II-VI Inc (IIVI) 2013 Q2 法說會逐字稿

Welcome to the II-VI Incorporated fiscal year 2013 second quarter earnings call. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session with instructions following at that time.

(Operator Instructions)

As a reminder, this conference is being recorded. Now, I would like to turn the conference over to your host, Chief Financial Officer and Treasurer, Craig Creaturo. Please, begin.

Thank you, Tyrone. Good morning, everyone. I am Craig Creaturo, Chief Financial Officer and Treasurer of II-VI Incorporated. Thank you for participating in the second quarter fiscal year 2013 II-VI Incorporated investor teleconference. As a reminder, this teleconference is being recorded on Tuesday, January 22, 2013. The forward-looking statements we may make during this teleconference speak as of today. We do not undertake any obligation to update these statements to reflect events or circumstances occurring after today.

Thank you, Craig. I am Francis Kramer, President and CEO of II-VI Incorporated. As I noted in the press release, our quarter came to an anti-climatic close when we experienced lower sales activity during the last few weeks of the quarter than what we'd anticipated. In spite of this, we can say II-VI had one of its most active quarters ever. It was a quarter in which we completed three acquisitions. Each will be a new part of a different business segment within II-VI. Also during the quarter, we significantly expanded our credit facility and settled a contractual obligation that we had been working on since the Thailand flood in October of 2011. I'll now turn my attention to review each of our business segments.

During the second quarter, in Infrared Optics which includes HIGHYAG, we had bookings of $44.6 million, up 2% compared to the second quarter of FY 2012. There was a significant shift in the composition of our bookings. Japan bookings were $4.5 million for the quarter, down $2 million year over year. This was offset by increased bookings in Germany, Taiwan, Korea and North America. North America bookings increased 4% year over year; however, it was down 16% from the first quarter of fiscal year 2013. We feel, this is a result of a decrease in laser utilization driven by the holidays in November and December, combined with a business cautiousness over the fiscal cliff, sequestration and worldwide economic concerns.

For IR Optics business, in the US, orders and shipments from domestic OEMs decreased 15% quarter over quarter. This was a result of timing of blanket orders from both high and low power OEMs and softer demand for replacement parts from our high-power OEM customers. Aftermarket bookings declined 16% quarter over quarter, as a result of the declining machine utilization rates. The outlook for the third quarter and fourth quarter depends on the near-term economic impact of recent government policy decisions and consumer consumption, which drives laser utilization. European bookings for the second quarter were down 2% compared to the first quarter, while the European aftermarket was up 4% quarter over quarter, reflecting our increased efforts to expand our support into this region.

Our diamond optical windows for the EUV photolithography systems business continue to grow as projected during the quarter. Asia bookings were down 5% quarter over quarter, driven mainly by the softening of the Japanese economy. Both the low and high-powered Japanese OEMs have slowed production rates compared to the first quarter. Japan bookings were down 4% from the first quarter of FY 2013. China bookings were down in the second quarter, but indications point towards some recovery during the third quarter. Bookings finished down 26% from the first quarter, but up 12% year over year. The sales of variable radius mirrors, the aftermarket sales and penetrating the glass tube laser suppliers continues to show positive results.

At HIGHYAG, bookings of $4.7 million for the second quarter were down 30% quarter over quarter and year over year. We continue to ship from our backlog, which was reduced by $3.9 million in fiscal year 2013; although, we have seen a softening in the bookings, we continue to see growth in 1 micron welding, beam delivery and 1 micron laser cutting. In order to take advantage of these opportunities, we continue to add manufacturing capacity, increase our staff to serve these markets. Now, moving to the Near-Infrared Optics segment. Bookings during the second quarter, compared to the same quarter last year, were up 19% to $35.7 million. By segment revenues were up 14% to $37 million. The bookings increase was attributable to increased demand for Photop's green laser devices, along with one month of bookings relating to the acquisition of the assets of Oclaro's Santa Rosa thin film operation and the Oclaro interleaver product line that we acquired in December.

