Newport Corporation Q2 2009 Earnings Call Transcript

Newport Corporation (NEWP)

Q2 2009 Earnings Call Transcript

August 5, 2009 5:00 pm ET

Executives

Robert Phillippy – President and CEO

Chuck Cargile – CFO, SVP and Treasurer

Analysts

Mark Douglass – Longbow Research

Ed Einboden – Wm Smith & Co.

Ajit Pai – Thomas Weisel Partners

Jiwon Lee – Sidoti & Company

Presentation

Operator

Welcome to the Newport Corporation second quarter 2009 financial results conference call. Today’s call is being recorded.

Now, at this time, I would like to turn the conference over to the Chief Executive Officer, Robert Phillippy. Please go ahead.

Robert Phillippy

Thank you. Good afternoon and welcome to Newport’s second quarter 2009 conference call. With me today is our Chief Financial Officer, Chuck Cargile. During the course of this conference call, we will be making a number of forward-looking statements that are based on current expectations and involve various risks and uncertainties that are discussed in our periodic SEC filings. Although we believe that the assumptions underlying these statements are reasonable, any of them could prove inaccurate, so there can be no assurance that the results will be realized.

During the second quarter of 2009, we made excellent progress on our plan to better position Newport strategically and tactically for future earnings growth. We achieved a number of important milestones in our initiative to reduce our cost structure while continuing to focus on providing our customers with innovative photonic solutions coupled with highly responsive service and support.

I would like to comment on a few highlights of the quarter. First, we announced and completed an asset exchange with Oclaro in which we acquired Oclaro's New Focus business and divested our Tucson diode laser operations. New Focus brings a complete portfolio of highly differentiated photonics products to Newport along with the brand that is well recognized in our industry for innovation and quality.

Our Tucson diode business, like others in that industry, had experienced ongoing losses due to under-absorption of the high fixed costs of running a semiconductor fab operation. This transaction enabled us to eliminate those losses while ensuring that we continue to have access to leading-edge diode laser technology at competitive price levels. We expect this asset exchange to generate $5 million to $8 million in incremental profits in 2010.

Second, we continued our aggressive initiative to streamline our cost structure across the company. We are achieving our cost reduction milestones at an accelerated pace. In fact, over the last year the steps we have taken to reduce our cost are expected to generate in excess of $30 million in annual savings. Some of these savings are not sustainable because they result from temporary salary and incentive compensation reductions and factory shutdowns.

However, we believe that approximately $25 million of these savings will be sustainable on an annual basis when market conditions improve. At the same time, we continue to invest in product development to drive future growth and maintain our ability to effectively respond to more favorable market conditions as they occur.

Third, we signed a new lease to relocate our Spectra-Physics Lasers Division from its current five-building campus in Mountain View, California, to a single new state-of-the-art facility in Santa Clara, California. The new building enables us to significantly improve the workflow of our operations while reducing our footprint by more than 20%. The new facility also accommodates the integration of the New Focus operations currently conducted in nearby San Jose, California.

Finally and perhaps the most important, despite the low sales levels in the second quarter, we were able to generate $11.6 million in cash from our operations. We believe this exemplifies our ability to effectively align our expense structure and manage our working capital during difficult market conditions. In short, we are pleased with the progress we made on many fronts during the quarter.

Now, I would like to comment on the current environment in our target markets and characterize our orders and sales trends in that context. Our new orders received during the quarter were $80.4 million, essentially flat on a sequential basis, but down 27% compared with the second quarter of 2008. Sales in the quarter of $87.5 million were down 2.2% sequentially and 25.6% during the second quarter of 2008. Both of these were in accordance with our expectations and are a direct reflection of the current recessionary environment.

Looking forward, the combination of recent improvements and customer forecast, increasing acceptance of our new products, and encouraging macro environment trends lead us to expect increased orders on a sequential basis in the third and fourth quarters of 2009. In other words, we are cautiously optimistic that we have managed through the bottom of this cycle during the first half of 2009.

I will now expand on some of the key factors in our target markets that give rise to this softness. In the research market, robust quotation activities continue, but we have not yet seen any meaningful orders as a result of the U.S. government stimulus funding. As of the end of the second quarter, the majority of funding related to projects requiring photonics products had not been distributed. In fact, in some cases normal equipment purchase patterns have been – actually been delayed in anticipation of researchers receiving these new grants.

However, some U.S. agencies did begin issuing stimulus related grants in July. We have seen similar situations in other countries with stimulus funding targeted at scientific research. We believe that this is just a timing issue as agencies scale up to distribute this increased funding. As reported previously, although stimulus related equipment purchases will likely be partially offset by reduced research funding from corporations and private foundations, we do expect sequential increases in research market orders in the second half of this year.

In the life and health sciences market, we achieved modest gains in both orders and sales in the second quarter of 2009. This is due primarily to new program wins with OEM bio-instrumentation customers, as well as strong orders in sales levels for products used in multiphoton microscopy applications. We anticipate that government stimulus funding will also have a favorable effect on our activity in this market during the second half of 2009.

Activity in our micro-electronics market remained at depressed levels during the second quarter with orders of $15 million representing a drop of $20.8 million or 58.1% from the second quarter of 2008. This result is consistent with industry trends, particularly in the semiconductor equipment manufacturing sector.

The good news is that we have begun to see some improvement in that sector with second quarter orders from semiconductor equipment customers increasing 21.8% on a sequential basis. Sales to semiconductor equipment customers also grew sequentially by 25%. This increased activity coupled with reduced inventory levels and improved forecast from several of our key semiconductor equipment customers gives us cautious optimism that we will see near-term improvement in this sector.

