Coherent Corp (COHR) 2018 Q2 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the Coherent's Second Quarter Fiscal Year 2018 Financial Results Conference Call hosted by Coherent, Inc. (Operator Instructions) As a reminder, the 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, Britney, and good afternoon, everyone. Welcome to today's conference call to discuss Coherent's results from its second quarter fiscal 2018. On the call with me are 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 benefit, if any, of such trends. These forward-looking statements may contain such words as outlook, future, 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, including the risks identified in today's financial press release.

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

Thanks, Bret. I'd like to welcome everyone to our second fiscal quarter conference call. I'm pleased to report that customer engagement remains high, demand was strong in a number of key areas and the display market has lots of runway, so let's start there.

After recycled reports on microLED displays were recently published, we fielded a number of inquiries about how this technology potentially affects the OLED market and Coherent. I'd like to start by repeating some comments I made several quarters ago. The appeal of microLEDs is that they produce higher brightness and consume less power compared to other emissive devices such as LCDs, LEDs and OLEDs.

The challenges in turning microLEDs into manufacturable displays include high process intensity and yield. There are 2 methods to make a full-color microLED display today. The first is to grow the emitters on wafers where any wafer consists of a single color in the red, green or blue. Emitters from different colors are then forward-transferred onto a display substrate. This involves separating the emitter from the growth substrate and using pick-and-place to relocate it to the display substrate. The total number of pixels drives the number of pick-and-place operations. In the case of a smartphone display, this is millions of pick-and-place transfers. Since some number of transfers fail, repairs are necessary that further increases process intensity and costs.

It's important to point out a couple of things. To separate the emitters from the growth substrate, you have to break a very strong chemical bond that requires either high energy or high intensity, which translates into excimer or ultrashort lasers, respectively. Coherent excimer lasers are being used to develop the forward transfer process. If microLEDs are ultimately successful and this technique was adopted, it is a net benefit to Coherent as we would now have content in the front plane of the display.

The second method to make a full-color microLED display is to use a single color, likely blue, to excite a quantum dot overlay to produce red, green and blue pixels. This would allow the emitters to be removed in bulk -- think of it as removing sort of a one square inch patch through laser liftoff -- and transferred in bulk to the display substrate. The steps are greatly reduced from the pick-and-place approach, but the pixel density or PPI is determined by the pitch or emitter separation in the original growth substrate. In addition to PPI limitation, quantum dots are not 100% efficient so you sacrifice overall power. This may not be an issue for wall-plug power displays, but it does offset the inherent power efficiency of microLEDs in battery-powered devices.

My comments up to this point have focused on the front plane of FPDs. The backplane is equally important to the conversation. Similar to the power hit from quantum dots, it would be counterproductive to use a microLED display with a less electrically efficient backplane in a battery-powered device. An LTPS backplane seems the likely choice.

To recap, if microLEDs are commercialized using current methods under development, it is a net benefit to Coherent. We see LTPS being very compatible for all mobile displays. Putting it another way, we don't see microLEDs as a threat to our market position, rather we see them as a potential market expansion into new display modalities for very large or very small screens, such as video walls or AR devices, respectively. And in our view, microLED is a technology that still needs to mature.

This means that OLEDs remain the display of choice for mobile displays, although capacity constraints are limiting their market share. Samsung is the only manufacturer producing OLEDs with acceptable performance and quality. SDC claims that they can build approximately 500 million displays with their current capacity, which is largely consumed by internal demand for Galaxy phones and their largest external customer. An increase in market -- OLED market penetration into the remaining 1 billion handsets will require either Samsung to invest in additional capacity or one or more of their competitors to demonstrate a manufacturable design of acceptable quality. This is an important distinction.

Much of the recent cycle is focused on a single handset, which uses one of the highest performing displays in production. It is not necessary to replicate the specifications of this display to address the other 2/3 of the market. As an example, BOE has been aggressively investing in R&D. They have shown a number of designs, including foldable displays, that are targeting the total available market. They have backed up their R&D commitment with capacity investments in 2 recently announced Gen 6 OLED fabs. These will be the first Gen 6 fabs outside of South Korea.