We are excited to have purchased these assets and to supply Oclaro and other customers solidly as we take over these operations. The revenue increase was driven by improvements across most of the Photop and Aegis product lines; although, the telecom component business did experience a softening during the end of the quarter. Compared to the first quarter of fiscal year 2013, Near-IR bookings were up sequentially 2%. Near-IR revenues were down 9% from the first quarter of FY 2013, due to a softening in the telecom component business. We are pleased with the segment earnings improvement from the Near-IR, which is up 115% for the December quarter compared to last year, driven by higher sales volume, better operational execution and recovery from the Thailand flooding.

At Photop, despite the second quarter revenues being up 10% year over year, they decreased 8% sequentially from the first quarter. Revenues were impacted by lower vendor managed inventory demand at the end of the quarter by a major customer, several holiday periods in China, North America and Europe and general market softening in the telecom component business. During the second quarter, the telecom component business experienced a slowdown in the legacy products with the China and Asia markets in EDFA components, switching and WDM products. In the telecom related R&D area, Photop made good progress towards the final development of high-end components and module products for the next-generation high-speed network requirements of its customers, such as 100G ICR, tunable pump splitters, multi-task switches and EDFA arrays.

At Photop, we continue the integration with Aegis Lightwave on R&D programs, our initiatives to improve customer service and our efforts to reduce time-to-market of new products. On January 7, 2013, we completed the move of Aegis Lightwave under the Photop brand identity. Aegis Lightwave Incorporated based in Woburn, Massachusetts will now operate as Photop-Aegis. Its subsidiary AOFR Pty Limited based in Australia has been renamed Photop AOFR PT Limited. The merger will allow us to better serve an expanding global customer base with coordinated sales, marketing, applications engineering and product development activities using the combined resources, complementary expertise and global reach of Photop.

The Photop laser business revenues increased by over 10% quarter over quarter, due to the increasing demand and volume delivery of laser devices and the laser module assemblies driven by several applications in the life science and the broad industrial markets. Photop's Optics business revenue experienced weakness in the second quarter in telecom and industrial laser Optics markets. Fiber to the home filter shipments dropped, due to the seasonal demand, softening and pricing pressure from competition on the legacy GPON and EPON filter products. Industrial laser Optics revenue decreased slightly during the quarter. However, we also achieved several key wins in Optics for new product initiative in telecom Optics, industrial lasers and instrumentation. These include new products like gratings, F-beta lens and EO crystals.

During the quarter, Photop completed the acquisition of the Oclaro Santa Rosa thin film filter operations and the Oclaro interleaver product line. The integration of this business is progressing very well. We expect to see growth in the telecom and life science filter businesses as we supply Oclaro and other customers. Now, at Photop-Aegis, second quarter revenues were down 19% compared to the first quarter of FY 2013, or up 48% over the same quarter one year ago. The sequential quarter over quarter decline is the result of reduced demand for Aegis's legacy products. Aegis continues to see growing demand in China and globally for its high-powered laser combiners serving the industrial fiber laser markets. Aegis continues to expand its manufacturing capacity at Photop for its next-generation optical channel monitors for the ROADM market and for high-powered fiber laser combiners serving the industrial fiber laser market.

In collaboration with Photop, ongoing investment is being made in low-cost, small form factor in high-performance OCMs that address the flexible bandwidth requirements of transmission networks with data rates of 100 Gbps, 400 Gbps and beyond. Similarly, AOFR continues to expand its portfolio of high-powered, fiber laser combiners for fiber laser applications consistent with the broadening of the fiber laser components across Photop. Also during the quarter, as noted in our press release, a final settlement was reached on the fiscal year 2012 Thailand flood-related damages. Craig will touch on this further in his remarks.

Now, moving to the Military & Materials segment. During the second quarter, bookings of $27.5 million were lower by 13% compared to a year ago. This shortfall was made up of lower Sapphire bookings in our Military segment and lower demand for selenium products in our Materials business. Compared to the first quarter, bookings increased by nearly $10 million, of which 70% was attributable to our Military businesses and 30% to our Materials business. Revenues for the second quarter of $21.4 million decreased 30% from the second quarter of last fiscal year and 11% from the first quarter of this fiscal year.

Both the year over year reduction in bookings and the reduction in quarterly revenues are the result of weakness in our Materials business. Overall, the booking and revenue outlook for the remainder of this fiscal year as compared to the first half is expected to improve. This is driven by the additional bookings and revenue associated with the acquisition of LightWorks and also increased bookings and shipments for EEO products. We do continue to see potential softness in the Military business related to the federal budget uncertainty and the threat of sequestration in our Materials business selenium and tellurium demands remain weak and our new product line start-up is slower than anticipated.

