Coherent, Inc.
Q4 2017 Earnings Call Transcript

Published: 7 Nov 2017

[Operator:]

Good day, ladies and gentlemen, and welcome to Coherent's Fourth Quarter Fiscal Year 2017 Financial Results Conference Call hosted by Coherent, Inc. [Operator Instructions]. As a reminder, this call is being recorded. I would now like to introduce Bret DiMarco, Executive Vice President and General Counsel. You may begin your conference.

[Bret DiMarco:]

Thank you, Ian, and good afternoon, everyone. Welcome to today's conference call to discuss Coherent's results from our fourth fiscal quarter and fiscal 2017. On the call, we have 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 and operating results, business trends and the expected timing and benefits of the integration of our recent Rofin-Sinar transaction. These forward-looking statements may contain such words as 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're encouraged to review Coherent's periodic SEC filings, including its most recent Form 10-K, Form 10-Q and Forms 8-K. I will now turn the call over to John Ambroseo, our President and Chief Executive Officer.

[John Ambroseo:]

Thanks, Bret. Allow me to add my welcome to our fourth fiscal quarter conference call. As reported in today's press release, Coherent set new records in our fourth quarter and full fiscal year for sales, gross profit and EPS. We also generated significant cash from operations that enabled several voluntary prepayments during fiscal 2017 against the debt taken on to finance the acquisition of Rofin. And today, we celebrate the 1 year anniversary of that transaction. These results were achieved through the hard work of colleagues across the company, who developed, delivered and supported high value-added products to our customers. We will be releasing our Form 10-K in a few weeks. One of the most easily anticipated metrics is backlog and its extrapolation to bookings, and we're going to end the mystery. Coherent achieved record bookings in fiscal 2017 of $2.03 billion with a corresponding book-to-bill of 1.18. The commercial markets accounted for all the order growth. Microelectronics orders increased by double digits for the full fiscal year. The FPD market contributed in multiple ways. New system orders were robust and highlighted a shift towards Gen 5 and above. The LDU service business grew, along with the installed base and utilization rates. We also received approximately $70 million of orders for ultrafast and CO2 lasers used in glass and film cutting for smartphones. The latter were tied to the launch of new handset models. I would like to reiterate and expand on the comments from the last conference call. New ELA shipments for fiscal '18 are fully committed. Growth against fiscal 2017 occurs in 3 ways, a mix shift towards larger format tools; fully utilizing existing capacity in fiscal 2018, this wasn't the case in 2017; and an increase in service revenue. FPD orders taken in 2018 will ship in fiscal 2019 and beyond. We have fielded a number of questions at recent conferences regarding microLEDs and LTPO displays. The promise of microLEDs is that they can produce higher brightness while consuming less power than OLEDs. They also have a wider operating range than LCDs or OLEDs, and that's a temperature operating range. The biggest challenge is manufacturing. Unlike OLEDs that are based on organic emitters, microLEDs rely on inorganic material systems like gallium nitride. Each color in RGB emitter cluster is grown using a different material set in MOCVD reactors. These emitters are removed from the growth substrate and transferred to a display substrate using pick-and-place tools. A typical high-definition 5.5 handset requires more than 3 million to pick-and-place operations. This is far more process-intensive than an already complex OLED production method and costs more than 10x a similar OLED. As a consequence, it is unlikely that they pose a market threat to OLEDs in the handset market. So where do microLEDs play? There has been early interest from wearables, AR/VR and VR micro displays due to brightness and power consumption and in large-format emissive displays like theater screens, where the scaling is limited by chamber size. Low-temperature polycrystalline oxide, or LTPO, was first demonstrated by Japanese researchers more than 15 years ago. Published results suggest that the annealing process helps stabilize the material rather than augment its properties. If this is the case, then it remains an inferior material to LTPS. One Japanese manufacturer recently indicated that an LCD LTPO display could alleviate some of the current supply constraints on OLEDs. It is not clear if there's any validity to this claim or if it is their hope to overcome their absence from the OLED market. The Semicap market was very strong in fiscal 2017, with orders growing well into double digits on an organic basis, and that means excluding a small legacy contribution from Rofin. Ship manufacturers invest in CapEx with no reductions for logic devices to serve the mobile server and AI markets. The DRAM and 3D NAND markets remain very tight, which has led to capacity expansion. And finally, IoT devices have driven service demand for legacy lines. The 2018 outlook from Gartner is for a similar level of CapEx to 2017, although it may be shifting in favor of logic devices as memory supply comes in line with demand. The advanced packaging market continued its mini resurgence with the highest quarterly bookings over the last few years. Capacity is being added to via drilling and laser direct imaging, which are both tracking some of the investments. Perhaps more importantly, a frontrunner may be emerging for 5G circuit boards. If you're not familiar with them, they're called substrate-like PCBs and allow for thinner packages. They're a shrunk in FR-4 board with a fiber glass core wrapped in resin wrapped in a