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Coherent, Inc. (NASDAQ:COHR)

F1Q 2014 Earnings Conference Call

January 29, 2014 04:30 PM ET

Executives

John R. Ambroseo – President & CEO

Helene Simonet – EVP & CFO

Analysts

Jiwon Lee – Sidoti & Company

Patrick Newton – Stifel Nicolaus

James Ricchiuti – Needham & Company

Mark Douglass – Longbow Research

Lawrence Solow – CJS Securities

Operator

Good day, ladies and gentlemen, and welcome to the Coherent First Fiscal Quarter Results Conference Call hosted by Coherent Inc. (Operator Instructions) As a reminder, this call is being recorded. I would now like to introduce Ms. Leen Simonet, Executive Vice President and Chief Financial Officer. You may begin your conference.

Helene Simonet

Thank you, Derrick. Good afternoon and welcome to Coherent’s first fiscal quarter conference call. 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’s 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 highlights of the quarter. Bookings for the quarter were $201.5 million, resulting in a book-to-bill of 1.04. Revenues for the quarter were $193.6 million with corresponding pro forma earnings of $0.68 per diluted share. Earnings per share were below our expectations, primarily due to lower than expected revenues and higher than usual unrealized currency exchange losses.

Revenues are at the lower end of our guidance primarily due to softness in the advanced packaging markets. Notwithstanding the lower than expected revenue, our gross profit percentage was slightly above guidance and has increased consecutively for the past three quarters. As indicated in prior conference calls, we expect this promising trend to continue.

Cash generation is another positive highlight. We ended the quarter with a cash balance of $274 million, reflecting a quarterly cash flow from operations of approximately $29 million. Our pro forma EBITDA percent for the quarter was 16.4% and compares to 18.1% the same quarter a year ago.

Net sales for the first quarter declined $19.6 million or 9.2% sequentially and increased $10.4 million or 5.7% compared to the same quarter a year ago. The backlog shippable within 12 months at the end of December was $286 million, unchanged from the prior quarter.

Flat panel display applications’ backlog is approximately $73 million or 25% of the total. None of these numbers reflect the large $100 plus million flat panel display orders we highlighted in the press release. Those orders will be part of the second quarter bookings and backlogs.

Geographically, on a trailing 12 month basis, Asia accounted for 51% of the company’s revenues, U.S. 23%, Europe 19% and rest of the world 7%.

Similar to fiscal 2013, we had one customer in South Korea who contributed more than 10% of the company’s first quarter revenues.

With respect to the first quarter revenues by major market applications, we achieved double-digit sequential growth of approximately 10% and 12% in Scientific and OEM Components & Instrumentation markets, respectively.

Scientific benefited from strength in Europe while the growth of OEM Components and Instrumentation was a result of strong revenues in our newer medical applications such as cataract surgery and dental treatment as well as continued successes in the bioinstrumentation market.

The Microelectronics sequential decline of 20% is mainly impacted by the timing of excimer annealing system shipments and as mentioned earlier, the softness in the advanced packaging market. These declines were partially offset by a robust performance in our semiconductor submarket.

Materials processing sequentially declined 12%, which is not an unusual pattern based on historical revenue comparisons of our fourth to first fiscal quarters. When compared to the first quarter of the last year, materials processing grew 5.5%.

Service revenues for the quarter were $60 million or 31% of sales and compared to $64 million last quarter and $43 million a year ago. About 70% of the year-over-year service revenue growth originated from flat panel annealing tube replacements. On a trailing 12 month basis, service revenues represented 27% of the total company’s revenues.

The sales by major market application are as follows: Scientific 33.3; Microelectronics 92.3; Materials Processing 28; OEM Components & Instrumentation 40, for a total of 193.6 million.

The first quarter pro forma gross profit excluding $0.5 million stock compensation charges and $1.5 million intangibles amortization was $79.6 million or 41.1% of sales, an increase of 30 basis points from the 40.8% we recorded last quarter. The increase is due to a favorable product mix primarily in the microelectronics market, partially offset by the negative impact from lower volumes and a stronger euro.

Our total pro forma operating expenses were 29.2% of sales or 28.1% excluding the impact of an increase in our employee deferred compensation plan liabilities which resulted from exceptional investment returns last quarter. An offsetting income to this charge is included in other income so the net impact to the company is insignificant.

