Coherent Corp (COHR) 2018 Q4 法說會逐字稿

Good day, ladies and gentlemen, and welcome to Coherent's Fourth Quarter and Fiscal Year 2018 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, John, and good afternoon, everyone. Welcome to today's conference call to discuss Coherent's results from its fourth quarter and fiscal year 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 project, outlook, future, expects, will, anticipate, believe, intend or referred to as guidance. 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.

These forward-looking statements are only predictions and are subject to substantial risks, uncertainties and assumption that are difficult to predict and may cause actual results, performance or achievement to materially differ from those expressed or implied by these forward-looking statements. Factors that could cause or contribute to such differences include, but are not limited to, risks associated with global demand, acceptance and adoption of our products, the worldwide demand for flat panel displays and adoption of OLED for mobile displays; the pricing and availability of OLED displays, our ability to generate sufficient cash to fund capital spending; operations or debt repayment; our successful implementation of our customers' design wins; our ability to successfully rectify execution issues on a going-forward basis; our and our customers' exposure to risks associated with worldwide economic conditions; our customers' ability to cancel long-term purchase orders, the ability of our customers to accurately forecast their own end markets; our ability to accurately forecast future periods; continued timely availability of products and materials from our suppliers; our ability to timely ship our products and our customers' ability to accept such shipments; worldwide government economic policies, including U.S. tariffs on Chinese manufactured goods; our ability to integrate the business of Rofin and other acquisitions successfully; our ability to manage and integrate our expanded operations and achieve anticipated synergies; and other risks identified in the company's SEC filings.

For a detailed description of risks and uncertainties which could impact these forward-looking statements, you should review Coherent's periodic SEC filings, including its most recent Form 10-K, Form 10-Q and Form 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. Good afternoon, everyone. I have a lot of information to communicate today, and I'll start with our disappointing fourth quarter results, which were impacted by executioners at one of our German manufacturing sites and a pronounced weakening of Chinese market conditions.

Part of the integration of legacy Rofin sites is in ERP implementation. For those of you who have experienced one, you know they are complex, painful and not very much fun. We have already successfully completed a number of these across Europe and Asia. The site undergoing an implementation in the September quarter had particularly complex legacy practices that did not translate well. Gaps are normally identified through testing but were not caught in this case either due to inexperience, lack of judgment or resistance to change. These gaps caused the manufacturing parts shortage late in the quarter that stranded millions of dollars of shippable inventory and required us to push new rather than refurbished material out for service. Kevin will review the specific financial impact of this during his remarks.

We have taken various remedial actions to correct the situation, including changes in processes responsibilities and personnel. We anticipate having these remedies completed within the current quarter. Market conditions in China began to noticeably erode around the middle of August as Chinese manufacturers came to grips with U.S. tariffs on Chinese goods. The drop in export demand caused many Chinese customers to reevaluate their expansion plans, leading them push out, or in some limited cases, cancel orders. The effect was mostly confined to the materials processing space that covers the manufacture of soft and durable goods.

Business in China was also affected by retaliatory tariffs on a range of U.S. goods, including certain photonic products. While the tariff percentage was high, the cost increase against the customers' bill of materials was far from debilitating. To complete the picture, the first salvos in the current price war in the 1 to 4 kilowatt fiber laser space further exacerbated the challenges in the materials processing market. Customers claim prices have been discounted up to 30% within the September quarter. While pricing may be more about market share than end user demand, it forces greater discipline about what business to pursue.

There have been a number of noticeable developments -- or notable developments and announcements in the flat panel industry. Fab utilization rates have risen with the release of 2 new OLED-equipped iPhones. This has had a favorable impact on LDU service demand. So were recent reports, support continued investment in China, and building on what we reported on our last call, a broader recovery in 2020, including AU Optronics converting an LCD fab into a flexible OLED facility, as reported by DIGITIMES; Visionox announcing a $6.3 billion investment in a second Gen 6 flexible OLED line, according to OLED-info; DSCC and CINNO noting Taiwan-based Kuntech’s cooperation with the local government on a new Gen 6 flexible OLED fab in Shaanxi; and the Korean government establishing an OLED R&D center with $470 million of funding.

