Coherent, Inc.
Q2 2015 Earnings Call Transcript

Published: 29 Apr 2015

[Operator:]

Good day, ladies and gentlemen. And welcome to the Coherent Second Fiscal Quarter 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 Ms. Leen Simonet, Executive Vice President and Chief Financial Officer. You may begin your conference.

[Leen Simonet:]

Thank you, Eric. 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 second fiscal quarter. Our second quarter results exceeded consensus with revenues of $203.7 million and corresponding pro forma earnings of $0.94 per diluted share. The second quarter reflects the benefits of a lower effective tax rate as a result of a more favorable distribution of profits across the various jurisdictions, impacting the quarter positively by approximately $0.04 per diluted share. In addition, foreign exchange gains included in other income contributed $0.03 per share. We ended the quarter with a cash balance of $344.4 million, reflecting a quarterly cash flow from operations of $49 million. Our pro forma EBITDA percent for the quarter was 17.6% and compares to 18.7% last quarter. Net sales for the second quarter of $203.7 million increased $4.5 million or 2.3% compared to the same quarter a year ago and increased $3.1 million or 1.5%, sequentially. Our book-to-bill ratio for the quarter was 1.08. The second quarter’s ending shippable backlog, defined as shippable within the next 12 months, is approximately $315 million including $116 million, or 37%, flat panel display shippable bookings. The comparable shippable backlog at the end of last quarter was approximately $296 million including $102 million, or 34%, flat panel display shippable bookings. Geographically, Asia accounted for 53% of the company’s revenues, U.S. 26%, Europe 16% and rest of the world 5%. Service revenues for the second quarter were almost $66 million and represent a record for the company. This represents an increase of $10.6 million compared to the first quarter, of which approximately 70% is related to replacement parts for the excimer annealing systems. This increase exceeded our expectations as we benefited from a rapid step up in system utilization from our flat panel display customers. Total service revenues represented about 32% of the total company revenues. Similar to the first quarter, we had one customer in South Korea, who contributed more than 10% of the company’s second quarter revenue and this includes the shipment of our second Triple Vyper Linebeam 1500 ELA system. With respect to revenues by major market application compared to last quarter, all markets with the exception of scientific realized single-digit growth rates ranging from 2% to 7%. Revenues in the OEM Components and Instrumentation market grew approximately 6.5% as a result of continued strong ophthalmic and aesthetic application revenues, as well as higher bioinstrumentation sales. Microelectronics’ revenue growth of approximately 2.5% or $2.5 million was driven by higher revenues for semiconductor applications. Materials processing market revenues grew 2.1% mainly from Asian and U.S. customers. And our scientific revenues declined 8.5% sequentially, due to weakness in Europe, partially offset by strength in Asia. The company’s sales by major market application for the second quarter are as follows, Scientific $28.6, Microelectronics $101.8, Material Processing $29.3, OEM Components and Instrumentation $44, for a total of $203.7 million. The second quarter pro forma gross profit, excluding stock compensation and intangibles amortization was $85.4 million, or 41.9% of sales, which is at the mid-point of our guidance range. The sequential decrease of 20 basis points is the result of the net impact of several factors. Our CLC segment revenues were higher as a percent of the total company revenues and CLC margins are lower than the SLS segment margins. This unfavorable segment mix and the unfavorable impact of product mix and volume changes in some business units were partially offset by the benefit of higher service revenues, and the net benefit of foreign currency fluctuations versus the dollar. Pro forma period expenses were 27.7% of sales, compared to a guidance of 27.5% to 28% of sales, which is in line with our prior estimates. Our cash and cash equivalents balance for the quarter was $344.4 million, which represents an increase of $21.5 million compared to last quarter. We have completed our previously authorized stock repurchase program of $25 million. The second quarter reflects the repurchase of approximately 134,000 shares for $7.7 million. Under the completed program, we repurchased approximately 434,000 shares. No purchases have been made under the $25 million