copper cladding. The via diameters tend to be 50 microns or less, which is at the edge of CO2 drilling, so alternate lasers are being explored. We'll provide periodic updates as the technology is further developed. Material processing orders grew by almost 3.5x on a year-over-year basis due to the acquisition of Rofin-Sinar. Annual core market growth was in double digits with a corresponding book-to-bill that was well over 1. There were several additional trends that drove our annual results. A large portion of our fiscal 2017 multi-kilowatt fiber laser sales went into battery welding for electric vehicles and energy storage systems. You can think of these as a whole house pack of batteries. The potential for this market is obviously large with a projected long-term CAGR in excess of 20%. As an example, governments are signing up for the 30% at '30 goal, which is 30% electric vehicles by 2030, and/or announcing further restrictions or bans on gasoline and diesel-powered engines. Automakers and Tier 1 suppliers are committing large amounts of capital in the tens of billion of dollars to develop and deploy next-generation EVs. Coherent is one of the leading suppliers of fiber components and semiconductor pump modules to the fiber laser market. The Chinese fiber domestic fiber laser market, where we enjoy a strong market share, has been especially active for 1 to 1.5 kilowatts fiber lasers used in mid-power cutting workstations, which appeal to small and midsize manufacturers. Increased adoption of laser-based processes is also contributing to the business. The introduction of new flagship phones has led to significant demands for lasers used in packaging, marking and cutting. We expect this trend to continue as other smartphone players release new models. Product identification and traceability as well as inventory managing have long relied upon laser marking. We are seeing a broader portfolio due to new materials that respond to different wavelengths of light, and new requirements are on quality and clarity of the imprint information. Consumer packaging also remains a key of the business, with speed of the line and size of the package or feature being the key variables. Additive manufacturing has been an active area and represents a potentially large growth opportunity. Most of the attention has been focused on metal parts fabrication given the size of the market as well as the cost and inventory benefits. We are also enthusiastic about opportunities in cladding and plating. Laser-based cladding is used in multiple industries such as oil and natural gas exploration, mining and agriculture, to coat metal parts so that they would stand very aggressive operating environments. The electric industry is facing bans in Europe and China due to hazardous waste concerns. A high-speed, laser-based process is one of the possible replacements to the galvanic process. If adopted, it is a very large opportunity for the laser industry. The laser-based tools, and that means end user workstations, are part of our overall market strategy for materials processing. We enjoyed a good year in medical device manufacturing and believe the regulatory requirement for unique device identification, which goes into effect in September of 2018, will drive higher demand for lasers and marking systems capable of producing corrosion-free remarks and stainless steel. Consumer electronics manufacturing is another active area, especially for ultrafast lasers, subsystems and systems due to the unique capabilities they provide. We have record orders in the OEM instrumentation market in fiscal 2017, and the outlook is positive. The market is simultaneously addressing greater global access to health care, a higher incident rate of age-related conditions and managing costs. Laser support increased accuracy and efficiency in medical diagnostics and therapeutic treatments that are less invasive with shorter recovery times. Bioinstrumentation orders reflected our leading position in cytometry as well as a growing business in gene sequencing. Within the medical OEM market, bookings were solid across all applications. We're very encouraged by demand trends in dental, surgical consumables and aesthetics. There was substantial annual bookings growth of more than 2x in aerospace and defense. The defense industry is working to address asymmetric threats post the military personnel vehicles and vessels. And one example is drones that can be easily purchased from electronics distributors and repurposed to deliver IEDs. Directed energy weapons are one possible solution to counter such a threat. We supply components and lasers to prime contractors and subcontractors that are developing countermeasures. Orders for ground-based and space-based imaging were also good, and we supply primary collector optics for satellites and telescopes from the same facility that makes the optics for the Linebeam 1500 FPD annealing systems. The scientific market is largely unchanged. Revenue trends in North America, Europe and Asia are stable, and competitive dynamics exhibit the usual give-and-take. With the growth that we've experienced in the commercial markets, the scientific market now represents less than 10% of total revenue. We remain committed to customers in the space and will continue to innovate in support of scientific discovery. Further commentary will be limited to major changes in the markets or new technology introductions. We are very well positioned for another record-setting year in fiscal 2018. We have a plethora of new products in the pipeline and look forward to expanding our presence in the commercial markets. We've done a very good job of driving profitability and cash generation. We expanded on both in the current fiscal year and plan to use the cash to invest in future growth and retire the debt. I'll now turn the call over to Kevin Palatnik, our Chief Financial Officer.

