Coherent, Inc.
Q4 2016 Earnings Call Transcript

Published: 3 Nov 2016

[Operator:]

Good day, ladies and gentlemen, and welcome to Coherent's Fourth Quarter and Fiscal Year 2016 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, Alex, and good afternoon everyone. Welcome to today's conference call to discuss Coherent's fourth quarter fiscal 2016 results. On the call we have John Ambroseo, our President and Chief Executive Officer, and Kevin Palatnik, our Chief Financial Officer. Before we begin I would like to remind you that shortly after the market closed today, Coherent issued a press release announcing its fourth quarter and fiscal year 2016 financial results. You may access the press release on the Investor Relations section of the Company's Web site. During the course of today's call, management will make forward-looking statements including statements regarding Coherent's anticipated financial results, our expectations for future revenue growth and the growth of our business and the expected completion, timing and benefits of the Rofin-SINAR transaction. These forward-looking statements may contain such words as expects, will, anticipates, intends, or forecast. These statements are based on current expectations and beliefs as of today November 2, 2016. Coherent disclaims any obligation to update information contained in these forward-looking statements whether as a result of new information, future events or otherwise. These forward-looking statement involves a number of risks and uncertainties, some of which are beyond our control that could cause actual results to differ materially. 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 Form 8-K. I will now turn the call over to John Ambroseo.

[John Ambroseo:]

Thanks Bret. Good afternoon everyone and welcome to our fourth fiscal quarter conference call. Fiscal 2016 was an extraordinary year for Coherent. We celebrated our 50th anniversary which is a meaningful milestone for Silicon Valley Tech Company. We set new records for orders, revenue, EBITDA, EBITDA percentage and pro forma EPS. We also announced the acquisition of Rofin-SINAR which just cleared the last regulatory hurdle. Let me now provide some color on the quarter. Bookings of $251.8 million decreased 35.6% sequentially and rose 22.6% versus the prior. The book-to-bill for the fourth quarter was 1.01%. Scientific orders of $34.9 million increased 36.7% sequentially and 4% compared to the prior year period. Seasonality, product performance and market share gains led to very good sequential order growth. The fourth quarter usually benefits from year-end spending in the U.S. and a rebound in Europeans spending following summer holidays. Our Astrella ultra fast amplifier is a leading solution in the research marketplace, based upon performance and unit volumes. Astrella did particularly well in China where funding for applied physics and physical chemistry appears to be on par with the U.S. The community and discovery, our most advanced life stores for multi full time imaging, posted record unit and dollar bookings in the fourth fiscal quarter. Instrumentation and OEM component orders of $42.5 million decreased 3.1% versus the prior quarter and were up 2.7% versus the prior year period. All submarkets in bioinstrumentation are enjoying very good demand. In flow cytometry, market adoption of test protocols and the proliferation of desktop instruments from existing to new market entrants are fuelling growth. Bookings for confocal microscopy were solid. Our efforts in high speed gene sequencing are paying off and orders continue to grow as we secure more design wins. The medical OEM market is being affected by M&A activity and reorganizations within existing customers, which is causing changes in demand, inventory practices and R&D spending. From historical experience these are mostly transient factors. By contrast the consumable business is robust, suggesting a number of procedures being performed as stable to up. Microelectronics orders of $146.3 million declined 48.4% sequentially and increased 50.2% compared to the prior year period. Semi-cap orders posted double-digit sequential and prior period gains. The increases are primarily tied to investment from logic chips. Fab utilization rates were generally positive, which helped service orders and revenues. Finally we saw inventory corrections at certain customers that appear to be sustainable. We do not anticipate any falloff from the recent collapse of two proposed mergers in the semi cap space since they were largely complementary with respect to our ongoing business. A tear down analysis of the new smartphones, illustrates an increased use of seps or system and package which increases the number of interconnect and functionality in a smaller footprint. This approach will maintain pressure on the growing market in the near-term, but it appears to be a temporary reprieve since new applications like BR in large amount of processing power. After building significant FPE feedback over prior three quarters, system orders temporarily returned to a more modest pace while FPD service orders and revenue ran at a record pace. The fourth quarter was one of -- was our first full shipment quarter of large-format systems, a combination of FPD systems and services had a stunning impact on our P&L and was the main reason that we set a number of fiscal records for the most recent quarter and the full fiscal year. I'm also pleased to report that pipeline is very robust. Some customers are adding capacity to take a larger share of the first wave of