stock repurchase program that was approved during the second quarter of this fiscal year. Of the $344.4 million cash, 77% is denominated in U.S. dollars. Approximately $259 million or 75% of the cash balance is held internationally, mainly in Europe. Cash flow from operations for the second quarter was very strong at $49 million reflecting a sequential improvement in accounts receivable DSO from 59 to 55 days, an increase in inventory turns from 2.9 to 3.1 coupled with higher liabilities for inventory purchases that occurred late -- that occurred late in the quarter and the build-up of the first half variable compensation charge which will be paid during the third quarter. Capital spending for the quarter was $7.1 million or 3.5% of sales, bringing the year-to-date spending to $12.2 million or 3% of sales. Let me now give you the guidance for the third quarter. Our current outlook for the third quarter revenue ranges from $190 million to $210 million and is inclusive of our third Triple Vyper Linebeam 1500 ELA system which we pulled in from the fourth quarter based on customer requests. In addition, we are adjusting the full fiscal 2015 revenues to be in the range of $820 million to $830 million reflecting foreign exchange headwinds and a customer process change in one of our previously forecasted bookings for a consumer electronics application. We project third quarter pro forma gross profit percentage to be in the range of 41.5% to 42.5% of sales. And as a reminder, this excludes intangibles amortization and stock compensation costs. And we anticipate the second quarter pro forma period expenses to be approximately 27% to 28% of sales. And again the guidance excludes intangible amortization and stock compensation costs. Other income and expense is estimated to be immaterial. We do not include transaction 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 26% for the fiscal year. And we continue to forecast our full fiscal 2015 capital spending to be approximately 3.5% of sales. We are assuming weighted outstanding shares for the third 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 second fiscal quarter conference call. Consistent with our outlook from last quarter’s earnings call, the demand environment improved in many of our commercial markets during our second fiscal quarter. Bioinstrumentation and medical OEM rode improving customer sentiment to deliver the biggest gains. We received new system and higher service orders in FPD. Via drilling continued to make steady progress. Our financial results were in good order including lower accounts receivable DSO and higher cash. Second quarter bookings of $220.6 million increased 35.7% sequentially and declined 15.8% compared to the prior year period, which included a $100 million order for ELA equipment. The book-to-bill for the second quarter was 1.08. Scientific orders of $26.4 million were seasonally down 23.9% sequentially and up 6.4% compared to the prior year period. Demand for ultrafast amplifiers used in chemistry and physics research continued to improve during the second quarter. Much of the business is for our Astrella product line. Within biological imaging, the Chameleon Discovery is being well received, given its industry leading performance, which is applicable to traditional reagent-based imaging as well as CARS microscopy. CARS, which is an acronym for Coherent Anti-Stokes Raman Spectroscopy, is a reagent or label-free imaging technique. It has applicability in several areas including cancer detection. Asia did very well with contributions from Korea, China and India. Japan also showed signs of life after a prolonged period of sluggishness. The U.S. and Europe were lower on a sequential basis. We believe the change in the U.S. is mostly timing of orders. Europe may be funding or exchange rate related. We’ll need more data to confirm either issue. Record instrumentation and OEM components orders of $57 million increased 80.5% sequentially and 51.2% versus the prior year period. Order timing and share gains led to higher bookings in bioinstrumentation and medical OEM accounts. Multiple flow cytometry customers placed orders to cover longer-term demand, suggesting growing confidence in their business prospects. The microscopy and DNA sequencing submarkets were in-line with our expectations. Medical OEM bookings were very strong. Non-LASIK, ophthalmic demand was robust with key orders for cataract and photocoagulation products. Dental lasers also enjoyed very strong demand as the procedure is gaining adoption. Aesthetic products continue to benefit from a growing home treatment market throughout the U.S., Europe and parts of Asia. Orders for medical fiber consumables were well