Coherent Corp (COHR) 2019 Q3 法說會逐字稿

Good afternoon, everyone, and welcome to the Coherent, Inc. Q3 2019 Earnings Conference Call. (Operator Instructions) Please also note, today's event is being recorded.

At this time, I'd like to turn the conference call over to Mr. Bret DiMarco, Executive Vice President, General Counsel and Corporate Secretary. Please go ahead.

Thank you, Jamie, and good afternoon, everyone. Welcome to today's conference call to discuss Coherent's results from its third fiscal quarter. 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 benefits, if any, of such trends. These forward-looking statements may contain such words as project, outlook, future, expects, will, anticipates, believes, intends 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 assumptions 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; the demand for and use of our products in commercial applications; our ability to generate sufficient cash to fund capital spending or debt repayment; our successful implementation of our customer design wins; our and our customers' exposure to risks associated with worldwide economic conditions, in particular in China and the Eurozone; our customers' ability to cancel long-term purchase orders; the ability of our customers to 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; our ability to have our customers qualify our products; worldwide government economic policies, including trade relations between the United States and China; our ability to integrate the business of Rofin and other acquisitions successfully; manage our expanded operations and achieve anticipated synergies; our ability to successfully transfer the manufacturing of our high-power fiber lasers and related business and operations between facilities; our ability to successfully manage our planned site consolidation projects and achieve anticipated savings as well as 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. Our June results were affected by ongoing challenges in the materials processing market and slightly lower service demand in FPD. I'll be discussing various topics around materials processing as well as optimism around the OLED business. I'll also review some recently announced site consolidation activity.

The microelectronics markets was largely in line with our prior commentary. Flat panel display system revenue reached a trough as we are completing deliveries of the Phase 1 orders for OLED fabs. Service revenue came in lower than expected and is likely related to Samsung Display's announced receipt of a compensatory payment of more than $680 million from a customer that didn't fulfill its volume commitment. Last quarter, we also reported that RFP activity was picking up, which is a key precursor to new order flow. We received the first new system order in the June quarter, and we believe this marks the beginning of the Phase 2 in the OLED build-out. As a reminder, we and everyone else in the OLED universe are tracking more than 20 new fabs planned between now and 2023 with emphasis on flexible OLED. This will drive incremental investment in laser lift-off or LLO, where we continue to hold substantial market share. Our data suggest that we won 2/3 of the orders and approximately 80% of the revenue in new LLO equipment orders over the last 12 months.

There are 2 storylines in the display market that are noteworthy. JDI is struggling and will be further challenged if the 2020 iPhone lineup goes all OLED. The company is reportedly in financing discussions with offshore investors. While the probable outcome is that Korea and China will battle over the OLED market, Japan may also play a role in this contest. The Japanese government recently announced plans to restrict the sale of key materials used in microelectronics manufacturing to Korea apparently as retaliation for a Korean court's decision regarding war time forced labor compensation. This could create shortages while Korean firms realign their supply chains, which would ultimately hurt Japanese suppliers. At this stage, it is unclear how this dispute will play out.

Our semicap business is still outperforming the broader wafer fab equipment market. New system orders have benefited from both select deployment wins and strategic inventory builds from OEM customers. The service business has been brisk due to high utilization rates especially in legacy nodes in automotive and IoT applications. While orders were sequentially higher in June, the API market is shadowing broader WFE demand. PCB manufacturers are deferring new equipment orders until they have greater clarity on product configurations and volumes. We also note that a number of industry brethren are espousing the benefits of ultrafast lasers in API applications. While we share the enthusiasm, we don't think many manufacturers have finalized technology deployment decisions, so stay tuned.

The global materials processing market is facing multiple challenges from depressed macro demand, concerns over trade and an increasingly aggressive pricing environment in China. PMI data is below the midpoint in the majority of large economies with the U.S. being an outlier with a PMI just above 50. The global machine tool business has been particularly hard hit due to lower spending in the automotive and construction sectors. Reports from the German machine tool association suggest that demand has been cut roughly in half over the last 12 months. Trade issues between the U.S. and China are fostering short-termism between customers and manufacturers with everyone wanting to avoid tariff-inflated inventory. Perhaps the upcoming presidential election cycle will lead to some form of resolution.