So, now our Military business is comprised of -- recently the acquisition of LightWorks announced last month; combined with EEO which is Exotic Electro-Optics; with VLOC; and with MLA which is Max Levy Autograph. LightWorks, based in California, manufactures precision optical systems and components including visible, infrared and laser-based system and sub-assemblies addressing the defense, aerospace, industrial and life science markets. We're excited about the opportunities that LightWorks brings to the Military business. This acquisition will provide increased market share in intelligence, surveillance and reconnaissance, which we call ISR. These are defense applications, which continue to receive favorable funding in the defense budget. LightWorks has a considerable foreign military serials portion to their business that provides a solid base for the next several years.

During the past quarter, the Military business had several significant production orders and design wins. These include a production order for missile warning systems, prototype development orders for patterns, ceramic radomes for high-speed missile applications and infrared windows and Optics for ISR applications. In addition, we are pleased to see new activity in our medical assembly business with a development order to support next-generation laser eye surgery requirements. In our Materials business at PRM, we continue to experience low demand for our tellurium products due to a slowing in the photovoltaic market attributable to a large buildup of tellurium inventory in the supply chain. Although we were able to offset a significant portion of the shortfall in the photovoltaic business during the first quarter by servicing other markets, that alternative was not available this past quarter.

We also experienced lower demand for our selenium product from the agricultural feed market as falling index prices caused buyers to delay purchases in anticipation of further price declines. Additionally, lower than expected output from our new, rare earth product line added to the weak performance of this business unit. The selenium index price decreased from $43 per pound at the beginning of the quarter to $40 at the end. The tellurium index price was volatile during the second quarter, starting at $110 per kilogram, increasing to $120, then slowly dropping back to $110 per kg by the end of the quarter. The changes in index price combined with timing of raw material deliveries resulted in an inventory write-down of $800,000 for the quarter.

We continue to experience production difficulties in our new rare earth product operation. Deals are improving. We are producing and shipping product. However, yields are below expectations and currently not sufficient to achieve our targeted revenue or financial results. Moving to the Advance Product Groups. M Cubed Technologies Incorporated, during the quarter, was acquired. We're excited about it. Bookings, for the two months as part of the II-VI organization, were in line with expectations. Some softness was experienced in the semiconductor capital equipment sector for silicon carbide components, while this shortfall was fully offset by orders from metal matrix composite components serving customers in the display, defense and industrial markets. Revenue continue to favor the semiconductor sector which was bolstered by next-generation prototype component orders.

On the manufacturing front, work continues on our precision products division expansion within the M Cubed Technologies business with the construction of new clean room manufacturing facilities to support next-generation production of the 450-millimeter semiconductor tool components. Construction at our Newtown, Connecticut facility is anticipated to be completed in February, permitting production to commence at the site during the third quarter of fiscal year 2013. Development efforts remain focused on next-generation semiconductor components and assemblies required to support OEM customers in lithography, inspection and metrology areas.

We are also advancing initiatives in the defense and refractory areas for material development programs designed to meet greater threat levels or higher temperature operating conditions. At Marlow Industries, bookings for the second quarter were up 34% year over year, primarily due to increases in defense driven product orders which are our legacy products, end-of-life purchases for a major automotive product platform and new product introductions in the life sciences market. These increases offset reductions on the gesture recognition consumer market. Overall bookings for the quarter were down 7% quarter over quarter, due to reduced demand in gesture recognition and telecom markets and were partially offset by the increases in the automotive and life sciences market.

Revenues for the second quarter were down 6% year over year, primarily due to reductions in the gesture recognition market, driven by weaker consumer demand as well as reduction in our automotive business as we produce -- as we approach the end-of-life for this product line in our government R&D contracts. These reductions partially offset the increased revenue in defense that focused on the legacy products for repair parts. Revenue increased 4% quarter over quarter as stronger revenues in defense and power generation offset the decline in our gesture recognition business. The personal comfort market continues to develop with the shipments of [prototope] products to customers.