The takeaway is simple: It is reasonable to discuss the timing of certain investments such as Samsung's A5 fab, but we believe the future of OLEDs is very bright.

Service demand for FPD has been in line with our recent commentary. Reported underutilization at Samsung has been offset by an increase in the overall installed base. Second fiscal quarter FPD service revenue was similar to the prior quarter. We expect FPD service demand to accelerate between now and the end of the calendar year to support the introduction of new smartphone models.

Semiconductor CapEx is going strong for systems and service and resulted in high, sequential double-digit bookings growth in our second fiscal quarter. The order strength comes from high utilization rates that drive service revenues and new capacity investment for memory and logic devices in China. A cornerstone element of Made in China 2025 is to reduce the country's dependence on IC imports, which account for 80% to 90% of IC usage. China created a $150 billion investment fund to support their semiconductor evolution. The Chinese sense of urgency has likely increased following recent enforcement actions against ZTE. It is anticipated that Chinese investments will be sustained at or near the current level for calendar year 2019. Growth in other areas, including self-driving vehicles, artificial intelligence and IoT devices is expected to accelerate over the next few years, which will require new capacity and/or recommissioning of older-node tools. As the leading supplier of inspection and metrology lasers, Coherent will benefit from each of these.

The advanced packaging market has been running at 5-year highs over the last few quarters due to a growth in advanced packaging designs among top-tier smartphone manufacturers and HDI board usage among second-tier manufacturers. These trends are expected to continue as smartphone manufacturers jockey for market share.

Materials processing orders were very strong across all submarkets. Fiber laser orders were up significantly for cutting and welding applications. Chinese customers accounted for the growth in cutting for powers up to 10 kilowatts. Welding orders were led by Tier 1 automotive component suppliers and EV battery manufacturers. Fiber component orders were also up from demand in China, where we are one of the principal suppliers to the Chinese domestic fiber laser companies. The market for lasers used in additive manufacturing of plastics and polymer remains robust. And bookings for medical device manufacturing workstations and marking systems increased on demand for cardiovascular therapy and dental appliances.

There has been tremendous growth in metal additive manufacturing. Industry data shows that metal AM machine unit sales grew 80% in 2017 compared to 2016. Despite these impressive numbers, the market is constrained, in part, by process development and process knowledge. Many of the existing tool providers in metal AM are providing process development services and encoding the parameters into their tools. While this may ensure reproducibility and quality, it creates a logjam for evolution -- or for innovation, rather.

One of the companies seeking to disrupt this approach is OR Laser, which has been developing its first metal AM tool. They wanted users to have access to process parameters to encourage collaboration, expand the knowledge base and shorten the development to manufacturing cycle. The company has also developed a complete AM software suite so no third-party software is needed to go from a CAD model to printed part. We believe this combination will be critical in opening up the metal AM market. We also see opportunities for process improvement in the types of lasers being applied in metal AM. Given these synergies, we agreed to acquire OR Laser. This transaction was closed in early March 2018.

Our first tool, the Laser Creator, is a compact workstation that combines the printer, powder bed, process control and other system hardware into a 19-inch cabinet standing approximately 6 feet tall. The compact nature and entry-level price point make it ideally suited to build parts for the dental, medical and jewelry markets as well as for process and product development. Future tools will address automotive and aerospace applications.

We have very good bookings for OEM instrumentation and components. Bioinstrumentation orders were up significantly on the timing of large annual and semiannual orders. Medical OEM orders were also up on demand from ophthalmic, aesthetic and surgical consumable markets. We are seeing more and more opportunities in the aerospace and defense market for everything from large format imaging optics to directed energy applications due to our diverse capabilities and our U.S. manufacturing base.

I hope you've gleaned from my comments the number of opportunities that lie ahead of us. We have always been well positioned in microelectronics and instrumentation, but through R&D programs and acquisitions, we have aligned ourselves with some very exciting opportunities in the material processing market.

I'll now turn the call over to Kevin Palatnik, our Chief Financial Officer.

Thanks, John. Today, I'll first summarize fiscal second quarter 2018 financial results, then move to the outlook for fiscal Q3. I'll 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 to stock-based compensation expense, amortization of intangible assets, restructuring costs, purchase accounting adjustments, impairment charges and recoveries 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 second quarter 2018 financial results for the company's key operating metrics were: Total revenue of $481.1 million, non-GAAP gross margin of 47.7%, non-GAAP operating margin of 26.2%, adjusted EBITDA of 29% and non-GAAP EPS of $3.37.

