Coherent Corp (COHR) 2016 Q4 法說會逐字稿

Good day ladies and gentlemen, and welcome to Coherent's fourth quarter and fiscal year 2016 financial 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 Bret DiMarco, Executive Vice President and General Counsel. You may begin the conference.

Thank you Alex, and good afternoon everyone. Welcome to today's conference call to discuss Coherent's fourth quarter fiscal 2016 results. On the call we have John Ambroseo, our President and Chief Executive Officer, and Kevin Palatnik, our Chief Financial Officer. Before we begin, I would like to remind you that shortly after the market closed today, Coherent issued a press release announcing its fourth quarter and fiscal year 2016 financial results. You may access the press release on the Investor Relations section of the Company's website.

During the course of today's call, management will make forward-looking statements, including statements regarding Coherent's anticipated financial results, or expectations for future revenue growth, and the growth of our business and the expected completion, timing and benefits of Rofin-Sinar in our transactions. These forward-looking statements may contain such words as expects, will, anticipates, intends, or forecasts. These statements are based on current expectations and beliefs as of today, November 2nd, 2016. Coherent disclaims any obligation to update information contained in these forward-looking statements, whether as a result of new information, future events or otherwise.

These forward-looking statements involve a number of risks and uncertainties, some of which are beyond our control that could cause actual results to differ materially. For a description of risks and uncertainties that could impact these forward-looking statements, you are encouraged to review Coherent's periodic SEC filings, including its most recent Form 10-K, Form 10-Q, and Forms 8-K. I will now turn the call over to John Ambroseo.

Thanks Bret. Good afternoon everyone, and welcome to our fourth fiscal quarter conference call. Fiscal 2016 was an extraordinary year for Coherent. We celebrated our 50th anniversary, which is a meaningful milestone for a Silicon Valley tech company. We set new records for orders, revenue, EBITDA, EBITDA percentage, and pro forma EPS. We also announced the acquisition of Rofin-Sinar, which just cleared the last regulatory hurdle. Let me now provide some color on the quarter.

Bookings of $251.8 million decreased 35.6% sequentially, and rose 22.6% versus the prior year period. The book-to-bill for the fourth quarter was 1.01. Scientific orders of $34.9 million increased 36.7% sequentially, and 4% compared to the prior year period. Seasonality, product performance, and market share gains led to very good sequential order growth. The fourth quarter usually benefits from year end spending in the US, and a rebound in European spending following summer holidays. Our Astrella ultra fast amplifier is a leading solution in the research marketplace, based upon performance and unit volumes. Astrella did particularly well in China, where funding for applied physics and physical chemistry appears to be on par with the US. The Chameleon discovery, our most advanced light source for multi-photon imaging, posted record unit and dollar bookings in the fourth fiscal quarter. Instrumentation and OEM component orders of $42.5 million, decreased 3.1% versus the prior quarter, and were up 2.7% versus the prior year period.

All sub markets in bio instrumentation are enjoying very good demand, in flow cytometry, market adoption of test protocols and the proliferation of desktop instruments from existing and new market entrants are fueling growth. Bookings for confocal microscopy were solid. Our efforts in high speed gene sequencing are paying off, and orders continue to grow as we secure more design wins. The medical OEM market is being affected by M&A activity and reorganizations within existing customers, which is causing changes in demand, inventory practices, and R&D spending. From historical experience these are mostly transient factors. By contrast the consumable business is robust, suggesting a number of procedures being performed as stable to up. Microelectronics orders of $146.3 million declined 48.4% sequentially, and increased 50.2% compared to the prior year period. Semi cap orders posted double-digit sequential and prior period gains. The increases are primarily tied to investment for mobile logic chips. Fab utilization rates were generally positive, which helped service orders and revenues.

Finally we saw favorable inventory corrections at certain customers that appear to be sustainable. We do not anticipate any fallout from the recent collapse of two proposed mergers in the semi cap space, since they were largely complementary with respect to our ongoing business. A tear down analysis of the newest smartphones illustrates an increased use of SIPs, or system in package, which increases the number of interconnects and functionality in a smaller footprint. This approach will maintain pressure on the via drilling market in the near term, but it appears to be a temporary reprieve, since new applications like VR need large amounts of processing power. After building significant FPD backlog over the prior three quarters, system orders temporarily returned to a more modest pace, while FPD service orders and revenue ran at a record pace.