[Kevin Palatnik:]

Thanks John. Today I will first summarize fiscal fourth quarter 2016 financial results and then move to the outlook for fiscal Q1 2017. 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. Non-GAAP adjustments relate primarily to stock-based compensation expense, amortization of intangible assets, acquisition expense 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 Web site. A replay of this webcast will also be made available for approximately 90 days following the call. Fiscal fourth quarter 2016 financial results for the company's key operating metrics were bookings of $251.8 million, total revenue of $248.5 million, non-GAAP gross margin of 46.8%, non-GAAP operating margin of 23.7%, adjusted EBITDA of 26.7% and non-GAAP EPS of $1.65. John talked about our bookings for the quarter of approximately $252 million in detail, so I'll move on to the P&L and balance sheet. Net sales for fiscal fourth quarter of $248.5 million is a record for the company. This is an increase of $29.7 million or approximately 14% sequentially. $27.7 million of Q4 sequential increase was in the microelectronics market primarily driven by FPD applications. Geographically Asia accounted for 64% of the company's fourth quarter revenues, the U.S. 20%, Europe 12%, and Rest of the World 4%. Asia includes two territories with revenues greater than 10% of sales. Specifically South Korea and Japan representing approximately 35% and 21% of fourth quarter revenues respectively. Total backlog of $890 million at the end of fourth quarter is also a record for the company. The shippable backlog defined as shippable within the next 12 months is approximately $605 million. This includes $382 million or approximately 63% of shippable backlog related to flat panel display applications. The comparable shippable backlog at the end of fiscal third quarter was $565 million of which $356 million or approximately 63% was related to flat panel display applications. Other product and service revenues for fiscal fourth quarter of 2016 were $70 million or approximately 28% of sales. Other product revenue consist of spare parts related to accessories and other consumable products and was 23% of sales representing growth of 11% compared to last quarter. Revenue from services and service agreements were approximately 5% of sales virtually flat sequentially. We also had two customers one in Japan and one in South Korea both integrators to large flat panel display manufacturers that contributed more than 10% of the company's fiscal fourth quarter revenues. Fiscal fourth quarter non-GAAP gross profit excluding stock-based compensation charges and intangibles amortization was $116.4 million. At 46.8% of sales for the quarter non-GAAP gross margin came in at the high end of the guided range. Non-GAAP operating margin was 23.7% for fiscal fourth quarter also at the high-end of guidance for Q4. Adjusted EBITDA was 26.7% in fiscal Q4 exceeding our long-term goal of 19% to 23%, it's also a new record for the company and was primarily driven by the positive impact of increase deliveries of ELA tools. Turning to the balance sheet, cash, cash equivalents and short-term investments was $400 million at the end of fiscal Q4 and increased approximately $26 million compared to the end of last quarter. International cash primarily in Europe was $331 million or approximately 83% of the total cash and short-term investment balance. Approximately 77% of total cash and short-term investments is denominated in dollars and we ended the quarter with $20 million of short-term borrowings. Accounts receivable DSO was 60 days an improvement of 2 days sequentially and as I had mentioned last quarter, we expect to see fluctuations in our DSO based on the timing of our larger flat panel display systems, shipments during future quarters. The net inventory balance at the end of the fourth quarter was approximately $213 million. This is a sequential increase of $13 million and was primarily due to increased WIP levels to support the flat panel display demand ramp up. Capital spending for the quarter was $21 million or 8.4% of sales. This is higher than our historical averages and is a result of finalizing the additional manufacturing capacity put in place for our ELA machines. Now I'll turn to our outlook for fiscal first quarter of 2017. Since the Rofin transaction is expected to close within a few weeks, this outlook represents Coherent as a standalone company. This outlook also does not include any debt financing-related cost for the same reason. We will update our fiscal Q1 outlook once the transaction closes. Revenue for fiscal Q1 2017 is expected to be in the range of $255 million to $265 million. We expect fiscal Q1 non-cash gross margin to be in the range of 46% to 48%. Non-GAAP gross margin excludes intangibles amortization of $1.4 million and stock compensation costs estimated at $600,000. Non-GAAP operating margin for fiscal Q1 is expected to be in the range of 22.4 to 24.5%. This excludes intangibles amortization estimated at a total of $1.8 million and stock compensation expense of a total of approximately $5.5 million. Other income and expense is estimated to be immaterial. 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 2017 to be approximately 30% and finally we are assuming weighted average outstanding shares of 24.7 million for the first quarter. With regard to our participation at upcoming conferences, we will be presenting at Staples Midwest Conference on November 10 in Chicago, The Mizuho Investor Conference in New York on November 14 and the Barclays Global TMT Conference in Sam Cisco on December 8. I'll now turn the call back over to the operator for a Q&A session

