Coherent, Inc.
Q4 2014 Earnings Call Transcript

Published: 5 Nov 2014

[Operator:]

Good day, ladies and gentlemen, and welcome to the Coherent Fourth Quarter and Year End Fiscal 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. Lene Simonet, Executive Vice President and Chief Financial Officer. You may begin your conference.

[Helene Simonet:]

Thank you, Glenn. Good afternoon 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 the fourth quarter. Revenues for the quarter were $205.3 million with corresponding pro forma earnings of $0.96 per diluted share. Although revenues were below rent of our guidance range, we exceeded our earnings expectations mainly due to lower operating expenses and $1 million favorable exchange rate impact included in other income. We ended the quarter with a strong cash balance of $318.3 million, reflecting a quarterly cash flow from operations of $26.5 million. Our pro forma EBITDA percent for the quarter was 18.6% and compares to 15.8% last quarter. Net sales for the fourth quarter of $205.3 million increased $8.8 million or 4.5% sequentially and declined $7.8 million or 3.7% compared to the same quarter a year ago. Year-to-date revenues of $794.6 million declined 1.9% compared to the previous fiscal year. Our shippable backlog at the end of September displays a shippable within the next twelve months is approximately $328 million including $136 million or 41% club panel display shippable bookings. The comparable shippable backlog at the end of last year was approximately $286 million of which $80 million or 28% related to flat panel display obligation. Geographically, on a year-to-date basis, Asia accounted for 49% of the company’s revenues, U.S. 26%, Europe 19%, and rest of the world 6%. Asia included two territories with revenues greater than 10%. South Korea and Japan represent 21% and 16% of fiscal 2014 revenues respectively. Service revenues for the fourth quarter were $57 million, unchanged from last quarter. Flat panel display service revenues decreased about $1 million sequentially which reflects our previous guidance of lower utilization rates. Fiscal 2014 total service revenues increased to almost $234 million or 29% of sales compared to $208 million last fiscal year. And flat panel display service revenues grew up by 24% year-over-year. We had one customer in South Korea who contributed more than 10% of the company’s fourth quarter and year-to-date revenues. With respect to fourth quarter revenues by major market applications, we saw a high single digit sequential increase in Microelectronics, smaller increases in our materials processing and scientific market, and a slight decrease in the OEM components in instrumentation market. Microelectronics revenues grew 8% sequentially, mainly due to an increase in the flat panel display set markets, primarily as a result of a large shipment to China for sulfide Proto Glass processing. Advanced packaging revenues also increased sequentially, however we are comparing to one of the lowest quarters in recent history. API revenues remain at lower levels when comparing to prior year run rate as is the adjuring market recovery has been slower than originally anticipated. Semiconductor revenues declined sequentially and reflect a softer environment for this market. For the full fiscal year the largest year-over-year percentage change was in the OEM component in instrumentation market. Our revenue in this market grew 13% which is primarily the result of success in a wide range of medical applications including ophthalmology, static surgical and dental. These increases were more than offset by lower microelectronics revenues as a result of less flat panel display system revenues due to the timing of customer demand and lower advanced packaging revenue due to market softness, partially offset by higher flat panel services revenues and higher semiconductor business. The company’s sales by major market applications for the quarter is as follows; scientific $29.1 million, microelectronics $102.9 million, material processing $31.9 million, OEM components & instrumentation $41.4 million for a total of $205.3 million. The fourth quarter pro forma gross profit was $83.1 million or 40.5% of sales which is in line with our guidance. The sequential increase of 160 basis points was mainly the result of a more favorable mix and higher volume. Pro forma period expenses were 25.4% of sales, compared to a guidance of 25.5% to 26% of sales. Fourth quarter expenses were unchanged from last quarter and continue to be lower than the first half run rate due to higher customary endorsements through a certain development projects and lower variable compensation. Our cash and cash equivalents balance for the quarter was $318.3 million, which represents an increase of $15 million compared to last quarter and $68.2 million compared to the previous fiscal year end. Approximately $201 million or 62% of the cash balance is held internationally, mainly in Europe. Cash flow from operations for the fourth quarter was $26.5 million bringing the year-to-date to approximately $91 million. Day sales outstanding for the quarter remained at 60 days compared to last quarter. And inventory turns improved sequentially from 2.7 to 2.9 turns. Capital spending for the quarter was $5.5 million or 2.7% of sales, and year-to-date spending is $23.4 million or 2.9% of sales. Let me move onto the guidance for the first quarter of fiscal 2015. As a reminder, our first fiscal quarter is typically a shot quarter due to the many holidays. Looking at Coherent’s prior ten years of actual excluding a couple of recovery years, our first quarter revenues generally ranged 2% to 12% below the fourth quarter of the prior fiscal year. Our current outlook for the first quarter revenue ranges from $190 million to $200 million, representing a sequential decrease ranging from 2.5% to 7.5%. The guidance is inclusive of our first single vital line [ph] being 1,500 flat panel display systems which is currently scheduled to ship at the end of the first quarter. This is the first of the systems there is always a possibility that shipment could slip into the beginning of the second quarter. During the fourth quarter we shift a thin wiper line being 1300 systems which clears the last of the backlog related to this equation. In addition, the first quarter guidance reflects the following assumptions; first, a delay in a follow-on order to the sapphire processing order that we fulfilled in fourth quarter; second, a flat panel system utilization rate consistent with the fourth quarter run rate; and third, no recovery yet of the advanced packaging market. We project the first quarter pro forma gross profit percentage to be similar to the fourth quarter in the range of 40% to 41%. We believe that the favorable impact of the recently weakened euro against the dollar will be offset by the negative impact of lower volumes. As a reminder, the guidance excludes intangible amortization and stock-compensation costs. We anticipate the first quarter pro forma period expenses to increase to approximately 27% to 27.5% of sales mainly as a result of the lower revenues, higher compensation cost, and lower customary endorsement for certain development projects. Again, the guidance excludes intangible amortization and stock-compensation cost. Other income and expense is estimated to be immaterially, we do not include gains in market related to future changes in the foreign exchange rates in our guidance. We project our pro forma tax rate to be in the range of 27% to 28% for this fiscal year, and this is at the assumption of the Federal R&D tax credits will not be reinstated during this fiscal year. Before we cast our full fiscal 2015 capital spending to be approximately 4% of sales and we are assuming weighted outstanding shares of 25.3 million for the first quarter. I will now turn over the call to John Ambroseo, our President and CEO.