Net sales for fiscal second quarter were $481.1 million, representing growth of 14% year-over-year. Sales came in virtually at the midpoint of our previously guided range, with sales in the microelectronics and materials processing end markets increasing 23.9% and 6.5%, respectively, year-over-year.

Our revenue mix by market for Q2 was microelectronics, approximately 54%; materials processing, 28%; OEM components and instrumentation, 11%; and scientific and government, 7%.

Geographically, Asia accounted for approximately 62% of revenues in fiscal second quarter, the U.S., 16%; Europe, 19%; and rest of the world, 3%. Asia includes 2 territories with revenues greater than 10% of total sales.

Other product and service revenues for the fiscal second quarter were $132 million or approximately 27% of sales, representing an increase of approximately 21% year-over-year. Other product revenue consists of spare parts, related accessories and other consumable products and was approximately 24% of sales. Revenue from service and service agreements was approximately 3% of sales.

We had one customer in South Korea related to large flat panel display manufacturing that contributed more than 10% of our fiscal second quarter revenues.

Fiscal second quarter non-GAAP gross profit, excluding stock-based compensation costs, intangibles amortization, purchase accounting adjustments and restructuring, was $229.5 million. At 47.7% of sales for the quarter, non-GAAP gross margin came in slightly higher than the midpoint of the previously guided range.

Non-GAAP operating margin was 26.2% for the fiscal second quarter and was slightly below the midpoint of the guided range as a result of the acquisition made in the quarter and various accelerated R&D investments. Adjusted EBITDA was 29% in fiscal Q2.

Turning to the balance sheet. Nonrestricted cash, cash equivalents and short-term investments were approximately $346 million at the end of fiscal Q2, a decrease of approximately $77 million compared to the end of last quarter.

During the quarter, while cash from operations generated $68 million, as John mentioned, we acquired OR Laser and consistent with our priority of using excess cash flow to delever the balance sheet, we made a voluntary EUR 60 million payment against our outstanding debt. The total of the voluntary payments made to date is EUR 285 million against our EUR 670 million loan. The current amount of outstanding term loan debt in USD is $462 million.

International cash was $185 million or approximately 53% of the total cash and short-term investment balance. Approximately 54% of the total cash and short-term investments is denominated in dollars.

Accounts receivable DSO was 59 days compared to 58 days in the prior quarter. The net inventory balance at the end of the second quarter was approximately $493 million, an increase of $60 million, of which, FX was approximately $13 million and support for excimer and high-power fiber laser businesses drove the rest. Capital spending for the quarter was approximately $21 million or 4.4% of sales.

Now I'll turn to our outlook for our fiscal third quarter of 2018. Revenue for fiscal Q3 is expected to be in the range of $480 million to $500 million. We expect fiscal Q3 non-GAAP gross margin to be in the range of 46% to 49%. Non-GAAP gross margin excludes intangibles amortization of approximately $13.1 million, stock compensation cost estimated at $1 million and purchase accounting adjustments of approximately 400k.

Non-GAAP operating margin for fiscal Q3 is expected to be in the range of 25% to 28%. This excludes intangibles amortization estimated at a total of $16 million and stock compensation expense of a total of approximately $8.2 million. Other income and expense is estimated to be an expense in the range of $7.5 million to $8.5 million. We do not include transaction gains and losses related to future changes in foreign exchange rates in our OI&E outlook.

We expect our fiscal Q3 non-GAAP tax rate to be in the range of 28% to 29%. And finally, we are assuming weighted average outstanding shares of approximately 25.1 million for the third quarter.

With regard to our participation at upcoming conferences, we'll be presenting at the Stifel Cross Sector Conference on June 11 in Boston and the CJS Summer Conference on July 10 in White Plains, New York.

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

(Operator Instructions) And your first question comes from the line of Mehdi Hosseini.

