Coherent Corp (COHR) 2017 Q3 法說會逐字稿

Good day, ladies and gentlemen, and welcome to Coherent's Third Quarter Fiscal Year 2017 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, Julienne, and good afternoon, everyone. Welcome to today's conference call to discuss Coherent's results for the third quarter of fiscal 2017. On the call, we have John Ambroseo, our President and Chief Executive Officer; and Kevin Palatnik, our Executive Vice President and Chief Financial Officer.

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, anticipated financial results, business trends and the expected timing and benefits of the integration of our recent Rofin-Sinar transaction. These forward-looking statements may contain such words as expects, will, anticipates, intends or referred to as guidance.

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. 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.

For a description of risks and uncertainties which 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, our President and Chief Executive Officer.

Thanks, Bret. Good afternoon, everyone and welcome to our third fiscal quarter conference call. We have a very simple story for Q3: record revenue, record profits and sustained strong demand.

Microelectronics bookings delivered another terrific result. ELA systems led the way with multiple large format tool orders. ELA service continues to grow as more systems move from warranty to the service pool. Pull along orders were again in the $20 million range for OLED film cutting using CO2 and ultrafast lasers and SmartCleave glass cutting systems, also based upon ultrafast technology. The current backlog pretty much takes us through fiscal '18. Future orders will be scheduled for shipment in fiscal '19 as new fabs come online.

As a reminder, our own capacity expansion at our integration facility in Göttingen, our refurbishment center in Osan and our optics fab in Richmond is necessary to meet delivery requirements in fiscal '19 and beyond as well as supporting continuous growth in service.

Semiconductor CapEx has been on an extended streak. Three factors are driving utilization and investment. Memory prices remain very high and manufacturers are adding capacity to meet demand. High utilization rate of larger nodes for IoT devices such as sensors has revitalized the service business and is driving capacity expansion at legacy nodes. And finally, growth at leading nodes translates into inspection tool sales. Based on multiple market research sources, it appears the streak will continue into fiscal 2018.

There are some interesting opportunities in the advanced packaging market. The emergence of wafer-level packaging has rekindled laser direct imaging. Outsourced semiconductor assembly and test providers or OSATs, where wafer-level packaging resides, are quite keen to structure down to 2-micron features to provide density and speed and potentially capture higher margins. UV lasers such as our Paladin product are well suited to support this feature size in a high throughput environment.

The next generation of smartphones will utilize more system-in-a-package or SiP devices and lasers are one of the core technologies to produce SiPs. Manufacturers are evaluating a number of laser-based processes for SiP production, and we expect these decisions to be finalized in 6 to 9 months.

Demand in materials process and applications remain robust. We did very well on high-power fiber lasers with high double-digit quarter-on-quarter growth in bookings and shipments. The largest applications were battery welding and metal cutting. System configurations range from 1 to 8 kilowatts, and we are shipping everything we can manufacture and are working diligently to expand capacity.

We launched our new 3-kilowatt module at Lasers Munich. The response from customers was quite good, particularly from China and Europe. We will begin shipments of the 3-kilowatt module late this quarter or early next quarter.

Ultrafast lasers are making inroads in materials processing since they're very effective at cutting mixed material and/or multilayer stacks without damage or delamination. Applications will grow as power increases and the wavelength coverage broadens.

Marking, engraving and component orders were up sharply. And marking and engraving customers in Europe and Asia saw an upswing in their businesses. This translated into orders for several key products, including our C and J-series CO2 lasers. And we are key component supplier of fibers and diodes for manufacturers of low to mid-power fiber lasers.

The laser tools business again performed well. Orders from Tier 1 automotive component manufacturers for marking and manufacturing workstations were solid and complemented laser bookings for powertrain welding and surface treatment. Marking tools and rails, orders for consumer electronics were good as were bookings for medical device manufacturing workstations.

Our instrumentation and components businesses continue to march up and to the right. The bioinstrumentation market is experiencing good demand with more subsystem business that increases technology and dollar content for us. The medical OEM market is increasing on consumables for lithotripsy and lasers for disease management of the eye.