[John Ambroseo:]

Thanks, Lene. Good afternoon everyone, and welcome to our fourth fiscal quarter conference call. The economic news coming out of China and Europe has raised many questions about how these economies affect global Photonics industry. Slowing growth in China does not have uniform effect of Thunder laser marketplace. Markets, applications or technologies that enjoy central or regional government support tend to be more immune to macroeconomic pressure. For example; high definition LCD or OLED Panels or mobile, OLED for lighting biotech, environmentally friendly manufacturing technologies, and university lead scientific research are supported by either or both levels of government and have maintained a bullish outlook. General manufacturing market is feeling the pinch and small companies are feeling it disproportionately. So I think fewer overall opportunities, more aggressive behavior from established competitors, and concerns about those survivability from end users. None of this would cause us to materially change our mid-term outlook and accelerated technology investment could drop some upside. Europe is mixed, the combination of slow growth and the fear deflation has caused commercial customers to be very cautious. The bright spot in the commercial markets in medical OEM where several European companies are among the worldwide leaders for vision correction and disease management of the eyes. Scientific research funding is being directed to more successful research groups and/or into large Euro zone projects such as the human brain project, the extreme light infrastructure project, and the graphene flagship program. These large programs may create infrastructure dollars but how much will benefit the Photonics industry is unclear. The best opportunity is to reside within EOI. Net-net, our near term projections for Europe remain unchanged and we recognize there is down side risk. Fourth quarter bookings of $182.7 million decreased 25.3% sequentially and 8.8% compared to the prior year period. The book-to-bill for the fourth quarter was 0.89. So I think orders in the fourth quarter are $34 million, we’re up 17.9% sequentially and down 0.09% compared to the prior year period. The overall scientific market is stable although there are some – several underlying trends. The U.S. market delivered a typically strong performance in the fourth quarter and anchored worldwide bookings. China and Korea maintained their high investment rate across multiple applications as opposed to Europe and Japan which both lagged. Some of the performance in the later geographies can be called timing issues but a closer look hoisted fund initiatives and program philosophy. In Japan life sciences funding is outpacing physical sciences, this is consistent with policy statement of life sciences spending has been essentially flat the most of fiscal 2014. The EU and the U.S. both launched major programs to study human brain. The U.S. brain project has tried to develop a deeper understanding of how the brain works through the study of clusters of hundreds of thousands of neurons. This involves many experimental techniques including laser imaging. The project is gaining momentum and there is hope for two or three fold expansion of the current annual $100 million operating budget. This will enable the development of novel techniques to advance the studies. Europe’s human brain project is attempting to create a large-scale map of the neural network, we think of it as a road atlas of the brain through computational analysis which is distant [ph] franchise many experiment neuroscientist. We do not anticipate any significant funding changes for fiscal 2015. We’re already focusing on market share gains through our industrial scientific product strategy, as well as the introduction of several new offerings. Instrumentation and OEM component orders are $40 million, decreased 26.9% sequentially and 8.2% versus the prior year period. The sequential swing was due to the timing of large orders in the medical OEM market. Bioinstrumentation also were up modestly on a sequential basis with customers in Flowcytometry and DNA sequencing fine tuning their inventory positions. Medical OEM accounts are seeing steady to improving demand, this is especially truly atomic space for vision correction and disease management. Microelectronics orders of $77.9 million decreased 37% sequentially and 19.6% compared to the prior year period. While demand from the semiconductor CapEx market remains strong, we have seen some significant swings over the last quarter, few quarters due to the timing of large service contracts. And this was again evident in the fourth quarter as orders reflected lower services bookings. According to Semi’s worldwide forecast in August of 2014, the near term outlook through 2015 is robust with projected capital investments reaching record levels of $42 billion. Often trailing it views on – also been voiced suggesting a cyclical downturn, capital investment announcements for leading notes from Intel and Samsung, couple with the march towards 3D memory seems to favor the bulls. We are very well positioned that the leading should benefit from any investments there. The swing [ph] is always, will be utilization rates for legacy notes as they draw service demand and capacity