Coherent, Inc.
Q2 2018 Earnings Call Transcript

Published: 2 May 2018

[Operator:]

Good day, ladies and gentlemen, and welcome to Coherent's Second Quarter Fiscal Year 2018 Financial Results Conference Call hosted by Coherent, Inc. At this time, all participants are in a listen-only mode. At the conclusion of our prepared remarks, we will conduct a question-and-answer session. [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.

[Bret DiMarco:]

Thank you, Britney, and good afternoon everyone. Welcome to today's conference call to discuss Coherent's results from the second fiscal quarter of fiscal 2018. On the call with me are John Ambroseo, our President and Chief Executive Officer; and Kevin Palatnik, our Executive Vice President and Chief Financial Officer. I would like to remind everyone that some information provided during this call may include forward-looking statements, including, without limitation, statements about Coherent's future events, anticipated financial results, business trends and the expected timing and benefit, if any as such trend. These forward-looking statements may contain such words as outlook, future, expects, will, anticipates, intends or referred to as guidance. These forward-looking statements are only predictions and are subject to risks, uncertainties and assumptions that are difficult to predict and may cause actual results to vary significantly. These forward-looking statements reflect beliefs, estimates and predictions as of today, and Coherent expressly assumes no obligation to update any such forward-looking statement. For a description of risks and uncertainties, which could impact these forward-looking statements, you are encouraged to review Coherent's periodic SEC filings, including its most recent Form 10-K, Form 10-Q and Forms 8-K including the risks identified in today's financial press release. I will now turn the call over to John Ambroseo, our President and Chief Executive Officer.

[John Ambroseo:]

