Rofin-Sinar Technologies' (RSTI) CEO Günther Braun on F2Q 2014 Results - Earnings Call Transcript

Rofin-Sinar Technologies, Inc (NASDAQ:RSTI)

Q2 2014 Earnings Conference Call

May 8, 2014 11:00 ET

Executives

Günther Braun - CEO

Ingrid Mittelstädt - CFO

Analysts

Mark Douglas - Longbow Research

Mark Miller - Noble Financial Capital Markets

Rob Richardson - Stifel

Jiwon Lee - Sidoti & Company

John Lopez - Vertical Group

Operator

Welcome to Rofin-Sinar Second Quarter of Fiscal Year 2014 Financial Results Conference Call. Today’s call is hosted by Mr. Günther Braun, Chief Executive Officer; and Ms. Ingrid Mittelstädt, Chief Financial Officer.

Following management’s comments, you will have the opportunity to ask questions. Please go ahead.

Günther Braun

Thank you. Good morning or good afternoon to everyone. I’m here in Plymouth in Michigan together with Ingrid, Ingrid Mittelstädt, our CFO. I hope you all got the press release containing our second quarter 2014 results. We will give you some comments about our business and performance and then we will open it up for questions.

Now, before we start, I would like to make the usual statement about the information you are getting in this conference call, Safe Harbor statement. Our discussions may include predictions, estimates, or other information that may be considered forward-looking. While these forward-looking statements represent our best current judgments on what the future holds, they are subject to risks and uncertainties that could cause actual results to differ materially. Throughout our discussion, we will attempt to discuss important factors relating to our business that may affect our predictions. You may also want to review our last 10-Q and 10-K filings for a more complete disclosure of financial risks. The company disclaims any obligation to update any forward-looking statements.

Let’s start, as we have seen from our press release, we are pleased to deliver a better than projected gross margin and results at a high end of our guidance. Sales in our macro business were affected by softer business environment in Asia especially in China in the machine tool industry whereas Europe for marking and micro applications have improved across the industries with the exception of solar applications. Business in North America has not strengthened yet mainly suffering from a slow medical device and automotive industry.

We reached sales in the second quarter of $128.6 million which is $2.5 million or 2% lower than in the comparable quarter in 2013 but approximately 6% higher compared to our first quarter this fiscal year. Sales in our micro and marketing business mainly reflect almost most solar business, we a slow semiconductor business a very good consumer electronics business but also jeweler and watch business was at adequate level. Medical device business was acceptable because of North America and slower than normal and last but not least a decent flexible packaging business.

Net sales increased by 12% or $6.8 million to 65.9 billion which is 51% of overall sales. Sales in our macro business decreased 60% compared to the second quarter last year and reached $46.8 million. Macro business contributed 36% to quarterly sales again main reason was machine tool industry was less units of high-power laser meaning CO# and fiber laser but also less units of lower power CO2 laser.

Macro automotive business was below last year second quarter due to less volume business at sub-suppliers. Our component business decreased 4% to 16 million representing 13% of quarterly sales and our strongest contributors there were the laser diode business and products and from (indiscernible).

Now coming to the breakdown of our quarterly laser sales by industry, automotive this quarter was 12% versus 10% last year but it's more due to micro applications as we mentioned last time (indiscernible) drilling, machine tool was 39% compared to 42% mentioned already high power business mainly Asia. Semiconductor electronics 18% versus 23% as said already almost no solar business lower semiconductor business, but a good consumer electronic business.

Others 31% versus 25% last fiscal year and I would say due to this biggest contribution from flexible packaging and the jewelry and watch industry. During the second quarter we shipped a total of 1140 lasers versus last year 1260 lasers that’s approximately 10% or 120 lasers less compared to last year. We had 462 lasers versus 525 for macro applications low and high power below last year and we had 678 versus 735 units for marking and micro applications. In the comparable period we had multiple shipments last year to the solar industry and this makes a big difference.

Now let me hand it over to Ingrid with the further comments on the financials.