The period expenses ratio of 28.1% is slightly above the high end of our guidance mainly due to the lower revenues and some nominal higher spending compared to last quarter.

Other income and expenses include larger than usual currency exchange losses offset by the benefits of the aforementioned employee deferred compensation plans. Unrealized exchange losses amounted to $1.6 million and reduced our earnings by approximately $0.05 per diluted share.

Moving on to the balance sheet. Our cash and cash equivalents balance for the quarter was $274 million compared to $250 million for the prior quarter. Approximately $181 million or 66% of the cash balance is held internationally, with the majority positioned in Europe.

Cash flow from operations for the first quarter was about $29 million and was mainly driven by another meaningful improvement in our accounts receivable days’ sales outstanding. This improvement was primarily the result of better shipment linearity during the quarter.

Days’ sales outstanding declined to 54 days from 58 days last quarter and 62 days a year ago. Inventory turns on the other hand declined to 2.7 from 3 at the end of fiscal 2013 which is mainly due to a buildup of service inventory to support a growing installed base. When compared to the same quarter last year, inventory turns improved from 2.5.

Capital spending for the quarter was $6.8 million or 3.5% of sales.

Let me now give you the guidance for our second quarter. We expect our second fiscal quarter revenues to increase to a range of $196 to $203 million or 1% to 5% growth when compared to the first fiscal quarter. This growth takes into account a continued sluggish demand in advanced packaging.

With respect to the pro forma gross profit percentage, we expect further expansion and we are guiding to a range of 41% to 42%. As a reminder, the pro forma guidance excludes intangible amortization of $1.5 million and stock compensation costs of approximately $0.5 million.

We project the pro forma period expenses to be approximately 28% of sales. And again this excludes intangible amortization estimated at $0.9 million and stock compensation costs of approximately $4 million.

We are assuming a pro forma tax rate of 28% for the remainder of the year. And we continue to project our full fiscal 2014 capital spending to be approximately 4% to 4.5% of sales. We are also assuming a weighted outstanding shares number of 25.2 million for the second quarter.

I will now turn over the call to John Ambroseo, our President and CEO.

John R. Ambroseo

Thanks, Leen. Good afternoon everyone and welcome to our first fiscal quarter conference call. There is no question that our first quarter revenues and earnings were lackluster. Bookings, however, paint an attractive long-term picture.

Numerous commercial customers across various markets have locked in deliveries over upcoming quarters. For Coherent, securing these longer-term orders can help us further improve our gross margin and sustain our strong cash generation. The scientific market has shaken off some of the effects of sequestration and appears to be reverting to its traditional global GDP plus/minus model.

First quarter bookings of $201.5 million increased 0.6% sequentially and 14.5% compared to the prior year period. The book-to-bill for the first quarter was 1.04. Scientific orders in the first quarter were $38.1 million, up 11.4% sequentially and 4.8% versus the prior year period. The imaging market remains robust with orders near the highs set during the ARRA stimulus period. This is consistent with brain function research projects in the U.S. and Europe that I mentioned in previous conference calls.

The long-term trend has supported considerable growth in our Chameleon product portfolio and we are about to ship our 2000th laser system, making it our most successful scientific product. Bookings for amplifiers and excimer lasers were higher than our expectations.

Orders for applied physics and materials processing research in Asia, especially China, were stronger than expected. Demand from applied physics research in Germany and France was equally impressive, resulting in the best quarterly bookings in Europe in the past two years.

The only area of disappointment was Japan. We have not seen any appreciable effect from the stem cell stimulus package. It is possible the money is being directed into other technologies or towards Japanese vendors.

Our outlook for the scientific market in 2014 improved modestly with the passage of the Ryan-Murray Budget Bill. Funding was restored to a number of agencies, including the NIH and the NSF, two of the largest underwriters of scientific research in the U.S. We estimate that spending could increase by 3% to 5% in the U.S. market.

We’re introducing several new research products at the upcoming Photonics West tradeshow at San Francisco’s Moscone Center. These products will offer researchers new capabilities. They have been designed and will be manufactured using HALT and HASS protocols, which may be the first time these methods have been applied to research lasers. We’ve done this to support the continuing evolution of the scientific market from being widget-oriented to results driven.