[Kevin Palatnik:]

Thanks, John. Today, I'll first summarize fiscal fourth quarter 2017 financial results and move to the outlook for fiscal Q1 of 2018. 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, impairments of assets held for sale 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 fourth quarter 2017 financial results for the company's key operating metrics were, total revenue of $490.3 million, non-GAAP gross margin of 48.7%, non-GAAP operating margin of 28.8%, adjusted EBITDA of 31.5% and non-GAAP EPS of $3.72. Net sales for fiscal fourth quarter were $490.3 million, an increase of $26 million or approximately 6% sequentially and 97% year-over-year. Sales came in above the high end of the previously guided range, with sales into the microelectronics and materials processing markets providing the largest contributions. Our revenue mix by market for fiscal Q4 '17 was microelectronics at 54.2%; materials processing, 30%; OEM components and instrumentation, 10.5%; and scientific and government, 5.3%. Geographically, Asia accounted for 64% of revenues in the fiscal fourth quarter; the U.S., 15%; Europe, 18%; and rest of the world, 3%. Asia includes 3 territories with revenues greater than 10% of total sales. Other product and service revenues for the fiscal fourth quarter of 2017 were $126 million or approximately 26% of sales, representing an increase of approximately 5% sequentially and 79% year-over-year. Other product revenue consists of spare parts, related accessories and other consumable products and was 23% of sales. Revenue from services and service agreements was approximately 3% of sales. Total backlog was approximately $1.3 billion at the end of fiscal Q4 2017. The shippable backlog, defined as shippable within the next 12 months, is $1.04 billion. This includes $614 million or approximately 59% of shippable backlog related to flat panel display applications. We also had one customer in South Korea related to large flat panel display manufacturing that contributed more than 10% on the company's fiscal fourth quarter revenues. Fiscal fourth quarter non-GAAP gross profit, excluding stock-based compensation costs, intangibles amortization and restructuring costs, was $238.8 million. At 48.7% of sales for the quarter, non-GAAP gross margin came in virtually at the midpoint of the guided range. Non-GAAP operating margin was 28.8% for fiscal fourth quarter and was above the midpoint of the guided range as a result of flow-through from higher-than-expected revenues. And adjusted EBITDA was 31.5% in fiscal Q4. Turning to the balance sheet. Nonrestricted cash, cash equivalents and short-term investments were approximately $476 million at the end of fiscal Q4, an increase of approximately $3 million compared to the end of last quarter. During the quarter, cash from operations generated $101 million. And consistent with our priority of using excess cash flow to delever the balance sheet, we've made a voluntary €75 million payment against our outstanding debt. International cash was $300 million or approximately 63% of the total cash and short-term investment balance. Approximately 45% of the total cash and short-term investments is denominated in dollars. Accounts receivable DSO was 56 days compared to 54 days in the prior quarter. The net inventory balance at the end of the fourth quarter was approximately $415 million, an increase of $12 million, primarily due to FX. And capital spending for the quarter was approximately $18 million or 3.8% of sales. Now I'll turn to the outlook for our first fiscal quarter of 2018. Revenue for fiscal Q1 is expected to be in the range of $460 million to $480 million. This range reflects the expected seasonality of the legacy Rofin business, partially mitigated by the growth in other businesses. We expect fiscal Q1 non-GAAP gross margin to be in the range of 47% to 50%. Non-GAAP gross margin excludes intangibles amortization of approximately $12.2 million. And stock compensation cost is estimated at 900k. Non-GAAP operating margin for fiscal Q1 is expected to be in the range of 27% to 30%. This excludes intangibles amortization estimated at a total of $14.8 million and stock compensation expense of a total of approximately $7.1 million. Other income and expense is estimated to be an expense in the range of $7.5 million to $8.5 million, and we do not include transaction gains and losses related to future changes in foreign exchange rates in our outlook. We expect our non-GAAP tax rate for fiscal Q1 to be in the range of 30% to 32%. And finally, we're assuming weighted average outstanding shares of approximately 25.1 million for the first quarter. With regard to our participation at upcoming conferences, we'll be presenting at the Stifel Growth Conference on November 9 in Chicago; the Barclays Global TMT Conference in San Francisco on December 7; and the Needham Growth Conference on January 17 in New York. I'll now turn the call back over to the operator for the Q&A session.