The defense and aerospace market has become a larger part of this vertical following the Rofin acquisition and is growing at a good rate. The key applications are ground and space-based telescopes, laser gyroscopes and directed energy applications.

There have been no significant changes in applications or funding trends within the scientific research market, although the competitive landscape is evolving. It appears multiple competitors are retrenching or exiting this space, which may be due in part to the success of our Astrella platform.

The multiphoton imaging and optogenetics markets continue to adopt new reagents that require a range of powers and wavelengths from existing and emerging light sources, which is driving investment amongst a group of laser manufacturers. We believe our current and future products will enable us to remain a leader in this space.

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

Thanks, John. Today, I'll first summarize fiscal third quarter 2017 financial results then move to the outlook for fiscal Q4. I'll discuss primarily non-GAAP financial results and ask you to 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 to stock-based compensation expense, amortization of intangible assets, purchase accounting, acquisition-related costs, restructuring costs and their 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 2017 financial results for the company's key operating metrics were: total revenue of $464.1 million, non-GAAP gross margin of 48.5%, non-GAAP operating margin of 27.9%, adjusted EBITDA of 30.6% and non-GAAP EPS of $3.36.

Net sales for fiscal third quarter were $464.1 million, an increase of $41 million or approximately 10% sequentially. Sales came in above the midpoint of the previously guided range, with sales into the microelectronics and materials processing markets providing the largest contributions.

Our revenue mix by market for Q3 was microelectronics at 52.1%; materials processing, 30.7%; OEM components and instrumentation, 10.8%; and scientific and government at 6.4%. Geographically, Asia accounted for 61% of revenues in the fiscal third quarter; the U.S., 17%; Europe, 18%; and rest of the world, 4%. Asia includes 2 territories with revenues greater than 10% of total sales.

Other product and service revenues for the fiscal third quarter 2017 were $121 million or approximately 26% of sales. Other product revenue consists of spare parts, related accessories and other consumable products and was 23% of sales. Revenue from services and service agreements was approximately 3% of sales.

We had one customer in South Korea, an integrator 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 costs, intangibles amortization, purchase accounting and restructuring, was $224.9 million. At 48.5% of sales for the quarter, non-GAAP gross margin came in at the midpoint of the guided range.

Non-GAAP operating margin was 27.9% for fiscal third quarter and was slightly below the midpoint of the guided range as a result of expenses related to the repricing of our debt, FX or currency changes and a myriad of smaller items. Adjusted EBITDA was 30.6% in fiscal Q3.

Turning to the balance sheet. Nonrestricted cash, cash equivalents and short-term investments were approximately $472 million at the end of fiscal Q3, an increase of approximately $39 million compared to the end of last quarter, primarily as a result of higher net income, FX, along with a number of smaller items.

During the quarter, we made a voluntary EUR 45 million payment against our outstanding debt consistent with our priority of using excess cash flow to delever the balance sheet. International cash was $338 million or approximately 71% of the total cash and short-term investment balance. Approximately 36% of the total cash and short-term investments is denominated in dollars.

Accounts receivable DSO was 54 days, no change from the prior quarter. The net inventory balance at the end of the third quarter was approximately $403 million, an increase of $15 million primarily due to FX. And capital spending for the quarter was $15.8 million or 3.4% of sales. We expect this current spending rate to increase in fiscal Q4.

Now I'll turn to our outlook for our fourth fiscal quarter of 2017. Revenue for fiscal Q4 is expected to be in a range of $465 million to $485 million. We expect fiscal Q4 non-GAAP gross margin to be in a range of 47% to 50%. Non-GAAP gross margin excludes intangibles amortization of approximately $11.8 million and stock compensation cost estimated at 900k.

Non-GAAP operating margin for fiscal Q4 is expected to be in the range of 26% to 29%. This excludes intangibles amortization estimated at a total of $14.6 million and stock compensation expense of a total of approximately $7.1 million. Other income and expense is estimated to be an expense in the range of $6 million to $7 million, a reduction from prior quarters, recognizing the benefit from our debt repricing. We do not include transaction gains and losses related to future changes in foreign exchange rates in our outlook.