Last month's Lasers Munich trade show was an eye-opener for the fiber laser market. There were strong declarative statements from Chinese vendors over the level of supply chain independence and the future of market share in China. To reinforce this point, we were approached by one of our OEM customers with an offer to provide us with private-labeled 1 kilowatt modules for $7,500. They further suggested they would work towards reducing the price to $5,000 over 2 years. While these numbers might sound unreal, we would point out that they roughly correlate with end-user pricing and margins for the largest Chinese fiber laser manufacturer. It would appear fiber lasers are following the same trajectory as solar, LEDs and LCDs in China. Future competitiveness relies upon defensible device and process IP as well as supply chain excellence. These are some of the factors that led us pivoting towards markets and applications for our fiber-based ARM lasers which have demonstrated capability to solve manufacturing issues in electromobility for battery and electric motor production.

The OEM and instrumentation market are solidly positioned for strong double-digit growth in fiscal 2019. The biggest contributor to year-over-year growth are sales to directed energy programs. Additional opportunities exist in target designation and countermeasures. The bioinstrumentation and OEM medical markets are performing well, and we are working on plug-and-play subsystems for cytometry, imaging and sequencing that provide greater capability and drive higher ASPs.

In June, we announced 2 consolidation programs that will improve the efficiency of our business. We are exiting a leased facility in Santa Clara and consolidating fiber laser manufacturing into a single facility in Europe. We expect that the projects will be completed by the end of calendar 2020 and result in a run rate reduction of approximately $24 million annually.

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

Thanks, John. Today, I'll first summarize fiscal third quarter 2019 financial results then move to the outlook for fiscal Q4. 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, the related tax adjustments and tax adjustments for stock-based compensation. 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 2019 financial results for the company's key operating metrics were: Total revenue of $339.2 million, non-GAAP gross margin of 37.9%, non-GAAP operating margin of 12.1%, adjusted EBITDA of 16.2% and non-GAAP EPS of $1.33.

Again, total revenue for fiscal third quarter was $339.2 million and came in slightly below the midpoint of our previously guided range due primarily to continued weakness in the materials processing end market and lower-than-expected service revenue in display. Our revenue mix by market for Q3 was microelectronics approximately 42%, materials processing 30%, OEM components and instrumentation 19%, and scientific and government 9%.

Geographically, Asia accounted for approximately 51% of revenues in the fiscal third quarter, the U.S. 24%, Europe 21% and rest of the world 4%. Asia includes 2 territories with revenues greater than 10% of sales. We had one customer in South Korea related to large flat panel display manufacturing that contributed more than 10% of our fiscal third quarter revenues.

Other product and service revenues for the fiscal third quarter were $118 million or approximately 35% of sales. Other product revenue consists of spare parts, related accessories and other consumable products and was approximately 31% of sales. Revenue from services and service agreements was approximately 4% of sales. Total services revenues increased sequentially by approximately $2 million as OLED fab utilization started to increase for new releases in the fall.

Fiscal third quarter non-GAAP gross profit, excluding stock-based compensation costs, intangibles amortization and restructuring, was approximately $129 million. Non-GAAP gross profit was impacted sequentially primarily by volumes and to a lesser extent, product mix, resulting in a non-GAAP gross margin of 37.9% for Q3.

Non-GAAP operating expenses decreased by approximately $4 million primarily due to lower headcount-related spending, higher customer reimbursements for R&D projects and deferred compensation liability decreases. This resulted in a non-GAAP operating margin of 12.1% for the fiscal third quarter and also came in slightly below the midpoint of our previously guided range. Adjusted EBITDA was 16.2% in fiscal Q3.