ahead of forecast. Defense applications were up dramatically on a percentage basis from a single order for fiber used in passive sonar for submarines. It’s not large dollars, but it is incredibly cool. Microelectronics orders of $105.4 million increased 46% sequentially and declined 38.6% compared to the record-setting performance in the prior year period. The semiconductor market is generating very good service revenue, which is consistent with current utilization rates. By contrast, CapEx investments have been muted despite continued growth in bit and device output due, in part to yield and process enhancements. The near-term outlook is likely to remain sluggish given recent CapEx reduction announcements by TSMC and Intel. This will modestly limit growth within our microelectronics business for the remainder of fiscal 2015. Via drilling demand improved noticeably during the second quarter including multiple orders -- sorry multiple volume orders for the Diamond J-Series Hornet. The Hornet is our latest incarnation of CO2 technology. It offers users, unique performance and design attributes that provide high throughput and lower total tool cost. The combination resonates well with customers and we are optimistic that the Hornet will unlock a series of new opportunities over the coming quarters for 60 plus micron hole sizes. The push for further package miniaturization may lead to hole sizes as small as 25 microns. Current CO2 technology will have to be augmented with other laser sources to cover the combination of hole sizes and substrate materials contemplated by electronics manufacturers. We have been working with customers to explore possible solutions with several existing and future products. One of these is particularly intriguing since it supports smaller hole sizes, provides sufficient throughput and would sell at an enabling price point. We plan to launch this new system at Lasers Munich. A good portion of the sequential increase in bookings came from our flat panel display business. We received a number of Vyper/ Linebeam 750 orders, which are likely earmarked for LTPS LCD production. Service bookings also increased. As Leen mentioned, we delivered the second Triple Vyper/Linebeam 1500 system during the March quarter. The customer has requested that we pull in the third unit from the September -- in the September to the June quarter. This is a non-trivial request that requires expediting some of the large Linebeam optics and reallocating production labor and space. We believe we can get it done, but it is going to be very tight. We are including the $20 million system revenue in our guidance, but the range is wider than usual. Peering into our crystal ball, we expect meaningful ELA orders over the next few quarters with the peak coming in our Q4 or Q1 of fiscal ’16. We are engaged in a large number of projects using short pulse lasers for consumer electronics packaging. As we previously discussed, these are digital opportunities that entail rapid fulfillment. Our second half plan including one such opportunity for approximately $10 million. Unfortunately, the end customer decided to stick with their current process and reuse existing equipment. It will be difficult to accelerate other projects to replace the revenue prior to the end of fiscal 2015 and we have adjusted our outlook accordingly. Materials processing orders of $31.6 million were up 32% sequentially and 15.4% versus the prior year period. Several applications contributed to second quarter bookings. There was a significant uptick in laser marking demand that fueled orders for CO2, short-pulse and diode lasers. The CO2 and short-pulse lasers are used directly while the diode lasers are used as OEM pump lasers. Most of this activity originated in China following the local New Year’s holiday. Orders for high-power Diamond E-1000 CO2 lasers for use in the converting and cutting of organics came in strong and several other similarly sized opportunities are in the pipeline. We also booked a low seven-figure order for additive manufacturing using CO2 lasers and additive manufacturing is drawing on a wide range of solutions from us that also includes UV and direct diode lasers. We will release our next-generation fiber laser platform at Lasers Munich in late June. We believe the combination of enhanced performance, packaging and serviceability will allow us to be more competitive in the fiber laser space. We are encouraged by customer sentiment and application engagement across our commercial markets. We’re in an all-hands-deck situation to deliver the third Linebeam 1500 system well ahead of the original commit date and no effort will be spared. There are two upcoming tradeshows