We added another offering to our Climatherm product line this quarter, which is aimed at the less than 100 Watt cooling market segment. The Climatherm product line continued to sell well in Europe, where we had multiple design wins this past quarter. We continued to see an increase in activity and interest in our EverGen energy harvesting solutions. With these products, customers can harvest otherwise wasted energy from the temperature differences that exist in a variety of different environments to power wireless sensors and actuators. We have made significant efforts to align our cost with our revenues to mitigate market uncertainties and to focus our efforts toward the most promising markets. Now in our Wide Bandgap Materials group, our year over year second quarter bookings were down 70%, due to the debooking of a large blanket order for 100-millimeter n-type substrate by WBG's customer, SemiSouth, which announced during the quarter that it would cease operations.

In addition to the impact on bookings, the SemiSouth closing also had a negative impact on revenue. WBG total revenues for the second quarter were down 40% compared to the previous quarter and 33% year over year. Shipments of semi-insulating substrates for RF applications were down from the prior quarter. Customer demand for production deliveries and the completion of qualification programs of their devices on our substrates for both the wireless infrastructure market and the defense sector continues to slow. During the second quarter, we did see increasing interest in our 150-millimeter diameter products and expect shipments of 150-millimeter n-type silicon carbide substrates to increase in volume as well as increase in the number of customers in the second half of FY 2013.

In the second quarter, we received a large blanket order from a domestic OEM for 150-millimeters semi-insulating substrates for RF applications. Growth in the power device market based on the need for large diameter silicon carbide substrates continues to be driven by the promise of more energy efficient products and solutions. The rapid advancement of early introduction of 150-millimeter diameter substrates should enable device manufacturers to lower their device costs, enable them to manufacture using existing 150-millimeter diameter silicon and gallium arsenide device processing lines. We believe this will expand the potential market share for silicon carbide devices and accelerate the transition to 150-millimeters. We continue to add capacity in our Mississippi facility. In the third quarter, we expect delivery of new fabrication, polishing and characterization tools specifically targeted towards increasing our capability for manufacturing 150-millimeter substrates.

In summary, although we had many challenges during the quarter, we have confidence in the future of II-VI. This confidence has been bolstered by our three recent acquisitions that have been combined under the management of each of three different material-centric business segments. We remain focused, as usual, on our consistent growth and profitability model across the multiple markets that we serve. Our quarter cash generation is strong. Our product backlog without the effect of recent acquisitions is 9% above last quarter. We are optimistic that the worldwide economies will gradually improve as some of the uncertainty in the US is sorted out. Craig, this concludes my comments.

Thank you, Fran. Here are the items I would like to highlight before we open up the question-and-answer portion of the call. As described in today's press release, consolidated bookings for the quarter-ended December 31, 2012 were $127.1 million, 9% higher than the same quarter last fiscal year. In addition, as a result of our three acquisitions completed during the quarter, we acquired $36 million in backlog. Total Company backlog at December 31, 2012 was $199 million, up 23% or $38 million from the September 30, 2012 backlog. The components of the backlog at December 31, 2012 were -- Infrared Optics at $44 million; Near-Infrared Optics at $36 million; Military & Materials at $79 million; and Advanced Products Group at $40 million.

We finalized our settlement during the quarter with the Company's former contract manufacturer in Thailand as a result of the October, 2011 flooding. As part of the settlement agreement, the Company will receive approximately $5.3 million as a result of damage to our equipment and inventory that was lost in the Thailand flooding event. As of December 31, 2012, we have received $2.8 million in cash and will receive the balance, $2.5 million, no later than April 1, 2013. We recorded $800,000 as a credit to Cost of Goods Sold in the current quarter, as the recovery of what was expensed in Cost of Goods Sold in Q2 of FY 2012 and recognized a balance in other expense in the condensed consolidated statements of earnings.

During the current quarter, the Company repurchased $4.9 million of its common stock, as part of the $25 million Board authorized repurchase program announced in May, 2012. The number of shares repurchased during the December quarter was 300,000. To date, the Company has repurchased approximately 919,000 shares for a total of $15.8 million. It is the intent of the Company to continue with the Board approved purchases for the remainder of fiscal year 2013 in accordance with the 10b-18 rules. We have not forecasted further increases in our share count beyond the actual purchases made to date in the outlook that was included in today's press release. We plan to continue to report the actual repurchase activity as part of our future quarterly earnings releases.