[Operator:]

[Operator Instructions]. Your first question comes from Patrick Newton from Stifel.

[Patrick Newton:]

I guess just jumping in, first, John, I wanted to make sure I heard you correctly is on the $70 million in OLED pull on orders, was that an FY '17 total or just a September quarter total? And then if you could just comment on the sustainability of these orders. Should we expect the follow-on orders to track OLED trends in general?

[John Ambroseo:]

So those were FY '17 orders and deliveries. We do see a trend where new cellphone models are pulling along a larger percentage of the technologies, I think I've mentioned this a couple of times in previous conference calls. So as new devices are coming out, yes, we would expect to see some of these. We're not in a position yet to predict what a steady state model looks like, but we know the opportunities exist.

[Patrick Newton:]

Great. And then, I guess, given that you kind of assuaged fears on Samsung down taking in CapEx given your total order flow and the reiteration that FY '18 booked. If we look out to FY '19, you previously communicated your intention to expand capacity in the fiscal first quarter due to some deliveries. I'm curious, how comfortable are you right now if you look at some of the trends to larger-format phones, some of the commentary on foldables, some of the trends potentially on tablets that -- with that capacity expansion that you will eventually see the orders or have the orders on the horizon that you can fill up your capacity through FY '19?

[John Ambroseo:]

Patrick, we try to be methodical when we make capital investments like this. The factors that you've referenced are not news to us. We've been working with manufacturers across lots of different geographies to understand what their plans are. We still feel that the capacity is needed to be able to satisfy '19 and beyond.

[Patrick Newton:]

Great. And then just one more if I may, John. You did talk about the mix of backlog increasing into larger-format systems through FY '18. But I'm curious, could you help us quantify that a little bit as we look through your fiscal year maybe talking about the number of 750s that could have fallen out of backlog year-over-year? Or whether the improved mix of 1000 and 1500s is worth millions of dollars of growth each quarter or tens of millions of dollars.

[John Ambroseo:]

So I think you've made a statement there that's not correct. 750s haven't fallen out of the backlog. Orders have shifted towards larger-format tools, and that's because the efficiency that comes at working in Gen 5 and above -- or rather working in Gen 4. As far as the mix and what the dollar contribution is, nice try.

[Operator:]

Your next question comes from Joe Wittine from Longbow Research.

[Joseph Wittine:]

Joe Longbow at Longbow. Apologize for the background noise. And I missed a bunch of the prepared remarks, so let me just ask a couple of evergreen questions. Firstly, in the fiber portion, materials processing, how likely is it for Coherent to potentially add a major customer logo such as -- with a major cutting OEM going forward now that the integration is progressing? And then just second, Kevin, if you could address quickly how the company would approach a repatriation holiday if it comes to be.

[John Ambroseo:]

As far as adding more customers, of course, that's the ultimate goal. Highlighting who that may be is a different question. And you didn't ask that, so I'm not going to attempt to answer that either. But our engagement with customers remains very positive. We have been checking off the items that we need to check off in order to be qualified for deployment, and we're looking forward to occupying a bigger position in the market.