We expect our non-GAAP tax rate for fiscal Q4 to be in the range of 31% to 32%. And finally, we're assuming weighted average outstanding shares of 24.9 million for the fourth quarter.

With regard to our participation at upcoming conferences, we'll be presenting at Needham's Industrial Technology Day on August 3 in New York and the Jefferies Conference in Chicago on August 30.

I'll 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.

So Kevin, I wanted to get a little bit more detail on the expense side. You talked about debt, FX and some other expenses that led to an op margin being a little bit below the midpoint. I think relative to my model, that pretty much encapsulates the entire miss. Is there any way you quantify those more explicitly for us?

Yes. I don't want to drill down too far, Patrick. But we're talking about a growth quarter-on-quarter of about $1.9 million, and half of that was related to the debt repricing, about 1/4 of that was FX and then a myriad of smaller items.

Okay, great. That's helpful. And then John, as always, I got to dig into the FPD side. I guess, in your prepared remarks, you talked about several new fabs that you see that have been announced during the late stages of planning. I'm curious if all of these fabs are targeted towards handsets. Or are you starting to see any shift towards fabs that maybe targeted tablets or other devices?

Patrick, we -- the fabs target a panel size. What they cut it up into at the end of the day is sort of their decision, not ours. It's irrelevant to us. But we do hear that there are an increasing number of devices that are being planned for OLEDs beyond handsets, whether they're next-generation tablets or laptops in addition to the ones that have already been announced that we've talked about, I think, on multiple occasions.

Great, okay. And then on the capacity extension that you announced. It's supposed to be completed in FY '18. Could you put a finer point on (inaudible) why '18 that should be completed? And is it fair to say that, that additional capacity is included when you're speaking to be in -- fully booked for FPD through FY '18?

So the capacity expansion that we've talked about, and I think when I first mentioned it last quarter, was more to make us be able to meet all the delivery requirements for '19. Some of the service capacity that we're adding, particularly in Osan, will have an impact in '18. But the systems capacity is primarily targeted at '19 to make us -- to put us in line with our delivery obligations.

And Patrick, in terms of timing of that investment and when it will be completed, as you know, we're going through our planning process for 2018. So once that's completed, then I can put some finer points on dollar amounts and timing.

Great. And then just one more, if I may, on the services side. If we look at systems that are capable of flexible OLED production, can you help us understand a percentage of the installed base that is off warranty currently and contributing to surfaces?

I don't know that I have a good number because it's a pretty dynamic situation. But it would be shipments that are 6 months and older that are pretty much in the service pool at this point.

Your next question comes from the line of Jim Ricchiuti.

Just question with respect to the display market. I know you can't comment on specific customer plans. But I'm wondering, to what extent some of the fab investments that you have been anticipating -- has there been any change over the past couple of months? And I'm wondering if you can give us some sense of the magnitude of these changes from discussions you've had with some of these customers.

I don't know that the magnitude has changed over the past several months because we've always had pretty good insight as to what the customers were planning. We've always tried to be very careful about talking about things ahead of the customer. At this point, one major fab has pretty much been confirmed in Korea. There's another one that is being discussed, widely discussed, and one in China that's being widely discussed. There's virtually no backlog for any of those in the current backlog.

Okay, that's helpful. John, I don't know if this is, if you have -- if you can share any observations with us, maybe with respect to the variability of the service revenues as the new tools go into service at some of the newer entrants in the OLED market. Or is there not yet enough data for you to really talk about that?

There's really not enough data. We're not anticipating any major differences in the operating environments between the different market participants. I think the biggest difference -- the biggest delta amongst them, at least initially, will be yields, and that will obviously have an impact on how much product they'll turn out and what kind of market share they have. But the tools should run in a very similar fashion.

Okay. And last question for me on the materials processing side of the business. The demand you're seeing, sounds like it's fairly strong. Can you maybe drill down a little bit and talk about it, either with respect to market applications verticals or just some of the geographies. Where it's been particularly strong? And just in general, how satisfied are you with the progress of the integration?

Okay. So let me talk about the fiber laser applications and markets first, geographic markets. And then I don't know if your question on integration is specific to fiber lasers or if it's a general question. So maybe you can specify.