The year-to-date effective income tax rate was 30%, compared to 20% for the same period last fiscal year. The higher effective tax rate is primarily due to a shift in earnings to higher taxing jurisdictions, along with some specific items that were required to be recorded in the current quarter that will be recovered before the end of the fiscal year. In spite of the high tax rate during the just-completed quarter, we are still expecting the income tax rate for the fiscal year 2013 to range between 23% and 25%. During the just-completed quarter, we entered into a new $140 million line of credit facility that has an additional $35 million expandable borrowing option. Interest currently accrues at LIBOR plus 1.25%.

We had $121 million borrowed on this facility as of December 31, 2012 to help fund our recent acquisitions, as well as our share repurchases. The interest rate on our borrowings at December 31, 2012 was approximately 1.5%. During the six-months ended December 31, 2012, we generated approximately $61 million in cash from operations. A 41% increase from the same period last fiscal year. During the quarter, we used $7 million of our cash for capital expenditures and $5 million for the share repurchase program. We also acquired approximately $6 million in cash as part of the M Cubed transaction. During the quarter, our cash balance increased by $10 million and now stands at $163 million, with about 70% of this amount residing outside of the United States.

Fran, this concludes my prepared remarks. Before we begin the question-and-answer session, I would like to mention that these comments and answers to certain questions contain forward-looking statements, which are based on current expectations. Actual results could differ materially. For information about factors that could cause the actual results to differ materially, please refer to the risk factors section of our Form 10K for the fiscal year ended June 30, 2012. Tyrone, we are ready to begin the question-and-answer session.

(Operator Instructions)

Avinash Kant, DA Davidson & Co.

I just wanted to check a number. Then I had a question actually. The first point is that, if I looked all the charges that you had during the quarter, excluding the impact, the EPS would have been $0.17, right?

I think that's right. Again, Avinash, that's one of the reasons we put all of the details in there and try to spell them out. But I think you're doing the math correctly.

Okay. Then could you give us some idea about -- you've done three acquisitions in the current quarter, if you take the combined contribution of all these three -- and maybe you could break it down or kind of give us some idea -- how much of it is in the guidance that you are putting out for fiscal year 2013, that is coming in from all these acquisitions? -- and EPS [temps] --

Sure. Maybe just to give you a perspective on it, maybe for the just-completed quarter. Then we'll look out into the guidance for the full year. In the just-completed quarter, in our financials, we had M Cubed in there for two months. We had the business and product line we bought from Oclaro was in there for one month. The LightWorks acquisition really made no contribution to speak of in the December quarter. So, two months, one month and zero months respectively in the quarter we just completed. That was total sales-wise and bookings-wise, Avinash, for two months worth of M Cubed, one month worth of the businesses we acquired from Oclaro. It was approximately $8 million or so in total revenues and bookings.

When you look out into the full fiscal year guidance, we are still on track to do kind of around a similar run rate to what we had anticipated. We do anticipate that we would have for M Cubed, somewhere around $32 million to $34 million or so. That's pretty consistent with what we said back in the November 1, 2012 press release. We do think both LightWorks and the businesses we bought from Oclaro, they will contribute, but it will be at a much lower run rate than the M Cubed transaction itself. That will be somewhere around the $15 million to $20 million range. Again, some things we still -- still a little bit new to us as far as both those businesses go. We don't have quite a track record yet as to how they'll contribute. But that should generally give you some expectation there.

So, that begs one question though, that if you look at the contribution in the quarter that you had for $8 million or so in [RAD] new terms and if you look at the guidance that you had given prior to this quarter, that was $128 million to $132 million, where did the shortfall come from in the core business?

Yes. I think it really came, really, in a couple areas. Really, in our PRM business specifically was probably the biggest shortfall as far as where our expectations were for the quarter and where they actually ended up for the quarter. Then, as Fran mentioned in his comments, we did see some softness especially in our industrial businesses. I would say in our, as he mentioned in our HIGHYAG and Infrared Optics business specifically. More so right at the end of the quarter, Avinash, it was relatively strong throughout the quarter, but really saw a somewhat unusual, really finish to the quarter. Not a lot of activity in the last couple of weeks for many of our industrial businesses. Fran, do you want to add anything?