Our sales to solar cell manufacturing customers improved slightly from the severely depressed levels of the first quarter 2009. Second quarter sales were up 18% sequentially to $7 million. Second quarter orders from this sector while up very slightly sequentially, remained at a very low $1.6 million.

Looking forward, we expect to see the demand for laser processing equipment, which enhances the performance and reduces the cost of solar cell manufacturing to remain soft for the remainder of this year.

While our end-market diversity does provide a degree of insulation from deep-cyclic swings in some of our markets, it does not isolate us from the continued recessionary environment that exists globally. As such, we have taken and continue to take aggressive actions to align our cost structure with current market conditions.

At this time, I would like to turn the call over to Chuck to provide more detail on the status and result of those actions and our overall financial performance. Chuck?

Chuck Cargile

Thanks, Bob. Please refer to the press release and Form 8-K we issued earlier today. In addition, I encourage you to check our web site at newport.com where we've posted historical income statements and balance sheets and scheduled the detailed historical trends for sales and orders by market, the performance of our two reporting segments and a reconciliation of GAAP and non-GAAP financial results.

During this call, we will be providing certain financial measures on a non-GAAP basis, which excludes certain items that we consider to be outside of our core operating results. A reconciliation between these non-GAAP financial measures and the corresponding GAAP figures is attached with the press release we issued today and has been posted on the Investors page of our web site.

I'll first comment on our integration program for New Focus and how it overlapped to some degree with the cost reduction efforts we already have underway. We’ve identified the following primary steps in integrating New Focus into Newport. First, we relocated a number of products and personnel from existing New Focus facilities in San Jose, California and Shenzhen, China to existing Newport facilities, primarily in Wuxi, China and Santa Clara, California.

We expect the New Focus product lines to generate more than $20 million of revenue in 2010. It's also important to note that the synergies in our operations and sales channels would give us meaningful profit leverage on this incremental revenue. The best gauge of efficiency we gain is in headcount. At the time of our acquisition of New Focus, the headcount devoted to their business was approximately 180 people. By the time we complete our integration, we expect to be able to run this business with approximately 120 employees.

Our transition plans have already been communicated to the New Focus employees and in a number of cases, current New Focus employees will be reassigned to fill openings within Newport. This headcount reduction is a significant piece of the $5 million to $8 million in additional profit we anticipate generating from this transaction in 2010.

The second area of our integration program is leveraging the distribution of New Focus products through Newport's worldwide sales channels. There are two areas of opportunities as it relates to sales channels. One is that Newport has a more robust direct sales channel than New Focus. This will enable us to magnify the sales efforts for New Focus products with very little incremental selling marketing expense.

The other is that in many areas of the world New Focus utilizes representation and distribution agreements, which can be more expensive than Newport's existing direct channel. By switching from third-party representation to Newport channels, we expect to make New Focus more competitive, efficient, and effective.

A third area where we expect to create synergies is in the utilization of SAP as the underlying ERP platform for New Focus business processes. All of Newport utilizes SAP and we will implement it for New Focus in the fourth quarter of this year. We've already begun to appreciate the benefits of a common system across Newport's global operations. And now, we expect to expand those benefits with New Focus. Use of a common system will enhance the speed and effectiveness of our integration and will also allow us scale the business more efficiently as revenue levels expand.

On a related note, during the second quarter, the Newport team received an award from SAP as the best mid-sized company implementation in North America. We plan to leverage this award-winning expertise to efficiently implement SAP within New Focus.

In addition to these actions and our direct result of our integration of New Focus, there are a number of other initiatives in Newport designed to reduce our cost structure and make us more competitive. I'd like to comment on several of them.

Recently, we've reported on the progress we continue to make in expanding our operations in Wuxi, China. Through the first half of 2009, we've transferred over 1,600 products to Wuxi. The external revenue generated from Wuxi manufactured products exceeded $6.5 million in the first half of 2009. The progress in Wuxi continues to be ahead of our original internal expectations. And now, with the transfer of the New Focus operations currently conducted in Shenzhen, China, we expect to more than double the revenue from products from Wuxi.

Due to this increased volume, as well as some favorable changed in regulations, we are now moving our facility to the Wuxi export processing zone or EPZ where we will gain tax and processing efficiencies. Our new facility in the EPZ will be larger, yet lower in costs than our existing Wuxi facility.

I'd also like to highlight that we are progressing according to plan on the move of our Spectra-Physics Lasers Division headquarters from the current Mountain View campus to Santa Clara. We expect the move to be completed in the fourth quarter of 2009. In Mountain View, our operations are located in five different buildings. The facilities are old and disconnected and inefficient from a workflow standpoint. In Santa Clara, we will operate in a new facility, which is designed specifically for laser manufacturing with a very efficient layout and a favorable rental rate.

In addition, because the new facility is very close to both Mountain View and San Jose, we don't expect to have any negative impact on the retention of key talent from our laser business and the New Focus employees, whom will be moving from the Oclaro facility in San Jose to our facility in Santa Clara. Although we would have made this move irrespective of the acquisition, being able to easily accommodate the New Focus team is an added benefit.

Lastly, although it isn't impacted by our integration of New Focus, I would like to mention that we are on track to outsource our production from Ottawa, Canada to our contract manufacturing partner in Southeast Asia. This action will be completed in the new few months and will allow us to exit that facility and create a more variable cost structure for the product line currently manufactured there.

All of these actions are critical to the transformation we are making at Newport. And they require tremendous effort by our team. While we are quite pleased with this effort, we recognize the true test of the effectiveness must be reflected in our financial statements and it is.