expansion. The advanced packaging market is found in trends in consumer electronics. PC vendors and the supply chains for Apple and Chinese handset manufacturers, have reported high utilization rates which has led to modest order improvement for packing using lasers in the fourth quarter. This is a welcome development but other factors are more important. Inventory levels at key OEMs are reaching very low levels; this should stimulate orders in the second or third fiscal quarter. We have also rolled out two new platforms at the recent Taiwan PPCA printed circuit board show, the V-Annexe representatives a price performance breakthrough and should enable market share gains in V-drilling and [indiscernible] flat circuit packaging and other emerging applications. We also launched a new CO2 laser platform called the Hornet which has specific performance and design attributes for the Via-drilling market. The hornet allows integrators to eliminate a crystal optic modulators from the design saving significant cost and increasing available laser power and tool throughput. Shipping fortunes in the mobile industry have influenced the SPD marketplace. Apple’s high success the iPhone6 launch and shared gains with Chinese Smartphone manufacturers have led to increased demand for LTPS LCD displays. Samsung’s recent earnings announcement suggest that experienced share loss is a consequence. So what does this mean for customers and for Coherent? There are multiple vendors for LTPS LCD panels and price competition is fierce. We have heard that year-over-year price erosion is in the range of 30%. The mix shift from OLED LCD affects service revenue since OLED has a tighter process window and requires more frequent LDU replacements. Given these dynamics, customers are enquiring about winding systems larger than 750 millimeters that reduce the cost of the panel. We have also worked with our vendors to extend the lifetime of certain high cost components in the LDU. This reduces cost for customers and revenue for Coherent by $10 million per year with no impact to gross margin percentage. With respect for event basis to a contract model to ELA service, the rate of evolution manufacturing requirements is still high and these are the customer local hearing is in a position to agree on measured performance criteria for this new service model. During the fourth quarter we completed delivery of approximately $10 million of lasers used for sapphire processing. We had expected to receive a follow-on order of similar size. The laser release of the end product have postponed that order. We do not believe the availability of sapphires to blame since it is available from multiple vendors. We are in regular contact with our OEM integrators and can response spontaneously to deliver the requirements. Materials processing orders of $30.9 million were down 17.5% sequentially, and increased 20.2% versus the prior year period. Material processing orders were a record for a fourth quarter and showed remarkable resiliency coming off an exceptional third quarter. We received volume orders from a variety of applications including short pulse lasers from non-thermal processing, CO2 and pulse UV lasers for non-metal additive manufacturing and semiconductor lasers for Chinese laser manufacturers. We have been targeting the first two areas and we had anticipated positive results. The growth of semiconductor laser cells in China is consistent with vertical integration at the low end of the marking and engraving market. We have seen a similar trend in low power CO2 laser marking for several years. Incidentally this trend is not limited to China; U.S. and European manufacturers have taken similar steps to maintain financial competitiveness. Our efforts in the kilowatt space have been missed. Our direct dialed portfolio has a very high year-over-year growth due to partnerships with welding and cladding companies. Since the release of an updated product line, our laser manufacturing tool business has also had very high growth and is poised for more with recent new products targeting the thin metal cutting market. These positive results are offset by disappointing ones in the fiber space where we failed to reach our $10 million sales objective for fiscal 2014. The time from design win to volume has been slower than expected and it has taken longer than plan to launch the multi-kilowatt platform which apheresis the sweet spot of the market. We are on track to release the higher powered products in fiscal 2015 likely in conjunction with a major show in Europe or China. Looking back on fiscal 2014, I would offer the assessment that it was a solid year for financial performance. Fiscal 2015 is positioned to produce superior results. At present, the risk factors to fiscal 2015 are macroeconomic events in Europe and the timing of certain API orders within microelectronics. We are maintaining good cash generation as evidenced by our total to $380 million. Our top priority for the cash is to acquire complimentary revenue and technology. We are evaluating a range of M&A opportunities, both large and small. In event that these come to fruition, we will naturally provide an update as part of our regular quarterly calls or by other disclosure. I’ll now turn the call back over to Chris for the Q&A session.