The fourth quarter was our first full shipment quarter of large format systems. A combination of FPD systems and service had a stunning impact on our P&L, and was the main reason that we set a number of fiscal records for the most recent quarter and the full fiscal year. I am also pleased to report the pipeline is very robust. Some customers are adding capacity to take a larger share of the first wave of OLED adoption. Others are convinced OLED will replace LCDs everywhere, from handsets to mobile computing to TVs and signage. They are securing capacity to capitalize on these potential trends.

As a result we have already booked $100 million of new orders in the current quarter, which fills out most of our existing 2018 capacity. We are very mindful of how lead times may affect customers, and increasing capacity above the current plan would require a modest investment in our optics fab in Richmond. We'll update you during our next conference call. Following two quarters outstanding orders, fourth quarter material processing orders were $28.2 million, representing decreases of 25.6% sequentially, and 15% versus the prior year period. Q4 notwithstanding, it was a record year for orders and sales in our materials processing business. A number of applications contributed to our success, including thin metal cutting and consumer electronics packaging, additive manufacturing and short pulse processing, for the automotive, medical device and machine tool industries. On October 20, 2016 the European Commission and competition cleared our acquisition of Rofin-Sinar, which requires us to divest Rofin's low power carbon dioxide laser business headquartered in Hull, England. The Hull business produced about 23 million pounds, roughly $30 million of revenue in fiscal 2015, or approximately 6% of Rofin's total fiscal 2015 sales. Given prior European rulings in the space, we were not surprised by the decision, and had excluded Hull from our original synergy estimate. The Commission is allowing us to close the transaction and hole the Hull business separate. We have to satisfy certain administrative matters before we can formally close. We expect to have this completed in the next couple of weeks, and we will provide more granularity on the combined business and the integration after closing. 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 fourth quarter 2016 financial results, then move to the outlook for fiscal Q1 2017. 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 fourth quarter 2016 financial results for the Company's key operating metrics were bookings of $251.8 million. Total revenue of $248.5 million. Non-GAAP gross margin of 46.8%, non-GAAP operating margin of 23.7%. Adjusted EBITDA of 26.7%, and non-GAAP EPS of $1.65. John talked about our bookings for the quarter of approximately $252 million in detail, so I'll move onto the P&L and balance sheet.

Net sales for fiscal fourth quarter of $248.5 million is a record for the Company. This is an increase of $29.7 million, or approximately 14% sequentially. $27.7 million of Q4 sequential increase was in the microelectronics market, primarily driven by FPD applications. Geographically Asia accounted for 64% of the Company's fourth quarter revenues. The US, 20%. Europe, 12%, and Rest of the World, 4%. Asia includes two territories with revenues greater than 10% of sales. Specifically South Korea and Japan, representing approximately 35% and 21% of fourth quarter revenues respectively. Total backlog of $890 million at the end of fourth quarter is also a record for the Company. The shippable backlog defined as shippable within the next 12 months is approximately $605 million. This includes $382 million or approximately 63% of shippable backlog related to flat panel display applications. The comparable shippable backlog at the end of fiscal third quarter was $565 million, of which $356 million, or approximately 63% was related to flat panel display applications. Other product and service revenues for fiscal fourth quarter of 2016 were $70 million, or approximately 28% of sales. Other product revenue consists of spare parts, related accessories, and other consumable products and was 23% of sales, representing growth of 11% compared to last quarter. Revenue from services and service agreements were approximately 5% 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 fourth quarter revenues.

Fiscal fourth quarter non-GAAP gross profit excluding stock-based compensation charges and intangibles amortization was $116.4 million. At 46.8% of sales for the quarter, non-GAAP gross margin came in at the high end of the guided range. Non-GAAP operating margin was 23.7% for fiscal fourth quarter, also at the high end of guidance for Q4. Adjusted EBITDA was 26.7% in fiscal Q4, exceeding our long-term goal of 19 to 23%. It is also a new record for the Company, and was primarily driven by the positive impact of increased deliveries of ELA tools.

Turning to the balance sheet, cash, cash equivalents and short-term investments was $400 million at the end of fiscal Q4, an increase of approximately $26 million compared to the end of last quarter. International cash primarily in Europe was $331 million, or approximately 83% of the total cash and short-term investment balance. Approximately 77% of total cash and short-term investments is denominated in dollars, and we ended the quarter with $20 million of short-term borrowings. Accounts Receivable DSO was 60 days, an improvement of two days sequentially, and as mentioned last quarter we expect to see fluctuations in our DSO based on the timing of our larger flat panel display systems shipments during future quarters.