[Kevin Palatnik:]

And Joe, with regard to cash, as you know, the tax plan that's -- going forward is still in a state of flux. If there were a repatriation, it's doubtful we'd do anything significant there. As you recall, we took out a €670 million loan to finance part of the Rofin-Sinar transaction over the last 3 quarters, March, June and September quarters. We did voluntary prepayments of €30 million, €45 million and most recently, €75 million. So in terms of one of our priorities to pay down the loan, we generated a lot of our cash and just overall profits in Europe. And so I don't see taking tremendous advantage of a holiday if it comes to be.

[Operator:]

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

[Mark Miller:]

I was wondering if you could kind of think a little ahead in terms of new applications or biggest growth in markets for OLEDs. Will it be tablets, laptops, TVs, all those or foldable? What do you think will be, over the next 6 months, the biggest delta in terms of new OLED applications?

[John Ambroseo:]

I don't know that 6 months is a long-enough time line to hit multiple markets. Clearly, there's interest in the tablet market. That, ultimately, is going to be a capacity discussion. Foldable phones, we think you're going to start to see first articles in '18, although it's not going to be a big demand driver early on. And automotive, there are supposedly 18 models coming that have OLED screens and also some OLED lighting in them. The lighting is probably not a big driver for us. The screens, obviously, would be. TVs remain much further off in the distance for the reasons that we've talked about in previous conference calls.

[Mark Miller:]

And the via drilling market, are they finally progressing to a new shorter wavelength laser? Or is that to be determined?

[John Ambroseo:]

So if the movement that we're seeing right now really starts to drive down the via hole size, you very quickly get to a point where CO2 is going to be challenged to keep up with the dimension. And whether it goes to UV or another technology is not completely clear yet, but it would probably lead to a technology transition.

[Mark Miller:]

And the replacement market there or the market there, is it several -- was it 5,000 lasers using via drilling, 10,000-something in between them?

[John Ambroseo:]

I suspect the market today is probably close to 15,000 systems in total, and that's a bit of a swag ongoing from -- we knew it was 10,000 a number of years ago. There have been some additions, so it wouldn't be surprising if it's in the vicinity of 15,000 tools globally.

[Mark Miller:]

Roughly, the ASPs would be, estimated?

[John Ambroseo:]

Again, Mark, it's going to depend on the laser. But you're probably talking about lasers that are in volume probably anywhere between $50 and $100,000 a copy.

[Operator:]

Your next question comes from the line of Larry Solow from CJS Securities.

[Lawrence Solow:]

Just a few follow-ups. On the capacity expansion, have you given any more details, any more color on that? I think you're expecting capacity expansion, I guess, both on the fiber laser side and obviously, on the flat panel display side. Any color on that? How much CapEx spend do you expect in the upcoming year?

[Kevin Palatnik:]

Yes. Larry, it's Kevin. We haven't calibrated that. We're still finalizing some plans for fiscal '18. We have talked about the detail related to what we're investing in, fitting out a building for FPD and optics and refurbishment facility in Korea for the LDUs, but that's as far as we've come. We haven't calibrated it financially.

[Lawrence Solow:]

And with the industry, has it been very dynamic? I mean, is there a possibility that -- you have not even exactly decided how much capacity you will add? Or is it something you've already finalized and it's just a matter of time lines and expenses and whatnot?

[Kevin Palatnik:]

Yes. We'll come out pretty quickly with it, Larry. I think I've said in prior calls, where historically we've been in 3% to 5% range for CapEx as a percent of total sales, that we would expect it to be a little bit higher in fiscal '18 just because of some of the investments we're making. But that's kind of ballpark at this point. We'll come out and finalize it probably in the next call.

[Lawrence Solow:]

Okay, fair enough. John mentioned the TVs being a little bit out in the distance which, obviously, you guys have spoken about for several quarters or even years now. I know at the recent, I guess, European electronic show, a bunch of OLED panels and TVs were featured. I don't believe this is using the annealing process. With these TV coming out, is that something -- that process, is that potentially going to work for a TV? And could that process eventually invade other markets on the OLEDs display side?

[John Ambroseo:]

So the technology that's being used for OLED televisions, LG is the leader with the metal oxide backplane, which works fine for TVs. It has not been demonstrated to be suitable for handsets or battery-powered devices at this point. And at least based on what I know about the material, how it performs, it's not clear that it will invade the handset or the mobile market any time soon. As far as multiple manufacturers showing OLED televisions, again, as far as I know, there are only 2 companies that are making TV panels. One of them is LG, and then I believe there's a Chinese company that's producing them in very small quantities.