Turning to the balance sheet. Nonrestricted cash, cash equivalents and short-term investments were approximately $319 million at the end of fiscal Q3, a decrease of approximately $30 million compared to the end of last quarter. During the quarter, we repurchased shares totaling approximately $26 million. We did not make any voluntary payments against our term loan. At the end of fiscal Q3, the outstanding amount of the term loan in USD was approximately $417 million.

Accounts receivable DSO was 71 days compared to 76 days in the prior quarter. The net inventory balance at the end of fiscal third was approximately $469 million, a decrease of $14 million from the prior quarter. And capital spending for the quarter was approximately $19 million or 5.6% of sales.

Now I'll turn to our outlook for our fourth fiscal quarter of 2019. Revenue for fiscal Q4 is expected to be in the range of $320 million to $340 million. We expect fiscal Q4 non-GAAP gross margin to be in the range of 36% to 39%. Non-GAAP gross margin excludes intangibles amortization of approximately $11.7 million and stock compensation cost estimated at $1.2 million. Non-GAAP operating margin for fiscal Q4 is expected to be in the range of 8% to 11%. This excludes intangibles amortization estimated at a total of $13.8 million and stock compensation expense of a total of approximately $9.7 million.

Other income and expense is estimated to be an expense in the range of $2 million to $3 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 Q4 non-GAAP tax rate to be approximately 20%. And finally, we're assuming weighted average outstanding shares of approximately 24 million for the fiscal fourth quarter.

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

(Operator Instructions) And our first question today comes from Jim Ricchiuti from Needham & Company.

I wanted to pursue the order that you alluded to. If you could say, John, when you think this equipment may be delivered to the customer? And I don't know if you could say whether the customer is a Chinese display manufacturer or not?

So we typically don't announce who the customers are. We didn't do it this time either. The equipment will probably be a 2020 delivery, fiscal 2020, so that would mean from the December quarter onward.

Okay. In terms of the time line when you started tracking this to the orders coming in, was it fairly consistent with your expectations or is it what you normally can expect in this type of environment, delays in actual order placement and plans for moving forward with a fab like this?

I don't think there was anything unusual in the way this order came in. We have started talking a quarter or 2 ago about RFP activity. This was part of that group of orders that we were engaged on, so no surprises from our end.

And maybe also just as it relates to the activity you're seeing separate from this. You talked about it last quarter. How would you characterize the pipeline of activity as you look out over fiscal '20?

We are in the thick of it with customers right now. I mean again, going back to prior comments about RFP activity and how those roll over into orders, really no difference in what we've seen in the past. I'd say the one caveat is, in the prior cycle, it was dominated by a large customer early and then it diversified. This cycle, it's going to be more diversified. And we see that as a good thing because it means there are a lot of interested parties that want to pursue this technology.

And then if I could, one final question just on the materials processing business. Just in light of what you're describing the market environment for fiber lasers, I wonder if you could maybe take a step back and talk a little bit more about Coherent's strategy as it relates to this market. It sounds like you've had some success with potential applications that could be significant longer term in the EV market for battery welding. But just in general, how should we think about the company's strategy for going after this business?

I don't want to make it sound as though our crystal ball was any better than anyone else's. But the writing was sort of on the wall as to what was going to happen with pricing in the general cutting market. And that was evident for some time. And the level of aggressiveness has only increased as people are vying for a smaller number of deals given sort of the macroeconomic backdrop. We started to shift our focus a while ago towards applications where we felt, A, that we had a solution that had some unique capabilities; and B, where the IP was still being created and therefore better defensibility in the mid to longer term. That really hasn't changed.

Our next question comes from Patrick Ho from Stifel.

John, maybe can you first give a little bit of color on the services or the little bit of the shortfall you talked about in the quarter? Is it just timing-related by the customer? Is it something that's going to come back before this fiscal year end? You just give a little color on that.

Patrick, I think if you tie it back to handset demand and what certain handset manufacturers have been reporting, some of the numbers have not been as robust as they had hoped. They were pulling capacity from Samsung. And as a consequence, Samsung was running at least one of their fabs lighter than they would have thought originally. I think the difference is, later this year, you'll have a product introduction cycle. And typically when that happens, you do see demand pick up.