The net inventory balance at the end of the fourth quarter was approximately $213 million. This is a sequential increase of $13 million, and was primarily due to increased whip levels to support the flat panel display ramp-up. Capital spending for the quarter was $21 million, or 8.5% of sales. This is higher than our historical averages, and as a result of finalizing the additional manufacturing capacity put in place for our ELA machines.

Now I'll turn to our outlook for our fiscal first quarter of 2017. Since the Rofin transaction is expected to close within a few weeks, that outlook represents Coherent as a standalone company. This outlook also does not include any debt financing related costs for the same reason. We will update our fiscal Q1 outlook once the transaction closes. Revenue for fiscal Q1 2017 is expected to be in the range of $255 million to $265 million. We expect fiscal Q1 non-GAAP gross margin to be in the range of 46% to 48%. Non-GAAP gross margin excludes intangibles amortization of $1.4 million, and stock compensation costs estimated at $600,000. Non-GAAP operating margin for fiscal Q1 is expected to be in the range of 22.5% to 24.5%. This excludes intangible amortization estimated at a total of $1.8 million, and stock compensation expense of a total of approximately $5.5 million. Other income and expenses is estimated to be immaterial. We do not include transaction gains and losses related to future changes and foreign exchanges rates in our outlook, we expect our non-GAAP tax rate for fiscal Q1 2017 to be approximately 30%, and finally, we are assuming weighted average outstanding shares of 24.7 million for the first quarter.

With regard to our participation at upcoming conferences, we'll be presenting at Stifel's Midwest Conference on November 10th in Chicago, the Mizuho Investor Conference in New York on November 14th, and the Barclay's Global TMT Conference in San Francisco on December 8th. I will now turn the call back over to the operator for a Q&A session.

(Operator Instructions). Your first question comes from the line of Patrick Newton. Your line is open.

Good afternoon, John and Kevin. Congratulations on the solid results and guidance. Just jumping right in, John, you talked about for the FPD pipeline that it was very robust. You can talked about $100 million in orders already received in your December quarter, and also talked about multiple waves coming beyond this current mobile wave. I am curious if you could help us just understand where you believe we are in this mobility wave, and then what type of visibility you have into ensuing waves, as far as timing?

Right now we're seeing a lot of what has been ordered already, Patrick, is obviously tied to the handset market. There is some jockeying for position in terms of who will support the first wave. So some of the initial assumptions that various customers had about how much they were going to have to deliver has changed, and as a consequence, they're adding capacity to be able to address that increased demand. In terms of additional devices, or the layers that we've talked about at various conferences, we are starting to see OLED show up in mobile computers devices. It seems like every week another manufacturer is announcing a new model with an OLED screen. We see that as a generally positive trend. With respect to our visibility, it's always been good in this market because of the configurations, lead times, and quite frankly the relationships that we have with the customers, the engagement we have with the customers. We are working on some large orders. I can't tell you whether they're going to be a Q1 event or a Q2 event or a Q3 event, but there are a number of large orders in the pipeline right now.

And then on the capacity front, you discussed how you're largely booked through calendar 2018, and that you could with just some optical supply increases, you could increase capacity. But if we think about these waves, can you help us understand what you would need to do, or what steps you would need to take to further increase capacity, and what would it take for you to dramatically, or what do you need to see on the horizon to dramatically increase your capacity?

So as Kevin mentioned, we made a big investment this past year in capacity expansion, a footprint expansion in Germany. And this is simply to house these very large systems as they're going through final tests. We have ample space there to be able to handle more. We have equipment in place to deal with the deliveries and the commitments that we've made thus far. If the customer's expectations or needs change, and they want faster deliveries in certain areas, then we will add equipment in Richmond, which is optical fabrication equipment to be able to handle that. We don't think that we're going to need to add any space in Germany in the near term. It's literally adding capacity in Richmond. But again I want to highlight, the pacing item here is if the customers need us to respond faster or differently, then we will make those investments, and that's what we're going to find out over the next few weeks to few months in our conversations with them.

Great. And then just Kevin on the model, very impressive EBITDA margin exceeding the high end of the your long-term target range I guess. Given that you still have very good FPD backlog, you still have service revenues ramping, how should we think about profitability targets and potential on a go-forward basis?