Ingrid Mittelstädt

Thanks Günther. Good morning and good afternoon to everyone. As already mentioned in our press release, we could achieve sales at the higher end of our guidance and a gross margin of 36% that is better than estimated. This improvement in the gross margin is mainly a result of a favorable product mix, the reduction of service manufacturing cost of high power fiber laser and a strong service and spare parts in the reporting quarter representing 30% of our total revenues. SG&A including intangibles amortization for the quarter represents a 22.1% of net sales in the second quarter of fiscal year 2014 compared to 20.2% in the corresponding period last fiscal year.

In absolute figures SG&A increased by 1.8 million to 27.7 million for the quarter mainly due to higher labor cost, higher commissions as well as impact of exchange rates fluctuation. R&D expenses remained stable at 11.6 million representing 9% of total net sales in the second quarter of fiscal year 2014 and fiscal year 2013 respectively.

Quarter gross spending was 11.9 million in the reporting quarter compared to 12 million in the second quarter of 2013. The main R&D activities are still related to the expansion of our fiber lasers and ultrashort pulse laser product portfolio and the manufacturing cost reduction program for high power fiber lasers.

Now coming to other income expense, the quarterly net other income amounted to 0.2 million compared to 1.5 million in the second quarter of fiscal year ’13, the decrease in net other income mainly relates to the high net unrealized exchange losses generating during the reporting quarter partially offset by a 1 million forgiveness of the loan with the State of Connecticut related to investments in creation of new jobs.

Our effective tax rate on income before income taxes and minority interest for the second quarter was 32% compared to 28.1% for the same period last fiscal year. This higher effective tax rate is a result of the generation of taxable income mainly in countries with higher tax rate and because of the R&D tax credit legislation not being reenacted in the U.S.

Even with higher SG&A expenses, higher unrealized exchange losses and the negative impact of an exchange rate fluctuations we were able to generate net income of 4.5 million and earnings per share of $0.16 based on 28.3 million weighted average shares outstanding that also exceeds our estimation.

Now coming to the balance sheet, the weakening of the U.S. dollar mainly against the euro comparing the exchange rates for March 2014 versus September 2013 resulted in a change of approximately 1.7% but again other currencies in Asia like the Japanese Yen had a fluctuation of approximately 6% in the same period and therefore the impact on the balance sheet positions could be different depending on the geographical distribution of the corresponding balances.

Trade accounts receivables decreased by 14.3 million compared to last fiscal year-end and amounted to 96.4 million, the impact of exchange rate fluctuations was to increase account receivable by 0.7 million and the days sales outstanding improved to 70 days compared to 72 days last fiscal year. Net inventory increased by approximately 6.9 million to 205.4 million during the first six months of fiscal year ’14, inventory increased by 2.1 million due to the impact of exchange rate fluctuations. Additionally we had higher stock of finished goods and work in process at the end of the quarter due to several system and laser deliveries planned for the beginning April.

Based on the cost of goods sold figures, inventory turned approximately 1.6 times. Total debt increased by 4 million and amounted to 23.6 million compared to 18.6 million as of September 30, 2013 mainly due to additional short term debt in the U.S, partially offset by the forgiveness of 1 million on a long term loan with the State of Connecticut.

Now I would like to give you some information related to the cash flow. Cash in short term investments increased by 18.6 million to 155.6 million during the first six months or fiscal year ’14 and the impact of exchange rates fluctuations was to increase cash by 1.4 million. During the six months the company generated 18.4 million from it's operating activities, 0.6 million were provided by the company in investing activities mainly due to the net sales of shorter investments of 4.7 million partially offset by capital expenditures of 4.2 million. 1.2 million were provided by the company in financing activities mainly due to the increase in debt and the issuance of common stock partially offset by purchase of approximately 242,000 shares and our actual stock buyback program for an amount of 5.6 million.