[Lawrence Solow:]

Okay. I know you guys only guide out to 1 quarter. Obviously, the mix improving as we look out through fiscal '18, Q1 obviously is a sequentially or a seasonally slower revenue quarter. Any reason to believe that gross margin would have a tendency to rise through the year?

[Kevin Palatnik:]

Larry, remember, when it comes to the mix, right, which will drive the overall margin, certainly, the FPD applications generate higher than corporate average margins, so that's a positive upward pressure on margins. But also, recognize that from a fiber laser perspective, we intend to and have taken orders for fiber lasers, and that's a growing market. Those margins need to improve going forward, and we've got several cost initiatives to make that happen. But as that grows as a percentage of the business, too, that will be dilutive and probably offset the majority, if not all, of the FPD positive upward pressure. So there may be a slight movement in the positive direction, but I would keep it relatively minor.

[Lawrence Solow:]

Okay. Any update on Rofin-Sinar? Obviously, it's fairly integrated. But at this point, in terms of the synergies, I don't know if that $3 million number that you expected to reach this year, if you beat that. And you're still looking for -- sort of the 3 -- 50% and then the full 30%. Has that number changed at all?

[Kevin Palatnik:]

No change at all. 30% in terms of the total. And then what you described as the flow for the years, no change.

[Lawrence Solow:]

Last question. John, you mentioned a plethora of new products in the pipeline. Any -- care to give us a teaser on that or maybe, in general, areas you're working in or...

[John Ambroseo:]

Larry, seriously?

[Lawrence Solow:]

I thought maybe you had something you could tell us that's exciting. Doesn't have to be specific. I'm talking about general end markets, but that's okay.

[John Ambroseo:]

So I'll say this, Larry, that we're putting most of our R&D dollars into commercial markets. That much is clear. So the vast majority of these new products will be targeting existing and new commercial opportunities.

[Operator:]

Your next question comes from the line of Jim Ricchiuti from Needham & Company.

[James Ricchiuti:]

John, can you talk about just your line of sight into additional ELA orders over the next couple of quarters? Has it -- you generally have I think a pretty good view of what's happening in the market. I guess I'm just wondering, are you seeing -- have you seen any changes in the level of activity from the standpoint of the display manufacturers that are planning capacity?

[John Ambroseo:]

The market continues to be a very active place. We're engaged with virtually everybody on what their current deployment is as well as their future plans, and that's why we built this longer-term model and the manufacturing infrastructure and service infrastructure to take care of it.

[James Ricchiuti:]

So looking at China, if we could maybe discuss it in a couple of different ways. The industrial laser business has been fairly healthy in China. Number one, how sustainable do you think that is?

[John Ambroseo:]

I've been impressed with how buoyant it has been, and it seems as though the central bank policies remain very favorable. We are -- the level of engagement that we have in China right now across all the commercial markets as well as the scientific market is actually quite impressive. So it feels the same. Can I pinpoint it for you? No, but it feels very sustainable.

[James Ricchiuti:]

And again relating to China, just putting the FPD -- the OLED portion aside. How would you characterize what you're seeing in the broader electronics market, the semiconductor, the packaging markets? It sounds like the activity level has picked up quite a bit. Is that fair to say over the last couple of quarters? And same question. As you look out over the next couple of quarters, what is your sense as to the sustainability of that part of the business?

[John Ambroseo:]

So certainly, the consumer electronics business globally, but especially in China, has obviously been very, very active. A lot of these packaging lasers that I talked about during my prepared remarks and then responded to an earlier question about, much of that went into China. And again, a number of projects that are currently being discussed with customers remains at a pretty high level. It feels like the overall market in China, not just the industrial piece of it, is running pretty hot right now. And in terms of -- I was going to say in terms of a desire to move up the food chain and increase local innovation, I mean, clearly, that's on the mind of all the Chinese manufacturers.

[Operator:]

Your next question comes from the line of Mehdi Hosseini.

[Mehdi Hosseini:]

John, I just had a follow-up to the previous question. Would you elaborate on the mix of backlog by geography?