Yes, difficult question, Patrick. All we've given primarily is the longer term EBITDA targets, the 19 to 23. For the quarter, we surpassed that high end of the range. For the full year we came in right under the high end of that range. Looking in 2017, as we've said in the past, with the FPD backlog and microelectronics being in terms of margins higher than corporate averages, as that pushes through the P&L, that will put positive upward pressure on margins, but we haven't calibrated that. We will come out with another forecast as I mentioned, or outlook for Q1 once we close the Rofin transaction, but I am not going to go beyond that. Great. Thank you for taking my questions. Good luck. Thank you.

Your next question comes from the line of Larry Solow. Your line is open.

Good afternoon. Just a couple of follow-up questions to Patrick's question. Just on the industry capacity for OLED, are there other choices, I realize there are no other choices today, but I assume there are multi-competitors, or other companies trying to work on alternatives or anything. Is there anything you could speak out in the pipeline that are even several years out that might potentially compete with you guys on the excimer lasers today?

Larry, as I've mentioned a number of times, we ourselves have shipped a variety of different lasers into this application space, and we've worked extensively with customers exploring if there are alternatives out there. Can you anneal panels using other lasers?Yes, you can. Can you get the combination of outcomes with other lasers that you get with an excimer source. No one has demonstrated that. We are not aware of anybody else that has. So if the question is how long would it take somebody to come up with a competitive excimer laser, quite frankly we think it's years, because it's not just building a box, it's being able to achieve the performance criteria and the performance lifetime, that is so critical to making the application financially viable. I have no doubt that other laser companies will try to after this market. It is not surprising. I think it's a tough road given the expectations from the customers for things like through-put, pixel densities, yields, you name it.

Right, right. Okay. And just one other quickie. I know you just give normally quarterly guidance. Normally Q1 is seasonally a little bit slower, at least on the revenue side and you is given a preliminary at least a couple quarters back of $950 million to $1 billion. Can we assume at least that Q1 follows normal seasonal patterns in terms of revenue?

Larry, I think clearly for FPD given the backlog we have sequentially, that will increase because of the ASPs of the large format machines, that drives not only increase but fairly sizable numbers. So while there may be a little bit of seasonality in the other markets we serve, FPD will certainly offset that and that's why the guide sequentially is up.

Got it. Great, thanks.

Thank you.

Your next question comes from the line of Joan Tong. Your line is open.

Hi, guys. I'm just wondering for that $100 million order that you bought in this quarter, can you talk about whether it's mobility or for mobile computing, or for other applications?

We did not.

Okay. Got it. And then, just wanted to get a sense of in terms of non-display business, and just wanted to get a sense of like operating environment, macro factors, and obviously your display business has been very strong, but maybe just touch a little bit on the other businesses?

I thought I had done that during my prepared remarks but the scientific business, just going in the order that they were originally discussed, the scientific business is doing fine. No surprises one way or another. We continue to see increased spending in Asia, and modest decreases in Europe. Within the instrumentation business or the OEM components business, instrumentation is doing quite well. There seems to be a pretty good appetite for desktop instrumentation to make medical diagnosis more accurate and faster. The medical therapeutics market is a little bit choppy right now for the reasons that I cited, and materials processing for our standalone business was a terrific year overall. So the non-display parts of the business, or maybe more specifically the non-microelectronics parts of the business are doing fine, and even within the other parts of microelectronics, whether it's semi metrology and inspection or other areas, we see the trends that the rest of the market has seen. The packaging area continues to be weak, but that's not a new story, that's been true for a number of quarters now.

Okay. Thank you for the comment. And how about, like the growth margin. Obviously you guided continuous strong growth margin in the end of December quarter, and some of the larger format FPD products would start to kick in, in terms of like service components of it. And I assume, like that part of the business, that line item should continue to grow sequentially throughout the year on a standalone Coherent basis?

Hi, Joan, it's Kevin. Certainly from a backlog standpoint, we have a sizable backlog. We'll ship and deliver that throughout 2017 and 2018 as John described. As I mentioned, those machines carry higher than Coherent margins. The services piece carry higher margins than the machines themselves. So yes, that will put upward pressure on gross margins and up margins throughout 2017. But that's as a standalone company as you mentioned as we roll in Rofin, or consolidate Rofin, clearly that will dilute those margins a bit, until we work on the synergies related to Rofin.

Maybe just a quick one to follow up, like in terms of how much we think about from the installation of the larger format FPD system to the point that you actually really kick in and have that service revenue quick in usually there is a lag, right, I assume and I just want to get a sense of how long it is a lag?