Now coming to our earning guidance as a result of the backlog situation our current market judgment and the global economic environment, we want to give you the following guidance of the financial performance of the third quarter of fiscal year 2014. The company currently forecast revenue for the third quarter in the range of $132 million to $137 million, we estimate gross profit for the second quarter in the range of 35% to 36% of net sales. Period expenses including intangible amortization in the range of 29% to 30% of net sales income before income taxes and minority interest between 5% and 7% of net sales and the effective tax rate, but depends mainly on the overall mix of results in the different countries and the non-deductible expenses for tax purposes should be in the range of 32% to 33%. Intangible amortization and fixed assets depreciation are estimated between 3% and 3.5% of net sales. This guidance is only an estimate and again subject to all the risk of our Safe Harbor statement.

Thanks for listening and let me hand it back to Günther Braun.

Günther Braun

Thank you Ingrid. Let me update you on some other developments. First, the backlog, our backlog end of March was 136.3 million which is solid base for Q3, 2014. You have heard of our next quarter forecast is in $173 million and $177 million in sales. The current backlog includes $55.5 million for macro, 67.5 million for micro and marking and 13.3 million for our component business but on the component business this should not be an indication for the quarterly sales because you’ve a lot of book and bill activities within one quarter. Quarterly order entry was 127.5 million, was below our expectation but given the slow Chinese orders for machine tool and consumer electronics at the end -- this was acceptable and you all know we also had the Chinese new year and as we said last time we’re looking more towards the end of the quarter to see if we get some positive signs of China.

So volume projects in consumer electronics in Asia for higher single order project in semiconductor have slipped into Q3. Order entry in North America decreased 7%, in Europe 5%, in Asia decreased 12% compared to last year second quarter.

North American order entry was mainly influenced by solid orders in marking from the medical device means marking an automotive industries in micro and macro was mainly machine tool and medical.

Now let me give you a summary on our operations in the second quarter and include also the comments about our industry. So let’s start somehow in general with the regions. So the economic situation in Europe I think has improved and sustainable. Our U.S. business for all things but also in general I think it's more challenging, our Asian business stabilized and lower volumes, when I talk about the second quarter with further slowdown in China, in the second quarter, Korea, Japan and Singapore compensated the weaker Chinese business. The quarterly order entry in China was only 13% of our total order entry and again mainly missing EMS and machine tool orders while Japan contributed nicely in order entry mainly due to orders from automotive sub-suppliers and I think what’s known in the industry that there is certain activity.

China, it is our main contributor for our CO2 and higher power fiber laser business as well as of course our lower power CO2 laser business. The high power CO2 laser interest has improved and kept at that level. The amount for high power fiber lasers is increasing. The low power CO2 lasers from our Howell operations sense still high acceptance mainly in Asia and in Europe and in Asia, specifically one country of course China and in Europe we have three countries where we have got activities.

Now coming to a high power fiber laser, we have new OEMs in China starting to place orders towards the end of the quarter but again overall Q2 was weaker to the Chinese New Year. Not all orders basically the 16 order entry because of the delivery stage and the delivery schedules. European and U.S. orders for high-power fiber laser are more single orders and more volume applications and what we did is we started to promote the sales of high power fiber laser into specific power ranges for the margin profile is better for us.

Now coming to consumer electronics business, it's mainly triggered by the company demands for the new products of course. What we did we delivered multiple units to our European OEM with final destination Asia for sapphire cutting, a local OEM in Taiwan is looking for more units of mid-power fiber laser for spot welding. We had a good quarter in sales to the consumer electronic industry I would call it that the order entry is a bit soft.

Of course capping off brittle materials will be the new opportunity in applications through the consumer electronic industry and latter a little bit more. We had accepted the business with automotive and sub-supplier industry for high power lasers. CO2 laser is in demand but of majority is for fiber lasers. The price competition makes it difficult and challenging of course to renew orders without sacrificing margins. And the micro and marking business side was the Tier 1 or in general sub-suppliers, we have always proportionally contributed this quarter mainly due to the injection of the drilling business with short pulse lasers but also (indiscernible) contributed to this quarter.

Now talking about solar, solar business is nothing new, still larger orders depends mainly one bigger project. The story is again in China. We are in discussions in for new tax [ph] slips quarter-to-quarter and little invoiced in Q2 2014.