Instrumentation and OEM components orders of $54.0 million were up 24% sequentially and 60.1% versus the prior year period. Several factors influenced the outstanding bookings performance. Customer sentiment in the bioinstrumentation space improved due to higher clinical adoption and relief provided by the Ryan-Murray bill. This led to longer-term orders for systems and subsystems.

We also saw further penetration and market share gains of our OBIS platform in this space. Within the medical OEM area, orders for ophthalmic applications were very strong. We received a long-term order for Excistar excimer lasers used in LASIK. We booked a record order for Staccato lasers used in cataract surgery. We also had a key design win for high-power OPS lasers in photocoagulation. The win was accompanied by the initial volume order.

Microelectronics orders of $80.5 million decreased 16.8% sequentially and increased 1.8% compared to the prior year period. Semicap orders improved modestly from a very strong fourth quarter and are nearly 50% higher than the prior year period. This is consistent with market expectations for the overall semiconductor capital equipment market in 2014.

New orders were largely for sub 28 nanometer applications. We also entered into a development contract with a major OEM targeting inspection and metrology applications down to 14 nanometers. This is the first step in securing our leadership position for several generations of deployment.

Despite the uptick in semicap demand, advanced packaging for circuit boards remains sluggish. It is possible this is a result of the uncertainty created by an ownership change at a major integrator. However it is more likely the result of a capacity overbuild since demand has been slow for lasers serving several applications in this space. It may take between one to three quarters for the capacity to undergo a correction.

In contrast to the PCB market, interest in IC packaging is increasing. This application will rely upon short pulse lasers such as our HyperRapid laser system. We have received an initial order from a major IC packaging system integrator.

We have recently received orders of $101.4 million for annealing laser systems. The orders consist of two different ELA platforms: Linebeam 750s and a new configuration derived from the Linebeam 1300. A number of the 750s will fill open slots in the second half of fiscal 2014. The balance of the 750s will ship in 2015. The exact numbers will be reflected in our upcoming quarterly guidance.

During the rollout of the Linebeam 1300, customers identified an unexpected benefit that supported higher pixel per inch or ppi density. Working in conjunction with them, we have outlined a path to exploit this benefit further while increasing throughput by increasing the laser power and modifying the optical delivery system. We expect to make the initial shipment of this new system in the first half of 2015.

The unit ASP is approximately $20 million and the service events, based on today’s approach, will be approximately $750,000. There are several of these new systems included in the $101.4 million order.

There has been a very intriguing transaction in the strengthened glass market. Corning has acquired part of Innolas, a system integrator with significant experience in glass cutting. It is reasonable to assume the deal is intended to accelerate the adoption of strengthened glass through better process flow. With respect to our business, we booked a multi-unit order for HyperRapids for strengthened glass cutting. This is our first production deployment in this field.

Materials processing orders of $28.8 million were up 11.9% sequentially and 7.6% versus the prior year period. Bookings increased due to growth in kilowatt class products. We received orders from multiple customers for the Highlight FL-1000 fiber laser. Most of these customers are engaged in metal cutting in China. The Diamond E-1000 CO2 laser also performed well with Japanese and Korean cutting tool manufacturers.

Customers continued to evaluate our three kilowatt fiber laser prototype. The general conclusions are the device delivers cutting speed and quality consistent with other lasers for low reflectivity materials and outperforms on high reflectivity materials. We attribute the latter to our laser architecture that minimizes optical feedback.

There has been constructive feedback regarding the configuration and capabilities of a production device. We will continue to work with customers to learn more about how to optimize the final design. In one case, the customer has decided to pursue what I can only describe as a component level strategy for cost and brand management. We don’t think this will be an approach mimicked by others, but it certainly deserves to be watched.

Additive manufacturing remains a hot topic. And we have been receiving orders for a range of different lasers from UV through CO2 supporting different processes and materials. We have also gained traction in automotive and aerospace manufacturing for processing carbon fiber reinforced polymers or CFRPs.

The materials processing market has enjoyed consistent growth for several years with China playing a pivotal role. Recent economic data out of China imply a slower growth, which should raise a cautionary flag for materials processing. Input from customers in China is somewhat mixed.

The larger players have seen their growth slow over the last several months. The small players have a more optimistic view, but their businesses can swing wildly on a small number of orders. When we consolidate all current inputs, we conclude that 2014 will be slower for materials processing in China compared to 2013.