[Operator:]

(Operator Instructions) Your first question is from the line of Larry Solow with CJS Securities. Your line is open.

[Larry Solow:]

Good afternoon, John. Thanks for that handful of color you gave. So it sounds like your commentary is maybe a little more cautious from where you were last quarter. I’m just trying to get a better pulse on it. I know you won’t give full year exact revenue outlook but your book-to-bill was still four clear account basis, over 1.1. So I mean, is it fair to say that you will sort of reach, hit your long term type revenue outlook this year, is that an obtainable figure?

[John Ambroseo:]

I don’t know that we gave a fixed long term revenue outlook. I certainly am of the opinion that fiscal 2015 as I said just a couple of moments ago will be superior to fiscal 2014 in terms of financial performance. We do have some moving parts, particularly in the microelectronics space, some of those we see as more timing issues, some of them are potentially structural change, changes in the way that the business is operated. So there are pros and cons to the outlook but net-net we still maintain a positive outlook on 2015 with while recognizing that there are again some macro risks. I think there is probably more macro risk in the European market than anywhere else at this point.

[Larry Solow:]

And in terms of just the flat panel display and sort of shift away from OLED to LCD, how long would that play out assuming that LCD I guess will have to go to the LTPS for you to sort of get back to needing key or benefit.

[John Ambroseo:]

So if I can just correct a little bit there Larry, the high definition displays that are being used in the market whether they are LCD based or OLED based, all utilize LTPS back lanes. So from a unit basis it’s 6

[Larry Solow:]

Right.

[John Ambroseo:]

So the shift has more to do with service revenues and it does with new system demand which is really a belly button sort of model, the more handsets as you make or the larger handset display is, that’s generally good for consumption of total capacity. The service is much more sensitive to the mix of what the product output it.

[Larry Solow:]

Okay, fair enough. Just a quick follow-up on that so you – on your service percentage revenue, it’s obviously come in a little bit, and I guess it’s come down more in the flat panel display not to being offset by some the service revenue near core semi caps basis, sort of how to look at it?

[John Ambroseo:]

It’s come off a little bit in the flat panel space and yes, more recently that’s been option by games in Semi, that’s the correct statement, how that mix will vary overtime, will it really be a reflection of what utilization rates are on those different markets. It’s harder for us to predict that on a quarter-by-quarter basis.

[Larry Solow:]

On the – just lastly, the bioinstrumentation sort of some quarterly timing and issues you had last quarter and into this quarter? Has that – do you have some better visibility on that and as you look out into 2015 do think that sort of normalizes?

[John Ambroseo:]

I think the demand in bioinstrumentation actually looks reasonably good. We did have some order timing issues over this past year predominantly due to some of the larger customers changing our inventory management practices. I think some of that, I don’t know if all of it but at least some of that has washed out. I don’t see anything sort of underlying in the instrumentation market that would suggest any kind of market weakness. I really think it’s an inventory management issue.

[Larry Solow:]

Okay, great. Thank you.

[John Ambroseo:]

Sure.

[Operator:]

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

[Mark Douglass:]

Hello, John and Lene.

[John Ambroseo:]

Hey, Mark.

[Helene Simonet:]

Hi, Mark.

[Mark Douglass:]

John, so talking again on the LTPS on the shift, so you said it hasn’t effect as far as whether or not just OLED or LCD, you’re still going to shift a unit to high diff [ph] but looking at your – in fact you’re chewing through your backlog and the orders are down, you didn’t get follow-on orders? How do you look as far as orders for equipment?