I'd like to draw your attention to two metrics, which showed the effectiveness of the cost reduction steps. On a non-GAAP basis, excluding $3.9 million of expenses related to the previously announced cost reduction efforts and the acquisition and divestiture expenses, our selling, general, and administrative expenses declined by $9.6 million or 16% in the first half of 2009 compared with the first half of 2008. In addition, our research and development expenses declined by $5.4 million or 22.8% in the first half of 2009 compared with the comparable period of 2008.

So combined, the non-GAAP operating expenses were $15 million below the comparable half-year period of 2008. Also it should be noted that although our revenue declined by over $30 million in Q2 2009 versus Q2 2008, our non-GAAP operating income declined by only $3 million.

At Newport, we are also very focused on generating cash. In the second quarter, we generated over $11 million from our operations and our cash balance is now $149.5 million. We will continue to monitor capital expenditures and other discretionary cash outlays to ensure that we responsibly manage our cash. We expect that cash generated from operations will be sufficient to fund our integration and cost reduction efforts in the second half of this year without a meaningful reduction in our overall cash balance.

Now, Bob will make a few more comments before we address any questions you have.

Robert Phillippy

Thanks, Chuck. I would now like to provide an update on some of our key product and technology development initiatives and then comment on our outlook for our coming quarters.

Our acquisition of New Focus brings to Newport a number of highly differentiated product lines that fit perfectly into our portfolio and are protected by strong intellectual property including 71 issued patents and 23 pending applications that came with the acquisition.

One example is the PICOMOTOR line of high precision remote control actuators. These are the premier products in the industry for nanometer scale adjustments of optical systems in research and OEM applications. This product line includes open and closed loop actuators and vacuum compatible versions.

New Focus' line of Optoelectronics provides customers with a broad selection of wave lengths and configurations of low noise, high speed and a high accuracy detectors, modulators, and photo receivers. These devices have a reputation for being truly plug and play, providing useful and easy-to-use tools for scientists and commercial customers.

Another industry-leading New Focus product line is external cavity tunable lasers. New Focus pioneered this technology more than 15 years ago and continues to deploy proprietary techniques to produce lasers with unsurpassed single mode tuning ranges. This creates an ideal tool for scientists and commercial customers seeking to use flexible light sources for ultra-precision measurement applications.

New Focus also recently introduced a new open-cage opto-mechanical assembly kit that enables rapid three-dimensional prototyping of optical systems. The kit allows the use of standard optical mouse and easy access to individual optical elements while providing to quickly and precisely configure almost any optical train. This is just one of the dozens of categories of opto-mechanical components that can be configured into an unlimited number of applications in physics, chemistry, and biology labs around the world.

For more than 15 years, the New Focus team has passionately pursued an objective to develop and deploy what they have termed Simply Better Photonics Tools. The result has been a history of success in bringing some of the industry's most innovative laser and photonics products to market. We are proud to have the New Focus brand, products, and most importantly, people as a part of our Newport team.

As an update to our initiative to leverage our expertise to enhance the manufacture of solar cells and panels, I'm pleased to announce that the photovoltaics labs in our technology and application center in Irvine, California has been ISO 17025 certified by the American Association for Laboratory Accreditation as one of just five facilities in the world to measure, characterize, and calibrate the performance of solar cells. With this certification, we have now introduced a service to our customers to provide third-party measurement and validation of cell efficiency and performance.

This enables solar cell designers to quickly and accurately test the performance of cells using different materials and manufacturing processes. The photovoltaics lab uses our own state-of-the-art equipment including the Oriel Sol3A solar simulators and quantum efficiency measurement kits. The service is another step in our efforts to help accelerate the advance of solar energy as a cost-effective clean and renewable energy solution for our planet, and a demonstration that our products are indeed setting the standard for the analysis of solar cells.

Also, in June we participated in the Laser World of Photonics event in Munich, Germany. This event is the world's largest trade show dedicated to laser technology. At the show, we introduced several new products, two of which I'd like to highlight.

The first is our new Mai Tai Short Pulse Ultrafast Oscillator or Mai Tai SP. Mai Tai SP is the first fully automated short pulse ultrafast laser with both tunable wavelength and tunable pulse width from 25 femtoseconds to 100 femtoseconds.

We also introduced our new Unison ultrafast amplifier system, which is the first single system that provides users with optimized dual outputs of terawatt power levels and kilohertz frequencies for simultaneous experiments in multiple applications, making it the most versatile high-energy ultrafast system on the market. With higher power, shorter pulses and more automation, these products provide scientists with new tools to push the frontiers of chemistry, physics, and material science.

I would now like to discuss our outlook regarding the coming quarters. As mentioned earlier, we are cautiously optimistic that we will see near-term improvements in order levels from our scientific and life and sciences market and from semiconductor equipment customers. Although the degree and sustainability of recovery are uncertain, we do expect orders growth in the second half of 2009 compared with the first half.

Despite this anticipated orders growth, given our book-to-bill ratio of 0.92 in the second quarter and with consideration of our current due backlog, we expect sales to be slightly lower sequentially in the third quarter of 2009, followed by a sequential sales growth in the fourth quarter.

This outlook reinforces our results to ensure that our business model is streamlined, flexible, and highly efficient. We will balance our efforts to streamline costs with continued investments in next-generation technologies and products and a never-ending focus on excellent customer service.

In summary, in the second quarter of 2009 we accomplished the following. Acquired an excellent New Focus business to extend our leadership position in the photonics industry, divested our unprofitable diode laser operations, reduced our operating cost structure across the board, launched the move our lasers division to a new lower-cost facility, introduced a number of new leading-edge products and services, achieved profitability on a pro forma basis, and while accomplishing all these items, generated $11.6 million in cash from operations.