Great. That's helpful. And maybe, Kevin, for you on the margin front. Obviously, there's always a lot of influences on the mix absorption. Is absorption still the biggest issue as you look at your fourth quarter guidance or is product mix given some of the issues on the materials processing side in terms of the environment is that a bigger contributor to your gross margin outlook?

Yes. Thanks, Patrick. From a margin perspective, certainly, both product volumes and mix impact it. But in this case, both in the current quarter and next quarter, in my prepared remarks, I talked about product volumes first. That is the larger of the 2 in terms of impact. And certainly, when we look into Q4, that remains. It is the larger of the 2 in terms of impact.

Our next question comes from Brian Lee from Goldman Sachs.

Maybe just a couple of quick follow-ups on the new order for the Phase 2 OLED capacity. This is a single-tool order or is it a multi-tool order? And I know you don't want to talk about customer specifics, but can you give us a sense. Is this a Linebeam 1000 or is it a 1500?

So we don't release information on individual orders. I certainly understand the reason that you're interested in the information, but it's not our job to -- or it's not our right to share customer information. If a customer wants to disclose what they've bought, how much they've bought, that's their prerogative. It's not ours to share.

Okay. Fair enough. And then I guess just the characterization of the order. This is a single-tool order, that's correct?

Again, we received an order. We didn't define what the value is.

All right. Fair enough. Maybe on that same line of thinking, just on LG, I think they were out recently, announced some additional investment for the P10 facility. I would assume that's part of the RFP type of backlog you were talking about here. Just do you guys have any additional context around how to think about P10, that facility and the opportunity for you? Is it an all-TV facility or do you expect there to be some mobile capacity built there as well? Just any color you might be able to share would be helpful there.

There are various rumors floating around with regards to LG. We think that P10 is going to be predominantly television. And they're trying to win a key customer in the mobile market with their existing mobile capability.

Okay. Great. And then just last one for me and I'll pass it on. I know this has been a topic of interest in past quarters. Don't know if you have an update to share with us on the diode in-sourcing strategy. Just where you are on the inventory level because I think you had talked about in the past or maybe just last quarter, 6 to 12 months of potential inventory still needing to be digested. Any update as to your thought process around timing of when we might see that be more of a meaningful needle mover for your cost down potential?

Brian, it's Kevin. The short version of the storyline, it really hasn't changed. We have successfully in-sourced the diode manufacturer. However, with third-party inventories and the softness in China, we're carrying that inventory longer. We have not disclosed how long because of primarily the uncertainty with China. So whatever estimate I gave you in terms of months of supply of third party, I'm pretty sure I'd be off. So until we see a little bit more certainty with what's happening in China, I'm going to hold back on giving a forecast on when we would burn off that inventory.

Our next question comes from Blayne Curtis from Barclays.

I just want to ask on the fiber laser business, the restructuring you're doing. Maybe if you could give any more color as to what products you're stepping away from. And then I think you mentioned $24 million of cost savings. Just kind of curious of what the revenue and gross margin impacts would be from moving away from those products.

So we're not moving away from products. We're consolidating manufacturing facilities. Going back a decade or so, there was a decision taken by Rofin when it was a stand-alone to locate the fiber laser integration in Hamburg even though the business center, if you will, was in Tampere. So we are consolidating on the Tampere platform. We will still be able to serve customers in both the ARM market as well as standard CW applications using a Tampere structure. We will not be building a version of the laser that had been built in Hamburg.

And then Blayne, in terms of margins and so. Given we said in our prepared remarks that these items or these projects will be done by the end of 2020, I'll reserve to a later date when we talk about margin impacts.

Okay. And then just maybe if I could just ask from a high level on the September guidance, you're guiding down sequentially. I thought you said flat panel display is at a trough, but I just wanted to make sure that, that's what you meant in terms of the outlook per segment. Are all down or are you actually seeing flat panel actually flatten out?