There have also been recent announcements from Samsung and LG regarding foldable displays for mobile computing. Samsung is seeking to bring new value to the user experience in its own laptops; and LG is partnering with Lenovo on a 13-inch foldable tablet. While the trends continue to point to a 2020 recovery, there are some near-term issues we have to deal with in the display space. A customer has requested we postpone a shipment scheduled for this quarter into early next year. We have agreed to accommodate this request, resulting in approximately $10 million of revenue moving from our first to our second fiscal quarter. Another customer had scheduled deliveries for 2 Linebeam 1000s this quarter and some unscheduled backlog. The customer did not win as much business for flexible OLEDs as they had imagined and does not have an immediate need for additional equipment. They have proposed paying us compensation in lieu of taking these deliveries. We anticipate reaching an amicable settlement to resolve this situation.

Customers have expressed a reasonable amount of interest in our micro LED solutions. We have taken orders for R&D tools. If the research efforts are successful, a market release of cost-effective mass production displays is still years away.

I previously commented that the outlook for semi cap was easing and the decline in member spending could be offset by foreign investment in the Chinese chip industry. Memory prices decreased by 10% in the September quarter, and based upon industry reports, are projected to shed another 10% to 15% in the December quarter. This inevitably leads to slowdown in CapEx investments, although fab utilization and the corresponding service revenues remain high. The trade war between the U.S. and China has slowed Chinese semi cap investments either through direct tariff impact retribution or funding uncertainty. The net effect points to 2019 Semicap spending being down versus 2018.

The API market is running at a consistent level. Multiple competitors to micro via market leader Mitsubishi have positioned themselves to take share, which we believe will benefit us since we supply the laser sources. Fan-out wafer packaging continues to grow, especially in support of 5G development. This should drive demand for our lasers in direct imaging sources. Our component and instrumentation business delivered another record bookings performance in the fourth fiscal quarter. Bioinstrumentation orders were seasonally strong, with contributions from cytometry and sequencing. Orders for medical OEM accounts were up significantly on a sequential basis and compared to the prior year period. All applications, ophthalmic, dental aesthetic and surgical consumables did well. Aerospace and defense was down after a record third quarter, but the outlook remains very positive.

We recently completed 2 small acquisitions. In the first, we purchased Ondax, an LA-based company that makes frequency stabilizers used in high-power laser diodes. They are critical components for defense and solid-state pumping applications used in Coherent products and sold to others in the industry. Ondax also uses these devices in their own line of bioinstrumentation lasers. We also acquired certain intellectual property and equipment from the aerospace and laser coatings business of Quantum Coatings, which is highly complementary to our aerospace and FPD optics business. Quantum has been the world's premier supplier of space qualified metal coatings, and Coherent and Quantum have jointly supported multiple deployments including the polishing and coating of optics for the James Webb Space Telescope which will look for first light after the Big Bang when it launches in 2021. The same core technology is applied to our Linebeam optics for FPD such that we are vertically integrated on a go-forward basis. Both transactions were done with cash and are immediately accretive.

As I mentioned earlier in my prepared remarks, we have implemented remedies to resolve short-term operational issues. Market conditions, and especially in China, are harder to predict. While we are well positioned across our verticals for multiple outcomes, we think it prudent to update our 2019 revenue outlook. We are now forecasting fiscal 2019 to be down 8% to 12% compared to fiscal 2018 actuals. We believe the second half will be stronger than the first half. Given the updated forecast, we are taking steps to reduce our burn rate by $10 million to $15 million compared to fiscal 2018. The reductions come from a variety of sources, including headcount, program spending and marketing. Our balance sheet and cash generation remains very solid. We will continue to pursue complementary acquisition opportunities. We have also received board authorization to repurchase up to $250 million in the company's common stock over the next year with a limit of no more than $75 million deployed in any given quarter.

