Coherent, Inc.
Q1 2015 Earnings Call Transcript

Published: 29 Jan 2015

[Operator:]

Good day, ladies and gentlemen. And welcome to Coherent First Fiscal Quarter Results Conference Call hosted by Coherent Incorporated. 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 Ms. Leen Simonet, Executive Vice President and Chief Financial Officer. You may begin your conference.

[Leen Simonet:]

Thank you, Katrina. Good afternoon, everyone, and thank you for joining us on today’s call. I will provide financial information and John Ambroseo, our President and CEO, will provide a business overview. As a reminder, any guidance and any statements in today’s conference call pertaining to future guidance, market trends, plans, events or performance are forward-looking statements that involve risks and uncertainties, and actual results may differ significantly. We encourage you to refer to the risk disclosures and critical accounting policies described in the company’s reports on Forms 10-K, 10-Q and 8-K, as applicable and as filed from time-to-time by the company. 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. Let me first give you the financial highlights of our first fiscal quarter. We delivered strong financial performance with revenues and pro forma earnings above expectations and guidance. Revenues for the quarter were $200.6 million with corresponding pro forma earnings of $0.87 per diluted share. We ended the quarter with a cash balance of $323 million, reflecting a quarterly cash flow from operations of $31 million and cash used for stock repurchases of approximately $17 million. Our pro forma EBITDA percent for the quarter was 18.7% and compares to 18.6% last quarter and 16.4% a year ago. Net sales for the first quarter of $200.6 million increased $7.1 million or 3.6% compared to the same quarter a year ago and decreased $4.7 million or 2.3% sequentially, which is consistent with our historical seasonality from the fourth to the first quarter. Our first quarter ending shippable backlog, defined as shippable within the next 12 months, is approximately $296 million including $102 million or 34% flat panel display shippable bookings. The comparable shippable backlog at the end of the same quarter last year was approximately $281 million, of which $73 million or 26% related to flat panel display applications. Geographically, Asia accounted for 51% of the company’s revenues, U.S. 27%, Europe 17% and the rest of the world 5%. Service revenues for the first quarter were $55 million, representing a decline of $2 million compared to the fourth quarter. This decline is in line with the guidance we provided last quarter. At that time, we highlighted that the first fiscal quarter flat panel system utilization rates would be consistent with the fourth quarter run rate and that the cost of ownership reduction we introduced to the customer would result in lower quarterly service revenues of approximately $2 million to $2.5 million. Total service revenues represented about 27% of the total company revenues. We had one customer in South Korea, who contributed more than 10% of the company’s first quarter revenue and this includes the shipment of our first Tri-Vyper Linebeam 1500 ELA system. With respect to revenues by major market application compared to the same quarter a year ago, all major markets with the exception of Scientific realized single-digit growth rates ranging from 3% to 8%. Microelectronics’ growth of approximately 8% or $7 million was driven by higher revenues for flat panel display applications. Revenues in the OEM Components and Instrumentation market grew approximately 3% as a result of continued strong medical application revenues. Although the Scientific revenues declined year-over-year, the first quarter results met our internal expectations. The decline of $2 million in European scientific revenues is partially the result of a tough comparison to Europe’s strongest scientific revenue quarter last year. Company’s sales by major market application are as follows; Scientific $31.2, Microelectronics, $99.3, Material Processing $28.8 and OEM Components and Instrumentation $41.3 for a total of $200.6 million. The first quarter pro forma gross profit was $84.4 million, or 42.1% of sales, which is slightly above the high-end of our guidance. The sequential increase of 160 basis points was primarily the result of a more favorable product mix, reflecting the net benefit of foreign currency fluctuations versus the dollar, coupled with lower other costs resulting from improved inventory management and fewer warranty events. Pro forma period expenses were 26.7% of sales compared to a guidance of 27% to 27.5% of sales. Expenses were consistent with our estimates, the percentage improved due to higher than forecasted revenues. Our cash and cash equivalents balance for the quarter was $323 million, which represents an increase of $4.7 million compared to last quarter. We have completed our previously authorized stock repurchase program of $25 million. The December ending cash balance reflects the repurchase of approximately 300,000 shares for $17.3 million and the remaining $7.7 million of stock repurchased in January will be reflected in the second quarter financials. Under the completed program, we repurchased approximately 434,000 shares. The Board of Directors has authorized an additional stock buyback program to acquire up to $25 million of the company's outstanding stock through January 31, 2016. Approximately $223 million or 70% of the cash balance is held internationally, mainly in Europe. Cash flow from operations for the first quarter was strong at $31 million reflecting an improvement in working capital management. And capital spending for the quarter was $5.1 million or 2.6% of sales. I’ll give you the guidance for the second quarter. Our current outlook for the second quarter revenues ranges from $195 million to $205 million and is inclusive of our second Triple Vyper Linebeam 1500 System. In addition, we expect our second half revenues for fiscal 2015 to be approximately 10% higher as compared to the first half of the current fiscal year. We project the second quarter pro forma gross profit to be in the range of 41.5% to 42.5% of sales. And we anticipate the second quarter pro forma period expenses to increase to approximately 27% to 28% of sales mainly as a result of lower customer reimbursements for certain development projects. Both of these exclude intangibles amortization and stock-compensation costs. Other income and expense is estimated to be immaterial. We do not include gains and losses related to future changes in the foreign exchange rates in our guidance. We project our pro forma tax rate to be approximately 28% for the fiscal year. And our fiscal 2015 capital spending is forecast to be approximately 3.5% of sales. We are assuming weighted outstanding shares for the second quarter of approximately $25 million. I will now turn over the call to John Ambroseo, our President and CEO.