[John Ambroseo:]

I think you may be missing that of course is a little bit there Mark, maybe not, but let me try to clarify. Over the past several quarters we have substantial flat panel orders, as you know we handled reporter [ph] on a regular basis. We anticipate shipping that equipment over the next twelve plus months depending on exactly one, to call office. The fact that we didn’t get any orders or significant orders worthy of a call out in the fourth quarter is not a typical because as you know from our history, these things tend to come in big clumps.

[Mark Douglass:]

Right, right.

[John Ambroseo:]

The change in the delayed order was actually not flat panel display, it was sapphire processing. Just to make sure that I made myself clear, there are two different parts of the same market. The sapphire delay we can tie to a delay in the launch of the ultimate end product from consumer electronics company. We think that, that is more of a timing issue than anything else, obviously we thought the order was going to come earlier and that was an incorrect call on our part. As far as the flat panels, the ELA business, we will continue to add capacity into the marketplace, there seems to be a fairly significant appetite for this equipment, and even though there are some shifting market shares, the requirement to build larger screens and the requirement to drive the cost down on screens is actually putting customers to figure out how to get even more efficiency out of these systems which net-net is good for us. The biggest short term impact, and again, I think I’m saying this at least the third time here is the shift that we started to predict a quarter ago when we were talking about utilization rates changing is really the shift that’s taking place in the market between OLED based displays and LCDs. Even though they both use LTPS, the LCD processes is more forgiving and doesn’t require tube replacements as quickly.

[Mark Douglass:]

Right. I guess I wasn’t thinking that there was a delay in your LTPS equipment orders. I’m just curious, I know it’s pretty lumpy, and for a while we think we need to follow-on orders, still looking good. So your – the run rate is still really good but right now you haven’t received new orders, so you’re going through your backlog and right now you will be delivering on that backlog in fiscal 2015?

[John Ambroseo:]

That is correct. As I said in response to Larry’s question, we didn’t do a call out on any specific ELA orders during the fourth quarter because we saw them as more routine part of the business. We did receive systems orders but they were more in line with what we would consider a normal run rate rather than these large clusters of orders.

[Mark Douglass:]

Right.

[John Ambroseo:]

Of the concerns I potentially have around the business, ELA is not one of them.

[Mark Douglass:]

Right, right. We’re just trying to determine what’s going to happen in 2015. And then if you have – if you get more orders in the next quarter, what are the chances that any of those would actually ship in fiscal 2015, pretty slim?

[John Ambroseo:]

It will depend on what version is ordered. If it’s a standard version, we can probably get stuff out before the end of fiscal 2015. If it is one of these large line beam systems where the optics are not – I don’t want to say in inventory because we don’t really keep any of the inventory, the lead times are [Audio Gap] those would be harder to get out in fiscal 2015.

[Mark Douglass:]

Okay. And then the large wiper system you anticipate shipping in the first quarter, you have another one to ship later in fiscal 2015, correct? Again, two really large?

[John Ambroseo:]

We have…

[Mark Douglass:]

You had a few I should say, you never quantified it I guess.

[John Ambroseo:]

That’s correct.

[Mark Douglass:]

On the materials processing, going back to there, you said – you sounded pretty mixed, I missed what you were saying about the Chinese manufacturers, what was going on there, do you mind repeating?

[John Ambroseo:]

Sure. In China, the short story is markets where applications that are enjoying government support, whether it’s at the national level or regional level, they are continuing to move at pace. The general manufacturing environment has gotten a little bit tougher which would be consistent with a slowing GDP in China. My comment was that the large manufacturers seem to be withering that pressure a lot better than the small manufacturers because small manufacturers, they are seeing a number of things, obviously the big guys want to maintain share and they are becoming much more aggressive in a tightening market. Customers worry more in a tight market about whether these small guys can survive which influences whether or not they get orders. There are dynamics that we see every time there is a slowdown in China. We’ve been listening to lots of reports over the last couple of weeks in earnings season, and it seemed that many people, analysts in particular, were concerned about what’s happening in China & Europe. So we thought we would short-circuit that and talk about it upfront.

[Mark Douglass:]

Sure. And then final question, so your position for superior financial performance in fiscal 2015?

[John Ambroseo:]

That’s correct.

[Mark Douglass:]

Does that mean higher margins, higher EPS, both?

[John Ambroseo:]

It would suggest – what I’m suggesting in that is that we expect revenue to go up and EPS to go up. I’m not going to go beyond that because there could be puts and takes in different lines but we certainly think that 2015 is going to be higher in revenue and EPS.