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

Thanks, John. Today, I'll first summarize fiscal fourth quarter 2018 financial results and move to the outlook for fiscal Q1 2019. 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 the reconciliation between GAAP and non-GAAP financial results. The non-GAAP adjustments relate to stock-based compensation expense, amortization of intangible assets, restructuring costs, acquisition costs, purchase accounting adjustments, impairment charges, the related tax adjustments and tax adjustments primarily for the U.S. Tax Cuts and Jobs Act. 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 2018 financial results for the company's key operating metrics were: Total revenue of $461.5 million; non-GAAP gross margin of 44.1%; non-GAAP operating margin of 23.1%; adjusted EBITDA of 26.7%; and non-GAAP EPS of $3.22. As John mentioned in his prepared remarks, the company experienced a manufacturing parts shortage that impacted the second half of fiscal fourth quarter sales by approximately $6 million. In addition, as Chinese market conditions eroded also during the second half of the quarter, customer pushouts and a few cancellations impacted Q4 by approximately $5 million. These impacts, along with lower volumes in other end markets resulted in net sales for the fiscal fourth quarter of $461.5 million.

Our revenue mix by market for Q4 was microelectronics, approximately 53%; materials processing, 27%; OEM components and instrumentation, 14%; and scientific and government, 6%. Microelectronics and materials processing sales decreased sequentially by approximately $18 million and $8 million, respectively, primarily due to lower excimer and general shipments into the FPD market, and decreased shipments of tools used for marketing and engraving systems in the materials processing market.

Geographically, Asia accounted for approximately 61% of revenues in fiscal fourth quarter; the U.S. 18%; Europe, 18%; and rest of the world, 3%. Asia includes 3 territories with revenues greater than 10% of total sales. Other product and service revenues for fiscal fourth quarter 2018 were $118 million, or approximately 25% of sales. Other product revenue consists of spare parts, related accessories and other consumable products and was approximately 22% of sales. Revenue from services and service agreements was approximately 3% of sales. Total services revenues decreased sequentially as our key integrators continue to focus on conserving cash by keeping their service stock to lower threshold amounts.

We also had 2 customers in South Korea related to large flat panel display manufacturing that each contributed more than 10% of our fiscal fourth quarter revenues.

Fiscal fourth quarter non-GAAP gross profit, excluding stock-based compensation costs, intangibles amortization and restructuring, was $204 million. Non-GAAP gross profit was impacted sequentially by both product mix and volumes. In addition, the use of new material rather than refurbished material for warranty repairs impacted non-GAAP gross margin by close to a full point. This resulted in non-GAAP gross margin for Q4 of 44.1%.

While operating expenses decreased by approximately $500,000 sequentially, it was not enough to offset the lower non-GAAP gross profit, resulting in a non-GAAP operating margin of 23.1% for the fiscal fourth quarter. Adjusted EBITDA was 26.7% in fiscal Q4.

As you know, the U.S. Tax Cuts and Jobs Act was enacted approximately 1 year ago. The legislation imposed a onetime transition tax on foreign subsidiaries' earnings and profits and allow for a 1-year measurement period for the impact of this legislation.

Coherent reported an estimate financial impact of the tax reform in fiscal Q1 2018 and refined those estimates in our fiscal Q4. This is the primary reason for a lower-than-expected Q4 non-GAAP tax rate of approximately 22%.

Turning to the balance sheet. Nonrestricted cash, cash equivalents and short-term investments were approximately $311 million at the end of fiscal Q4, an increase of approximately $78 million compared to the end of last quarter. The amount of outstanding term loan debt in USD is $431 million. International cash was $216 million or approximately 69% of the total cash and short-term investment balance. Approximately 38% of total cash and short-term investments is denominated in dollars. Accounts receivable DSO was 69 days compared to 63 days in the prior quarter. The net inventory balance at the end of fiscal fourth quarter was approximately $487 million, a decrease of $8 million from the prior quarter. And capital spending for the quarter was approximately $25 million or 5.4% of sales.

Now I'll turn to our outlook for our first fiscal quarter of 2019. As a result of a customer request to postpone a Linebeam shipment out of Q1, and another customer no longer having immediate need for 2 Linebeam systems that were planned on being delivered in Q1, revenue for fiscal Q1 is expected to be in the range of $375 million to $395 million. We expect fiscal Q1 non-GAAP gross margin to be in the range of 42% to 45%. Non-GAAP gross margin excludes intangibles amortization of approximately $12.4 million and stock compensation cost is estimated at $1.3 million. Non-GAAP operating margin for fiscal Q1 is expected to be in the range of 17% to 20%. This excludes intangibles amortization estimated at a total of $15 million and stock compensation expense of a total of approximately $8.8 million.