[John Ambroseo:]

Thanks, Leen. Good afternoon everyone and welcome to our first fiscal quarter conference call. Before I discuss markets and performance, I would like to pay tribute to Charles Townes, the co-inventor of the laser, who passed away the other day. I had the good fortune to meet Professor Townes few years ago and I was struck by his humility and kindness. All of us in the photonics industry owe him thanks for enabling what we do. Our Q1 P&L results were solid due, in part, to higher revenue and lower warranty expense. Bookings were affected by the timing of certain OEM orders, and not by market demand or market share changes. Our regional view is unchanged with Asia trending higher, North America being neutral to positive and Europe looking neutral to slightly negative. Our outlook on Europe may change once we better understand how the recently announced ECB stimulus package will roll out. First quarter bookings of $162.5 million decreased 11% sequentially and 19.3% compared to the prior year period. The book-to-bill for the first quarter was 0.81. Scientific orders of $38.4 million were up 2.4% sequentially and down 8.8% compared to the prior year period. While overall research funding remains flat, there were some notable market and regional factors during the most recent quarter. The increase in life sciences research in Asia is continuing and led to record Chameleon orders from the region. Combined with physical -- traditional physical sciences, Asia also produced record scientific orders. Activity was especially strong in China and Korea. North America and Europe were in line with expectations and Japan was modestly up. The biological imaging market continues to be the largest opportunity in the research market. Our Chameleon product line is a workhorse in this area and we recently released the newest version at the Neuroscience Conference in November. The Chameleon Discovery is a different architecture than earlier Titanium

[Operator:]

[Operator Instructions] Your first question comes from Larry Solow with CJS Securities. Okay. That question is pending with John. The next question comes from Patrick Newton with Stifel Nicolaus.

[Patrick Newton:]

Hey. Good afternoon, gentlemen. Can you hear me all right?

[John Ambroseo:]

Yes.

[Leen Simonet:]

Yes, we can.

[Patrick Newton:]

All right. Perfect. So, I guess, first of all, I’d love you to elaborate on that second half guidance for 10% growth relative to the first half. If you could just give us a little bit more detail about what drives the confidence in the second half of the year? And is this from the stated strengthened FPD in the backlog that you already have? Or is there certain geographies or other segments that could contribute to this growth?

[John Ambroseo:]

Sure. The confidence in that number comes from not only from the fact that we do have a pretty healthy backlog. But as I mentioned in my prepared remarks, we are working on a fairly large number of commercial orders. And we have pretty good lines of sight to bring those orders in and they will convert into revenue. Some of it will convert into revenue in the second half and some of it will convert into revenue in '16. So it is sort of the traditional bottoms-up and tops-down process that we go through when we are looking at future performance.