[Mark Douglass:]

Okay. Thank you for taking my questions.

[John Ambroseo:]

Sure.

[Operator:]

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

[Patrick Newton:]

Gentlemen, I guess just following up on that, same as puts and takes on line. In fiscal 2015 versus 2014 what would preclude you from saying that gross margin should be higher, I would think that service revenue should continue to rise, you just saw STD grow by 24% year-over-year, so I’m curious why you wouldn’t say higher revenue, higher EPS, and higher gross margin.

[John Ambroseo:]

Patrick, the overly simplistic answer is I don’t want to put myself or the company in a position where we’re actually perceived to be giving full year guidance. I can tell you that right now we see revenue being higher, we see EPS being higher, you could derive other assumptions from that, we’re just not filling those blanks right now.

[Patrick Newton:]

Alright, fair enough. And then on the service revenue side, just put up 24% year-over-year growth, is that something that we would think given just higher installation rates and pretty decent utilization regardless of the shift between LCD versus OLED, that’s what actually accelerates at similar rate or maybe even faster in fiscal year 2015? I’m sorry, that was specifically flat panel display.

[John Ambroseo:]

The thing that you have to remember there is I have – I’m going to be potentially confusing here. On a unit basis your statement maybe correct but remember that we’ve also been able to eliminate a pretty high cost component from the existing service model which is going to drive customer cost down and our revenue down by about $8 million to $10 million. We see that as actually a positive development, not that the revenue is going down but that we’ve been able to eliminate one of the fuses in the system which is beneficial for uptime and cost management. So we would have to – service revenues in ELA would have to roll by $8 million to $10 million just to stay flat with fiscal 2014 and then grow on top of that. So I’m going to be cautious in – at least from where we’re sitting right now saying that ELA service revenue is going to be growing at any kind of accelerated rate.

[Patrick Newton:]

Okay. And then on guidance you did say that there is going to be light beam 1500 shipping them in quarter at the midpoint [ph] revenue flat year-over-year, I’m curious if you would comment on an expectation of whether flat panel display is going to be up or down year-over-year?

[John Ambroseo:]

We’ll have to pull it year-over-year.

[Helene Simonet:]

Just one second Patrick, it will be up year-over-year.

[Patrick Newton:]

Okay. And then I guess John on the mix of OLED versus LCD, could you help us understand a relative mix in your current installed base and then what that mix looks like in your backlog? So just to give us a better understanding.

[John Ambroseo:]

I understand why you are asking the question, and unfortunately I’m not going to answer it. The reason is that we continue to view this things as pretty proprietary for the customer, particularly since there is one customer that has a commanding lead in OLED. And if we tell you what the installed base looks like or what the ship of the backlog looks like, we’re basically painting a roadmap for their competitors and it’s not our place to do that. I realize the frustration it causes for you guys and the challenges it causes for you guys but I would point out that had we given you numbers previously, and we had updated them based on the changes that we were seeing in service revenue, people could have derived at least a portion of what was happening in the consumer electronics industry, it’s not our place to be providing that kind of visibility into the market and I apologize for that but we really have to maintain customer confidence here.

[Patrick Newton:]

Okay. And I guess on the order side, previously you’ve had pretty good visibility into large orders on the horizon for flat panel display, not necessarily perfect timing but you’ve at least known when they’ve been out there to be had. I’m curious if you could comment on how the pipeline looks for material flat panel orders on any timeframe, just any information you can give there.

[John Ambroseo:]

I guess the way that I would answer that is, we’re involved in a range of conversations with customers, both end-users as well as integrators on what their specific requirements are for their investments around, whether those are investments that have to be in place in 2015 or 2016. The outlook continues to be quite bullish, not to beat a dead horse but if you just look at the change that’s taken place in the icon format where the five was a 4 inch screen and six is – I think its 4.7 inch or 5.2 inch, I can’t remember the exact dimensions. But you know you’re looking at close to a 20% surface area increase on the low end and over 30% increase on the high end. And if we produce the same amount of devices it tells you that the amount of the surface area that you have to produce has gone up by 20% or 30%. Those are fairly large numbers which you don’t absorb in existing capacity and clearly the trend is towards these larger format phones. So the long term drivers continue to be increased use of high definition enabled handsets, increased diagonal as far as it goes for the handset side. And then to the extent that you start to get penetration into tablet, that would be the second layer of growth. We continue to have a pretty bullish outlook on ELA. Going back to Mark Douglass’s question, how much incremental demand we could fulfill in 2015 beyond what’s already in the backlog, we’ll really be dependent on mix but as orders come in 2015 and those orders will be coming in, I suspect it will start to populate fiscal 2016 pretty quickly here.