We are encouraged by our progress and confident that we are transforming Newport into an even more competitive company with improved market and financial strength. That concludes our prepared remarks. Now, we'd like address your questions.

Question-and-Answer Session

Operator

Very good. (Operator instructions) Our first question will come from Mark Douglass with Longbow Research.

Mark Douglass – Longbow Research

Good afternoon, gentlemen.

Robert Phillippy

Hi, Mark.

Mark Douglass – Longbow Research

You are doing a pretty good job here, congratulations. On the non-GAAP numbers, can you break down, Chuck, between SG&A, cost of goods sold, R&D?

Chuck Cargile

Yes. Mark, you have in front of you the GAAP to non-GAAP reconciliation that we put on our web site?

Mark Douglass – Longbow Research

Yes.

Chuck Cargile

Okay. So you can see there the cost. And we'll look at the six months row and that will help you see the numbers and then you can allocate in the same way to the quarter.

Mark Douglass – Longbow Research

Okay.

Chuck Cargile

Cost related to profit improvement actions is $3.992 million. You see that?

Mark Douglass – Longbow Research

Right, right.

Chuck Cargile

$600,000 of that in cost of sales and $3.3 million is in SG&A. And we did not allocate any of that to R&D.

Mark Douglass – Longbow Research

Okay.

Chuck Cargile

Next line is interest of course.

Mark Douglass – Longbow Research

Right.

Chuck Cargile

Next line the cost related to acquisition and divestiture activity, that's all within SG&A. The last on the disposal of the diode laser assets is predominantly in cost of sales.

Mark Douglass – Longbow Research

Okay.

Chuck Cargile

I'm sorry, excuse me. Yes, the $4.290 million, the operating loss is in cost of sales. The $4 million is a separate line on the P&L, the loss on the disposal of the business.

Mark Douglass – Longbow Research

Right. Operating loss is primarily costs?

Chuck Cargile

That's right.

Mark Douglass – Longbow Research

Okay.

Chuck Cargile

So that’s the makeup of the non-GAAP numbers.

Mark Douglass – Longbow Research

Okay. Very helpful, thank you.

Chuck Cargile

You are welcome.

Mark Douglass – Longbow Research

And so, right now, what are you seeing as break-even and I guess we are kind of flirting with that right now and then your sales are down slightly sequentially reporting of the non-GAAP loss in 3Q?

Chuck Cargile

Yes. If you look at the non-GAAP reconciliation, it shows you that with were $0.01 a share on the $85 million or $87 million. So that by definition is breakeven.

Mark Douglass – Longbow Research

Yes, yes.

Chuck Cargile

I think – as Bob mentioned in the guidance, we expect there to be downward pressure on revenue in Q3 and as you can tell from our prepared remarks, we have a lot of moving pieces in Q3. So I think you that should expect us to continue to bounce along that point for – that same breakeven point for the second half of this year and then I think for 2010, once we have all these actions completed, it will probably be down a little bit, but our hope is by then the top line will start improving and so, we’ll have some cushion between breakeven point and that should be profitable.

Mark Douglass – Longbow Research

Right. Okay and then on the reclassification, what exactly got shuffled around? I mean, it seems fairly minor between the segments but can you – what's there because of you are backing up maybe the sale – external sales of the laser diodes?

Robert Phillippy

Mark, I'm not sure what reclassification is, what you see in that indication of reclassification.

Mark Douglass – Longbow Research

I thought it looked like some of our historical numbers are slightly different than what you are presenting.

Robert Phillippy

In orders and sales by segment?

Mark Douglass – Longbow Research

Yes. Some of the smaller segments, but we can – we'll review it again and talk about offline if we have to. And then Bob, the uptick in orders in micro, can you give us some detail as to what types of applications we're looking at? Does it seem somewhat sustainable here for the next quarter or two? What are you seeing there?

Robert Phillippy

So the sequential uptick was from semiconductor equipment customers. As you may recall, in the micro-electronics, externally reportable segment, we have photovoltaics, we have semiconductor equipment, and we have laserdisc texturing and various other smaller applications.

So the uptick that we saw on a sequential basis was from semiconductor equipment OEM customers. And it's for the photonic type applications that we would typically participate in, inspection, wafer processing, various things like that.

However, that said, the sustainability and breadth of a recovery are difficult to predict at this point. I think it's too early to call it ramp, too early to call it recovery, but I think it's easier to say that we are pouncing along the bottom or maybe even a little bit off the bottom.

Mark Douglass – Longbow Research

Yes, I guess –

Robert Phillippy

Now with that in mind, several of our semiconductor equipment OEM customers have reported increased sequential orders and guided up to some degree over the next few quarters. So we would expect that those would ultimately help our business as well.

Mark Douglass – Longbow Research

Yes. I guess I was just wondering if there is any particular application that you got a design win on because of a new technology or is there something a little more isolated that – or it was just kind of a general trend across the OEM equipment?

Robert Phillippy

I'd say it's semiconductor industry specific and it's general in nature.

Mark Douglass – Longbow Research

Okay. That's helpful. Thank you.

Robert Phillippy

Mark, thanks.

Operator

Our next question is from Ed Einboden with Wm Smith & Co.

Ed Einboden – Wm Smith & Co.

Good afternoon, guys.

Chuck Cargile

Hi, Ed.

Robert Phillippy

Hi, Ed.

Ed Einboden – Wm Smith & Co.

I was just wondering, can you guys kind of go through a little bit more of your thought process and I guess timing with the New Focus acquisition? Is this something that you guys have been working on, kind of the outlook for where you see business going or opportunities that you see out there?

Robert Phillippy

So ask that question again. That seemed like about four questions rolled into one, Ed.

Ed Einboden – Wm Smith & Co.