Joan, the timeline hasn't really changed. It's about six months after the tools are qualified for production in the fab, that they flip from warranty into service.

All right. Thank you, guys.

Thank you.

Your next question comes from the line of Jim Ricchiuti. Your line is open.

Hi, thanks, good afternoon. Some of this may have been asked, I apologize. John as you look at the pipeline in FPD, can you talk about customers, not specific customers but just in general how broad is the order intake that you're seeing among multiple customers, and that also relates to that $100 million order that you just alluded to that you took in this quarter, and maybe also the pipeline that you're seeing?

The answer is the same, Jim. It is coming from multiple geographies. Multiple customers and multiple geographies.

Can you be at all more specific in terms of countries?Are you seeing more activity in China?Is more activity coming out of Japan?We understand, we think we know what Korea is doing.

Given the size of this market and the small number of customers, it would be inappropriate for me to comment specifically on countries. But what I would suggest is if you do a search on virtually any search engine on OLED investments, you'll see a number of headlines, and assuming that some of those tied to what we're seeing would probably be a correct assumption.

Okay. And when you talk about having discussions with customers and the pacing item being the customer, I mean some of this capacity, and correct me if I'm wrong, is capacity that's going to come in place in some cases late 2018, even looking out to early 2019. Is that a fair way to characterize it?In other words you're not the gating factor in this?

No, we're part of a larger plan obviously. But we're delivering equipment now that, it goes into full production, or is capable of going into full production pretty quickly. And I think the thing to recognize here is that different manufacturers, not only are in different, at different points of the development curve or the production release curve, but they're also staggered in terms of their facility investments. So my comment earlier, you may or may not have heard it. As we look at increasing capacity in our optics fab, which would allow us to ship more, the reason that we simply haven't pulled the trigger is if we increase capacity there, and the customers don't plan to be in production until 2018 or 2019, it doesn't really make a big difference. So we need to lock down what their expectations are, in terms of being in full production in order to make a smart business decision.

Sure.

Again, and I'm sorry that I'm being a little bit difficult here. But we don't want to disclose customer details unnecessarily. If you do a search, you'll see very quickly where some big investments are taking place. They're not Korean-centric, and they're phased in over the next few years.

I can we're somewhat aware of those headlines. Thanks, John. Appreciate it.

Okay.

Thanks, Jim.

Your next question comes from the line of Tom Hays, your line is open.

Great, good afternoon. Thanks for taking my call and congratulations on the quarter. I was just wondering you provide a little bit of detail as far as some of the market outlook. I was just wondering it's been a challenging year on the industrial side processing wise on a broader speaking basis. Just maybe your thoughts on how the business finished the year, and kind of the outlook for 2017?

Sure, Tom. The material processing business as I think I mentioned a couple of times already, it was a terrific year for materials processing. We had some tremendous bookings quarters in March and June. The fourth quarter tends to be a little bit softer anyway, as capacity has already been put in place for year end production. The drivers for us were more, I don't want to call in the specialty applications, probably is an unfair characterization. But we did a lot of really good work in metal processing for consumer electronics. That was more of a secular thing than a cyclical one. I think if you look at the core businesses, cutting, marking, engraving, sort of the traditional trinity, I would agree with you that they had a pretty tough slog of in this year, but it all comes down to alignment and we were aligned with some applications in that space that did exceptionally well, and we capitalized on them.

Okay, great. And I'm looking forward to close of the Rofin deal. I was just wondering perhaps if you could remind me, the financing of the deal is going to be a mix between new debt and some of your cash usage. Have you provided any thoughts on the split between the two?

We have, Tom, this is Kevin. So originally we were going to take out a $750 million US total loan. As it worked out working with the bankers, we pushed that all into Europe for the equivalent of which is a 670 million euro loan. We did that because looking forward, that's where we'll generate the majority of our profits and our cash. So to marry that loan up to our interest expense and cash and cash profits, that made sense. The rest of it, if you will, the 670 million Euros is equivalent to about $750 million US, of the total deal value is about $942 million, so the remainder call it plus or minus $190 million, will come from the consolidated balance sheet.

Great. Thank you. Appreciate the color.

Thanks, Tom.

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

Thanks Alex. We want to thank everyone for participating in today's call. We will hold a follow-up call once the transaction has formally closed, and we will be able to provide you with greater insight as to the combined operating model, as well as the plans for integration. Please look for that announcement in the next couple of weeks. Thanks very much.