Thanks, Bret. I'd like to welcome everyone to our second fiscal quarter conference call. I'm pleased to report that customer engagement remains high, demand was strong in a number of key areas, and the display market has a lot of runway. So let's start there. After recycled reports on microLED displays were recently published, we feel that a number of enquiries about how this technology potentially affects the OLED market and Coherent. I'd like to start by repeating some comments I made several quarters ago. The appeal of microLEDs is that they produce higher brightness and consume less power compared to other method devices such as LCDs, LEDs and OLEDs. The challenges in turning microLEDs into manufactured old displays include high process intensity and yield. There are two methods to make a full color in microLED display today. The first is to grow the emitters on wafers where any wafer consists of a single color in the red, green or blue. Emitters from different colors are then forward transferred onto a display substrate. This involves separating the emitter from the growth substrate and using pick and place to relocate it to the display substrate. The total number of pixels drive the number of pick and place operations. In the case of smartphone display, this is millions of pick and place transfers. Since some number of transfers spell repairs are necessary that further increases process intensity and cost. It's important to point out a couple of things. To separate the emitters from the growth substrate, you have to break a very strong chemical bond that requires either high energy or high intensity, which translates into excimer or ultra short lasers respectively. Coherent excimer lasers are being used to develop the forward transfer process. If microLEDs are ultimately successful and this technique was adopted, it is a net benefit to Coherent as we would now content in the front plane of the display. The second method to make a full color microLED display is to use a single color likely blue to oxide a quantum dot overlay to produce red green and blue pixels. This will allow the emitters to be removed in bulk a think of it is removing sort of a one square inch patch through laser lift off and transferred in both to the display substrate. These steps are greatly reduced and from the pick and place approach, but the pixel density or PPI is determined by the pitch or emitter separation on the original growth substrate. In addition the PPI limitation quantum, dots are not 100% efficient so you sacrifice all overall power. This may not be an issue for wall plug power displays, but it does offset the inherent power efficiency of microLEDs in battery-powered devices. My comments up to this point are focused on the front plane of it FPD's. The backplane is equally important to the conversation. Similar to the power hit from the quantum dots, it would be counterproductive to use a microLED display with a less electrically efficient backplane, the battery-powered device, an LTPS backplane seems the like the choice. To recap, if microLEDs are commercialized using current methods underdevelopment, it is a net benefit to Coherent. We see LTPS being very compatible for all mobile displays. Putting it in another way, we don't see microLEDs as a thread to our market position rather we see them as a potential market expansion into new display modalities for very large or very small screens, such as video walls or AR devices respectively, and in our view, microLED is a technology that still needs to mature. This means that OLEDs remain the display of choice for mobile displays although capacity constraints are limiting the market share, Samsung is the only manufacturer who producing OLEDs with acceptable performance and quality. HTC claims that they can build approximately 500 million displays with their current capacity, which is largely consumed by internal demand for galaxy phones and their largest external customer. An increase in market, OLED market penetration into the remaining 1 billion handsets will require either Samsung to invest in additional capacity or one or more of their competitors to demonstrate a manufacturable design of acceptable quality. This is an important distinction. Much of the recent cycle is focused on a single handset, which uses one of the highest performing displays in production. It is not necessary to replicate the specifications of this display to address the other two thirds of the market. As an example, BOE has been aggressively investing in R&D. They have shown a number of designs including foldable displays that are targeting the total available market. They have backed their R&D commitments with capacity investments into recently announced Gen-6 OLED fabs. These will be the first Gen-6 fabs outside of South Korea. The Takeaway is simple. It is reasonable to discuss the timing of certain investments such as Samsung's A5 fab, but we believe the future of OLEDs is very bright. Service demand for FPD has been in line with our recent commentary, reported underutilization at Samsung has been offset by an increase in the overall installed base. Second fiscal quarter FPD service revenue was similar to the prior quarter. We expect FPD service demand to accelerate between now and the end of the calendar year to support the introduction of new smartphone models. Semiconductor CapEx is going strong for systems and service and resulted in high sequential double-digit bookings growth in our second fiscal quarter. The order strength comes from high utilization rates that drive service revenues and new capacity investment for memory and logic devices in China. A cornerstone element of Made in China 2025 is to reduce the country's dependent on IC imports, which account for 80% to 90% of icy usage. China created a $150 billion investment fund to support their semiconductor evolution. The Chinese sense of urgency has likely increased following recent enforcement actions against CTE. It is anticipated that China's investments will be sustained at or near the current level for calendar year 2019. Growth in other areas including self-driving vehicles, artificial intelligence and IoT devices is expected to accelerate over the next few years, which will require new capacity and/or re-commissioning of all the new tools. As leading supplier of inspection and metrology lasers, Coherent will benefit from each of these. The advanced packaging market has been running at five-year highs over the last few quarters due to growth in advanced packaging designs among top-tier smartphone manufacturers and HDI board usage among second-tier manufacturers. These trends are expected to continue as smartphone manufacturers jockey for market share. Materials processing orders were very strong across all submarkets. Fiber laser orders were up significantly for cutting and welding applications. Chinese customers accounted for the growth in cutting for powers up to 10 kilowatts. Welding orders were lead by Tier 1 automotive component suppliers and EV battery manufacturers. Fiber component orders were also up from demand in China, where we are one of the principal suppliers for the Chinese-domestic fiber laser companies. The market for lasers is used in other manufacturing of plastics and polymer remains robust, and bookings for medical device, manufacturing workstations and marking systems increased on demand for cardiovascular therapy and dental appliances. There has been tremendous growth in metal additive manufacturing, industry data shows that metal and machines unit sales grew 80% in 2017 compared to 2016. Despite these impressive numbers, the market is constrained in part by process elements and process knowledge. Many of the existing tool providers in metal AM are providing process development services and encoding the parameters into their tools, while these may ensure reproducibility and quality, it creates a log jam for revolution or for innovation rather. One of the companies is seeking to disrupt this approach is OR Laser, which has been developing its first metal AM tool. They wanted users to have access to process parameters to encourage collaboration, expand the knowledge base and shorten the development to manufacturing cycle. The Company has also developed a complete AM software suite, so no third-party software is needed to go from CAD --- from a CAD model to printed part. We believe this combination will be critical in opening up the metal AM market. We also see opportunities for process improvement in the types of lasers being applied in metal AM. Given these synergies, we agreed to acquire OR Laser. This transaction was closed in early March 2018. Our first tool the laser creator is a compact work station that combines the printer, powder bed, process control and other system hardware into a 19-inch cabinet standing approximately 6 feet tall. The compact nature and entry level price point make it ideally suited to build parts for the dental, medical and jewelry markets as well as a process and product development. Future tools will address automotive and aerospace applications. We have very good bookings for OEM instrumentation and components. Bioinstrumentation orders were up significantly on the timing of large annual and semiannual orders. Medical OEM orders were also up on demand from ophthalmic, aesthetic and surgical consumable markets. We're seeing more and more opportunities near as based in defense market by everything from large format imaging optics to directive energy applications due to our diverse capabilities and our U.S. manufacturing base. I hope you believe in my comments the number of opportunities that lie ahead of us. We have always been well positioned in microelectronic and instrumentation, but through R&D programs and acquisitions, we have aligned ourselves with some very exciting opportunities in the material processing market. I'll now turn the call over to Kevin Palatnik, our Chief Financial Officer.