On semiconductor business the level in Q2 was pretty low, there was no revenue from special systems like our IGBT annealing systems. We got orders from Asian OEMs for IC marking, I believe somehow it looks like business is more normalized and expectations or the outlook what I see and what I got more positive. So let’s see if this turns into orders and sales the next quarters.

Negative device business, European demand stable, Asia we believe still there is growth opportunity, stable for stent cutters. Attractive, of course, mainly for femtosecond lasers or ultrashort pulse lasers. Also a good quarter for marking, yes medical device business still challenging but improving productivity and we believe we had a great MD&M Show in Anaheim last quarter.

And last but not least advanced application M&D business. I would say it looks promising because it's in the programs, we have first orders received this quarter and let’s see if the political environment would support our efforts to gain more traction in the U.S. in the M&D business.

There maybe a short summary of the quarter here sequentially machine tool business in macro was stable just macro alone it was 24 million whereas micro and marking increased by 3 million compared to the first quarter. This fiscal year low power CO2 sales are excellent on the solar side. A lot of talks, quotation, negotiations but no sizeable order. Semiconductor margin business were at the low end but we see indicators will improve. Also on IGBT annealing projects, hopefully turning into turn into all this quarter and the support of course more in the first quarter 2015 because of the delivery times, lead times there. Consumer electronic sales they are on the higher side due to sapphire cutting shipments but mostly it's backlog. So we need to get orders and we have some projects in the pipeline. Automotive and first-tier sales benefitted from injection markers, drilling projects. I guess to our quarterly service and parts business, I would say it was excellent it's $38.5 million and the component sales maintained this 15.9 million, a solid level supported by strong optics (indiscernible) components but also diode sales improved as well.

Now let me get to our fiber laser activities, I’m sure you’re waiting on this one. So our realized sales with fiber laser related products in the second quarter 24.2 million in total 299 units or the entry was 314 units and 21.5 million, so we have a backlog end of March of $31.6 million to a 189 units and approximately 48%, the dollar is for high power fiber laser in this backlog.

So some further comments we have successfully introduction in production the 200 watt pumping modules with 1.5 kilowatt fiber laser modules and have realized cost savings in our high power fiber laser products but last quarter mostly for all products yet we still have and had the older pump model version 135 watts on stock so you need to or we want to use them and so we will see the full effect on the 200 watts module implementation of course the next quarters. We’re working on the next generation of the 300 watt and 2 kilowatts fiber laser modules. As you all know and as usual we have to experience certain specification I will just call it deviations which we need to fix them. We’re working on. We’re still working towards end of summer to have this product development completed.

Now to our own chip activities, we have T-bars and pumping modules under lifetime tests in several locations. When they pass lifetime test and hopefully this quarter they will be introduced in our products. So, let’s look at it [ph] as usual.

And finally of course I would like to mention the Laser Show in Shanghai by the way which gave a good overview of the Chinese Laser Industry and by the way the quality of the crews [ph] and how they execute the products really well is comparable to western standards and we have seen many fiber lasers offerings in the low power range with very, very effective pricing and some high power fiber laser offerings. So it will be interesting to see how this market plays out in terms of fiber laser technology.

Okay, so now let give you a short summary of the outlook. So Chinese economy still somehow not absolutely predictable but OEM customer placed volume orders for higher-power fiber lasers and lower power CO2 lasers. So high power CO2 laser business has improved currently. We’re at a number of roughly 100 units a quarter which has increased compared to last quarter, our low power CO2 business is at an excellent business level and as per introduction of the 200 watt diode modules we currently targeting more OEMs for high power fiber laser and let’s see what we get over the next quarters.

European business is solid but North American business is somehow still sort of shaky. We recently closed the acquisition of FiLaser's assets and are already seeing promising interest in this new technology for brittle material application. I think you remember, we did press release somehow towards end of February and beginning March cutting sapphire, cutting (indiscernible) and so on. We expect this to contribute to our sales to both the second half of calendar year 2014 needs more midterm opportunity for micro, marking should benefit from the introduction launch of the new Powerline Pico laser to the market. EMS, improved company business, I think it's getting more very challenging because of Chinese competitor situation.