[Operator:]

[Operator Instructions] Your first question comes from the line of Larry Solow with CJS Securities. Your line is open.

[Larry Solow:]

Great. Good afternoon. John, just to reaffirm on the change in customer processes, you said that was about $10 million in sales that you were expected to occur in fiscal ’15. Is it fair to say the rest of the difference is currency?

[John Ambroseo:]

That is correct.

[Larry Solow:]

Okay. And assuming that normal holds true on the rest of difference, you should at least -- should be at least to move point on the bottom line, perhaps even a positive -- modest positive. Looking at gross margins, the temporary mix issues, is that something that -- it seems it was pretty small add but is that something you expect to continue or would you expect that to revert back next couple of quarters?

[John Ambroseo:]

I think we guided 41.5 to 42.5

[Larry Solow:]

Right.

[John Ambroseo:]

The midpoint, we put is just a touch over where we are right now.

[Larry Solow:]

Right.

[John Ambroseo:]

Projecting the exact mix is always a tricky thing to do at the beginning of a quarter. But we don't expect to see any large changes from what we've seen last quarter.

[Larry Solow:]

Okay. And sounds like you’re building some recovery now in the API. It sounds like trends R&D turning like you had expected. Could you just remind us is that -- I know those margins have been depressed but I thought it’s a pretty leverage business. So, on an operating basis, so it should could rebound, margin should improve as that sales come back in that business? Is that correct?

[John Ambroseo:]

It has disproportionately hit one business unit as we’ve mentioned a few times in the past. And as we convert these recent orders into sales, yes, it should help the margins within that business unit.

[Larry Solow:]

Okay. And just lastly, just can you give us an update just on the competitive landscape in LTPS and OLED, any change? On that front it sounds like most of the orders you’ve been getting are for LTPS LCD, is that correct?

[John Ambroseo:]

Well, for LTPS and it's a mix of end application, whether it's LCD or OLED. The orders that we received, the system orders that we received during the March quarter we believe are for LCD production.

[Larry Solow:]

Okay. Great. Thanks.

[Operator:]

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

[Jim Ricchiuti:]

Hi. Good afternoon. John, just a follow-up to that, the last questions on the display portion of the business. I think in the last call you alluded to anticipating some orders, order activity in China. Was that included in some of the bookings or is that, are these orders that you're expecting later in the fiscal year?

[John Ambroseo:]

The orders that came in March, I believe were for Chinese manufacturers. And the orders that will come in between now and the end of fiscal ‘15 and potentially into early fiscal ‘16 will be a mix of China, Japan and Korea.

[Jim Ricchiuti:]

Okay. And so you're assuming I guess, later in the year a pickup in order activity related to OLEDs in addition to what your ongoing activity that you're seeing in LCD?

[John Ambroseo:]

I'm being hesitant because I’m not sure that I -- it’s not place to discuss exactly what the end product mix is. But we would expect OLED capacity to expand, not only for the mobile market where it’s had the biggest impact thus far but potentially also for the automotive market.

[Jim Ricchiuti:]

Okay. And you mentioned, Japan, is that something new? I don’t recall you hearing you talk about a great deal of investment in this area from Japan of late. Is this something or maybe I missed it? Is that a pickup that you're seeing there?

[John Ambroseo:]

I’d say it’s more business as usual. We don’t define every order that we get geographically and there have been orders from time to time out of Japan. The bigger orders have obviously come from Korea and more recently from China. But I would categorize this as more common than not.

[Jim Ricchiuti:]

Okay. And then just finally on the service revenue side of the business. You clearly saw a nice pickup there related to the display business. Is that something that you would expect would grow sequentially as you go through the year, just given what your understanding is of the utilization rates out there?

[John Ambroseo:]

Trying to think how to frame this, Jim. One correlation is the number of sockets out there. Probably the more important correlation is what overall utilization looks like. And there certainly are signals that utilization is improving, whether it’s going to improve in one area or one product or broadly is more difficult to determine. As Leen mentioned in her prepared remarks, the step-up from Q1 to Q2, we think is closely related to the launch of some new mobile products that drove demand and those have always been strong correlators.

[Jim Ricchiuti:]

Okay. Thanks very much.

[John Ambroseo:]

Sure.

[Operator:]

Your next question comes from the line of Patrick Newton with Stifel. Your line is open.

[Patrick Newton:]

Yeah. John and Leen, thank you for taking my questions. I guess, just sticking to that service revenue question. I believe you said, 70% of the sequential growth was LDU related, with the remaining 30% still relatively impressive. I’m curious if you could dive into what parts of your business will drive in the other 30%, that growth?