[Patrick Newton:]

Okay. And then just last one for me John, is that [indiscernible] revenue and fiscal year 2015 and anything specific that needs to happen to hit that target, like having lasers be out be a large contributor?

[John Ambroseo:]

I think I have to say that I’ve switched my goal mindset, right now the most important thing is for us to finalize these packages and get them into the hands of customers, how much revenue it drives will really depend on whether it’s early or mid or late 2015 launch. I have not set specific revenue goals with the team, the success factor right now is getting these things launched and qualified with vendors.

[Patrick Newton:]

Thank you for taking my questions. Good luck.

[John Ambroseo:]

Sure.

[Operator:]

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

[Jim Ricchiuti:]

Thanks, good afternoon.

[John Ambroseo:]

Hi, Jim.

[Jim Ricchiuti:]

John if we look at the 25% or so of your revenues that you get from Europe, which verticals are you most cautious about, I mean it sounds like the components in instrumentation has hold on pretty well, is it the scientific, and government, and maybe the materials processing where you’re little more cautious about in Europe?

[John Ambroseo:]

Jim, I would have actually dissect differently, I would say that the commercial side of the business is probably a bigger question mark than the research. There will be undoubtedly shifts here and there on how research dollars are allocated but probably not meaningful shifts. And to the extent that European governments don’t dramatically reduce scientific funding and as of today there is not an indication that’s a probability, I think science is fine, scientific research is fine, and OEM instrumentation to the extent that it’s going into medical OEM also seems to be reasonably immune at this juncture because a lot of these European companies as I said in my prepared remarks are global leaders in things like refractive surgery, cataract surgery, and disease management, whether it’s photo-coagulation or photo-disruption, etcetera. And many of the end markets for those products are outside Europe as well, so they benefit from continued investment. If there is a challenge, I think it’s probably in the materials processing market in Europe where local companies will probably take a more conservative outlook as time goes on particularly if there is no signs of relief on the macroeconomic end. I mean when you look at GP growth rates in Europe right now, Germany is hanging in there, I think 1.5%, France is between 0% and 1%, Italy is negative 0.4% to plus 1%. I mean these are not numbers that set the world or the region on fire and the risk of deflation casting a shadow over all of this. I mean if there is a concern that’s where it comes from. So to simplify the answer, I would say that the commercial market for materials processing is probably a risk area, and the other markets are likely to continue on a pace similar to where they are on today.

[Jim Ricchiuti:]

In the tone of the business in materials processing that you’re seeing over the past month or so, how would you characterize it in Europe?

[John Ambroseo:]

Europe contributes a portion of our material processing business, obviously our practices is much more dependent on how things are going in Asia and the U.S. but I’d say that the comment that customers are being cautious is probably accurate, the first thing that they typically do is move away from long term orders and go to short term orders, and then they try to push their inventory levels down as low as they can and shift as much of the inventory burden as they tend to their vendors. We’ve seen this song and dance before, it’s not exactly new. The question is, is this a short term reaction to news or is this a longer term trend, my principle is not good enough to answer that.

[Jim Ricchiuti:]

Got it. One final question for me, just with respect to China, some companies have been talking about some softening in China and as a result of the anti-corruption crackdown or investigations that are going on, it sounds like your scientific and government related business, though in China it has hold up reasonably well, so you didn’t sound like you’re seeing it, is that fair to say?

[John Ambroseo:]

I would say that we’re not seeing it, certainly no way near to the extent that other companies have talked about but I also attribute that too, quite frankly, good training on the part of all the people that I work with to make our colleagues what acceptable business practices are. It’s hard for me to get from point A to point B on some other stuff. It’s you’re living the rules.

[Jim Ricchiuti:]

Just from a broader demand standpoint, you don’t – you haven’t really seen any – just cautious as part of customer…

[John Ambroseo:]

As I’ve said on the scientific side which is predominantly government funded, it’s continued strong investment across multiple end markets, whether it’s physical sciences, whether it’s biotech, we’re seeing continued good traction there. And then in areas, in commercial areas, where there are big government sponsorship programs like mobile flat panel, like OLED lighting, I’m repeating my prepared remarks comments since in regard to your – that’s continuing to crank along. If we see pressure anywhere in China it’s in the general materials processing market and again if this proportionately shifted to smaller companies who are on a greater risk position in any kind of contraction scenario.