But have you seen that come back a little bit, the weakness that you saw? Or has it stayed at that level from the last quarter?

I would say, just one that just adds a little bit of bad news to us in the past quarter. We had the telecom component business a little short in December. So you put the three things together, that Craig talked about, PRM, a bit in the IR and a bit in telecom, that's what hit us. Then looking at coming back -- the IR business seems stronger so far. But this is a month-to-month -- almost a month into it. So I think the IR might be better. No news yet that I can tell you about on either the PRM, except that the problems that we did have at PRM in the quarter -- the selenium and tellurium index price thing, it remains volatile.

But we haven't had a big shift yet. Our rare earth product line work, as I stated, we're making some progress. We're shipping. It's not enough yet to get it to the level we expect. So, better news in IR, PRM holding its own and in our Photop business, I think, it's going to be about the same. I don't have a real indicator, because telecom has runs on such a short fuse. But we're in good position with all our customers in telecom, it's just I can't tell you -- our forecast does have a slight improvement as we go finish the year at Photop also.

Jim Ricchiuti, Needham & Company.

If we look at your full-year guidance, excluding the acquisitions, it seems like you're looking for -- potentially revenues to be down modestly to flat. I'm trying to get a sense, are the same factors that contributed to the shortfall, revenue shortfall in the December quarter -- are they the same factors that you're seeing in for the full-year? In terms of more cautious, for the full-year?

I think you're right. We are cautious for the full-year. I tried to state that the volatility in selenium and tellurium is something we just can't predict. We thought we'd gotten ahead of that, but it still continues to jump around. Then the uncertainty in the worldwide economy on how it drives consumer consumption. That's really a big factor for laser utilization in the IR business. So, those two factors kind of taint our third and fourth quarter forecast.

I think we'll do better at our PRM in controlling the selenium-tellurium exposure we have. In IR, it appears to be trending up for how the confidence is happening. Because some of our belief on how lasers get utilize relative to consumer consumption -- there is a lag and then there is a buildup in the supply chain, which causes some changes on how we receive orders for that business. So it's harder to predict, a little bit now, with this volatility in the worldwide economies. But I think we're feeling better. Our numbers might show it a little bit conservative, but we're affected by what we've been through here in the last couple quarters.

Got it. Fran, you also alluded to just some ongoing issues on the new rare earth production. One, can you talk a little bit about that? To what extent do you think -- what's the timeline, do you think, to get back on track there?

Boy, we have been really at this now six, eight months. We keep coming into one bottleneck and then another. We're working through them. I think we've got one idea that's going to help our output quite nicely. But it's not enough to get us to the production rate we need. So, I can't give a good solid answer, but our belief is maybe within the six months, we'll get to the rate we need to be. But we have to take them one problem at a time. It's a processing line. So, if you have a bottleneck in the front part of the process, you never get to touch the backend of the process until you get the front one cleared. We have three or four stages. We been working them -- you try to do them simultaneously, but it just hasn't worked out. We've been bottlenecked at the first stage and at the second. Now I think we're working well on improving the second stage. Then, so we have the third and fourth stage of the process that are -- I think, really yet to be tested. We're maybe at something like maybe half where we want to be on the rate through the line.

Got it. One final question, just apart from sequestration, you seem to suggest a little better tone in the second half on the Military & Materials side of the business -- your confidence in that. Maybe I am reading too much into it?

I think for our traditional EEO, VLOC Max Levy businesses, we are at the same level of confidence on that Military business as we've been. It's okay. It's not booming, but it's okay. The one that we are getting more confidence on is LightWorks and that acquisition and the amount of business that we think will come with it. It's at least half booked that we're counting on. It's a foreign military sales opportunity that will carry on for some time, which is, for us, offsetting or helping with this sequestration and the cut down in US spending. This will be not affected by that.

Mark Douglass, Longbow Research.

Craig, so just to get some clarification. The full-year guidance is GAAP at this point?

Yes. The full-year guidance, Mark, that's in the -- on the outlook page or the guidance page, Page 3, excuse me, Page 2 or 3 of the press release, that is GAAP information.