[Operator:]

[Operator Instructions] Your first question comes from the line of Patrick Newton. Your line is open.

[Patrick Newton:]

Yes good afternoon John and Kevin. Congratulations on the solid results and guidance. Just jumping right in John, you talked about that for FPD pipeline that it was very robust, you talked about a $100 million in orders already received in your December quarter and also talked about multiple waves coming beyond this current mobile wavy. I am curious if you could help us just understand where you believe we are in the mobility wave and then what type of visibility you have into ensuing away the first timing

[John Ambroseo:]

Right now we're seeing a lot of what has been ordered already Patrick as obviously tied to the handset market. There is some jockeying for position in terms of who will support the first wave. So some of the initial assumptions that various customers had about how much they were going to have to deliver has changed as a consequence they're adding capacity to be able to address that increased demand. In terms of additional devices or the layers that we've talked about it at various conferences, we are starting to see OLED show up in mobile computing devices. It seems like every week another manufacturer is announcing a new model with an OLED screen. We see that as a generally positive trend. With respect to our visibility it's always been good in this market because of the configuration lead times and quite frankly the relationships that we have with the customers engagement we have with customers we are working on some large orders. I can't tell you whether they're going to be Q1 even or Q2 event or Q3 event, but there are a number of large orders in the pipeline right now.

[Patrick Newton:]

And then on the capacity front you discussed how you are largely booked through calendar 2018 that you could with just some optical supply increases you could increase capacity, but if we think about these waves, can help us understand what you would need to do or what steps you need to take to further increase capacity and what would it take for you to dramatically or what do you need to see on the horizon to dramatically increase your capacity?

[John Ambroseo:]

So as Kevin mention, we made a big investment this past year in capacity expansion, a footprint expansion in Germany and this was simply to house these very large systems that are going through final test. We have ample space there to be able to handle more. We have equipment in place to deal with the deliveries and the commitment that we've made thus far. If the customer’s expectations or needs change and they want faster deliveries in certain areas then we will add equipment in Richmond which is optical fabrication equipment to be able to handle that. We don't think that we’re going to need to air any space in Germany in the near term. It’s literally adding capacity in Richmond. But again I want to highlight, the pacing item here is if the customers need us to respond faster or differently than we will make those investments and that's what we're going to find out over the next few weeks to few months in our conversations with them.

[Patrick Newton:]

Great. And then just Kevin on the model very impressive EBITDA margin exceeding the high end of your long-term target range. I guess given that you still have very good FPD backlog you still have service revenues ramping. How should we think about profitability targets and potential on a go forward basis?

[Kevin Palatnik:]

Yes, difficult question Patrick. You know, all we’ve given primarily is the longer term EBITDA target the 19% to 23%. For the quarter we surpassed the high end of the range. For the full year we came in right under the high end of that range. Looking in 2017 as we said in the past with the FPD backlog and microelectronics being in terms of margins higher than corporate averages as that pushes through the P&L that will put positive upward pressure on margins but we haven't calibrated that. We’ll come out with another forecast as I mentioned or outlook for Q1 once we closed the Rofin transaction but I'm not going to go beyond that.

[Patrick Newton:]

Great. Thank you for taking my questions. Good luck.

[Operator:]

Your next question comes from the line of Larry Solow. Your line is open.

[Larry Solow:]

Good afternoon. Just a couple of follow-up questions to Patrick’s questions. Just on the industry capacity for OLED are there other choice, I definitely know there are no other choices today but I assume there are multi-competitors or other companies trying to work on alternatives or anything. Is there anything you could speak of in the pipeline even as in several years out that might potentially compete with you guys on the excimer lasers today?