Kevin, does the guide -- June quarter revenue guide, does it include the $10 million that was pushed out and you highlighted last quarter? And John, can you help us understand the dynamics on the OLED side? You sounded very constructive in the prepared remarks, but it did exclude OLED. And I just want to see if that's a reflection of what's out there. And in that context, what is the update with your capacity expansion?

Mehdi, I'll take the first one, obviously. In terms of the supplier concern that we had last quarter and described a one system push out into the June quarter, that did occur. And we resolved the concerns with the supplier, and it's full speed ahead from there.

As far as the OLED market, let me start with your last question first which is capacity. We have been working on expanding the service capacity because there are more and more systems that are going to be requiring service. And we simply couldn't support them with the footprint that we had so that is underway. We have also added some capacity in our facility in Richmond. And that's mostly tools by the way, and that's to accommodate a continuing shift to larger format tools. We shifted from Gen 4 to Gen 5 a few years ago. We're now seeing a shift from Gen 5 to Gen 6. And that means that our internal capacity needs to grow because we are independent on the Gen 6 optics, at least the terminal set of -- the terminal component of the Gen 6 optics. With respect to the overall market, let me talk about the utilization side first because I alluded to it in my comments. Samsung, I think, is well reported. They talked about it themselves in their recent earnings call that they did have a slowdown or experienced a slowdown in demand, very consistent with what everybody's been talking about in the market. They are projecting a pickup in production and therefore, utilization as we go into the second half of the year. And this is to support internal demand as well as shipments to their largest customer. So we expect service to be growing as we move into the last fiscal quarter of 2018 and the first fiscal quarter of 2019, which would take us through the end of the year. That's very similar to what we've seen in past cycles when new versions of phones have been introduced. Typically, for not only year-end shopping, but the Chinese New Year spurt at the beginning of calendar '19. With respect to overall demand in the market, we're still, like everyone else, we're looking for that catalyst that comes with new fab announcements. As some of these supply issues between Samsung and their customer or customers are resolved, we do think we get closer and closer to a decision on A5. BOE has announced, as I mentioned, a couple of new Gen 6 fabs, which we believe are going to lead to orders for tools. Can't tell you the explicit timing of that, but we know that it's on the horizon. So things are playing out on the service side pretty much the way that we had talked about previously. And on the capacity side, as it's always been, it's dependent on new fab announcements and new fab construction.

And your next question comes from the line of Jim Ricchiuti.

John, thanks for the microLED education. Are you working with any display company or consumer electronics company on microLED technology?

As I mentioned in my prepared remarks, Jim, we have shipped tools for the development of the microLED process. I can't go into much more than that. I can only tell you that we've shipped tools. And we feel like we're on the leading edge of that process development, but it's still a long way from being a commercialized technology.

What I was trying to get to also is maybe when these -- when you may have started working. Can you say, are these tools that were placed some time ago? Because this has been kicking around for a while now.

All I can say, Jim, is that these tools were delivered pre-fiscal 2018. I can't give you any more granularity than that.

Okay. Just turning to materials processing, looks like -- is it fair to say you're seeing demand across geographies? I mean, we seem to be hearing that from others as well, China being the lead market. Is that true also of CO2 as well as fiber?

So the CO2 business for us, we really bifurcate it between high power and low power. I would say for low-power applications, it's completely consistent with what you're hearing from others in the marketplace -- that China is leading the charge there. The one caveat is that we are selling -- we do sell CO2 lasers into some microelectronics applications which are not the sole domain of China, but they're largely Asia. With respect to high-power CO2, there's been a, quite frankly, a very attractive and surprising renaissance in demand for high-power CO2 lasers for nonmetal applications and a lot of that is coming out of Europe and North America.

Okay. And with respect to fiber, can you say what the power rating that you're currently selling at? I mean, I know you sell a range, but what's the sweet spot for you, John? Where do you see your business over the next quarter or so?

If I look at unit concentration, Jim, my guess is, it's in the 4- to 6-kilowatt range, but that has been shifting up. And as I mentioned, we've taken some orders for up to 10 kilowatts of power. And as you've seen in the fiber laser market over the last 5 or 6 or 7 years, the power is constantly shifting up as customers figure out how to use more and more power either in a single tool or splitting it up amongst multiple tools. So again, I think our experience is probably consistent with the market in terms of where the power demand is.