Other income and expense is estimated to be an expense in the range of $4 million to $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 Q1 non-GAAP tax rate to be in the range of 26% to 28%. And finally, we're assuming weighted average outstanding shares of approximately 24.5 million for the fiscal first quarter.

With regard to our participation at upcoming conferences, we'll be presenting at the Needham Growth Conference on January 15 in New York.

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

(Operator Instructions)Your first question comes from the line of Jim Ricchiuti from Needham & Company.

John, I wonder -- or Kevin, I wonder if you could help us understand the new revenue guidance relative to your prior guidance. How much of that revenue shortfall is display-related? And maybe how much is materials processing or China-related?

Yes. Jim, in terms of our prior outlook, we never really outlooked Q1, so this is new. We have said in the past or -- and updated it in this call, John mentioned 8% to 12% decrease fiscal '19 over fiscal '18. But as you look at the guide that we provided, $375 million to $395 million revenue, the majority of the decrease is in microelectronics.

Right. But also, there was a soft guide, there was a broad guidance for -- that you were providing for fiscal '19. It sounds like the way you were characterizing fiscal '19 back in late July and the change we're seeing today, it does sound like it's more microelectronics-related. Is that fair to say?

It's both microelectronics and China as well. I mean, we've seen a significant slowdown in China. We talked about some pushouts and cancellations in the market, so that's all being factored in into our fiscal '19 guidance.

And then just given the changes you've seen from some of your display customers, have you gone back and looked at the rest of the backlog and have spoken to customers to get a level of confidence that there's not a potential for other pushouts?

From the standpoint of that exercise, yes, we've done it. The shift from Q1 into -- or from Q4 into Q1 -- I'm sorry, Q1 into Q2, is mostly around the readiness of the facility. The shift or the push -- no, I'm sorry, the cancellation of the 2 units is really reflective of the fact that the customer didn't win business that they thought they were going to win. And putting more hardware out there that may not be utilized for a period of time didn't seem to be in anyone's best interests. As far as the rest of the market, yes, we're in contact with them constantly. Everything else remains pretty much in line with what we had previously thought. And as far as our views on 2020, again, we're checking that on a regular basis, and we've not heard of any major changes from customers at this point in time.

John, can you say what your backlog was going to be in the K and what your bookings decline was for fiscal '18?

Jim, Kevin again. We didn't mention bookings and backlog in this call. As John mentioned in his prepared remarks, we're working with a customer who basically canceled a couple orders, and looking forward into our backlog, we're in process of discussing potentially a cancellation fee and so forth. So rather than put out a number today and then update that in the K, until we resolve this with the particular customer, which we think we can do by filing the K, that's when everyone will see our backlog numbers.

Your next question comes from the line of Patrick Ho from Stifel.

Kevin, maybe first off, in terms of the ramp of your diode capabilities internally, can you give us an update on that? And over time, how do you see that potentially helping the gross margin, like given some of the weakness near term? Is this something that can contribute and maybe provide a little bit of support as we get into the second half of your fiscal year?

Patrick, as we've talked about in the past, our goal was, in the September quarter, to deliver a vertically integrated fiber. We did achieve that. The diode component from an insourcing standpoint continues to ramp up. We've also said in the past that we'll see the benefit from a margin perspective in fiscal '19 probably coming out of fiscal Q2 of '19. However, again, as we step back and look at the overall guide for fiscal '19, in our last call, we talked about display being down 10% to 15%. As you know in the ME business, that is particularly accretive to our business so that kind of decrease, even though we'll see a benefit from insourcing the semiconductor chips, typically gets far outweighed by the ME decrease.

Great. That's helpful. And maybe, John, as it relates to China and the weakness in demand that you saw during the quarter, you also mentioned a little bit about the pricing pressures that are in the lower end of the high powered segment. Can you just, maybe not quantify, but kind of qualitatively give your thoughts on whether it was more the weak demand environment or the increasing pricing pressures in that segment that caused, I guess, revenues to come in lower than expected?