Okay. Great. Thank you. Then if we look at HIGHYAG, Fran. Is some of the drop off at the end, timing? People have finished a lot of the end of year rush and then the last couple months the equipment bookings just kind of fell off as they digest all the new equipment that was installed in 2012? It seemed like there was a lot installed in 2012. So then, how did project, RFQ's look at this point versus where you were in December?

I think it's a little bit of just what you said. It's been very rapid. We've ramped up at HIGHYAG very nicely. Now we are getting a little bit of a lull here as people digest and put in the systems that we've sold. We've sold well into the US for welding applications. Those are automotive. Those might be slowing a little. The rest of the world have done well in some -- Japan, certainly, Germany where we're headquartered. But I think it's kind of the fiber laser deployment rate seems to be flat. In our view of it -- we're not -- we don't have a complete view, but our belief is, maybe 1,200 high-powered fiber lasers are going out to the market place at the current running rate, which might be consistent with what it was the prior 12 months or so. So, we think fiber laser is getting some real traction. But maybe they're having a lull right now as the first users put those machines out there and they're trying to digest them. It's happened to us at HIGHYAG. We took our forecast down in the third and fourth quarter just because of what we're seeing.

Okay. That's helpful. Any market share? Issues or shifts?

On HIGHYAG?

Yes.

No, I'm not able to comment on that. I don't think we feel we're losing. We sell at a -- kind of a high-end position on the product we offer into that space. So, some of the mid to lower end system applications -- there's a lot of shifting going -- I think a lot of Chinese, Indian, other parts of the world -- system builders who buy somebody else's fiber laser and put it on a system are entering the market. But we're not in that space. We're watching it.

Okay. Then, you mentioned maybe -- how come many high-power fibers are getting shipped? What do you think is happening right now in high-powered CO2, the 2D cutting? It reads closer to 4,500 per year run rate? Or what do you see in that market?

Yes, I think that you're right. Last quarter, I reported about 4,800 was the annual running rate of CO2. Right now, we would probably say 4,000. You can see from our customers -- they're down. I think that's 90% due to the worldwide economy, laser utilization not being as much. So people aren't buying new and maybe 10% due to just other alternatives.

Okay. Then one last question. Just a little more clarification. When you ranked the revenue guidance dropping -- on a organic basis, PRM is the biggest impact. Is most of that still selenium and tellurium or is that also just -- it seems like in the second half, you're expecting a pretty good ramp in this rare earth. I'm reading that's a pretty significant impact to the guidance? For me, Craig might clear me up a little bit. When I looked at the numbers, it's about 50% due to the rare earth deal of our being off at PRM and 50% on selenium-tellurium.

Yes. I would agree with that, Mark. It's really a combination of both factors. Again, we've seen some price stability, relatively speaking, in both selenium and tellurium. But really, where we have not seen a lot of strength has been especially in the tellurium market -- that market demand just is not showing itself just yet. We've got some challenges on the selenium side, as well. But I think, to Fran's point, I think it is kind of a -- somewhat of an even split between the legacy product selenium-tellurium and our rare earth product.

Even though the pricing seems fairly stable, the demand continues to fall at least year-over-year?

Yes. I just don't sense, Mark, that we see a big breakout on the horizon specifically for the tellurium market. It just doesn't seem like that's something that's imminent, at least, in the near-term here.

Dave Kang, B Riley Caris.

First, a couple of clarifications. When you said -- Fran, when you said Photop down 8% sequentially was it revenues or bookings?

Just let me check my note on that. So, Photop was down sequentially? Yes.

Revenues.

Revenues, yes.

Revenues. Got it. Then, also regarding Photop, you saw a weakness by major OEM or OEMs. Was it singular or plural? I just wanted to clarify that.

I think it was a plural comment, Dave. I think it was just kind of something we were seeing. I think we saw a bit of softness across more than just one OEM at the end of the 12 months.

Right.

I see. Would you say there are more of a Chinese related customers?

I think their mix is pretty spread. Really, --

Really. Okay. Then I thought you said, you expect Photop to be flat -- sort of flat this quarter, Q3. I am hearing China is still soft. So are you counting on some other regions like US to come back to make up that softness in China?

I think they're servicing a worldwide customer base, Dave. I think we've also anticipated or put into that forecast, the recent assets that we acquired from Oclaro and how that would contribute.

I see. Sorry, so you've got some acquisitions that are making up the difference then.