[Leen Simonet:]

It’s basically all microelectronics. Patrick, most of it is microelectronics, because we also have service that is linked to the semiconductor applications.

[Patrick Newton:]

And then any particular semiconductor application that you point to though?

[John Ambroseo:]

Most of our deployed product is inspection and metrology.

[Patrick Newton:]

Okay.

[John Ambroseo:]

And as I’ve mentioned in this call and previous calls, utilization rates within semi remain very high and that has that pull service along for us long. So there's not a great surprise there the -- at least for us there wasn’t a great surprise. The more -- frustrating piece of the semi-market has been sort of the sluggish nature of the CapEx market.

[Patrick Newton:]

Okay. That’s helpful. And I guess just drilling down on the gross margin, Leen you gave several reasons for the sequential down tick? But could you walk us through again some of the puts and takes, I am just curious perhaps, I thought service margin was better than it is or even some of the ATI commentary would seem to bode well for gross margin? So can you please walk us through some of the puts and takes again as to why that was sequentially pressured?

[Leen Simone:]

Indeed the service margins contributed positively to the gross margins, for the overall company margins, but that was offset by the unfavorable impact of having a higher percent of CLC business versus SLS business. So it was actually not visible. And then the net benefit of our currency which is the net benefit of the euro weakening offset by the unfavorable benefit of the Japan yen weakening was offset by the lower volumes in certain of our business units and then a couple of mix changes as well.

[Patrick Newton:]

Okay. That's great. And then, John, just jumping back to the flat panel display and the visibility into the good order demand that you think should peak in either fiscal fourth quarter or fiscal first quarter of 16’? I am curious if there’s any specific version of the Linebeam or geography that’s proving you that healthy visibility? And then assuming this order is coming as planned, can you help us understand the relative, I guess, timing of shipments or how far the bookings are into the future at this point?

[John Ambroseo:]

So geographically it’s going to be the three countries that we’ve been talking about Korea, China and Japan. From the standpoint of product mix, it will probably be skewed towards Linebeam 750s because more customers have experience with the 750 and they are working in Gen4 fabs. We do expect to see some business for larger systems and at this point, it will depend a little bit on timing on which customers order and whether those are 1000s, which is a derivative of 1300, a 1300 or 1500. But there’ll be some mix and right now I can't tell you exactly what the mix is going to be, because these are ongoing discussions with the end customers. And Patrick, I am sorry there was a third part to your question and it slipped my mind already.

[Patrick Newton:]

Just actual delivery dates, so I think previously you talked about being booked merely through the September timeframe?

[John Ambroseo:]

Yes. The -- so we are -- I think we are pretty much scheduled through the end of September at this point. Most of these orders, particularly they get placed in the fourth quarter as we are anticipating, these are ‘16 revenue.

[Patrick Newton:]

Okay. And then, I guess, just lastly, just trying to understand the guidance, if we take the $25 million mid-point and take the midpoint of your June outlook that backs into an implicit September about $221 million, the June quarter, as you said, it includes that $20 million Linebeam 1500? So normalizing in the September quarter does not. So if I normalize you are going from $180 June guide to $221 September? Can help us understand what gives you confidence in a $40 million sequential uptick?

[John Ambroseo:]

I am sorry, Patrick, $180..

[Patrick Newton:]

If so $200 is the midpoint of your guidance, if I pull out the Linebeam 1500, because there’s not going to be one in -- there’s one big end of June but not September. So if I normalize it, your underlying business sense these Linebeam 1500 would be $180 million and that would stepping up to $221 million. So about $40 million dollar delta sequentially and what's driving that confidence and that uptick?

[John Ambroseo:]

Okay. So, Patrick, we are shipping -- we’ve been asked to pull in the 1500 and that it appears we are able to do that. There are other systems that we would have shipped during the quarter that have to slide out because of limitations in terms of space and manpower availability and those systems will ship in the fourth quarter. So it’s not taking a $20 million shipment out and not replacing it with other yearly business there is a swap going on between Q3 and Q4.

[Patrick Newton:]

Great. Yeah. That was the explanation I was hoping for. Thank you for taking my questions. Good luck.