Sure. No, I mean was – is it – has – does it really have to do with how you see the industry and maybe changing from where it has been in the past or opportunities that in a challenging environment you can kind of take advantage of going forward?

Robert Phillippy

As it relates to New Focus?

Ed Einboden – Wm Smith & Co.

Yes.

Robert Phillippy

Okay. Well, I'll talk about the market opportunities for New Focus and then if Chuck wants to add on with discussion about timing for integration, we can talk about that as well.

But for market opportunities, the thing that is so great about New Focus is that fits just perfectly in our product portfolio. We can leverage our distribution and sales channels, it is complementary from a technology standpoint, many of the products we could see being right alongside Newport in a customers application phase, be that in a scientific laboratory or in an OEM opto-mechanical subassembly for the semiconductor equipment or life and health sciences segment.

The other thing that we like a lot about New Focus is that they've got a great brand reputation in the industry for some pretty clever stuff and we think that is leverageable, we intend to continue to reinforce that brand image as a part of the Newport family of brands and we think that those – that combination of factors just makes it a good fit for us, but it's not a new call it market segment opportunity, it's with our existing market segments, but it's an expansion of our product line and our technology base.

Is that what you are looking for?

Ed Einboden – Wm Smith & Co.

Yes, absolutely. And just maybe if you could let – just comment on whether that provides new customers or would that be existing customers?

Robert Phillippy

Probably both. There are several product categories or should I say products that are really differentiated and designed into applications both on an OEM perspective and well sold into the scientific research market that touch customers that aren’t on our list, but as we compare the two customer lists, there was quite a bit of overlap.

Ed Einboden – Wm Smith & Co.

Okay, great.

Chuck Cargile

And then Ed, let me comment on the timing. We outlined the key integration steps and we are pushing very hard to have the tactical part of the integration completed by the end of this year because we think it's very important that we enter 2010 with a clean slate and that's going to require a lot because there is a lot of moving pieces and it's also going to come with some degree of expense and cash burn that we'll highlight every quarter, but we expect that we'll spend about $3 million to $4 million in the second half of the year on the integration efforts themselves. So those will be charges or expenses that we'll show on a pro forma basis in Q3 and Q4.

And in addition to that, we'll have about $3 million to $4 million of capital that we'll spend to move to the new facility in Santa Clare and also to get the Shenzhen operations into our facility – the new facility that we have in Wuxi. And then also in addition to that and related is we will be completing the cost reduction steps that we've been working on since about one year ago, in fact September 2nd last year was when we announced first wave of our cost reduction steps.

And to finish those, including the move – the closure of our facility in Ottawa will have the tail on that of about $3 million or $4 million as well. So we are going to have a lot of activity and a lot of expenses and cash spend in the second half of this year in order to clear the debt for 2010.

Ed Einboden – Wm Smith & Co.

Okay. Thanks for the color there, Chuck. I just was also trying to find out cycling of that last question was, the – in the micro segment, are you guys seeing that from a specific customer or you guys are seeing in the kind of broad based and is that why you guys are not sure that it could be sustainable, but it's obviously a positive.

Chuck Cargile

Let me make one comment and then Bob can add the color. By a way of remainder that within the semiconductor space, our customer base is very concentrated. So anytime we are talking about specific quarters or specific business in that sector, it's going to be isolated to a handful of customers. So you always have to wonder whether we are talking about broad trends that our customers might be participating in or whether it's specific issues to the half a dozen or eight customers that will make up two-thirds of our business in that segment.

Ed Einboden – Wm Smith & Co.

Okay. So I guess broad based, is that what you guys there – just in communications I guess.

Robert Phillippy

Well, with that as a lead end, the fact that our customer base is concentrated to some degree and to use the handful of customers' analogy, everyone in that handful has lower inventory levels and has guided up.

Ed Einboden – Wm Smith & Co.

Okay, great. Thank you. And I guess lastly on the research side, you guys have talked about the research activity and the quotation activity increasing. Has the size and scale of those quotes been similar to what you guys were seeing in the past, are they larger or smaller to it?

Chuck Cargile

I'd say similar and just as a historical reference, in our first quarter earnings call, we reported an uptick in quotation activity and we believe it was directly correlated well effectively – we are confident it was absolutely correlated with the pending ARRA funding in the U.S. in similar packages, similar stimulus spending in other countries.

And we saw just a continuation of that, not more, maybe a tiny bit less just because those things tend to peak out, but we saw a similar activity in the second quarter, but still, as we indicated in the prepared remarks, we haven't seen the orders related to that quotation activity yet.

Now, in July we did see reports in public domain about some researchers that we've been in close communication feeding their brands, receiving their stimulus funding. So the expectation would be – is that as more of the stimulus funding becomes actually granted and available that that would lead to an improved research market activity level from an order standpoint rather than just a quotation standpoint.

Ed Einboden – Wm Smith & Co.

Okay, great. And keep up the good work, guys.

Robert Phillippy

Thanks, Ed.

Operator

Our next question is from Ajit Pai with Thomas Weisel Partners.

Ajit Pai – Thomas Weisel Partners

Yes, good afternoon and congratulations on the lot of the changes that both announced and completed.

Chuck Cargile

Thank you.

Robert Phillippy

Thanks, Ajit.

Ajit Pai – Thomas Weisel Partners

A few questions. I think the first one is about your guidance for the next quarter. I think you are guiding to down slightly sequentially, but could you give us some color as to why you are doing that just given the order trend you spoke about. I know that on a sequential basis, you are talking about it being pretty flat in orders, but you also have the New Focus business coming on board.

So could you give us some indication as to what the quarterly run rate from that business is expected over the next couple of quarters and why you are so cautious about the September quarter given your commentary on orders?