[Kevin Palatnik:]

Thanks, John. Today, I'll first summarize fiscal second quarter 2018 financial results then move to the outlook for fiscal Q3. I'll just 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 related to stock-based compensation expense, amortization of intangible assets, restructuring costs, purchase accounting adjustment, impairments charges and recoveries, and the related tax adjustments. The full text of today's prepared remarks and trended GAAP and non-GAAP supplemental financial information will be posted on the Coherent Investor Relations website. A replay of this webcast will also be made available for approximately 90 days following the call. Fiscal second quarter 2018 financial results for the Company's key operating metrics were, total revenue of $481.1 million, non-GAAP gross margin of 47.7%, non-GAAP operating margin of 26.2%, adjusted EBITDA of 29% and non-GAAP EPS of $3.37. Net sales for fiscal second quarter were $481.1 million, representing growth of 14% year-over-year. Sales came in virtually at the midpoint of our previously guided range, with sales in the microelectronics and materials processing and markets, increasing 23.9% and 6.5% respectively year-over-year. Our revenue mix by market for Q2 was microelectronics approximately 54%, materials processing, 28%, OEM components and instrumentation 11% and scientific and government 7%. Geographically, Asia accounted for approximately 62% of revenues in fiscal second quarter, the U.S 16%, Europe 19% and rest of the world, 3%. Asia includes two territories with revenues greater than 10% of total sales. Other product and service revenues for the fiscal second quarter were $132 million or approximately 27% of sales, representing an increase of approximately 21% year-over-year. Other product revenue consists of spare parts, related accessories and other consumable products and was approximately 24% of sales. Revenue from services and service agreements was approximately 3% of sales. We had one customer in South Korea related to large flat-panel display manufacturing that contributed more than 10% of our fiscal second quarter revenue. Fiscal second quarter non-GAAP gross profit, excluding stock-based compensation costs, intangibles amortization, purchase accounting adjustments and restructuring was $229.5 million. At 47.7% of sales for the quarter, non-GAAP gross margin came in slightly higher than the midpoint of the previously guided range. Non-GAAP operating margin was 26.2% for the fiscal second quarter and was slightly below the midpoint of the guided range as a result of the acquisition made in the quarter and various accelerated R&D investments. Adjusted EBITDA was 29% in fiscal Q2. Turning to the balance sheet. Non-restricted cash, cash equivalents and short-term investments were approximately $346 million at the end of fiscal Q2, a decrease of approximately 77 million compared to the end of last quarter. During the quarter, while cash from operations generated $68 million, as John mentioned, we acquire OR Laser and consistent with our priority of using excess cash flow to de-lever the balance sheet, we made a voluntary €60 million payment against our outstanding debt. The total of the voluntary make payments made to-date is €285 million against our €670 million euro loan. The current amount of outstanding term loan debt in USD is $462 million. International cash was $185 million or approximately 53% of the total cash and short-term investment balance. Approximately 54% of total cash and short-term investment is denominated in dollars. Accounts receivable DSO was 59 days, compared to 58 days in the prior quarter. The net inventory balance at the end of second quarter was approximately $493 million, an increase of 60 million of which FX was approximately 13 million in support for excimer in high-power fiber laser businesses drove the rest. Capital spending for the quarter was approximately $21 million or 4.4% of sales. Now I'll turn to our outlook for our second fiscal third quarter of 2018. Revenue for fiscal Q3 is expected to be in the range of $480 million to $500 million. We expect fiscal Q3 and non-GAAP gross margin to be in the range of 46% to 49%. Non-GAAP gross margin excludes intangibles amortization of approximately $13.1 million. And stock compensation cost is estimated at $1 million and purchase accounting adjustments of approximately 400,000. Non-GAAP operating margin for fiscal Q3 is expected to be in the range of 25% to 28%. This excludes intangibles amortization estimated at a total of $16 million and stock compensation expense of a total of approximately $8.2 million. Other income and expense is estimated to be in expense in the range of $7.5 million to $8.5 million. We do not include transaction gains and losses related to future changes in foreign exchange rates in our ONIE outlook. We expect our fiscal Q3 non-GAAP tax rate to be in the range of 28% to 29%. And finally, we are assuming weighted average outstanding shares of approximately $25.1 million for the third quarter. With regard to our participation at upcoming conferences, we will be presenting at the Stifel Cross Sector conference on June 11th in Boston and the CJS Summer Conference on July 10th in White Planes New York. I'll now turn the call back over to the operator for Q&A session.