As far as overall revenue out of that market, we do view it as trade-related. The pressure that has been exerted on Chinese manufacturers by the decline in demand, particularly from the U.S. for Chinese manufactured goods, flows all the way back through their supply chain. And as a consequence, they're being much more cautious on making investments to expand capacity or upgrade capacity, whatever it may be. Pricing is more about market share, and it erupted pretty abruptly between some of the market leaders, both domestic or Chinese players as well as Western manufacturers. And that -- I don't know that, that comes back or that comes -- or that unwinds, let's say, when we finally have a resolution to the trade differences between the U.S. and China. You have to assume at some point, those things will get worked out. I'm not sure that the pricing will follow the trade trend. That may be something that the market is going to have to deal with for an extended period of time. And for those of us who've been around for a while, unfortunately, we've seen this movie before in other photonic-based technologies. We may be looking at it again. And that's why a number of quarters ago, we started to look at applications, especially those for fiber lasers, where we could achieve differentiation and better stickiness, and it wasn't just a race against pricing.

Next question comes from the line of Joe Wittine from Longbow Research.

I'll just ask one, and then you -- I was hoping you could walk us through in rough terms what the 2019 guidance implies in terms of any materials processing recovery, or just kind of what your assumptions are. Because -- I mean, I don't envy anyone having to forecast 4 quarters given this geopolitical backdrop, so I'm just kind of curious if you could qualitatively walk us through what your baseline is.

Joe, when we look at '19, as you know, in our prior discussion on our last earnings call, we talked about fiber lasers and fiber components being, in fiscal '18, about a $250 million business with a growth rate of 20% as we looked into fiscal '19. That is -- as we look at it now, that's pretty aggressive. We've taken that down, and that's helped push our last call, minus 5%, to 8% to 12% looking into '19 now. That's the best I can say at this point.

I guess another way to put it is the -- specific to the industrial business does, because whatever your segment forecast that is assumed within that, kind of assume that we do get to some sort of resolution as far as the geopolitical stalemate goes today. I'm probably asking too granular, but I'm just kind of wondering how you're thinking about the business next year.

It's hard -- Joe, it's John. It's hard to predict when the trade issues are going to be resolved. We've taken the view that they will persist through the fiscal year, and we've also adjusted slightly the FPD outlook to account for the changes that both Kevin and I referenced earlier today. But I think if you're looking at market mix over the course of the year, you're probably looking at error bars of plus or minus a couple of percent on the markets. I don't think the ratios in '19 are going to be dramatically different than they are in '18 as it pertains to our business.

That's great. And then finally, with regards to FPD, does it still look like 2020, the recovery will be so strong that you'll eclipse 2018? Or are things kind of fluid right now and maybe we shouldn't be banking on that?

I don't think you should look at it as eclipsing 2018 because 2018 was -- despite all of the recent drama, 2018 was a record year for the company, and it was a record year for FPD. We do expect -- sorry, '20 to be dramatically improved versus '19. I don't think we would call it -- I don't think we're ready to call it another record year. We'll stick with our original line, which is a recovery against '19.

Your next question comes from the line of Joseph Wolf from Barclays.

I have a question about underlying demand as you see it, which is if you get the -- if we ignore the money or the settlement you'll reach on the product, and maybe this is connected to the last question, if you think about demand for 2020, is that -- was that -- never a real order or it was a speculative order? And as you think about your 2020 recovery, how much speculative ordering do you think could or might still be out there? Or when you talked about the optimistic sorts of discussions about new flex Gen 6.5 facilities, do you think that what you're looking at is real demand?

Great question, Joe. The order that we're negotiating right now, the resolution that we're negotiating right now, the customer placed the order assuming that they would win an increased amount of business, which did not happen. And as I mentioned in response to an earlier question, putting capital out there for the customer, or for us, that's not going to be utilized, it's better to resolve that and not go into an overcapacity situation in the marketplace. As far as 2020, we are tracking all these different fabs, and our analysis is based on those fabs coming online, nominally, in the time frame that the customers indicate -- and when I say nominally, we know that there's always going to be some that come on a little sooner and some that come on a little later, so the methodology hasn't changed. We're handicapping it pretty much the same way. These fabs are predominantly outside of Korea, and that is very much in line with where we see the investments. And today, I'd say, the biggest difference probably over the last year is a year ago, I think the assumption was most of the investment was going to come out of China. And today, I think you're seeing a renewed interest in Japanese manufacturers participating in the market. So it's not tied to a single market or a single player. It's tied to a wide range of players, both established manufacturers who are already in the space, and participants who are hoping to gain a foothold in the space.