For microelectronics, as we said and what we realized in the June quarter, we said that would be a trough. And as we look forward, we do see increases there. It's a little bit of math to get to the other piece parts, but we do see increases in microelectronics, continued softness in demand for materials processing and the others are obviously much smaller in terms of contribution to overall sales.

Our next question comes from Mehdi Hosseini from SIG.

The first one is for both John and Kevin. I'm just trying to better understand, this is the second resizing that you're doing for Rofin. As you look into the next 1 or 2 years, how are you sizing the company? Are you expecting that the volume and revenue would reach the fiscal year '18 level? And I'm avoiding the use of the word peak, but I'm just trying to better understand how you're planning and any forward-looking color will be great.

Mehdi, we've been pretty consistent in what we do in terms of guidance, right? We always go out 1 quarter. So it's really difficult to communicate a strategy or even a set of numbers for legacy Rofin. It's been fully integrated into the business and we don't really recognize Rofin at this point. We molded it into the segments between ILS and a little bit to OLS. So again, looking out a year or 2, we're not going to discuss strategy per se, but we're trying to deal with the near-term softness with China and taking actions around that to make the business more efficient.

I asked the question because back in '17 we started talking about capacity expansion for the volume that was supposed to come in 18 months later. Now that the dynamics have changed and we're looking 18 months out, I'm trying to understand qualitatively, you don't even have to give me numbers, how you've seen business. Because back then, you were proactively adding capacity and now you're taking a different action. And I'm just trying to better understand how you're planning for it. It can be just qualitative.

I think the reality is that the market has changed dramatically. The competitive dynamics have changed in a very significant way even in the last 6 to 9 months. And rather than sit around, we're trying to take positive action to be able to run the best business that we can. Our targets for the technology have shifted from being part of sort of a general cutting environment to a more IP protected, I guess, joining environment or welding environment. And the recognition is that we shouldn't have 2 locations manufacturing products for that market. We should have a single location manufacturing products for that market. So yes, there has been a change in direction from 2017 to today that takes into account what's been happening in the market. But we remain committed to these opportunities and we think we have a differentiated solution. At least that's what our customers are telling us.

Sure. And then on the diode topic, I understand this has been a recurring challenge. What's the life of these diodes? Does it have a multiyear? And when would you actually have to write off the value of these components?

There are no shelf life concerns on these things.

They're not perishable at all, Mehdi.

Okay. So we don't have to worry about that. And then when you think about the actions in terms of resizing, I think you announced some proactive actions 6 months ago and now you have this other $20 million, $25 million that is going to come out of cost. If I understand, it impacts 2 facilities, one in California and one in Germany. Should I assume that your ability to ship ELA system is unaffected? In other words, if the foldable market were to turn on, would you be constrained by capacity?

You're correct that ELA is unaffected by any of this. The Santa Clara consolidation, we have a leased facility which is office space. We've been working towards making some changes in the way we operate here in Santa Clara to be able to merge everybody back into a single building when the lease expires. That happens next year. And we've already talked about the activity in Hamburg. There's no change to any other parts of the business.

Our next question comes from Mark Miller from The Benchmark Company.

Could you comment about the linearity of your business as the quarter progressed into July? Are things strengthening or weakening?

Mark, we run such a diversified business that if you take them all into account, it's sort of a smoothing function on it. I'd say certain businesses like materials processing certainly got weaker as the quarter went on. Other businesses picked up and then others are more on a steady cadence to begin with.

Just wondering too about what traction are you getting in the higher power fiber laser market.

For ARM technology or standard kind of applications?

In general, in general, John.

So we continue to be pleased with the reception that we're getting from customers in lots of different applications for the ARM portfolio. In the cutting market, we're being very selective about where we participate. And we're not going to chase prices down the drain just to sell product. We're interested in being able to make money doing this. So it's very selective activity in CW fiber, standard CW fiber and a much greater focus on the ARM portfolio.

Our next question comes from Larry Solow from CJS Securities.