[Operator:]

[Operator Instructions] And your first question comes from the line of Mehdi Hosseini.

[Mehdi Hosseini:]

Kevin, does the guide -- June quarter revenue guide, does it include the 10 million that was pushed out and you highlighted last quarter? And John, can you help us understand the dynamics on your OLED side? And you've sounded very constructive in the pre-30 marks, but it did exclude OLED and I just wanted to see, if that's a reflection of what's out there? And in the context, what is the update with your capacity expansion?

[Kevin Palatnik:]

Mehdi, I'll take the first one obviously. In terms of the supplier concern that we have last quarter and described a one system push out into the June quarter that did occur, and we resolved the concerns with the supplier and it's supposed to be headed from there.

[John Ambroseo:]

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

[Operator:]

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

[James Ricchiuti:]

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

[John Ambroseo:]

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

[James Ricchiuti:]

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

[John Ambroseo:]

All I can say Jim is that these tools will deliver pre-fiscal 2018. I can't give you anymore granularity other than that.

[James Ricchiuti:]

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

[John Ambroseo:]

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

[James Ricchiuti:]

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

[John Ambroseo:]

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

[James Ricchiuti:]

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

[John Ambroseo:]

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

[Operator:]

Our next question comes from the line of Mark Miller.

[Mark Miller:]

I know several smartphone models are supposed to be introduced in the second half, are most of these are only is going to be OLED screen? Do you see any possibility or any impact from from full active LCD displays in terms of opportunities for these new products?

[John Ambroseo:]

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

[Mark Miller:]

What’s the competitive situation of that fiber laser market, as things started to heat up in certain areas, have you seen any changes, prices?

[John Ambroseo:]

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

[Operator:]

Your next question comes from the line of Joseph Wolf.

[Joseph Wolf:]

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

[John Ambroseo:]

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

[Joseph Wolf:]

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

[John Ambroseo:]

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

[Joseph Wolf:]

And if I can just jump over to the other side of the business. Just an update if I missed it on the trajectory of potential profitability improvements for the calendar year in the material processing side?

[Kevin Palatnik:]

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

[Operator:]

Your next question comes from the line of Patrick Ho.

[Patrick Ho:]

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

[John Ambroseo:]

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

[Patrick Ho:]

And maybe as a follow-up question on this the semiconductor and kind of PCB side of things. You mentioned in the past PCB view drilling as an emerging market opportunity and it had rapid growth in 2017. Do you believe that positive momentum continues in 2018? And would this be a catalyst of growth with the Company especially for your ultra short plus lasers?

[John Ambroseo:]

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

[Operator:]

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

[Joe Wittine:]

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

[John Ambroseo:]

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

[Joe Wittine:]

I was going to ask on the backlog, obviously, I know you want to close it on here today. But doesn't it include orders beyond the two Chinese fabs you referenced earlier or any future fabs beyond those two would be additive to backlog today?