That is correct. I think, the broader point is that, some of the recent acquisitions -- the recent acquisition revenues, that will help to offset a little bit of this softness that Fran was talking about that we're seeing.

Okay. So I just wanted to clarify as far as the secular trend is concerned. Then, without the acquisitions -- from apples to apples, would you say the Photop business would be down sequentially, then?

No, I wouldn't do that. I would say, third quarter might be looking like the second. But I think the fourth quarter will be up. It's such a volatile business, the telecom space. We see, having had a couple down, it looks like the fourth quarter will start back up.

So, why such weakness? I mean, we're hearing all these CapEx going up and all that? So, we were expecting things to improve. But, why aren't the vendors seeing that? That improvement?

I think it's the delay in the chain reaction as cutbacks happen. We get it a little bit later. As things turn up, we get it a little bit later. So I think, it's having to do with just -- yes, I understand people think it's going to head up a little bit in telecom. We're a little more cautious until we get that order. So we're putting it in the fourth quarter.

Okay. So, fourth quarter, June quarter. Then, does Photop go through the annual pricing negotiation in early January?

It depends on -- all their accounts are spread around the world. Some ask for price reductions or price work, quite early, if you know what I mean. So, I cannot give you a good comment on that.

I see. So some of your peers are saying a 10% to 15% -- where you think the 2013 annual pricing will be? Between -- still 10% to 15% low-end, high-end? What's your gut feel?

I couldn't make a good comment there, Dave.

(Operator Instructions)

Jiwon Lee, Sidoti.

Most of my questions were answered, but Fran, I wanted to ask if you could provide some geographic colors for your IR Optics, that you see for the second half of fiscal year?

I think it's going to come -- certainly, Japan is off so far. They are going to come a little bit back, there's no doubt about it. So that's going to have the biggest percent up. The rest of the world whether it's China, which is doing well. I think it will be nice. North America, fine. Europe, that's probably maybe the laggard on percent that it -- we might have them guided to be up in third and fourth quarter.

Okay. Fran, on the HIGHYAG side, I wasn't sure if I heard everything you said on the competition front.

Yes, on the IR business, you're thinking? Or any one of them? I don't think I made --

Specifically, on HIGHYAG, please.

In HIGHYAG.

I think Fran's comments overall, Jiwon, were -- we're kind of serving the high-end markets there. I don't think we're seeing anything. We don't -- I think, Fran was saying, we don't believe we're losing market share. I think it's just a little bit of a slower kind of rate of systems add-on. Components that we manufacture, I think that slowed down. We don't believe that we're losing market share necessarily.

Okay. Then on the PRM side of things. Just kind of understanding the businesses environment that you have now -- how much of the tellurium pricing has to fall down again for more write-downs?

We've kind of marked it down to where, for both the selenium and tellurium -- Jiwon, we've marked it down to where the end of the quarter prices were. Again, for tellurium that was $110 per kilogram and for selenium that was $40 per pound. So, any further changes thereafter, we would need to make adjustments in our inventory -- something we do every month. Something we've been reporting every quarter.

Okay. My last question. It seems to me, excuse me, I have a little cold. It seems to me that you are expecting some revenue upturn in the March quarter from your commercial IR Optics and the combination of that business rising up a little bit and the acquisitions, especially the M Cubed. That's the primary source of your EPS up, even though on an organic basis, the revenue seems to be rather flat? Correct?

I think that's a good summation of it, Jiwon. I think you're right on. Again, I think we also believe too that -- we had a higher than usual tax rate this quarter. We're kind of sticking to our overall guidance with tax rates. So, we believe we'll have Q3 and Q4 -- tax rates will be lower than what we've experienced in the average of Q1 and Q2 here. So, we think that's also a contributing factor that will drop down to the bottom line as well.

Thank you. I am showing no further questions at this time. I would like to turn the conference over to Mr Creaturo for any closing remarks.

If there are no more questions, I would like to thank everyone for participating today. Our next earnings release for the quarter ending March 31, 2013 is currently scheduled for Tuesday, April 23, 2013, before the market opens with the conference call to follow that same day at 9.00 AM Eastern time. Thank you for participating in today's conference call.

Ladies and gentlemen, thank you for your participation in today's conference. This concludes the program. You may now disconnect. Have a wonderful day.