In addition I think what was nice, we have experienced increased demand for our high power laser product out of Asia towards the end of the quarter, end of March this year, which support third quarter sales. Q3 ’14 guidance is based of course on our backlog lead time of orders but we need strong bookings in Q3 to deliver strong Q4 in sales. Of course during the remainder of fiscal year 2014 we will capitalize on our (indiscernible) cost structure of our fiber laser portfolio to the benefit of our profitability and new product introduction in the short pulse technology space should help us to grow the business.

These are my comments and as usual and as always thanks to the Rofin team for their contribution. Thanks for listening and now we’re prepared to answer your questions.

Question-and-Answer Session

Operator

(Operator Instructions)

Our first question comes from Mark Douglas with Longbow Research. Please state your question.

Mark Douglas - Longbow Research

So Günther these benefits of the diode lasers, you said the lifetime testing is going well, you will introduce them into production of your high power fiber lasers in fiscal 3Q, is that correct on a small ramp?

Günther Braun

It's still lifetime test and we have good number of hours and it's so far okay and let’s wait. Let have this result and let’s put the time tack behind. But it looks okay and good.

Mark Douglas - Longbow Research

But really the benefits once you put them into production, we’re talking fiscal ’15, correct?

Günther Braun

I will say real, real benefit it should be fiscal ’15.

Mark Douglas - Longbow Research

Okay. In the meantime you realize modest benefit from the 200 watt diodes with the 1.5 kilowatt modules, you will see more benefit in fiscal 3Q, can you frame that for us, how much of the gross margin improvement is coming from volume versus just improved costs on the high power fiber?

Günther Braun

Most of it is improving cost, it's less -- we don't talk about 100s of high fiber power lasers, therefore it's not attributed to volumes at the moment. It's really now one laser reduced manufacturing cost and I think you’ve seen that in our gross profit margin and as I said we still have of course the old modules and stock which we need to build and consume until we have 100%, 200 watt modules in production but I hope this should end somehow this quarter.

Mark Douglas - Longbow Research

And then my final question, a lot of your high power fiber laser sales are coming from China, what needs to happen for you to get more traction in Europe with some of the bigger European OEMs?

Günther Braun

Match pricing. Match market price, then you’ve immediately more traction, it depends of course on the emphasis on the competition.

Mark Douglas - Longbow Research

That’s interesting because I would think China would be more price sensitive than Europe but you’re doing better in China with high power than Europe?

Günther Braun

I would call it more a way that China is looking for good corporation and that’s also one of the reason and the performance of the lasers. So overall I would say China has disciplines of price structure so far I would call it. For us a better price structure, by the way.

Operator

Our next question comes from Mark Miller with Noble Financial. Please state your question.

Mark Miller - Noble Financial Capital Markets

Pursuing fiber a little further, last year you reported there was some pricing pressures, I think you said around 10%. Is that continuing this year?

Günther Braun

Depending project by project, so that’s overall I would call it more disciplined if I can phrase it in that way but of course it depends on customers and how desirable is one customers then, of course. So we see fluctuations in pricing. I hope that tough days are behind in big price reductions. Let's see. We will learn.

Mark Miller - Noble Financial Capital Markets

You mentioned semi area was kind of slow. Are you feeling any affect that there is a number of the major semiconductor firms reduce their outlook because of uncertainty over next generation specifically 3D chips, is that also impacting you in the semi area?

Günther Braun

Our biggest business is IC marking and I was in Asia, two or three weeks ago I got from our customer base better thinking and improved sentiment of IC, so this caused it -- we believe somehow the next two quarters should be somehow reasonable good on our side and also we have some projects going on in IGBT annealing, hopefully we can turn them into orders and there we do systems type – one ticket is 2 million plus so therefore I would not blame on the project side at the moment this industry. Activity is good.

Mark Miller - Noble Financial Capital Markets

You did break out fiber laser orders but did I miss the breakout for macro and marking and also component orders?

Günther Braun

Maybe I did not do that.

Ingrid Mittelstädt

Order entry Mark?