[John Ambroseo:]

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

[Joe Wittine:]

And Kevin with net debt, you have a zero mark here maybe given updating you thoughts or the board thoughts on capital allocation particularly what your equities valuation essentially pricing, and you'll never sell another piece of FPD equipment again?

[Kevin Palatnik:]

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

[Joe Wittine:]

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

[John Ambroseo:]

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

[Operator:]

Our next question comes from the line of Larry Solow.

[Larry Solow:]

Just a few follow-ups. John, has your capacity plans that you are expansion has that slowed or change at all it's from your end?

[John Ambroseo:]

For FPD correct?

[Larry Solow:]

Correct.

[John Ambroseo:]

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

[Larry Solow:]

So it didn’t -- but your plans or whatever 12 months ago or versus today nothing has but didn’t change anything or slowdown that whatever you…

[John Ambroseo:]

We didn’t.

[Larry Solow:]

And then just on in terms of orders, you didn’t want to give an exact timeline of how booked you are into 19. But it's safe to say that anything order today would be, obviously, not deliverable until sometime in 19. Has any orders been cancelled delayed or could you speak to that at all? Is there any indication to that or?

[John Ambroseo:]

Can’t give any updates Larry.

[Larry Solow:]

Fair enough. How about on terms of the OR acquisition and also accelerate R&D investments, maybe not qualify but just give us a little more color on that? It sounds like OR maybe a little bit dilutive in the beginning.

[Kevin Palatnik:]

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

[Larry Solow:]

This quarter, might not have been, it sounds like?

[Kevin Palatnik:]

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

[Larry Solow:]

Very small, okay. And then just on the -- in terms of the material processing market sounds super doing -- doing very well. Last quarter, John, you've spoke up this first volume contractor this Chinese indicator integrator and you've spoke obviously more of this in your commentary this afternoon about just the Chinese market and. Have you gotten any more orders or have any anecdotally expansion within that customer? I realized it's long been three-months, but any update on that?

[John Ambroseo:]

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

[Larry Solow:]

Were there any share purchases in the quarter?

[John Ambroseo:]

There was not.

[Operator:]

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

[James Ricchiuti:]

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

[John Ambroseo:]

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

[Operator:]

Our next question comes from the line of Mehdi Hosseini.

[Mehdi Hosseini:]

Just two follow-ups John. You talked about visibility for FY18, you have two cores in the back and we just have a guide for the June quarter. So my question is what is most valuable part of the September quarter? Is that OLED? Is that the new customers win associated with Rofin? Or is that just everything? And I have a follow-up.

[John Ambroseo:]

Not sure, I know how to answer that. I'll let Kevin pick a crack out of it.

[Kevin Palatnik:]

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

[Mehdi Hosseini:]

The reason I asked the question is, you have done a great job of growing your revenue by double-digit on a year-over-year basis and quarterly and fiscal year '17 your earnings were up three digits. And as stock has come under pressure and as we try to figure out companies earning, I think it does help to have some qualitative assessment, and as I'm looking to let's say FY19. Would it be fair to say that the core business meaning semiconductor or packaging and perhaps even some of the Rofin could be a flattish revenue contributor? And then the growth is going to come from new customer win in high power fiber laser and your overlay ELA? Then you would get some double-digit growth and in combined with some operating leverage, you have a higher earnings growth. And I'm not asking for a specific quantitative Scott, I think for investors, especially in the context of stock being under pressure would benefit to have some sort of the thought process, how to think about the longer term earning power?

[John Ambroseo:]

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

[Operator:]

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

[Mark Miller:]

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

[John Ambroseo:]

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

[Mark Miller:]

In terms of the automotive opportunity how does the size and display compared to typical smartphones with OLEDS?

[John Ambroseo:]

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

[Operator:]

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

[John Ambroseo:]

Thank you, Britney. I would like to thank everybody for joining us. We certainly look forward to catching up with some of you at these upcoming conferences, and we will talk to you again few months.

[Operator:]

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