[Kevin Palatnik:]

Mehdi, it's Kevin. We haven't given that detail. We do backlog at a pretty high level total, shippable and then the FPD piece because the FPD is the largest piece of the overall backlog. But we don't break down by geography.

[Mehdi Hosseini:]

Okay. And then you mentioned that the December quarter has some seasonality from Rofin. And I'm just trying to better understand, as Rofin mix increases into early calendar year, calendar year '18, how should we think about the inherent lower-margin mix versus your efforts in improving the cost structure?

[Kevin Palatnik:]

So Mehdi, Kevin, again. So in terms of margins, you're correct that legacy Rofin business was dilutive to legacy Coherent business. We've already talked about the trajectories, right, looking into fiscal '18. Seasonality in the fiscal Q1 or the December quarter exists, and we've guided that seasonality, right, for the team. Looking a little bit longer term into fiscal '18, we do intend to deliver vertically-integrated fiber in fiscal '18. That will be across the improved model of fiber. But many of those improvements, I suspect, won't come until the second half. So the first half, second half, you should see more positive upward pressure in the second half than in the first.

[Mehdi Hosseini:]

Sure. So would it be fair to assume that when you -- as the second half of fiscal year '18 and the cost synergies kicks in, should we assume that there is upside to the high end of your December quarter operating margin of 30%? Would that be material enough so that you could exceed the current margin profile?

[Kevin Palatnik:]

So I won't calibrate that here on the call. We don't give longer-term guidance with specificity, but I will give you some of the vectors. And recognize that while these synergies continue to be realized throughout fiscal '18, there's pretty significant growth in other areas of the business that may offset some of those synergies, right, in total.

[Mehdi Hosseini:]

Okay. Are those offsetting factors? Or one of the vector has more to do with the services and localizing the services? You have, in the past, talked about the inflection point in services part of the business, especially as it relates to ELA, that should start to scale. And to -- in that context, how much of a localization of the services would have to happen? And is that one of the vectors that you were alluding to?

[Kevin Palatnik:]

Well, certainly, ELA, in general, and service specifically, as we continue to ship and deliver additional Linebeams, that generates -- coming off a warranty period, that will generate additional service revenue. And as you know, that service revenue -- or that profitability related to that service revenue is higher than the base machines, which are accretive to corporate margins. So those are all positive vectors as well. But each month that goes by, each quarter that goes by, clearly, we deliver more ELA machines, and that's positive.

[Mehdi Hosseini:]

Okay. But just trying to better understand the negative vector that you were alluding to. Does it go back to inherent lower-margin mix coming from Rofin? Or is there something else that I'm missing here?

[Kevin Palatnik:]

No, no. It comes from legacy Rofin and in particular, the fiber lasers until we execute against our cost synergies, of which number one was insourcing the semiconductor chips that we've talked about in the past.

[Operator:]

[Operator Instructions]. Your next question comes from the line of Joseph Wolf from Barclays.

[Joseph Wolf:]

A question, I guess, just overall. You talked about the services revenue and the replacement LDUs. Are you seeing any improvements in yields or difficulty...

[John Ambroseo:]

When you're asking yields, you mean customer yields?

[Kevin Palatnik:]

Yes. Joe, if you can still hear us, you fell off.

[Operator:]

Excuse me, Joe's line has dropped.

[John Ambroseo:]

Okay, I'm going to assume that he means customer yields. And we've tried to remain silent on what yields are. In fact, not try, we have remained silent on what yield are of customers. Some of the customers have disclosed what their yields are. It's a pretty wide spread, and it continues to be a wide spread. If I could summarize that, I think there needs to be a number of process breakthroughs for those yields to be significantly improved.

[Operator:]

Your next question comes from the line of Mark Miller.

[Mark Miller:]

Just wondering, did you see a significant pickup in business from Europe?

[John Ambroseo:]

It was good, but not significantly different.

[Operator:]

There are currently no more questions over the phone line. I'll turn the call back over to the presenters.

[John Ambroseo:]

Okay. Thanks very much for participating in the call. We look forward to speaking with you again in January.

[Kevin Palatnik:]

Thank you.

[Operator:]

This concludes today's conference call. You may now disconnect.