Given the number of positive market developments and the strength of our product pipeline, we believe the business will build momentum throughout fiscal 2014 and into fiscal 2015. Any uptick in China or a rebound in advanced packaging should add to the momentum.

We’re presenting at the Stifel Technology Conference in San Francisco on February 11 and the Sidoti conference in New York on March 18.

I’ll now turn the call back over to Derrick for the Q&A session.

Question-and-Answer Session

Operator

(Operator Instructions) And our first question will come from the line of Jiwon Lee from Sidoti & Company.

Jiwon Lee – Sidoti & Company

Thank you and good afternoon.

John R. Ambroseo

Good afternoon Jiwon.

Jiwon Lee – Sidoti & Company

John, just wanted to go back and talk a little bit about your China comment. Did I hear you correctly that China would be down in ’14 versus ’13 because of the markets that you are involved or because largely of the advanced packaging and the materials processing area?

John R. Ambroseo

My comments about China were related to materials processing. The slowdown that we saw in advanced packaging in the first quarter was actually across the region. It wasn’t isolated to China.

Jiwon Lee – Sidoti & Company

Okay, that was helpful. And then on this $100 million order that you received, that’s clear to us that it is from a single customer or how many customers gave you this order?

John R. Ambroseo

It’s from a single integrator but it will support multiple end users.

Jiwon Lee – Sidoti & Company

Okay. Great. Any idea of what type of end product that supports?

John R. Ambroseo

I suspect that a portion of it will go into high performance LCD and a good portion of it will go into high performance OLEDs.

Jiwon Lee – Sidoti & Company

Perfect. And then let’s talk a little bit about the guidance, the advanced packaging being a little bit pressure; that’s a pretty clear message. But what other type of sort of revenue assumption did you put in to the guidance please?

John R. Ambroseo

I am not sure I completely understand the question. The guidance was certainly affected by our view on advanced packaging, which we don’t we expect to see a short term recovery on. I think that was the largest portion of it.

Jiwon Lee – Sidoti & Company

In terms of I guess your end markets?

John R. Ambroseo

So the guidance reflects the softness in advanced packaging. Our outlook on the other markets is really unchanged.

Jiwon Lee – Sidoti & Company

Okay, great. And lastly, the carbon fiber comment was interesting. And if you kind of think about a little bit of a longer term view, right, because it’s still unproven market but there is a lot of interest out there. How do you see that for your lasers to kind of develop this market?

John R. Ambroseo

Well, based on the early feedback from customers, it looks like it’s a pretty intriguing application set and it’s not related to a single process but multiple processes. I am not sure that we are in a position today to give you a long term view on the market but given the prevalence of carbon reinforced polymers, it’s certainly an area that we want to be invested in given the upside opportunity that it represents.

Jiwon Lee – Sidoti & Company

Okay. That’s perfect. I’m going to step out for now but thank you.

John R. Ambroseo

Okay.

Operator

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

Patrick Newton – Stifel Nicolaus

Hey good afternoon John and Leen. John congratulations on that ELA order I guess the magnitude definitely explains why you’ve been so comfortable the last couple of quarters. So multiple questions to dovetail off of Jiwon on this is, one is, could you help us understand the potential mix between LCD and OLED at the system integrator? Two, could you help us understand the unit mix between the 750 system and then the modified 1300 system? Three –

John R. Ambroseo

The mix between LCD and OLED doesn’t take place at the integrator. That’s an end customer comment or an end customer consideration. We know where some of the equipment is bound for based on the configurations that we are going to be delivering. As far as the balance of it, there is not a fine enough line between the 750s with respect to LCD versus OLED that we can give you a mix, because the LTPS backplanes where the excimer laser technology is applied is more or less indifferent to the front plane.

Patrick Newton – Stifel Nicolaus

But the 1300s are going to OLED? Is that correct?

John R. Ambroseo

Did we lose you, Pactrick?

Patrick Newton – Stifel Nicolaus

John, I am still here. Do the 1300s, are they going to OLED? Can you hear me, John?

John R. Ambroseo

I can hear you now. Did you hear my answer?

Patrick Newton – Stifel Nicolaus

I heard your answer on the 750s. I was asking is the 1300 systems, are those bound for OLED?

John R. Ambroseo

They are likely bound for OLED.

Patrick Newton – Stifel Nicolaus

Okay. And then if we look at the service event, you brought it as being a $750,000 event per the $20 million system. Is that fair to say that there is three LDUs per advanced system or are those service events being somewhat discounted relative to prior generations?