Okay. Can I shift gears? On the A&D front, you mentioned some optimism and a strong outlook. We've heard from other companies that there was an increase in the restricted list that the United States have put out in terms of customers that you cannot sell to based on what's going on in China. Have you -- do you have any exposure to that sort of restriction? Or is your A&D business and outlook with customers that you are -- that they are still strong and you still have the same outlook?

So from the standpoint of restrictions, I don't think any -- I don't think much has changed for us. There are always customers that you can't sell to. There are maybe certain technologies that have become more restricted. We factor all of that into our assumption. But the dominant part of our defense business at least has always been U.S.-based.

Your next question comes from the line of Mehdi Hosseini.

Two follow-ups. First one for John. When I look at commentary from some of your fiber laser competitors, it seems to me that the China weakness actually started earlier in the year and accelerated in the second half and perhaps the tariffs has made that situation worse. Looking at the Rofin acquisition from 2.5 years ago, that supposed to give you more a vertically integrated system. Perhaps my own rather broad-based conclusion is, maybe you need to be more aggressive in resizing or doing some changes to the Rofin assets. I think the China weakness has been quite -- more than just a few months, and I'm just wondering if you have a plan B or you have any alternative action in addressing the Rofin assets that were meant to be more productive a little bit earlier. And I have a follow-up.

Mehdi, it's Kevin. We wouldn't disagree that certainly within the quarter, the China discussion or the impact on the macro certainly accelerated the softening in China. But again, if you look at our business relative to some of the peers that you mentioned, we have a much smaller percentage of share in the metal cutting market. So that impact on Coherent is much, much smaller than some of our peers. That's the way we're looking at it. With regard to kind of restructuring some of the businesses, we look at that all the time. That's not something we would preannounce or even discuss to see what happens. So let me just put that aside for now.

Sure. And then is there any way you can qualitatively or quantitatively help us understand the impact from some of the cost cutting as we look beyond this next quarter? Like when we look at FY '19, how should we think about OpEx and the changes you're making in the lieu of lower than expected revenues?

Yes. So first, Mehdi, let me say, your line is really bad, and I'm hoping I didn't mishear your last question. With regard to OpEx going forward, I think that's the current question, in our prepared remarks, we talked about potentially OpEx reductions of $10 million to $15 million to help offset some of the top line increases. We didn't skew that for fiscal '19. That's the total number for the full year. But again, we're looking at that, and we'll continue to look at that. And I think that answers your question, but it was really hard to hear.

Next question comes from the line of Larry Solow from CJS Securities.

Just a few follow-ups since most of my questions are answered. On the $10 million to $15 million in cost cutting, is that a 2019 realized number for the full year? Is that how we can look at that?

Larry, it's Kevin. Yes, that $10 million to $15 million will be realized in fiscal '19.

Okay, is it fair to say that some of -- I don't how much is in Q1, maybe nothing, but it'll -- obviously, you'll get more benefit. You haven't done it yet, or it'll be more back-end loaded at least?

You'll see some of that pick-up in Q1. Not material, roughly 10% of that in Q1. But it is skewed throughout the second half of the year as well.

Okay. Okay, great. And then on the pushout and the cancellation, I don't know if you said, were those Linebeam 1000s, 1500, did you say what that was?

Yes. We did say 1000s.

Okay. They're all 1000s. Okay. And then on the impact of the execution -- the misexecution and the issues you had at one of your facilities. You mentioned that, combined with China, was $11 million impact. Was there a disproportion or more of an impact on the margin side from the misexecution issue? I know you mentioned you had to use newer material as opposed to refurbished stuff. So was there more an impact on margin than you would normally think on that lower sales?

Yes. And specifically, with regard to using new parts instead of refurbished parts for the warranty or the service business. That caused us close to a point. If you look at quarter-on-quarter, we're down 3 points; 2.5 points, call it, in gross margin; 1 point solely from warranty -- or close to 1 point solely for warranty. So yes, that was a significant factor.

Okay. And so you may pick up -- not putting words in your mouth, but it sounds like you'll be -- have this issue resolved by the end of the quarter, so perhaps you have a little bit of a tailwind going -- from that as well -- go ahead, I'm sorry.