[John Ambroseo:]

So Larry as I've mentioned a number of times we ourselves have shipped a variety of different lasers into this application space and we work extensively with customers exploring if there are alternatives out there. Can you and renew panels using other lasers? Yes, you can. Can you get the combination of outcomes with other lasers that you get with an excimer source? No one has demonstrated that. We haven’t demonstrated. We’re not aware of anybody else that. So if the question is how long would it take somebody to come up with a competitive excimer. Quite frankly we think it's years because it’s not just building a box. It’s being able to achieve the performance criteria and the performance lifetime that are so critical to making the application financially viable. I have no doubt that other laser companies will try to go after this market, it’s not surprised. I think it's a tough road given the expectations from the customers for things like throughput, pixel densities, yields you name it.

[Larry Solow:]

Right. Okay, and just one other quickie on just on your, I know you just give normally quarterly guidance. Normally Q1 is seasonally a little bit slow at least on the revenue side and you have given a preliminary at least a couple of quarters back of 950 to 1 billion. Can we assume at lease Q1 follows normal seasonal patterns in terms of revenue?

[John Ambroseo:]

Larry I think clearly for FPD given the backlog we have sequentially that will increase because of the ASPs of the large format machines that drives not only increase but fairly sizable numbers. So while there maybe a little bit of seasonality in the other markets we serve, FPD will certainly offset that and that's why the guide sequentially is up.

[Larry Solow:]

Got it. Great. Thanks.

[Operator:]

Your next question comes from the line of Joan Tong. Your line is open.

[Joan Tong:]

Hi guys. I was just wondering like for that $100 million order that you booked this quarter, did you talk about whether it's a mobility or for mobile computing or other applications?

[John Ambroseo:]

We did not.

[Joan Tong:]

Okay. Got it. And then just want to get a sense of in terms of non-display business and just want to get a sense of like operating environment, macro factors and obviously your display business has been very strong, but maybe just like touch on a little bit on the other businesses?

[John Ambroseo:]

I've done that during my prepared remarks but the scientific business just going in the order that they were originally discussed. The scientific business is doing fine. No surprises one way or another. We continue to see increased spending in Asia and modest decreases in Europe within the instrumentation business or the OM components business, instrumentation is doing quite well. There seems to be a pretty good appetite for desktop instrumentation to make medical diagnosis more accurate and faster. The medical therapeutics market is a little bit choppy right now for the reasons that I cited and materials processing for our standalone business was a terrific year overall. So the non-display parts of the business or maybe more specifically the non-micro electronics parts of the business are doing fine and even within the other parts of microelectronics whether it's semi metrology and inspection or other areas we see the trends that the rest of the market has seen. The packaging area continues to be weak but that's not a new story. That's been true for a number of quarters now.

[Joan Tong:]

Okay. Thank you for the comment and how about like the gross margin. Obviously you guided like continuous strong gross margin in the December quarter and some of the larger format FPD products would start to kick in, in terms of like service components of it and I assume that like that line item should continue to grow sequentially throughout the year on a standalone basis on a standalone coherent basis?

[Kevin Palatnik:]

Hi Joan it's Kevin. Certainly from a backlog standpoint, we have a sizable backlog. We'll ship and deliver that throughout 2017 and 2018 as John described. As I mentioned those machines carry higher than corporate margins. The services piece carry higher margins than the machines themselves. So yeah that will put upward pressure on gross margins and up margins throughout 2017 but that is a standalone company as you mentioned as roll in Rofin or consolidate Rofin, clearly that will dilute those margins a bit until we work on the synergies related to Rofin.

[Joan Tong:]

Maybe just a quick one just follow-up like in terms of how we think about from the installation of the larger format FPD system to the point that you actually really kick in have that service revenue kick in usually there is a lag right. I assume and I just want to get in a sense of like how long is the lag?

[Kevin Palatnik:]

Joan, the timeline hasn't really changed. It's about six months after the tools are qualified for production in the fab that flip from warranty into the service.

[Joan Tong:]

Okay. All right. Thank you guys.

[Operator:]

Your next question comes from the line of Jim Ricchiuti. Your line is open.

[Jim Ricchiuti:]

Hi thanks. Good afternoon. Some of this may have been asked, I apologize but John as you look at the pipeline in FPD can you talk about customers not specific customers, but just in general how broad is the order intake that you're seeing among multiple customers and that also relates that $100 million order that you just alluded to you've taken in this quarter and maybe also the pipeline that you're seeing?