Chuck Cargile

Yes. Ajit, first you have to consider that our backlog is quite low compared to where we like to be. Because of the industry dynamics over the last year, our book-to-bill has been consistently below 1 for five quarters. So our shippable backlog entering this quarter is as low as it's been and certainly in recent memory.

So even an uptick in orders won't be enough, we don’t anticipate there would be enough book in turn business to overcome the fact that we had two straight quarters of $80 million in orders and the backlog itself currently is about $88 million. So we got that to – kind of it will take more than just a near-term blip in increased orders to get that moving back in the right direction.

And as it relates to New Focus, we commented in the prepared remarks that the 2010 revenue expectation for New Focus is about $20 million. But keep in mind the flipside of the asset swap with Oclaro was that we are divesting revenue – external revenue that we used to generate for diode sales out of our Tucson operation.

So when we announced the transaction back in July, we talked about there may be being a $10 million annual delta positive, but that's just a couple of million dollars in the quarter. So it's not enough to push the guidance to be something that’s more aggressive than what Bob referred to in the prepared remarks.

Ajit Pai – Thomas Weisel Partners

Got it. And then just looking at New Focus and you talked about some of the synergy that you expect when you bring them in and one of them that you mentioned was channel and you talked more about Newport's direct channel that you have and then being able to work more on that side and capture greater margin. But, what about the catalog business? I mean, you have one of the best catalogs in the industry. Is that something where you might have New Focus – either New Focus branded products or even Newport branded products or does New Focus' channel not require a catalog and (inaudible) into a catalog?

Robert Phillippy

No. Actually, catalog products and the synergy associated with them are one of the key areas where we think there is leverage and that is that catalog has a great brand – I'm sorry, catalog is a great brand, New Focus has a great brand and we intend to position those products accordingly.

So a lot of those are merchandise products, they are sellable in a catalog and we would expect to see in some cases, New Focus branded products and Newport branded products side by side, but we also want to have the distinction associated with the New Focus brand as it relates to merchandise products sold into the research market.

So I guess to answer your question more specifically, we do see the need for catalogs and catalog based products branded still with New Focus. We don't intend to just completely merge them in with the New Focus – the Newport catalog, but we do believe that that's an area for synergy.

Ajit Pai – Thomas Weisel Partners

Got it. But you will also include New Focus – core New Focus products branded as Newport within the Newport catalog?

Robert Phillippy

Perhaps.

Ajit Pai – Thomas Weisel Partners

Perhaps, okay. And then when you are looking at the timing for all of these moves that you – lots of moving parts in the next couple of quarters and you quantified the amounts that are associated with them, but while the costs are expected to be incurred before the end of this year or in the third and fourth quarter, will all the actions – you expect them all to be complete by the end of the year?

Chuck Cargile

We have about half a dozen different teams that have been assigned integration projects and we have several more projects that have already been in place and in every instance, there is a detailed project plan that calls for completion by the end of the year.

Ajit Pai – Thomas Weisel Partners

So Santa Clara, Wuxi, all of those, all the plants that you have right now finished by the end of the year and what about the SAP implementation? Is that also expected to be complete by the end of the year?

Robert Phillippy

The SAP implementation is expected to be completed by the end of the year. In fact, it's – it should be completed prior to the other two – the move to Wuxi and the move to Santa Clara are both later in the fourth quarter. The SAP turn-on should be early in the fourth quarter and I will say that it will be a challenge to accomplish everything by the end of the year, but we have to grow a hard line in the Santa and try get that done because we believe that – where we like to have some optimism that 2010 is going to be a more robust year on the top line and we would like to have all the moving pieces completed by then so that we can have a full year of positive and clear and clean results.

Ajit Pai – Thomas Weisel Partners

Okay. And then the last question would be more sort of a higher level question, just looking at the commercial laser market and the fact that given your diode business out, so just the landscape, how is it changing right now and how Newport's competitive position has either been altered or how you are thinking about that business on a go-forward basis competitively right now?

Chuck Cargile

As it relates to diodes?

Ajit Pai – Thomas Weisel Partners

No, not the diode business. Just in terms of commercial lasers, your participation, your overall laser business like you have outsourced I think a big chunk of that for now, but from a competitive perspective you think that the cost structure of that business for you – I mean, it's been a business that has been losing money for a while. You've taken some proactive steps to reduce the cash loss there, but as an overall business right now, when does it get to break even? Do you still have to scale that business? Do we look at potential acquisitions for that business? Do you think you have the right scale, do you think you have to larger, you have to be smaller? And are you losing share in that business against some new competitors? You have potential to gain share there and how do you expect to gain share there?

Robert Phillippy

Okay. Let me give, Ajit, our complete strategic plan. Let me try to bite off one chunk at a time. So first, as it relates to diodes and your words the outsource, so by divesting our diode laser business we have indeed outsourced our source for that component as it goes into our commercial laser product portfolio.

We believe that that hasn’t hurt our competitive position one bit. In fact, if anything, it's enhanced us because we of course no longer have the operating losses associated with that business and also, we had significant R&D resources dedicated to diode development where we can now partner to get those resources and focus our R&D efforts on next-generation products in our commercial laser systems business.

Further, the diode industry is a very, very competitive place as I know you are aware. And we believe that by having supplier relationships, we'll be in a position to source best-in-class leading-edge products.

And our partnership with Oclaro is the first step in that and as we mentioned, when we made the announcement, Oclaro has a significant infrastructure for diode lasers in addition to the Tucson business that we just sold them. So they will be able to consolidate their manufacturing operations and get greater leverage out of their infrastructure. So we think all the things are going to help us in the competitiveness related to diodes.