Mark Miller - Noble Financial Capital Markets

Yes, please.

Ingrid Mittelstädt

Order entry for macro was 49.3 million, working in micro 62 million, in components 16 million.

Operator

Our next question comes from Patrick Newton with Stifel. Please state your question.

Rob Richardson - Stifel

This is Rob Richardson on for Patrick this morning. Ingrid, a question on gross margins obviously solid in quarter and you had mentioned some of the factors driving that mix reduction of high power fiber manufacturing cost, strong service and spare part revenue. Just want to know obviously it's going to reflect a little bit in the guidance for next quarter but how sustainable this level is and how should we think about that on a continuing basis and kind of what the overall I guess trend you see for gross margin being?

Ingrid Mittelstädt

It always depends on the product mix, it is important factor for us but as we already mentioned with the introduction of the new pumping modules and the new fiber laser modules of course we should see a positive impact in the high power fiber lasers. So that is the reason, if you look at the guidance this quarter compared to last growth’s gross profits you also see there already is an improvement.

Rob Richardson - Stifel

Okay and so that’s just kind of vary quarter-by-quarter? I mean is this kind of like a trend that you would anticipate trying to--

Ingrid Mittelstädt

Yes that is what we already said several quarters in the prior quarters that this is our expectation.

Günther Braun

The target is of course to get back to the floor (indiscernible) over the next quarters for sure and one of the parts where parts is of course improving the cost structure of fiber laser but they are in addition of course it depends on our other products what is the product mix which laser or systems are sold to the industry or to which project. I think we’re on the right way, I have seen the gross profit quarter is 36% so let’s see what we can do over the next quarters to improve that.

Rob Richardson - Stifel

If we look at kind of the industry growth rate in 2014 overall do you have any expectations or what are your expectations for fiber and CO2 growth for I guess the industry overall for the year? Has that changed?

Günther Braun

No I think overall for the industry it has not changed in my view. I still believe that fiber laser will grow at a higher rate than the CO2. But there you have to differentiate. The high-power CO2 laser is on the slow-down site, the low power laser is still in the growth area and fiber laser in general, I would say it's still got it's issues but growth is double digit number. We will see if that any more upto 30% range that fiber laser is growing. That’s my opinion.

Rob Richardson - Stifel

So just kind of talking about the FiLaser acquisition, you mentioned that you expected to kind of contribute to some growth in the second half of the year. I am just wondering if you guys can sense -- was that a meaningful impact and is that what kind of impact will that on margins and earnings?

Günther Braun

We’re in the learning curve at the moment. You do have applications for customer or were applications done from customers and it depends on at the end who are the final customers for such projects if you get into a consumer electronic project of course then you will see bigger numbers than if you should go for a semi areas and has been now more and let it use -- I would say not prudent at the moment to give you really a clear direction but so far what we have seen that quality of the applications of the customers is -- we believe that speed is great, the setup is great. And we see from customers that they absolutely love the result. So, let's wait and let us execute and then we will experience if it's bigger volume or not. But we believe it should not be single digit. It should go, at minimum, double digit over within the first timeframe. I would say within six months we should get to a higher numbers here.

Rob Richardson - Stifel

And one last question for me, it's for a couple of quarters into the fiscal year, visibility has been kind of an issue thus far and you’re preventing full year outlook just to want to see update on are you seeing any improvement in your order visibility or revenue visibility and how is that going forward?

Günther Braun

I would say if I judge the overall sentiment of our business it looks better than I would say five or six months ago. Of course you know we have three months visibility so we need to book the orders. Of course also we have a little bit of shift in terms of more systems which have longer lead times and we expected some order entry last quarter already out of I would say two industries which somehow we had slipped. We’re working on that, if you get then -- I would say it looks pretty good this quarter would look pretty good. So, overall sentiment I would say it's better than we had someone to go.

Ingrid Mittelstädt

But it's still difficult to give the guidance for the whole fiscal year because we see really that the orders are placed just in the last minute. So it's a good project situation but it's very different to predict when we will realize the revenue of these projects.