Most of my questions have been answered. Just a couple of quick follow-ups. John, the pricing pressure in China in materials processing, is that more focused on fiber lasers or are you seeing that across the board?

It's predominantly in fiber lasers.

Okay. And is that -- I know you've talked about trying to get away from some of these more high-volume areas. Are you still feeling that impact despite that? Sounds like yes.

I'd say we're seeing the effects of macro demand in China unrelated to pricing dynamics in the fiber laser market. We're reporting on the fiber laser market because it's part of the overall universe and people expect us to be able to opine on this. The direct impact on the business is actually fairly small.

So do you still -- I mean is your fiber laser your piece that originally you had thought was going to grow 20% when you had originally given guidance, is that piece actually growing year-over-year by itself?

So the business that we referred to was for lasers and components. And the components included both fiber and semiconductors. And I'd say, it's a mixed bag. The laser side, there's certainly demand pressure and price pressure that has affected those growth numbers. On the fiber components side, it has been a surprisingly strong market, but that ties into some of the numbers that are reported by Chinese domestic manufacturers because we're one of the main providers of the fiber modules to them. And on the semiconductor side, it's a mixed bag because what we're seeing in China is Chinese domestic suppliers are trying to move rapidly to fulfill domestic demand and drive supply chain independence. So that is a more challenged market. Now this is going to sound defensive, Larry, and it's not intended to. But when we first came out, we had a view. We did correct that view when we saw things start to change.

Absolutely. No, no absolutely. I didn't mean to be offensive on the company. I was just trying to see growth, see where we stood today from...

Completely fair. Just for some folks who may not have been part of that earlier conversation, I wanted to make sure they had the history.

Our next question comes from Nik Todorov from Longbow Research.

Sorry to go back to the OLED order, but John, are you willing to share if the order represents the full capacity for the fab in question or do you expect additional orders from the same fab?

I do not believe, and I have to say, Nik, that I'm making an assumption here based on what was ordered that it probably doesn't fill the entire fab.

Okay. That's helpful. And how much of the restructuring charges that you're taking for the move will be actual cash outflow? Are you guys sharing that?

For the move itself, so there's Hamburg and then there's the Santa Clara. Most of Hamburg is restructuring that is on -- you can see the GAAP to non-GAAP reconciliation, the impacts related to that. So I would refer you to that. The exit of the building next door, virtually nothing to accrue there, happens late next year. So only what you see on the tables today will be Hamburg only.

Okay. Got it. And question on the materials processing on the pricing pressure. Do you get a sense that even if demand recovers, the space is going to continue to be ultracompetitive? I just ask because seems like those Chinese players are just hungry to steal market share and willing to do whatever it takes. So from your point of view, do you get a sense that space is going to continue to be ultra-price aggressive even if demand recovers?

I don't think that the genie is going back into bottle here. And I will take exception on behalf of the Chinese manufacturers that they're stealing market share. The challenge between Western manufacturers and Chinese manufacturers, we have very different focus. Most of the Western manufacturers are P&L-driven and we're trying to run good healthy businesses. A lot of the Chinese manufacturers are focused on growth and they do receive subsidies from the government to help bridge the gap. So we're really operating on 2 different models. I don't think that they're "stealing". I think they're being very aggressive to try to gain share and grow into their business model. Because at some point, we know that the subsidies expire just as we've seen in the other markets that I mentioned during my prepared remarks.

Our next question comes from Joe Wittine from Edgewater Research.

On Phase 2 in FPD, can you help us understand how you and your partners are viewing the phase relative to the prior Phase 1, either from an investment potential or an output potential, it will be great to get your thoughts just to frame things up.

So certainly, understand the interest in the data. One of the things that's difficult to project at this point is exactly what configurations will be introduced in each of these potential fabs. And it has a pretty big impact on output as well as the scale of investment. So let's just assume for a moment that a line takes 2 pieces of equipment from us, whether it's a Linebeam 1000 or a Linebeam 1500. The delta, however, is 2x in terms of revenue opportunity, right? It's from $20 million to almost $40 million in terms of revenue opportunity.