[Patrick Newton:]

And I think in the past you talked to depending on the type of FPDs, that’s ordered, that certain deliveries would already as of last quarter push in the fiscal year '16 and some you could backfill and capitalize on. And it sounds like there is still -- I guess is a decent amount of this 10% growth relying on you obtaining new orders? Or is a good chunk of it already in your backlog?

[John Ambroseo:]

A good chunk of it is in the backlog. There are probably a couple of slots and I don’t know the exact number to be honest Patrick, but they are probably a couple of slots or thereabouts that are available for deliveries this year. And we anticipate having the orders in hand to fulfil those assuming the customer wants them deliver this year or not next.

[Patrick Newton:]

Okay. And then on the service revenue, you talked last quarter about removing some costs and we saw the step down as anticipated here. Should we see this as an absolute bottom for service revenue should start to march up from current levels as the quarter now fully reflects the impacts you discussed previously?

[John Ambroseo:]

So to the extent that our service revenues are dominated I think is the right way to put it by FPD. Historically as we look at the demand profile for FPD service, it typically troughs in the December quarter. Now having said that, bear in mind that we’ve only been doing FPD service for not even a handful of years here. So it’s relatively small data set, but it is consistent with the idea that production for mobile devices sort of peaks before the holiday shopping season and then begins to tail off so that story would be self-consistent. I can never say with absolute certainty that it’s a trough, but given historical trends, it’s not an unreasonable assumption.

[Patrick Newton:]

Okay. And then I guess on based on utilization, some of your comments around API were actually quite positive. And it sounds like you feel like there should be a rebound in the coming quarters. I am curious if you could talk a little bit about a magnitude of the rebound in this business and how much of that is baked into the second half commentary. And then Leen, can you help us understand the margin profile of API relative to the corporate average?

[John Ambroseo:]

So it’s a little bit early for me to be giving predictions as to exactly to what extent API is going to rebound. As I have said in prior calls, we felt that it was a Q2, Q3 event for orders to start to recover. We’ve seen some indication of that. We have not baked in any sort of extraordinary rebound in API as part of that 10% prediction.

[Patrick Newton:]

And on the margin?

[Leen Simonet:]

The recent margin for API is below the company average because the volume was so low as we talked about that before. As volume picks up that should improve, but it is below the company average today.

[Patrick Newton:]

Okay. And then I guess last one for me is on the Sapphire side, it seems like that product that was delayed now has an official launch date. Could you just comment on the amount of revenue you recognized so far based on that product? Do you still have the same confidence and ability to shift follow-on orders? And more broadly speaking, could you just touch based on cutting in general that seems to be something that market is really excited about and how you view that as an opportunity in fiscal year '15?

[John Ambroseo:]

Okay. So the first comment is that you are drawing a correlation that I can’t confirm or deny regarding who the -- what can product these things are being used for, okay. Having said that, I think we mentioned that we shipped about $10 million worth of product into this application or into Sapphire cutting already and that was completed if memory serves I think in Q4. And I had mentioned at the time that we thought there could be a follow-on order of similar magnitude. Those views are largely unchanged. Do we have the ability to ramp? The answer is yes. We did it last year, last fiscal year. We could certainly do it again. And as is usually the case with these consumer electronics applications, an order is placed and delivery has to be fulfilled very, very quickly. It’s not like say the semiconductor industry where there are cycles that you can look at. These are in our laser parlance. This is sort of a personal thing. You get in order, you fulfil it, you move on to the next one. That’s the expectation of the customer.

[Patrick Newton:]

And then any timing aspects, you’ve seen confidence is coming, but is that baked in the March quarter guidance or is that part of the second half story?

[John Ambroseo:]

Patrick, I can’t comment on when we are going to -- when we expect to receive a specific order from a specific customer, I am sorry.

[Patrick Newton:]

Okay. Thank you. Good luck.

[Operator:]

Your next question comes from Jim Ricchiuti with Needham & Company.