John R. Ambroseo

As I mentioned, the 750 – the $750,000 number was based on the assumption of today’s approach. It is a safe – it’s a safe bet that there are more lasers in this new system than there are in the current system.

Patrick Newton – Stifel Nicolaus

Okay. And then did you receive any flat panel display orders in the December quarter?

John R. Ambroseo

That was – oh, the December quarter, I believe we did but it was small numbers.

Patrick Newton – Stifel Nicolaus

Okay. Can you quantify that? I mean we are talking like sub-10 million?

John R. Ambroseo

We are looking the number up now.

Patrick Newton – Stifel Nicolaus

Okay. I’ll move to the next one while you are looking that up. One is, Leen, I wanted to make sure I heard you correctly that LDU service revenue was 77% of the $60 million in service revenue in the quarter. Was that correct?

Helene Simonet

No. What I said was that 70% of the year-over-year growth came from the [Indiscernible].

Patrick Newton – Stifel Nicolaus

Okay. And then I guess also on the service related revenue and back into a sequential decline going from about $65 million to $60 million, I am curious is that just timing related to LDUs, because one would think that we should be marching up as more and more LDUs come online, or would that be more related to service revenue from the remainder of your microelectronics business?

John R. Ambroseo

Patrick, if you look at the last conference call results, we had talked about the fact that there was a significant bump in service revenues in the September quarter as a result of all these new cellphones that were being released that used LTPS displays. We didn’t expect that number to be repeated because the products had already been prep-ed and shipped. So the downturn I think is more of a reflection – the quarter-to-quarter downturn is more a reflection of the overshoot in September than any change in the underlying market.

Patrick Newton – Stifel Nicolaus

Okay, that’s great. And then I guess on the glass cutting side, you discussed receiving your first production orders in the quarter. Could you help us understand when we should be seeing that impact in the P&L? And then John, can you kind of update us on how you view the strengthened glass cutting market as far as an opportunity for Coherent or the number of units that you think that could represent on an annual basis?

John R. Ambroseo

Sure. So as far as when we are going to start shipping units, I suspect that we will have some shipments in the current quarter with the balance going out over subsequent quarters. Typically the integrators don’t ship all the products to the end customer or end customers in one shot. They go in and get qualified. So this will be over a period of I’m guessing somewhere between two and three quarters.

As far as the opportunity, I don’t think much has changed from our original projection. If you recall a few conference calls back, I had sized the market at a 1000 to 2000 systems depending on the power level of the lasers. Nothing has really changed because that calculation was based on the number of square meters per month of glass that would be processed. Now it is possible that you could look at the investments that Apple is making in thin Sapphire and say well could that be additive and the answer is probably not because that was part of the total calculation in glass area. So whether it’s Sapphire or strengthened glass, it doesn’t change the numbers very much.

So I think that 1000 to 2000 guesstimate is still right and it’s early innings in this market.

Patrick Newton – Stifel Nicolaus

Great. And did you happen to find that flat panel display order?

John R. Ambroseo

Systems were less than $10 million in the December quarter.

Patrick Newton – Stifel Nicolaus

Alright. Great. Thank you. Good luck.

John R. Ambroseo

Sure.

Operator

Your next question is from the line of Jim Ricchiuti, Needham.

James Ricchiuti – Needham & Company

Hi, good afternoon. John, just given the orders in flat panel, and Leen, maybe you could answer this, how should we think of the mix of business as we roll out these orders over the next several quarters? Is there going to be a mix shift more towards microelectronics with a heavy display focus?

John R. Ambroseo

So if you go back to the comments that I made and I assume you are talking about revenue, Jim. Some of these the 750s that were just ordered will ship in the latter part of fiscal ‘14. So there is not going to be an impact from that order this quarter, next quarter and even in the fourth quarter. Those are filling slots that we were anticipating filling anyway. I think what you see the potential needle mover is when we start shipping these more advanced systems at $20 million a copy, because if you think about the numbers and you may recall from previous discussions, the 750s are anywhere from, say, $3.5 million to $4 million each depending on the exact configuration. So that’s a pretty big step-up in ASPs from the 750 to this new system.