And last question, I'll jump back in the queue. On OR, I mean, it seems like a very small company. And what I'm wondering is, is this potentially the first of other investments? Do you believe you can scale this particular company, this operation? Or would you be looking also at pursuing other M&A opportunities in this area?

So the focus on OR was to enter a part of the market that we think is attractive yet underserved. And that's for a compact tool that can target not only opportunities in things like medical and dental and jewelry and do it very effectively, but can also be used as a process development tool for larger-scale applications. And as I mentioned, the future investments that we're making on an organic basis, we'll be looking at automotive and aerospace applications. Having said that, if the right opportunities come along within the additive manufacturing space, and we can feel we can execute on them, then we will.

And your next question comes from the line of Mark Miller.

I know several smartphone models are supposed to be introduced in the second half. Are most of these -- or all these going to be OLED screens? Do you know? And do you see any possibility or any impact from Full Active LCD displays in terms of opportunities for these new products?

So we've heard the same rumors probably that everyone else has heard. That from one of the manufacturers there are 3 handsets that are going to be introduced in September. Two of those are purportedly OLED screens. One of them will be an LCD screen, although the exact composition of that LCD screen, we can't tell you if it's a Full Active or not. We know that a lot of suppliers have been trying to tout the benefits of Full Active versus OLED, in particular, rigid OLED, as a means of counteracting the rush to OLEDs. I think that discussion is, in part, due to availability, not just performance or price. There's a -- again, as I said in my prepared remarks, you have one manufacturer today that can build at performance and quality and, quite frankly, quantity. And until either that supplier adds capacity or other suppliers demonstrate that they can also do it, there's going to be a split in the market between OLED and other display modalities or display technologies, rather.

What's the competitive situation in the fiber laser market? Things starting to heat up in certain areas? Have you seen any changes, pricing different than it was?

There is -- I'd say that there's a company that dominates in the low-power space and there's a company that dominates in the high-power space. And that dynamic really hasn't changed.

Your next question comes from the line of Joseph Wolf.

I guess as a follow-up on the one -- only one customer being able to produce in volume at the right -- I guess at the right specification. Can you -- do you have any feel for what is taking so long for the other customers? Is it other equipment? Is there anything that -- is there a fix that anybody can figure out? Is it just a hard technology to do? And is there anything that you guys are working on that will kind of jump-start that? And then if that's true, is there a timing where there's a lot of equipment out there that is just not -- that's not being utilized properly right now so that's why there's a volume issue?

Let's see. And Joe, you have to keep me honest here that I answer all parts of that question. So with respect to why haven't others done it yet, it takes time and experience and knowledge. People tend to forget that Samsung had been working on this technology for a decade before it really took off. And others are trying to compress that learning into a much shorter time frame. And if it were easy, they would have all done it already. So there is knowledge that they have to gain to be able to successfully do this. I think for all vendors, not just Coherent, who supply equipment into the space and who are very active in supporting customers, both established ones and emerging ones, you have to be really, really careful about cross-contamination of intellectual property and process knowledge. So the guiding principle that we've used with customers is, we can help them with work that they define, we can't tell them what to do because we cannot risk compromising somebody's IP in the process. And I think there was one other part of the question, if you'd remind me.

I guess, you have an installed base which is producing, and you have sales to other geographies, where presumably they're trying to use their installed base to produce. Does that slow down growth in installed base? Meaning, if I think about the most negative commentary I can make on OLED is -- or the 2 parts of it would be, it's a technology that we don't need and that goes back to the active LCDs you were talking about or there's a lot of equipment out there already, it just has to be turned on properly.

Besides Samsung, no one else has a large amount of capacity yet. A lot of the stuff, for example, that's going into China outside of BOE is mostly in the process development mode. They've been, I'd say, judicious in their investments. BOE has obviously been more aggressive given that they have a very large base of display business already that they want to add to. And they have talked about some gains that they've made in yield, et cetera, recently. We can't validate those numbers, but the public statements that they're making certainly would suggest that they're moving towards a manufacturable process.

All right. That's helpful. And if I can just jump over to the other side of the business. Just an update, if I missed it, on the trajectory of potential profitability improvements for the calendar year in the material processing side.