In related – in relation to the laser systems business on the competitive frontier in a more global sense, we have been on a path to improve the tactical execution of our lasers division for some period of time now. We’ve made great progress on that. I'm very pleased with the results in terms of product reliability, in terms of on-time delivery with our customers, in terms of warranty performance and a lot of those executional, operational metrics – and I would just basically put a stamp on those and say, we are pretty well where we need to be in that regard.

The laser business, in an overall sense, does suffer to some degree at present as most businesses do, with a deteriorated revenue stream and they still have a significant infrastructure that they have to deal with and so, we are going to be doing prudent things to make sure that our cost structure is aligned with business realities.

Ajit Pai – Thomas Weisel Partners

Got it.

Chuck Cargile

Ajit, you asked about the breakeven, one of the 15 questions that was embedded a second [ph] ago. And I think that's an important one to point out and on the web site, we have the profitability by each of our reporting units. So if you look at that sheet, you'll see the segment loss for lasers.

And then if you look at the non-GAAP to GAAP reconciliations, you can see in the first and second quarter, the loss, the drain that came from Tucson on the reconciliation and you can see the total loss to lasers. And that will show you that at $37 million in the first quarter, the laser business was slightly profitable and at $35 million of revenue this quarter, without the drain from the Tucson loss, we would have lost about $0.5 million.

So you can see at that level today and again, the – there are still efficiencies and cost reduction steps that haven’t been completed at the lasers. $35 million, just at about breakeven. And then if you look back historically, a year ago at $49 million in revenue, we were barely breakeven. So the laser business with $15 million less in revenue, they are at about the same breakeven point and we think that breakeven point is even going to go down a little bit as we complete the steps that we talked about for the second half of the year.

Ajit Pai – Thomas Weisel Partners

Got it. Well, thank you.

Robert Phillippy

– with the auto project that Chuck referenced in the prepared remarks is a laser division entity. So we've still got a facility closure to go. And remember, at the end of all of these activities, we will have fewer facilities, a smaller footprint, and a more variable cost oriented infrastructure. So we will be able to sustain market cycles in the future as well.

Ajit Pai – Thomas Weisel Partners

And just one clarification. Your tie-up with Oclaro in terms of fixed pricing for diode is for about a year, right? It's 12 months fixed and after that I think you only have to take 50% of your needs from them and you can go to the merchant market. Like how long are you committed to getting all your production – all your needs from them?

Robert Phillippy

The supply agreement itself is a three year and it has reduction each year in the amount that we have to source from them to allow us to go to a third party if we need to. But the full intent of supply agreement is they would continue to be our diode source for the foreseeable future.

Ajit Pai – Thomas Weisel Partners

Got it. Thank you so much.

Robert Phillippy

You are welcome.

Operator

(Operator instructions) We do have a follow-up from Mark Douglass with Longbow Research.

Mark Douglass – Longbow Research

Hello again.

Chuck Cargile

Hi, Mark.

Mark Douglass – Longbow Research

What was CapEx in the quarter? And then what are you expecting in the second half? I know you mentioned that there is going to be some for the facility moves. So I assume it would have a bump sequentially.

Chuck Cargile

Yes, it will. In the second quarter, our total CapEx was about $1 million. And in the first quarter, it's about $1.1 million.

Mark Douglass – Longbow Research

Right.

Chuck Cargile

So we have really squeezed the normal CapEx and I would expect that that level is kind of a base level that would go – that we would have going forward and then you have to put on top of that, as I mentioned, the $3 million to $4 million of capital that we are going to spend in the second half of the year for the integration efforts.

Mark Douglass – Longbow Research

Is that more weighted in the third quarter than the fourth or just – it's splitting hairs, but –?

Chuck Cargile

Let's see. It's actually a little bit more in the third quarter, yes. A little bit more in the third. So I would say there is going to be about $4 million to $6 million with a little bit heavier weight in the Q3.

Mark Douglass – Longbow Research

Okay. And then, the final question is on the convertible debt. Any thoughts on taking any more debt out? You feel a little more comfortable way things are going, you are still generating cash, lot of cash in the balance sheet, are you just thinking to letting that lie for a while till things improve?

Chuck Cargile

We continue to monitor it all the time. As you probably won't be surprised to know is the ability to get that at the steep discounts like we did two quarters ago and three quarters ago, that opportunity is pretty much past. The latest read on the discount would be no less than 85% at par.

So it certainly becomes – it’s not quite as compelling as it was when we did it before. But we will keep monitoring because we are confident in our ability to generate cash although we have already earmarked a lot of cash usage for the second half of the year, but we will keep an eye on it. It's just quite as compelling as it had been.

Mark Douglass – Longbow Research

And share buybacks are just – so kind of on hold?

Chuck Cargile

Yes. And we have flexibility there as well because we've got almost 4 million shares that our Board has authorized us to buy back, but right now our focus is more transforming the business and using our cash to things that we've identified and then keep an eye out to see if opportunistically we could do one of the other financing transactions.

Mark Douglass – Longbow Research

Okay. Thank you, good job.

Chuck Cargile

Thank you.

Operator

And we do have a question from Jiwon Lee with Sidoti & Company.

Jiwon Lee – Sidoti & Company

Yes. Hi, good afternoon.

Robert Phillippy

Hi, Jiwon.

Jiwon Lee – Sidoti & Company

The first question is when – what kind of a revenue assumption for next year from New Focus? Did you blend them to get to this $5 million to $8 million of profits? I’m asking because it looks like the kind of a profit that you are looking for is significantly better than corporate average.