[Jim Ricchiuti:]

Good afternoon. John, I wonder if you can comment on, as you look at the FPD business. It sounds like you’re anticipating additional follow-on business in the second half? Does that include follow-on orders for the Triple Vyper?

[John Ambroseo:]

The orders that we’re looking at right now are for the smaller format versions of the system. A lot of that business is actually headed or a lot of the systems are actually headed to China, where the domestic display market is growing pretty rapidly. I think when we launched the Triple Vyper, we mentioned that there was a modest explicitly period around it which is still in place.

[Jim Ricchiuti:]

Okay. Thanks. And just if we -- since you have given us some broad guidance as to how to think of the second half of the year? I wonder if you can comment or maybe provide some color on the other market verticals in the second half. Is there any -- sounds like you see some pickup in the OEM portion of the business? Is that fair to say?

[John Ambroseo:]

The way things are trending right now, clearly, we think that Microelectronics is going to have a strong demand profile going forward. My commentary around the OEM Components and Instrumentation space is as much tie to demand and the medical OEM market, where customers are reporting a pretty good demand or pretty good pull from end markets. Historically, what has happen in that market is customers place large blanket orders and they follow up over a period of time, their burn rates are probably a little bit higher than they had anticipated, which would correlate with earlier reorder points. And we’re augmenting that by bringing out some new products, which we think are particular interest to customers. The one market where, I think, that we’re more at the mercy of sort of general funding and scientific but that’s been true historically.

[Jim Ricchiuti:]

Okay. And Leen, I wonder if you can comment on this. As it -- as we see the Microelectronics business outlook brightening in the second half of the year? Can you talk a little bit about maybe the impact on gross margins in the second half of the year? How we might think about gross margins?

[Leen Simonet:]

As you know the Microelectronics and OEM Components and Instrumentation are the businesses where we have typically above company average. And I believe that with the higher volume we’ll see a better flow through and that should be positive for the margin.

[Jim Ricchiuti:]

Okay. Thank you very much.

[John Ambroseo:]

Sure.

[Operator:]

Your next question comes from Mark Douglass with Longbow Research.

[Mark Douglass:]

Good afternoon, John and Leen.

[John Ambroseo:]

Hi, Mark.

[Leen Simonet:]

Hi, Mark.

[Mark Douglass:]

So looking at second half guidance again, looks like we’re looking at high single-digit year-over-year growth? Is that fair to characterize it that way?

[John Ambroseo:]

I don’t know if you quite get there to the high-single digits.

[Mark Douglass:]

At least mid to high.

[John Ambroseo:]

I guess, you definitely get is -- what your definition of high is -- but take the guidance that Leen gave to the second quarter added to the performance of the first quarter at 10%. I mean its …

[Mark Douglass:]

Right.

[John Ambroseo:]

But it will tell you pretty much how we’re thinking about the year.

[Mark Douglass:]

So based on that, do you have -- I guess, you’re going to say its mix. But I think, do you look at it as far as incremental margins and every dollar sold year-over-year basis, how that flows through to EPS or we see operating income line?

[Leen Simonet:]

I think we’re holding to the number we’ve given in prior session. We typically on average received approximately 30% flow-through to the operating income.

[Mark Douglass:]

Okay. Thank you.

[Leen Simonet:]

And that …

[Mark Douglass:]

Go ahead.

[Leen Simonet:]

No. No. Fine. I’m done.

[Mark Douglass:]

Okay. And John, with shipments of 1,500 in the second quarter then you have another one in fourth quarter, right?

[John Ambroseo:]

That’s correct.

[Mark Douglass:]

As we’re modeling, there’s going to be a little bit of a whole in the third quarter, is that fair to say?

[John Ambroseo:]

Well, there will be a 1,500 shipment in the third quarter.

[Mark Douglass:]

Right. So it will be a revenue -- I mean, there is likely these things are pretty big revenue [indiscernible] right.

[John Ambroseo:]

They are higher ASP units, you’re correct. But we’re not modeling that the full benefit comes in the fourth quarter.