Yes, Joe. It's Kevin. In terms of profitability, we're going to be consistent with what we've said in the past. The trajectory going forward, there are certain cost initiatives certainly on the fiber laser side affecting materials processing as well as just the general weighting in of the excimer business that will move the trajectory positive from a margin perspective. The guide quarter-on-quarter adjusted for currency last quarter is relatively flat. But as John mentioned in his prepared remarks, as services tends to accelerate in the second half of the year, as manufacturers prepare for the Christmas season and one manufacturer of smartphones, that should help and improve trajectory going forward on margins.

And your next question comes from the line of Patrick Ho.

First, John, maybe in terms of the fiber laser business, you noted the strong sequential growth in that segment. And in the past, you've mentioned battery, welding and energy storage systems as being some of the market drivers there. Have you seen a pickup in any other applications or markets or are those continuing to be the main drivers for the growth in that segment?

So the 2 things that I referred to in my commentary, Patrick, were for cutting and welding applications. The cutting were predominantly nonautomotive applications and the welding was a combination of -- or predominantly automotive, whether it was for batteries or electric drive componentry and then nonautomotive welding applications.

Great. That's helpful. And maybe as a follow-up question on the semiconductor and kind of PCB side of things. You mentioned in the past PCB via drilling as an emerging market opportunity. And it had rapid growth in 2017. Do you believe that positive momentum continues in 2018? And would this be a catalyst of growth for the company, especially for your ultrashort pulse lasers?

So advanced packaging consists of a lot of different pieces. The traditional advanced packaging market has been via drilling, and this is mostly for high density interconnects and then direct-write applications in PCBs. The ultrafast technologies tend to be associated with some microvia applications, but then there are other types of advanced processes, including flex devices, et cetera, that rely on ultrashort lasers. The positive trends that we've seen in the microvia market, I think I mentioned that it's been operating at sort of 5-year highs for a number of quarters now is an encouraging sign. It's coming -- that recovery looks like it's coming predominantly from the adoption of legacy architectures like HDI boards into second-tier handset manufacturers. It doesn't appear -- it does not appear that it's coming from a shift to smaller density or smaller diameter componentry or smaller diameter holes from the existing base. And certainly, flex technologies have added to the mix over the past year or 2 as that's been adopted by different areas. But flex is not 100% dependent on ultrafast lasers. You can use sort of conventional pulse lasers to do that. And we've seen that growth. That's sort of the lay of the land that we have today.

And your next question comes from the line of Joe Wittine.

I'll ask on FPD first. John, are you willing to share how you're envisioning the trajectory of Linebeam deliveries progress for the foreseeable future? I mean, based on the fabs you know of today and your backlog, do you anticipate kind of trending at a similar level from a shipment perspective? Or is it safe for us to kind of model a lull here and then perhaps a little bit of a wait for the next round of fabs ahead and even qualitative comments here would be useful.

Sure. So there's really no change to what we talked about last quarter that for fiscal '18, things are consistent with the way we viewed it going into the year. There's the normal push and pull, but beyond that it's pretty predictable. We do have backlog for '19. We're not prepared to talk about what -- how much of that is going to ship by quarter. And we're also waiting for fab announcements that we think are on the horizon. And that'll give us a much better view on what '19 and beyond are going to look like.

Okay. That's helpful. I was going to ask on the backlog. Obviously, I know you won't disclose it here today, but does it include orders beyond the 2 Chinese fabs you referenced earlier? Or would any future fabs beyond those 2 be additive to backlog today?

Any future fabs would be additive to backlog. There is some backlog that's tied to those Chinese fabs, but I think it's only partial of what they need.

Excellent. Appreciate it. And then Kevin, with net debt near the 0 mark here, maybe give an update on your thoughts or the board's thoughts on capital allocation, particularly with your equity's valuation essentially pricing in you'll never sell another piece of FPD equipment again.

Yes. So in terms of capital allocation, as I mentioned in the prepared remarks, we did make another voluntary payment in the March quarter, in March, specific to EUR 60 million. We will continue to do that with excess cash flow to the extent that it is more accretive than any share repurchase. So we will continue to delever the balance sheet. And as we talked about last quarter, the authorization from the board, the $100 million of repurchase, that gives us added flexibility to produce the best shareholder return, if you will, by using that cash, either for paydown or repurchases.