Robert Phillippy

Okay. There is two ways or two pieces of information that you have to manage with it. First, as we said in our prepared remarks that we believe that New Focus will provide $20 million of additional revenue in 2010. And we've also said, in that $5 million $8 million there is two pieces of it and it's split about evenly. The one piece is the profit that we will get, the incremental profit that we'll get on that $20 million of New Focus revenue.

The other piece is the losses that we avoid for Tucson business that we divested. So if you take half of that $5 million to $8 million and apply it to the New Focus revenue, you'll see a certainly profitable revenue, but it's not an unrealistic amount of profit on a percentage of sales.

Jiwon Lee – Sidoti & Company

That’s very helpful, thank you. And then – yes, can you give us a little more sense as to the $3 million to $4 million each from New Focus, as well as your own cost reduction program in the second half? How would that split in the second half roughly?

Chuck Cargile

The spending that we are going to incur, you mean?

Jiwon Lee – Sidoti & Company

Well, the charges. I’m sorry.

Chuck Cargile

Yes. Yes, there is interestingly and conveniently enough, it's about $3 million to $4 million for both. So $3 million to $4 million to complete our cost reduction actions and $3 million to $4 million for the integration efforts. So it just happens to be –

Jiwon Lee – Sidoti & Company

Okay.

Chuck Cargile

I do that to make it easy for you to writing a model.

Jiwon Lee – Sidoti & Company

And that will be split roughly in even quarters in each quarter of the second half?

Chuck Cargile

I don’t have right in for me what that split is. I can look at that and – the other thing that I want to mention as it relates to that where I think you will start to see the real benefit and where you can start to see it this quarter is when you look at the gross margin, I think we've talked a lot about the reduction in our operating expenses and that's clear to see when you look at the non-GAAP numbers as we explained. But also what might be not quite as easy to see is that in the quarter, our gross margin that’s reported for GAAP was 36.7%, but that included the charges that I talked about earlier that was in restructuring charges that were included in cost of sales, and also the loss that we had from Tucson. If you exclude those two items and look at what the gross margin would be on a non-GAAP basis, not including those non-recurring charges, the gross margin would have been 40% on only $87 million of revenue. So I think that you are starting – you will be able to see as we get through these items, a real increase in the gross margin that I think might not be as easy to see as the reduction in the operating expenses.

Jiwon Lee – Sidoti & Company

Terrific. And then on to Wuxi, remind me again, what was the current revenue out of that and how much should we be expecting for next year?

Chuck Cargile

For the first half of 2009, we generated approximately $6.5 million of external revenue and would have expected that to be about the same or maybe a little higher in the second half. And then we've mentioned that by bringing the Shenzhen volume into Wuxi, we expect in 2010 we may as much as double that.

Jiwon Lee – Sidoti & Company

Okay. That’s very clear. And then what was the headcount before the quarter and the headcount at the end of the quarter roughly?

Chuck Cargile

We ended June with about – with 1,675 employees. So that's down about 17% from when we started the cost reduction program a year ago. And then as part of the asset swap, we divested – the Tucson divestiture took with it about 100 employees and as we mentioned, we'll have about 120 as it relates to New Focus. So it will go up a little bit as a result of the asset swap, but only about 20.

Jiwon Lee – Sidoti & Company

Okay. And lastly, I missed your comment on the CapEx for the quarter and the rest of the 2009.

Chuck Cargile

CapEx for the quarter was about $1 million and then we said that was going to go up $4 million to 6 million in the second half of the year.

Jiwon Lee – Sidoti & Company

Okay, great. A lot of clarity came out of the conference call. So thank you.

Chuck Cargile

Welcome.

Operator

And with that, there are no further questions in the queue. I'd like to turn the call to Robert Phillippy for any additional or closing comments.

Robert Phillippy

Thanks, Dwayne. Thanks again for joining us today and for your interest in Newport Corporation. As noted in the call, we've made a great deal of progress on our initiatives to improve the competitiveness and performance of Newport. We remain steadfastly committed to continue to effective execution to ensure we are positioned to capitalize on improved market conditions in the future. Thanks.

Copyright policy: All transcripts on this site are the copyright of Seeking Alpha. However, we view them as an important resource for bloggers and journalists, and are excited to contribute to the democratization of financial information on the Internet. (Until now investors have had to pay thousands of dollars in subscription fees for transcripts.) So our reproduction policy is as follows: You may quote up to 400 words of any transcript on the condition that you attribute the transcript to Seeking Alpha and either link to the original transcript or to www.SeekingAlpha.com. All other use is prohibited.

THE INFORMATION CONTAINED HERE IS A TEXTUAL REPRESENTATION OF THE APPLICABLE COMPANY'S CONFERENCE CALL, CONFERENCE PRESENTATION OR OTHER AUDIO PRESENTATION, AND WHILE EFFORTS ARE MADE TO PROVIDE AN ACCURATE TRANSCRIPTION, THERE MAY BE MATERIAL ERRORS, OMISSIONS, OR INACCURACIES IN THE REPORTING OF THE SUBSTANCE OF THE AUDIO PRESENTATIONS. IN NO WAY DOES SEEKING ALPHA ASSUME ANY RESPONSIBILITY FOR ANY INVESTMENT OR OTHER DECISIONS MADE BASED UPON THE INFORMATION PROVIDED ON THIS WEB SITE OR IN ANY TRANSCRIPT. USERS ARE ADVISED TO REVIEW THE APPLICABLE COMPANY'S AUDIO PRESENTATION ITSELF AND THE APPLICABLE COMPANY'S SEC FILINGS BEFORE MAKING ANY INVESTMENT OR OTHER DECISIONS.

If you have any additional questions about our online transcripts, please contact us at: [e-mail]. Thank you!