James Ricchiuti – Needham & Company

Got it. And as we look at the ASPs and the size of these orders, can you help us at all in terms of how we should think about the margin profile on these systems, the 1300s? And again I know you could not be specific about it. But is there anything that we should think about in terms of looking out as this large piece of business begins to ship, how should we think about the impact on your overall margins?

John R. Ambroseo

So just to put a fine point on it, these are not 1300s, they are a product derived from the 1300. And I make that distinction because the 1300 configuration is more or less known in terms of its capabilities and its power profile et cetera. This is a much beefier version. Last year when we were rolling out the 1300s, clearly we suffered some because our estimates on what those 1300s were going to cost the manufacturer were higher than we had projected when we first took the orders. We have learned from that mistake and I think having built these 1300s already we have a much clearer idea of what the new cost profile is going to look like. And as a consequence I think it’s fair to assume that the 1500s will be at higher margins than the 1300s.

James Ricchiuti – Needham & Company

Okay, thanks, that’s helpful and John, just on the materials processing, the demand environment in China – are there any particular areas where you are more cautious outside of packaging on the microelectronics side? But just within the materials processing, where are you seeing some softness in China, is it across the board?

John R. Ambroseo

I don’t want to cap these versions on it, on any of our customers, but there is publicly available information on some of the larger integrators in China and when you go and look at it, it clearly shows a rollover in growth. Some of that obviously could be competitive pressure from these smaller players that are trying to eat into the market. But we clearly see that overall demand growth and a shift from export growth to domestic consumption is taking place and it’s actually being favored by the government. That is going to have an influence as far as we can tell on what the materials processing market looks like. And again, as I, I think, responded to an earlier question, API was more a regional issue than a China issue. So we saw a softness in API in the countries where PCB drilling or PCB being manufacturing, I should say, is prevalent. It was not specifically a China issue.

James Ricchiuti – Needham & Company

And on the last point about API, there has been some consolidation in Japan. Is there any sense that some of that is impacting the overall demand?

John R. Ambroseo

So it’s certainly possible but again when you see it happening across regions and then you start to dig in with customers and the end user as well as the integrator, the signals that we are getting is that this is an over-build that took place several quarters back and they have to take the time to absorb that capacity before they go into another expansion mode. And the expansion mode is probably consistent with a string of new products that are anticipated for sort of the June timeframe. That’s as far as we can piece together today.

James Ricchiuti – Needham & Company

Okay. Thank you.

John R. Ambroseo

Sure.

Operator

And your next question will be from the line of Mark Douglass, Longbow Research.

Mark Douglass – Longbow Research

Hi john and Leen.

John R. Ambroseo

Mark, how are you?

Helene Simonet

Hi Mark.

Mark Douglass – Longbow Research

Fine. [Indiscernible]. So Leen, can you discuss SG&A, was the market stepped up in the quarter and even in the guide, I guess assumed SG&A, you mentioned 20% OpEx, that seems to be above kind of the trend that you had it coming out of ‘13, a big step up in the first quarter ’14. Can you discuss little more as to where these expenses are going and are they going to roll off by the end of ‘14? What’s your expectations there?

Helene Simonet

Well, our expenses for the first quarter were normally higher than fourth quarter. I think the reason that the ratio is still high is because the revenue came down. Remember in the fourth quarter, we had revenue of $213 million. So I believe on an apples-to-apples basis the expenses grew $500,000 when you compare Q4 to Q1.

With respect to Q2, I guided a little less because the revenue was higher. So there is not that much movement in the absolute spending number from quarter to quarter. If you discount of course, if you eliminate the impact of the deferred compensation plan.

Mark Douglass – Longbow Research

Right. But even with the – I guess I got a – it was like a $3 million difference from 4Q to 1Q in SG&A.

Helene Simonet

Well, there was – there is definitely – on a pro forma basis it’s not marked. You need to take out the $2.1 million expenses that are associated with the deferred compensation plan, whereas we had a credit in the fourth quarter. So the net change from Q4 to Q1 due to the deferred compensation plan and this relates to the investments return, is more than $2.5 million, it’s about $2.5 million, which leads then to $500,000 which is the absolute impact of the increase. And there is a variety of many, many different components that play to it. Just one example, in Q1 we always have higher audit fees because that’s our fiscal year end. And so a lot of the fees happen in the first quarter. That’s just an example of why Q1 is higher than Q4. We have the same headcount, no increase in headcount in Q1 versus the fourth quarter.