Okay. And finally for me, in MP, where are you in working through the prior diode inventory?

So we are -- we're still burning through inventory. It appears that from the -- from our internal work to replace those third-party components that the design work is done, and we're now into the reliability testing phase. And I think we're aligned with what we've told you all along that we'll be shipping vertically integrated product this year and that the full benefit is a 2019 event.

And your next question comes from the line of Larry Solow.

Just a few follow-ups. John, has your capacity plans, your expansion, has that slowed or changed at all just from your end?

For FPD?

Correct.

So again, the 3 elements. For service, we made the investment because we needed to. We couldn't possibly manage the installed base on a go-forward basis with the legacy footprint. We've made, quite frankly, very minor tool investments into our optics facility, not a space increase, just additional tools into the facility. And that was needed to address a mix shift between Gen 5 and Gen 6 on a go-forward basis. And for the laser testing facility in Germany, again, this was not a space increase, it was the addition of some test fixturing because if we shift from a Gen 5 model or a Gen 5 heavy model to a Gen 6 heavy model in the future, we need to be able to test multiple Gen 6 tools at the same time in order to meet commitments. So yes, we've continued with them. As I've said previously, these were very nominal investments that give us the right alignment for the business mixes going forward.

Okay. So it didn't. But your plans being a year or whatever, 12 months ago versus today, nothing has -- it didn't change or anything or slow down that whatever you...

We didn't.

Okay. And then just in terms of orders, I think you didn't want to give an exact time line of how booked you are into '19, but it's safe to say that anything ordered today would be obviously not deliverable until sometime in '19. Has any orders been canceled, delayed? Can you speak to that at all? Is there any indication of that or?

Can't give you any updates, Larry.

That's fair enough. How about in terms of the OR acquisition and also the accelerated R&D investments. Can you maybe not quantify, but just give us a little more color on that? It sounds like OR may be a little bit dilutive in the beginning or?

Larry, Kevin. On the accelerated R&D investments, frankly, we made decisions there to accelerate things to basically accelerate future releases. In a nutshell, that's it. On the OR side, frankly, it's a relatively small business. It's accretive going forward.

Okay. But this quarter, might not have been, it sounds like?

This was a partial quarter. But again, in terms of accretion value, it's very, very small.

It's very small. Okay. And just on the -- obviously, the materials processing market sounds super. They're doing very well. Last quarter, John, you spoke of this first volume contract with this Chinese integrator and you spoke, obviously, more in your commentary this afternoon about just the Chinese market. And have you gotten any more orders or have any anecdotally expansion within that customer? I realize it's only been only 3 months, but any update on that?

We have added some customers in the space. For competitive reasons, I don't want to get into all of the details of where and how much. But I would say that what we're seeing in the Chinese market is very consistent with the overall market. It is active and growing. And there's an appetite for multiple vendors. And that's what's given us the opportunity. On the welding side, it's much more wide open than the cutting side because there's so much process development that's done with customers. The recipes around cutting are well understood. The recipes around welding are being developed as we speak. So the engagement tends to be very high.

Okay. Then any -- were there any share repurchases in the quarter?

There was none.

And your next question comes from the line of Jim Ricchiuti.

John, I'm still struggling a little bit with the FPD commentary in the sense that on the one hand, as it relates to backlog, you're saying, well, kind of the normal push and pull, yet you're not really -- you don't want to comment about any kind of delays or cancellations. And again, it's just -- it's a little confusing as to what you're really seeing in the market and what -- just in light of what the weakness overall in the OLED market has been going on for about 5 or 6 months. It's just -- are you not seeing any change in plans?

So Jim, let me try to clarify. My previous comments on the OLED market was for fiscal '18 we were not seeing any significant changes. It's the normal push and pull that we see in the market. And for the remainder of fiscal '18, which is the June and September quarters, that view is consistent. We do have backlog beyond fiscal '18. I'm not going to quantify how much that is today, but we are waiting like everybody else is for the catalyst of new fab announcements to continue to drive the installed base. I don't think there's any magic there.