Sorry, Larry. Yes, we are expecting to resolve that. We should see a pickup in warranty, a benefit to warranty, if you will, but that's being more than offset by reductions in top line and the profitability with those reductions as well.

And just lastly, John, you've talked about before, obviously pricing and availability of OLED panels to get some more handset providers to switch over. Obviously, it sounds like the ramping of these new fabs is still on the map and still as expected. Has there been any changing -- change, or in terms of flexible pricing on OLED panels at all, or any color on that?

I think there's 2 tiered pricing; there's Samsung and everybody else. Samsung is still the technology leader. They can produce in quantity at the highest levels of performance and quality, and they command premium pricing for that. And others are trying to break into the space. There is a gap in terms of performance and reliability.

Next question comes from the line of Mark Miller from The Benchmark Company.

Firm reported last night that we're seeing some signs of pricing stabilization in China in terms of the fiber laser market. Are you seeing such signals?

Stabilization, meaning they're not falling any further?

Yes.

I guess, you could view it that way. We've also heard reports that local players have said that they will continue with their strategy to price below the market leader. I don't -- I wouldn't feel confident telling you that pricing has reached a trough. It's probably fair to say that it took a big step down and has maintained at that level. I think we really have to see what happens when demand picks up and, following a solution to the trade conflict, what pricing does.

In terms of the buying decision, besides pricing, are there any technological factors in the tools that are resulting in some of the shifts in the buying patterns in terms of technological features?

I'd say it's application-dependent. In cutting, customers have a number of choices where the lasers are apparently good enough, and you see this because of market changes that have taken place just in China between the market leader and some of the Chinese manufacturers. It would suggest that performance is not a gating factor, and we would probably agree with that. In other applications where individual capabilities matter, yes, then it does make a difference.

And finally, Momentum, which I always was surprised hadn't done more in the fiber space, has reported a couple of very strong quarters of growth in terms of fiber laser sales. Are you seeing any -- are they becoming more and more of a major player in this space? Or are they still relatively small?

As far as I know, they have a relationship with a single large customer that provides the majority of their revenue. So I would assume that, that customer is doing well, which is the reason that their business is performing the way it is.

Your next question comes from the line of Jim Ricchiuti.

Again, going back to the Rofin integration. We haven't really seen too many missteps, at least not obvious to us. How much risk is there going forward? Where are you with respect to the integration of Rofin? It's certainly been going on for some time. Have you taken steps to hopefully avoid this type of situation occurring again? How do you characterize where you are with the integration?

Jim, from an integration standpoint, we're exactly where we expected to be. Turning on this one system, this ERP in a German location, that was all planned and so forth. Clearly, there are lessons learned that -- from this implementation that we will apply into future implementations. But it's pretty much on track with what we expected. From an organization standpoint, the integration happened a while back already. That's fully completed and working very well. Some of the processes, legacy Coherent versus legacy Rofin, have also been harmonized. It's just from a system perspective ERP. As you know, those are very complex and there are a lot of factors that go into a successful implementation, some of what John described in his prepared remarks. So again, with this implementation now behind us, we've taken those lessons learned. We've had a little bit of time in terms of the overall implementation, and we'll apply those lessons going forward.

And just a final question for me, just as it relates to the automotive market. Rofin historically had a little bit more exposure I think to that market. I wonder how you'd characterize that part of the business. And you may also want to just fold in your view on whether we're seeing any kind of an upturn in some of the EV applications you've talked about in the past.

So we're actually pleased with the progress we're making in the automotive space. We're engaged with a number of Tier 1 suppliers on a variety of different processes, whether they're for electromobility, and that's both battery technology as well as drive technology or body and white or lightweighting of vehicles. All those applications are benefiting from the application of lasers. We have some solutions where we think we're actually doing better than some of our competitors right now. We want to continue to promote those. We're trying not to disclose too much at this point because we prefer not to let competitors know exactly where we're active.

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

Thanks very much, everybody, for participating today. As Kevin mentioned earlier, we'll be publishing our K in a few weeks, and we certainly look forward to catching up with you either at an upcoming conference or during our next earnings call. Have a good day.

This concludes today's conference call. Thank you for participating. You may now disconnect.