Mark Douglass – Longbow Research

Okay. Thank you. John, looking at the fiber laser, can you say again, so you had multiple one kilowatt orders but your multiple kilowatt laser is still undergoing testing, is that correct?

John R. Ambroseo

That’s correct.

Mark Douglass – Longbow Research

How much longer – is it going to undergo testing before you start shipping for sort of revenues?

John R. Ambroseo

I don’t have a good release date for you at this moment. There is some more work that we want to do before we finalize the design. And then once the design is finalized, it’s typically a quarter or two to roll it out after that. So we do have some testing that we want to complete. As soon as that’s done, we will give you a date. And I don’t have better information than that at this point.

Mark Douglass – Longbow Research

And back to the hot topic of flat panel, so very large orders of one integrator, are there integrators involved here, are there potential orders from other integrators that you can get coming on the plank?

John R. Ambroseo

That is correct. I wasn’t sure what the question was. Yes, there are other integrators and we have sold to them in the past, and we anticipate selling to them in the future. Exactly when they are going to place orders, I mean we don’t guide to that level of specificity.

Mark Douglass – Longbow Research

Well, right, I was just wondering that there are other integrators that you can be selling to that are in the market.

John R. Ambroseo

Absolutely. And there are two primary integrators that I think are well known and then there is a smaller integrator that is linked to a specific end manufacturer. And we have been selling to all of them. In this particular instance, one of the integrators secured some substantial business and that resulted in a substantial order from us, or for us.

Mark Douglass – Longbow Research

Okay, great. Yes, I will just stop there. Thanks.

John R. Ambroseo

Okay.

Operator

Your next question is from the line of Larry Solow, CJS Securities

Lawrence Solow – CJS Securities

Hi, good afternoon, just a couple of follow ups. John I thought the advanced packaging market was showing some recovery in the last couple of quarters, and I know that a few quarters back that the issues were sort of the overbuild and capacity, is it also potentially a function that these guys are under estimated what the overbuild was and so they started ordering and they stopped or any color there will be great.

John R. Ambroseo

Well, you know Larry, I will answer that question in two different ways, I suspect that some of the integrators – well, not integrators. I suspect some of the end customers were anticipating securing orders from various device manufacturers and there may have been double counting, different integrators both assuming they were going to win business and then only one of them did.

Lawrence Solow – CJS Securities

Okay.

John R. Ambroseo

Well, not integrators but packaging houses. I suspect that lead to some of it. As far as Coherent goes, quite frankly we pride ourselves on having pretty good market intelligence and we didn’t see this one coming in and that is, it is highly disappointing. You know, it created a hole in the first quarter and it’s creating a hole in the second quarter and no one is happy about that, but we think we have our arms around the situation and understand that we should have had that understanding a little bit sooner.

Lawrence Solow – CJS Securities

Right. And that’s seems like [sort of] the bigger hole in Q2, just -- I’m just trying to size up that compared to I guess the other negative or change in tone from the last couple of quarters on the materials processing in China, so if China is down year-over-year in materials processing does that -- how does that -- I mean I assume that jeopardizes sort of your long term 10% to 15% growth in this fiscal year, is that fair to say, in that segment?

John R. Ambroseo

I think it’s too early to jump to that conclusion because remember we also adding new products that’s sold all around the world not just in China. My comments, my cautionary tale is around China and I know that there are lots of opinions from the highly positive to the highly negative that are circulating about what’s going to happen in China.

Lawrence Solow – CJS Securities

Right.

John R. Ambroseo

I’m sharing our view based on our most current look under the covers so to speak.

Lawrence Solow – CJS Securities

Okay. The cataract order, is that your first sort of significant order in this, I mean, can you just sort of give us an update on where you stand there and in trials with other customers?

John R. Ambroseo

So it’s certainly the largest order we have received thus far, and I guess by definition and it is the most significant order that we have received, but others have come in the past and we think it highlights the fact that this is an early stage growing market and one that we anticipate participating in.

Lawrence Solow – CJS Securities

Okay. Any update on just coming out of the Consumer Electronics Conference, and I think they were sort of some decent products around the OLED and televisions, I imagine most of these are still are mostly handsets and tablets, but any update on, thoughts on where we stand there, or is it pretty much status quo.