Yes. No. I think I've got it. Okay.

And your next question comes from the line of Mehdi Hosseini.

Just 2 follow-up, John. You talked about visibility for FY '18. You have 2 quarters in the bag. And we just had a guide for the June quarter. So my question is, what is the most variable part of the September quarter? Is that the OLED? Is that the new customer win associated with Rofin? Or is that just everything? And I have a follow-up.

Not sure I know how to answer that. I'll let Kevin take a crack at it.

Yes, Mehdi. If you're saying the most valuable contribution and correlate that to revenue, we would expect consistent with what we've seen in the first 2 quarters, microelectronics being more than half the business, we don't see any significant change to that as it relates to relative percentages of microelectronics and materials processing going into that final September quarter.

Sure. Got it. The reason I asked the question is, you have done a great job of growing your revenue by double digit on a year-over-year basis and quarterly. And fiscal year '17, your earnings were up 3 digit. And the stock has come under pressure. As we try to figure out the company's earning, I think it does help to have some qualitative assessment. And as I look into -- let's say, FY '19, would it be fair to say that the core business, meaning semiconductor, packaging and perhaps even some of the Rofin could be a flattish revenue contributor and then the growth is going to come from new customer win in high-power fiber laser and you overlay ELA? Then you would get some double-digit growth. And then combine with some operating leverage, you will have a higher earning growth? And I'm not asking for a specific quantitative guide. I think for investors, especially in the context of the stock being under pressure, would benefit to have some sort of a thought process how to think about the longer-term earning power.

Yes, Mehdi. I'm not going to comment specifically on '19. You asked a lot of effectively guidance questions and our practice is not to do that beyond one quarter out. But I think it is fair to say, and we've discussed this in the past, that leading indicators for the ELA business are announcement of new fabs. Certainly, as John described earlier, we're aware of some fabs. Some of that -- a small part of that is in the backlog. Small that -- a piece of that is to come. So that takes care of the ELA business. The rest of the business, we've often talked about margins and trajectory. And as you know, on the fiber side, in-sourcing the diodes was one of our cost initiatives. We will finish thereabouts the synergies related to Rofin at the end of the year. All of those will drive margin benefits as we look into '19. So from a trajectory standpoint, on one hand, over half of our business, primarily in the microelectronics space, leading indicator there are new fab announcements. And then from a margin perspective, we see a good trajectory going forward. That's the closest I can give you in terms of a forward look.

And your next question comes from the line of Mark Miller.

I was just wondering if you've seen expansion or expect expansion of OLEDs into other areas such as tablets from what's currently on the table or automotive or any other areas? Do you see any other opportunities coming up where -- adoption of OLEDs in non-smartphone applications?

We continue to hear that there's a fair amount of work being done for larger format devices, including the ones that you mentioned, which is mobile computing and automotive. Just in this last few months, there's been 1 or 2 announcements from major automotive manufacturers that are talking about product releases using OLED displays inside the vehicle. We see that as encouraging. And if you look at how new technologies are adopted within automotive, it goes into the leading models and then over a 2-, 3-, 4-year period it percolates down to mass market production. So we're at the front end of that right now. As far as going into the mobile computing market, there are a handful of high-end laptops that have those screens today. There's at least one tablet from Samsung that has an OLED display. To get into some of the larger volume applications there, obviously, dedicated capacity would have to come online because there's not enough existing capacity to be able to satisfy the handset market as well as any of these additional markets.

In terms of the automotive opportunity, how does the size of the display compare to a typical smartphone display with OLEDs?

So it really depends on the individual vehicle, but we would probably put it at an 8x multiple against a handset. Now I have to further qualify, we put in an 8x multiple against a 5.5-inch handset. As you move forward, that conversation changes because handsets appear that they're going to get supersized again to 6 inches and above. But right now at a 5.5-inch average, we would say roughly 8 for a standard vehicle. And it could be larger depending on how it's implemented, but that would be for the instrument cluster and a small driver information system or center.

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

Thanks, Britney. I'd like to thank everybody for joining us. We certainly look forward to catching up with some of you at these upcoming conferences. And we'll talk again in a few months.

Thank you.

And this concludes today's conference call. You may now disconnect.