[John Ambroseo:]

The answer is the same Jim. It's coming from all multiple geographies, multiple customers and multiple geographies.

[Jim Ricchiuti:]

Can you be at all more specific in terms of countries, are you seeing more activity in China, is more activity coming out of Japan. We understand and we know what - we think what Korea is doing.

[John Ambroseo:]

Given the size of this market and small number of customers it would be inappropriate for me to comment specifically on countries but what I would suggest is if you do a search on virtually any search engine on OLED investments, you'll see a number of headlines and assuming that some of those tied to what we're seeing would probably be a correct assumption.

[Jim Ricchiuti:]

Okay. When you talk about having discussions with customers and the pacing item being the customer, I mean some of this capacity and correct me if I'm wrong is - capacity is going to come in place in some cases late '18, even looking out to early '19 is a fair way to characterize it? In other words you are not the gating factor in this.

[John Ambroseo:]

No, we’re part of a larger plan obviously but we're delivering equipment now that it goes into full production or capable of going into full production pretty quickly. And I think the thing to recognize here is that different manufacturers not only are in at different points of the development curve or the production release curve but they are also staggered in terms of their facility investments. So my comment earlier, you may or may not heard it. As we look at increasing capacity in our optics fab which would allow us to ship more, the reason that we simply haven't pulled the trigger is if we increase capacity there and the customers don't plan to be in production until ‘18 or ’19, it doesn't really make a big difference. So we need to lockdown what their expectations are in terms of being in full production in order to make a smart business decision. Again if you - I'm sorry that I am being a little bit difficult here but I don't want to disclose customer details unnecessarily. If you do a search you'll see very quickly where some big investments are taking place they are not Korean centric and they are phased in over the next few years.

[Jim Ricchiuti:]

I think we’re somewhat aware of those headlines. Thanks John. I appreciate it.

[Operator:]

Your next question comes from the line of Tom Hays. Your line is open.

[Tom Hays:]

Great. Good afternoon gentlemen, thanks for taking my call and congratulations on the quarter. John I was just wondering maybe you provide a little bit of detail as far as some of the young market outlook. I was just wondering it’s been a challenging year on the industrial side material processing wise broader speaking basis just maybe your thoughts on how the business finished the year and kind of the outlook for 2017?

[John Ambroseo:]

Sure Tom. The materials processing business I think I mentioned a couple of times already was, it was a terrific year for materials processing. We had some tremendous bookings quarters in March and June. The fourth quarter tends to be a little bit softer anyways as capacity has already been put in place for year-end production. The drivers for us were more, I don’t want to call it a specialty applications probably is that an unfair characterization but we did a lot of really good work in metal processing for consumer electronics that was a - more of a secular thing then a cyclical one. I think if you look at the core businesses cutting, marking, engraving sort of the traditional trinity, I would agree with you that they had a pretty tough slog of it this year. But it all comes down to alignment and we were aligned with some applications in that space that did exceptionally well and we capitalized on them.

[Tom Hays:]

Okay great. And I am looking forward to closing the - I was just wondering perhaps if you could remind me that the financing the deal is going to be a mix between new debt and some of your cash uses. Have you provided any thoughts on the split between the two?

[Kevin Palatnik:]

We have, Tom this is Kevin. So originally we were going to take our $750 million U.S. total loan as it worked out working with the bankers we push that all into Europe the equivalent of which is €670 million loan. We did that because looking forward that’s where we’ll generate the majority of our profits and our cash so to marry that loan up and interest expense to our cash and cash profits. That made sense. So the rest of it if you will and the €670 million is equivalent to about $750 million for the total deal values $942. So the remainder call it plus or minus $190 million will come from the consolidated balance sheet.

[Tom Hays:]

Great. Thank you. Appreciate the color.

[Operator:]

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

[John Ambroseo:]

Thanks Alex. We want to thank everyone for participating in today's call. We will hold a follow-up call once the transaction is formally closed and we'll be able to provide you with greater insight as to the combined operating model as well as the plans for integration. Please look for that for that announcement in the next couple of weeks. Thanks very much

[Operator:]

Ladies and gentlemen, this does conclude today’s conference call. You may now disconnect.