John R. Ambroseo

You know, from CES I think there was a lot of emphasis on wearable devices and not just smart phone technology but lots of different wearable devices, monitors, the different sorts et cetera. There was probably more chatter around 4K because to price performance ratio is improving there. For OLED the price performance is still unfavorable, and as I think I may have mentioned previously our outlook is that this is still a market that is a few years out to get the price clarity with today’s technologies but it does appear that the manufacturers remain fully committed to it and that’s pretty interesting.

Lawrence Solow – CJS Securities

Okay, lastly just on gross margins which have been ticking up for the last few quarters, it sounds like at least over the next quarter they are going to continue go up, do you expect this trend to continue assuming you get some topline growth?

John R. Ambroseo

Yes. I’m not sure, I know that we had some technical difficulties when I first started my prepared remarks and I’m not sure if the audience heard my opening statements, but we do look at this sort of pick up in commercial activity as being a positive one because it should allow us to continue to expand gross margins and it should result in sustained strong cash flow, where we believe those things are forced to happen and now we have to go and execute.

Lawrence Solow – CJS Securities

Okay and just last on scientific it sounds like a little more positive after a couple of negative years, fair to say at least we have reached a period of some stability here?

John R. Ambroseo

I think that’s a fair way to describe it, certainly the relief provided by the Ryan-Murray Bill in the US, it has restored some funding to these agencies, there has been some other stuff that’s happened to help the agencies funding levels. It probably doesn’t get worse and it could be up as I said in my comments on the scientific market maybe 3% to 5% higher spending in the US how that flows into various markets or into individual manufacturers remains to be seen but I think the trend, the trend statement is the positive one.

Lawrence Solow – CJS Securities

Okay. Great. Thank you very much.

John R. Ambroseo

Sure. Thanks.

Operator

We have a follow up question from the line of Patrick Newton, Stifel.

Patrick Newton – Stifel Nicolaus

Yes, John just a follow up on that gross margin question maybe asked slightly differently, even assuming a flat revenue type of basis given the improving services as a percentage of revenue and [Indiscernible] consumer side we could anticipate this trend to go up in the right, so it’s not revenue dependent, I guess is my question.

John R. Ambroseo

Well, it’s always revenue and mix dependent, always. If you are going to ask a question around a particular set of criteria, you know, we can answer it. If you are asking if the mix shifts on flat panel to these more advanced systems from what we have today and everything else remains the same is the gross margin better, and the answer is probably. But there is a lot of underlying business, so I just -- I’m not trying to dodge the question I’m just telling you there is lot of moving pieces here, revenue and mix are always important as it pertains to gross margins, but our view is that given the trajectory we are on in terms of bookings and backlog, demand profiles and the revenue, the product mix that we see today yes we are comfortable that gross margins continue to expand.

Patrick Newton – Stifel Nicolaus

Good, and then I guess on the flat panel display side, given the current orders you have in hand, can you help us understand how far --

John R. Ambroseo

If you are about to ask when the next one is coming?

Patrick Newton – Stifel Nicolaus

No wasn’t going there at all. The question was given that order in hand how far is your capacity utilization pushed into fiscal ’15 or how far are you booked at this point?

John R. Ambroseo

Well, if we assume that this entire order ships or I should say the balance of the order ships in ’15 we will still have some capacity available to us. Again it’s going to be dependent on mix because the bigger the system, you know, the more it takes to manufacture, testing tends to be a little bit longer on the higher performance systems than on a lower performance systems. If it comes down to a point where we need to add capacity it’s relatively straightforward to add in this area because it’s literally just floor space.

Patrick Newton – Stifel Nicolaus

And as sit here today, do you anticipate that you are going to have to add capacity in year 2015?

John R. Ambroseo

Again it will be mix dependent we are not full for ’15 in terms of commitments and as that happens will be able to make the determination. I’m going to stress again if we have to add floor base it is not a big deal.

Patrick Newton – Stifel Nicolaus

All right. Thank you, John.

John R. Ambroseo

Sure.

Operator

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

John R. Ambroseo

Thank you, Derrick. I would like to thank everyone for participating. Clearly we’ve got some pretty good news here on the order front and we are looking forward to continue growth in fiscal ’14 and into fiscal ’15, and we will speak to you again in a few months.

Operator

Ladies and gentlemen that concludes today's conference. We thank you for your participation, you may now disconnect, have a great day.

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