[John Ambroseo:]

Sure.

[Operator:]

Your next question comes from the line of Mark Douglass with Longbow Research. Your line is open.

[Mark Douglass:]

Good afternoon, John and Leen.

[John Ambroseo:]

Mark, how are you?

[Leen Simonet:]

Hi.

[Mark Douglass:]

All right. How are you?

[John Ambroseo:]

Good. Thanks.

[Mark Douglass:]

Good. In the quarter, Leen, what was the currency effect in the quarter whether dollars or year-over-year percentage growth in sales?

[Leen Simonet:]

It was about unfavorable $3.5 million.

[Mark Douglass:]

$3.5 million. Okay. And your price on..?

[Leen Simonet:]

Mark, this is sequential rise from Q1 to Q2.

[Mark Douglass:]

Okay. From 1Q to 2Q. So, it’s save to say, it will be a little bit more a negative currency in the 3Q baked in your guidance?

[Leen Simonet:]

No, because the guidance of the -- difference between the $10 million and the $15 million was -- let’s say, the $5 million was currency for two quarters.

[Mark Douglass:]

Two quarters, right.

[Leen Simonet:]

That was for the second half.

[Mark Douglass:]

Right. Okay. John, will you drive much benefit from the much value through the 15 unit EUV order in U.S?

[John Ambroseo:]

There is probably some test and measurement equipment that will go to support that. But I don’t think it’s a large number.

[Mark Douglass:]

Okay. I think get the sense of the real material for you. Okay. Looking at the Vyper getting pulled in. And you’re having to work really diligently in getting that done. I know, it’s a huge effort. Did you bake in your guidance, some conservatism there on the gross margin line, just potential for some expedited shipping or I don’t know, services, things like that?

[John Ambroseo:]

Not at this point, no.

[Mark Douglass:]

Okay. Fair enough. That is all the questions -- oh, no, wait. You mentioned share gains in the OEM, instrumentation. Was that -- that's in flow cytometry or where was that again?

[John Ambroseo:]

It was in flow. It was -- and it was in medical OEM for both coagulators and cataract.

[Mark Douglass:]

Okay. What’s driving the share gains, is it pretty much your technology, the price?

[John Ambroseo:]

We’ve been working with a number of OEMs for a while to displace places that they were buying from other vendors. And it was simply a matter of developing the technology and getting it qualified. Once that happens, they were more than happy to make the switch especially in the cytometry space where we are now providing these multiple modules to customers. So they get a fully integrated package from us that drops into the system. And in the medical OEM space, we've been working very hard on some new technologies that are -- and those efforts are very improved. So it was not price driven, it was solution driven.

[Mark Douglass:]

Great. And then just one final question. That $10 million opportunity that dropped off unlikely that that ever comes back, do you think that customer is just….

[John Ambroseo:]

I don’t think it comes back for this generation of the end-customer’s product because it would be very unusual for them to change manufacturing processes in the middle of a production run. Historically, that’s not the way its wrapped. So we were well down the path. We thought that the business was coming and fairly late in the game, the customer -- the end customer decided to stick with an existing process and reuse existing hardware. Disappointing, but it happens.

[Mark Douglass:]

Yeah. When is the next refresh? Does these customers do it every year or is it more I get to your cycle?

[John Ambroseo:]

No. These -- the refreshes here tend to come sort of six to nine months.

[Mark Douglass:]

Okay. So potential, you can give some into it, talking during the fiscal ‘16 maybe?

[John Ambroseo:]

There is certainly time to work on the process with them. But as I said I don’t think that we were -- I don’t think that this recovers for fiscal ‘15. That would be…

[Mark Douglass:]

Right.

[John Ambroseo:]

…that would be an unusually quick recovery.

[Mark Douglass:]

Okay. 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 or closing remarks.

[John Ambroseo:]

Thank you, Eric. And again we appreciate everybody’s time. We look forward to seeing you at some of these trade shows or at the upcoming conferences that we’re going to be attending. Thank you.

[Operator:]

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