And then everyone has been making assumptions about the geographic origin, at least of this most recent order. And the important part of the Chinese player group is that a lot of these fabs are subsidized. They're going to be in the 45,000 sheet variety in all probability. But the 45,000 sheets of Gen 5.5 glass or it could be 45,000 sheets of Gen 6 glass, again, that has a big impact on the size of the investment. The numbers are out there, so I don't think that we're sharing anything that people don't know, but it's roughly 2 machines per 15 -- it's 2 ELA machines roughly for every 15,000 sheets. So if you assume it's the low end, the fabs are at the low end of the scale in terms of size and you multiply that by the number of ELA tools that go into it by the dollars per tool, it gives you a relative estimate on the size of the business.

Now if you look at installed base that exist today, Samsung's own comments would suggest that they can cover somewhere in the vicinity of 1/3 of the market. You're going to be in a situation where at the end of this phase, which is going to be somewhere out in the early 2020s, that you'll cover at least another 1/3 or more of the market. And it's consistent with the view that OLED will take over from LCD. Of course, none of us got the timing right. We thought we would have been at 80% market penetration already. It's going to take a few more years to get there.

So that would imply that Phase 2 is roughly similar to the size of Phase 1 if I compare 1/3 to 1/3?

Roughly. These are not exact numbers. And again, it depends highly on what the mix is.

No, I understand. I appreciate it. Maybe order of magnitude on the Phase 2 orders that you actually have in hand relative to some of the initial orders you received in the last cycle. I would assume based on your tone that these are more modest than those from 4 years ago or so.

Again, you have to remember, in the early stages of the OLED market, it was a single large customer who was placing orders that covered entire fabs and the scale of those fabs was quite large. This is going to be a much more diversified customer group. I don't think you'll see customers placing orders, single orders that are similar in size to what we saw early in the first stage, but you'll have many more customers placing orders so collectively, the dollars will balance out.

Great. And then finally on materials processing, the only subsegment of the business that I think has not been asked on are, any CO2s that are still being sold? And then your tools business, can you speak to just general trends in those 2 smaller pieces?

Yes, so the CO2 business has held up very well. A lot of the applications there as I think you're aware are predominantly nonmetal processing. So that business has been chugging along. On the tools business, we have seen pressure there. And I go back to the German machine tool industry which is one of the canaries in the coal mine for the global machine tool business. I mean the data that's coming out of there is pretty weak. And I think that's reflected across a lot of the laser-based tools as well.

And our next question comes from Andrew DeGasperi from Berenberg.

Berenberg. I guess the first question with regards to Japan-Korea trade impasse on those 3 chemicals key to OLED. Do you have any, I guess, outlook or idea how much supply they have and could it impact OLED screen production in the near term?

We have visibility on a great many things in the OLED market, but what the chemical stockpiles are for our customers is unfortunately not one of them. What I would imagine they're doing right now is probably forward ordering and trying to stockpile more because it is going to take some time for them to qualify secondary vendors on some of these chemicals.

Got it. And then maybe I know material processing has been discussed at length. Just on a bigger picture, given what you've seen and know in terms of competition and demand, does it still make sense to be in the cutting fiber laser business at this point?

So I think what we've been saying sort of indirectly is, we're trying to avoid that space because we see it as being very cost competitive and therefore it's going to be margin challenged. The market leader reported earlier today and I think you saw the impact that pricing had on their margins. And they have scale that nobody else has. So you can imagine what it does to players who don't have scale. It's an even more challenging proposition. And that's why we've been shifting our focus over the last several quarters into areas where we think we can drive a benefit for customers and we can maintain more realistic pricing for the technologies that we provide.

And ladies and gentlemen, with that we'll end today's question-and-answer session. I'd like to turn the conference call back over to John Ambroseo for any closing remarks.

Just again want to thank everybody for participating, and we look forward to catching up with you at a future conference.

Ladies and gentlemen, the conference has now concluded. We do thank you for attending today's presentation. You may now disconnect your lines.