporting OLED's for mobile, and I should -- to be more specific, for handsets.

Right.

As we move forward, there may very well be a shift in the mix of what the products will be supporting going from handsets to mobile computing as one example. I can't tell you where we are with respect to the handset build out because, as I also alluded to in my comments, customers are starting to reevaluate their market share thoughts and considerations which will also drive incremental investment.

Okay. Fair enough. In terms of the gross margin outlook, without getting into specifics beyond what you have already given, some of the efficiencies with the excimer build out, are those continuing? Are there still some inefficiency in that Q4 number? And then are you now getting the benefit from -- I know you had made a couple acquisitions last year of Raydiance and Tinsley, I believe, and I think they were sort of ramping up through this fiscal year? Can you give us an update on that and how that relates to gross margin?

Yes, hey, Larry; it's Kevin. So, at this point we have pretty much rung out the inefficiencies on the manufacturing side to build against the ramp or the demand for the ramp. That is why we did guide down in Q3. We came in at the high end of the range. We pushed really hard to get people trained and on board and that is reflective in the 45% to 47% GM guide for next quarter. We have rung it all out and, again going back to Q2, the 45.3%, if you go to the midpoint it shows clear improvement, but it is not totally outrageous to say. So, 45% to 47% is our best view of Q4.

Got it. Okay. And then just -- I know you sort of gave a brief look into 2017 last year -- on your last call. You still comfortable with at least that revenue target you have put out?

We have not changed anything from the $950 million to $1 billion outlook for 2017.

Okay, great, thanks.

Thank you.

Our next question is from the line of Mark Miller with Benchmark.

Congratulations on another impressive quarter for orders. Just was wondering in terms -- as you noted, the basic drivers is mobile handsets for the OLED and the flat panel. When do you think the OLED TVs become significant or you can start getting excited about? Is that two years away?

We have always looked at that as a three to five year opportunity and I think it continues to be a three to five year opportunity, because it is going to come down to the cost to produce these things and the dollars per square inch that you can charge for a handset display versus the dollars you can charge per square inch for a TV are dramatically different, and that is the math that the manufacturers have to deal with.

Do you see anything else besides handsets and TVs being three to five years out as being significant in terms of application of OLEDs?

Well, as we've talked about recently, the mobile computing market, which is tablets and laptops, has started to see the first articles show up in the marketplace, OLED equipped devices. If you size that market on a square meter basis, it is actually larger than the existing handset market. And the assumption there is that you can drive the same level of penetration in the mobile computing market that you are driving in the handset market, but on an equivalent basis, it is 20% to 40%, 20% to 50% larger than the handset market.

And the ramp for that, a year, two years away?

I suspect, and this is just an opinion, Mark, I suspect that it is really going to depend on new devices that are equipped with OLED screens. It is highly unlikely that manufacturers are going to go in and upgrade an existing laptop or an existing tablet with a new display. It would be when they go through a new product release is what's likely to happen.

And if you just concisely can give us a little more color on this laser lift-off application, what that is and how that comes into the process?

Sure, when you make a traditional rigid flat panel display, it is -- you are laying the structures down on a piece of glass which is part of the display sandwich. When you are making a flexible display, it is a -- as the name implies -- it is a flexible substrate. So they first adhere the flexible substrate to a carrier glass to allow it to go through the process in a rigid position and at the very end you have to de-bond the flexible display which now has the structure on it from the carrier glass. And the way that is done is -- well the way you attach it in the first place -- is to use an adhesive and then you photo-chemically de-bond the flexible display from the carrier glass using an ultraviolet laser. And that is where our ultraviolet lasers play in the laser lift-off game.

Thank you. And just one final thing. I assume it is due to the large orders, but SG&A kind of ticked up more than I thought. Is that just the orders coming in -- commissions from the orders?

Hey, Mark, it's Kevin. So yes, a bit of it is commissions; a bit of it is bonuses. Certainly with this level of orders and P&L impact, if you will, we are seeing increased bonuses so we are accruing for that.

Thank you.

Thank you.

Our next question is from the line of Joan Tong with Sidoti & Company.

Hi, John and Kevin; how are you guys?

Very well.

Good, Joan.

Good. So I just wanted to make sure I understand this correctly. John, did you say or you didn't say that all of the orders that you have booked until the third quarter would be good enough or would feed all the capacity that required to turn that 80/20 -- 20/80 to 80/20 or you didn't say that?

My comment, Joan, was that everything we've booked through the third quarter is OLEDs for mobile handsets. I didn't say whether it filled out any ratios. I just said that everything that has been booked so far goes into the mobile handset market.

Okay, all right. Got it. Okay, and then for the SG&A so this quarter it's higher. Are we expecting it would stay high next quarter? Obviously, it is 20%-something of total revenue but you had mentioned about bonuses, accrual and things like that and your next quarter numbers, total revenue numbers looks pretty good so I assume that the SG&A expenses would remain elevated?

Well, I don't know about elevated, but it should be plus or minus around the same as Q3.

Okay, got it. And then maybe something related to the ROFIN acquisition. Any -- like can you just share with us any pre-integration work that you are working on right now that get us comfortable that once the deal is closed then you know exactly what you are doing?

Joan, I understand the reason for the question, however, we are not going to disclose things to the outside world before we've discussed them with the people internally that have to execute against them. Once the deal is closed we will provide an update on a lot of these issues. Today we can't do that.

Okay. That's fine. And then, Kevin, in terms of the debt, the credit rating gave you a rating already. So I know that you are still in the middle of raising debt for deal. Are we thinking about interest rate at the level that you originally guided for or is there any changes since we have actually have a rating right now?

Joan, it is premature to talk about that because we are in the middle of the process. But I think at a broader level if you look at the macro environment rates have tightened since we first started out and, as you know, we started out at LIBOR plus 4.75%.

Right.

But given the general market has tightened you would expect that to happen with our offering as well.

Okay. All right. That's fair. Thank you.

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 or closing remarks.

Thanks very much for participating and we look forward to catching up with some of you at the upcoming conferences.

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