It's -- well, 2 parts. General, with respect to the overall integration of the Rofin business, but then you've got several fairly important initiatives underway with respect to fiber that I just wanted to get a sense as to where you are with that.

Sure. And Jim, if I don't answer -- if I forget one along the way, please remind me at the end. So with respect to what we're seeing in the marketplace, there -- as I said last quarter, the customer engagement for high-power fiber lasers has been very, very good. We had some -- an initial hiccup in reliability shortly after the transaction closed. The team did great job of resolving that quickly and convincing customers that it was resolved quickly. The traction that we're seeing predominantly is in metal cutting and in battery welding, which are obviously two very important markets. Not surprisingly, a lot of that engagement is taking place in China followed by Europe. With respect to how we're doing on the initiatives, we've put in place what we need to do to grow this business. We've put the plans in place, and we're going to be rolling that out, as I mentioned, over the next year or so in terms of being able to meet demand. And right now, we are capacity constrained in high-power fiber lasers. We could -- if we could build more, we could ship everything we could build. The activity on the semiconductor side is progressing. We're making investments there to expand capacity. We have to expand test and measurement. I think the fiber component side we're probably in the best overall shape in terms of being to ramp capacity. So all of that is going along. Of course, we like it to go 10x faster, but we're dealing with the realities of trying to grow this business in an awfully big hurry. With regard to the overall integration, we continue to herald milestones. It's not always pretty, as you can imagine, putting two organizations together. But I really have to complement everyone for doing just a terrific job of making sure we take care of customers first and foremost. There continue to be very few surprises, stress in different parts of the organization. But I don't think there's anything unusual in any of that.

And then one last question, just with respect to the capacity constraints in fiber. So what is your sense as it relates to what's happening in the market? You had a competitor out today with very strong numbers. Is this just a case of an accelerated shift toward fiber? Or are there some other dynamics in the market? Are you perhaps taking some share from some of the weaker players?

So look, our numbers are still a small part of a very large market. I don't know that I could use ours as a litmus test for very much of anything. We're very happy with the growth that we're seeing, we're very happy with the customer engagement. Those are sort of critical to drive forward. I'm not at all surprised by the activity in battery welding. Obviously, there's a tremendous amount of emphasis these days on electrified and autonomous vehicles, which is driving demand across many of our submarket verticals. With respect to metal cutting, it has been and continues to be a robust environment. I think less and less of that is about CO2 displacement because if I look at our CO2 business and now looking at sort of a global CO2 business that ranges from low power to high power, that's a stable to growing business. It's not growing at a high rate, but it's holding its own. So it would suggest that the displacement of CO2 by fiber at least in new installations is -- has abated, if not completely abated, but largely abated. I don't know that I'm ready to call a victory on market share gains. I think we're taking pieces of the market as we can as capacity allows us to. The key message, again, for me in looking at this business is performance seems to be fine. The reliability seems to be fine. Products are sticking with customers. That's a great place for us to be at this point in the development.

(Operator Instructions) Your next question comes from the line of Larry Solow.

Most of my questions have been answered. Just a quick one, John. Since you have -- you're taking orders today that won't be delivered until '19, is there a sense that -- because by then, we'll actually be entering the -- even the next-generation cellphones. Is there a sense that some of the drivers of OLED expansion, like higher PPI and stuff like that, are starting to be incorporated into these orders that won't be delivered for a couple of years? Or is that sort of hard to read?

I think what we're seeing right now, Larry, is just continued build-out of the handset market in general terms. I don't think ppi has played a major role in it. That's a spec that customers want in their displays and I mean, the handset manufacturers want in their displays, and it's probably consistent with capabilities that are in the market today. As that ppi grows, it will put pressure on the systems to be able to keep up with it.

Right. And then what's the thought as that ppi or other things grow? I mean, would you -- if the demand goes up threefold, would they -- would these [car] machines become obsolete? Or would they be a -- we just have to add to them?

It is difficult to say because a lot will depend on the process that is used to produce those higher ppi displays. We have seen in earlier generation tools that they can't keep up with the higher ppi demand. That may be true as the ppi goes past 600 to 800 to 1,000, we may see the same thing. It's a little bit early to be calling that particular outcome.