[Jim Ricchiuti:]

Okay, I will slip one more in John. Is your acquisitions, like the targets that you’re looking at, would you characterize it as more active today versus a year ago or valuations and issue out there?

[John Ambroseo:]

We’re constantly going through evaluation, sometimes that evaluation is internal process that never reaches a potential target, sometimes its engagement with a potential target, it varies. I don’t know that I would necessarily call it more active. And as far as valuations go, I guess in general people see a strong market as a reason to add more money but there also has to be disciplined on the part of the buyer to figure out what the right valuation is for the business and either you can come up with the right number or you can’t and the right number of course is to find that one that satisfies both parties.

[Jim Ricchiuti:]

Okay, thanks a lot.

[Operator:]

Your next question is from Mark Miller with Noble Financial Capital Markets. Your line is open.

[Mark Miller:]

Good afternoon. I’d like to follow-up on Jim’s question. Would you say your sales and bookings and chart were up sequentially year-over-year?

[John Ambroseo:]

I have to rely on Lene if she’s got that data with her.

[Helene Simonet:]

Our revenue was definitely up year-over-year for China, I don’t have the bookings handy. I need to get back to you on that one.

[Mark Miller:]

What about sequentially, were the China sales also up?

[Helene Simonet:]

Yes, remember we shipped – as John alluded to the $10 million order that we shipped in Q4 and that was in China.

[Mark Miller:]

Was that sapphire system, is that correct?

[Helene Simonet:]

Yes, its sapphire processing, yes, that’s correct.

[Mark Miller:]

Coming on another trend what some others heard in other meetings that the fact we’ve heard it for some time and then we recently from one of your competitors there has been an impact on the uncertainty of the ramp up, three dimensional chips, finFET and NAND flash, and like you said we had seen that for some time in a couple of other equipment firms but now one of your competitors said it also starting to impact them. I’m just wondering your semi business was strong I believe you said, are you seeing any effects of that or you’re just expecting it’s going to Rob, Peter and PayPal [ph] for doesn’t ship this quarter or [Audio Gap].

[John Ambroseo:]

The second and third position looks between either capacity expansion for legacy or investment in new technologies. We’ve heard similar things but there are delays in certain aspects. We don’t see it at least for our business as having a material effect from one quarter to another.

[Mark Miller:]

Okay. I’ve seen you said leading edge was basically not changed, undeflected, one high processes following that is the fact that if they can’t get say 16 nanometer or 14 nanometer for the ramps, then you’re going to shift to 10 nanometer for that introduction of that mold [ph] but they’ll be expanding significantly capacity in the legacy nodes. And again you said it’s not a primary fact but would that have any positive or negative impact on you?

[John Ambroseo:]

Again, as I mentioned during this call and plenty of previous calls, legacy capacity is certainly a driver for our business and the decision process varies from Fed to Fed into what they are [Audio Gap]. If we’ve seen that before, I don’t know if the timing is right to call back Race given that it’s election day, it seems like an appropriate – but it might be a little bit premature to say that the 40 nanometer technology is not going to work for those particular applications.

[Mark Miller:]

We’ve heard from you and another one, your competitors, you’re taking to significant additive, sales, rather than applications, many facts and applications, did you study grow last quarter and it’s becoming significantly worse, I think rather surprised and it showed by so strongly last quarter.

[John Ambroseo:]

It – I don’t know I should know this smart but I don’t know if it grew quarter-over-quarter. The adoption that we’re seeing of added manufacturing I’d say has a good deal to do with the fact that there are environmental rules been, have been put in place and continue to be put in place in various geographies, most notably China which is Driving customers to alternative manufacturing techniques, electroplating which is a very common technique, it’s pretty hard right now to get a permit, in fact it might be impossible to get a permit to put in a chemically based electroplating factory in China and one of the alternatives is using laser plating as an alternative, that’s creating market opportunities within our industry. So even – and this is why I try to allude to the fact in China if there is a government sponsored program whether it’s a key investment area or whether it’s an environmentally friendly manufacturing technology, that can create demand within our market and that’s generally a positive thing.

[Mark Miller:]

And finally, I’m sorry, I just wanted to check on the service revenues this quarter. Was it $57 million or do I have that wrong?

[Helene Simonet:]

No, that’s correct.

[Mark Miller:]

Thank you.

[John Ambroseo:]

Okay. Thank you, Mark.

[Operator:]

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

[John Ambroseo:]

Thank you, Chris. We certainly appreciate everyone’s time, and we look forward to catching up with you in a few months.

[Operator:]

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