[Mark Douglass:]

Okay. Okay. That helps. And then on scientific, can you run through your expectations on scientific again? What are you thinking over the next year? Looks like I assume -- sounds like Asia is still going to be pretty good for you, Europe maybe not so much and then the U.S. maybe some growth or what are you thinking on scientific again?

[John Ambroseo:]

Historically, scientific has been a global GDP plus or minus kind of business. I don’t think anything exist today that would change that view. Other than the fact that when we had Aura in the U.S. and we are going back now, whatever it is five or six years when it was enacted. There is a substantial amount of money that’s flowed into scientific research as part of Aura. I don’t know enough about how the ECP stimulus package is going to rollout and whether, we would see any benefit flowing into scientific research coffers around Europe it’s just a lack of information right now. But I think looking at this is as a GDP plus or minus kind of market is a consistent view.

[Mark Douglass:]

Isn’t there a rather large laser program that obviously you are trying to rollout in the [indiscernible]?

[John Ambroseo:]

Well, there are few. There is the extreme light source initiative and then there is Brain Research program. As I commented on in previous conference calls, the BRAIN program that they are running in Europe seems to be more computational than experimental. So the amount of opportunity, if you will, in our space is probably less than the U.S. BRAIN program corresponding effort here, which seems to be much more experimental than computational. As far as the extreme light initiative, there are a bunch of countries that are involved in it. Much of the money that we’ve seen so far has been for infrastructure, not necessarily for lasers. But going beyond that, the kind of lasers that they are going to use in this at least my limited understanding probably are more custom component level designs…

[Mark Douglass:]

Okay.

[John Ambroseo:]

…where researchers are putting these things together. So there is probably some opportunity. I don’t think it represents a game-changing opportunity for the laser industry.

[Mark Douglass:]

Okay. Thank you.

[John Ambroseo:]

Sure.

[Operator:]

The next question comes from Mark Miller with Noble Financial Capital Markets.

[Mark Miller:]

Good afternoon, Leen and John.

[John Ambroseo:]

Hi, Mark.

[Mark Miller:]

Just wondering if you saw -- hi. Just wondering if you saw any foreign currency headwinds last quarter or expect any this quarter from the weakening of the euro?

[Leen Simonet:]

My best guesstimate is that of the 160 basis points improvement quarter-on-quarter is about a third, so let’s say, 50 basis points with benefits from currency. With respect going forward, it’s hard to know because we are just early in the quarter and the currency rates fluctuate so quickly. I can hardly give you an estimate that at today’s rates, it would be slightly more beneficial on gross margins. We have a negative impact on revenue. We have a positive impact on gross margins and a positive impact on expenses.

[Mark Miller:]

Any more color you can give us on what’s going with fiber laser or any coating activity there? Just -- you made some improvements and I am just wondering what’s going on with fiber?

[John Ambroseo:]

We are on track. As I mentioned last quarter, we are doing the second gen release this year. Not at a point where I want to make a final commitment on a release date. But the program is proceeding as plan right now.

[Mark Miller:]

And then finally for me. It sounds like China remained strong as the quarter went on, did you see any tail off, but it doesn’t appear that from your comments? It seems China remain…..?

[John Ambroseo:]

Yeah. I made some comments last quarter and I guess I’ll reiterate some of those now. The overall growth rate in China is -- has come down again. I think it’s the current projection maybe somewhere around 7%, although I may be a week or two out of date. What we are -- we are benefiting from the fact that we are tied to programs funded by the Chinese government. So, this display initiative for example has captured a lot of investment. The same would be true. My comments are around the semiconductor industry, where China aspires to be the largest semiconductor manufacturer in the world that’ll drive an awful of investment if they follow-through on it. So with China, you have to be tied to the right wagons if you will and right now we have pretty good alignment.

[Mark Miller:]

Thank you.

[John Ambroseo:]

Sure.

[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 comments or closing remarks.

[John Ambroseo:]

Thank you, Katrina. Again, we appreciate everybody’s participation and we look forward to seeing some or most of you, I guess over the next couple of weeks either at the conference or at Photonics West. Thanks.

[Operator:]

Thank you for participating in today’s conference. You may now disconnect.