Okay. Then how about on your side? Is there -- just on your equipment, is there a gen 8 likely in the -- material sales in the future or near future or...

So I think I've commented on this in the past that we have told customers if they want a gen 8 tool that we know how to get there, we've mapped it out, we can do it. But we would want to engage them in a thorough discussion around what they're trying to achieve and what the most efficient way to do that is. And it may not be a gen 8 tool, it may be using a gen 5 or a gen 6 tool and a double pass. And quite frankly, a lot of is going to depend on other equipment suppliers that would have to get to gen 8 before we do. So I think the short answer is we wouldn't be the long pole in the tent there because we want to be sure that it's going to meet not only the technical requirements but the financial requirements.

Your next question comes from the line of Mehdi Hosseini.

A couple of follow-ups. On the Rofin side, can you give me an update on what's going on with the insourcing of parts and components that was -- that is going to help you with a bit of margin profile? And also, if I'm reading the P&L right, your SG&A went up by $9 million on a sequential basis. Is that GAAP or non-GAAP and what is driving that? And I have one follow-up on the OLED side.

It's Kevin. So specific to the $9 million SG&A, that's -- you're reading GAAP. So that would include your intangibles, it would include some PPA or inventories step for PPA, stock comp and the like. If you net that out to non-GAAP, sequentially, you'll see round numbers of $2 million increase sequentially.

Okay. And on Rofin, on insourcing?

So the insourcing work is continuing. As I mentioned, we were doing the first roads of material and that work is progressing. It's not a quarter-to-quarter update, if you will. We're doing what we need to do to make that transition. And then you said you had a follow-up question on OLED?

Yes. On OLED side, it seems like you have pretty good visibility into perspective shipment in calendar year '19. And I'm just curious if you can qualitatively help us understand where these incoming orders -- is that China and Korea? Or is that the mix of China and Korea that is -- that will drive the incremental order that will give you this kind of visibility?

The comment that I made in response to an earlier question is that there are multiple fabs that have been announced or are anticipated, and those currently are planned in Korea and China.

Okay. But when you say China, is that -- sorry, go ahead.

But again, the backlog through '18 and starting into '19 has virtually no content from those fabs in it.

Got it, got it. And then when you refer to China, is that some of the fabs that are operated by non-Chinese or is indigenous Chinese fabs?

We can't comment on that.

Your last question comes from the line of Joe Wittine.

In microelectronics, could you talk through the quarterly trajectory of the segment at all going forward, at least qualitatively? I asked because it sounds like the capacity expansion, at least the big slug, is coming in fiscal '19. So is it most accurate to assume for '18 in the segment, trends that are relatively steady state quarter-by-quarter before a directionally increase in '19?

So Joe, it's Kevin here. We don't give specific guidance long term. We just go quarter-by-quarter first off. But just anecdotally, if we look at microelectronics, we will: one, we said a quarter ago that we have backlog through fiscal '18. The capacity we're putting in place really is to deliver and meet shipments for '19 and beyond. So in that regard, you'll see a movement, an increase in microelectronics going forward. Whether that's a quarterly stair step or a linear growth, I just -- I haven't guided that. I'm not going to do it here, but it should be increasing going forward.

And I apologize if I missed this, but did you give an update on where we are in the Rofin synergies to date?

We haven't in this call yet. In terms of the announced $30 million of synergies on the OpEx side, we had -- a couple of quarters ago, we said we probably will achieve about 10% of that in fiscal '17, a little more than half of that in fiscal '18. And at the end of the 2-year period, meaning at the exit rate, we would achieve $30 million annual run rate, if you will, on that exit. That's the primarily the OpEx synergies. Last quarter, we had talked about the insourcing of the third party semiconductor chips that legacy Rofin had acquired or purchased externally. It is our plan, and it's well under way to insource that. That represented an opportunity of close to $10 million as well. So that's the only synergy update we have at this point.

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.

All right. Thanks, everyone, for joining us, and we look forward to speaking to you again in 3 months.

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