Operator

(Operator Instructions). Our next question comes from Jiwon Lee with Sidoti. Please state your question.

Jiwon Lee - Sidoti & Company

Hopefully just a couple of quick ones, Günther, explain a little bit the competitive dynamics for the sapphire cutting lasers and what lasers are you addressing the market and then how do you see that revenue potential if we stretch that out in the next few quarters?

Günther Braun

Yes, on sapphire cutting, it depends on the sapphire and on the surface. You can use I think different methods. Currently the lasers which are used are based on fiber, fiber lasers and so far I would say the cutting speed takes longer than we believe we can achieve with our new technology. So our new technology is based on ultrashort pulse lasers for that difference. Of course competitive environment clearly it's an attractive application and it's clear that each laser company who has a product offering wants to get this business and it's not just between the western companies, also Chinese companies, laser companies want to get a share in this business. So it's highly competitive but I think everybody learns that it's highly competitive that everybody gets the best performance on the table to gain profits. So, let’s see.

Jiwon Lee - Sidoti & Company

Did I hear you correctly that you’re targeting sort of a long term margin? You know not long term but sort of a GM to approach 40% first of all.

Ingrid Mittelstädt

Yes. I think we already said that this is target for next fiscal year.

Jiwon Lee - Sidoti & Company

And that target level, I mean not to try to get into like sort of a long term revenue guidance but what kind of a revenue level would you need and that level, is that mainly sort of kind of function of your 200 watt pumping module performing and the FE making improvement?

Günther Braun

Well of course this would be part of the cost structure that we implement, what we communicated over the past, what we’re going to do. There is one thing but at the same time then of course we have to get higher volumes to get into that space. But besides that it's not everything about fiber. Also the rest of the product and the price structure must work out and for new products we introduce into our market on the short pulse laser side -- it has to deliver also reasonable margins to deliver such results. The 40% is mid-term, it's up next quarter, it's after next quarter.

Jiwon Lee - Sidoti & Company

I think understand it just a bit and then in terms of the high power CO2 lasers the slowdown is, there is sort of a kind of a longer term I guess trend and so seeing that dynamics are you also seeing pricing pressure on the CO2 side, especially the high power?

Günther Braun

I would not call it pricing pressure but pricing demand I think that’s normal from our customers. They want to get some more advantage if they take some volumes but so far you know the nice thing is we had even slower order entry towards the end of last year, we can say that this has improved. And it looks like at the momentum the numbers are stable which I would is great.

Jiwon Lee - Sidoti & Company

And lastly for me the 300 watt, the 2 kilowatt pumping module is this sort of a first half FY ‘15 sort of a goal or the second half rather?

Günther Braun

That’s to have the 2 kilowatt fiber laser towards the first quarter 2015, means the December quarter this year.

Operator

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

Mark Miller - Noble Financial Capital Markets

With the progress you're making on your diode modules, are you able to say or give a forecast, what percent of internally produced diodes are being used in fiber lasers?

Günther Braun

Not yet because I said it's in lifetime test and we’re working towards that.

Mark Miller - Noble Financial Capital Markets

But that’s part of the 40% the pushup to 40% next year?

Günther Braun

It's part of the mix set, of course.

Mark Miller - Noble Financial Capital Markets

And I’m just wondering since summer, it was kind of slow were you seeing some signs because the company reported last night that their orders were picking in the solar industry this quarter and I’m just wondering if you’re seeing some encouraging signs for solar for this quarter?

Günther Braun

Well we have not really big orders, I have to say. In quoting activity, there discussions but I think if you look to this industry everybody is so hungry to get some order that is also certain price slides and final destination, most of it is of course Asia and China and it's even more sensitive in pricing on how they do it. So I agree, it's -- the activities have increased a lot but the results and the order flow is not what we thought we can expect so far but there is still some negotiations out at the moment.

Operator

Our last question comes from John Lopez with Vertical Group. Please state your question.

John Lopez - Vertical Group

My first question is I’m just wondering if you can refresh my memory but in your fiscal Q1, if my numbers are right your fiber laser revenue dropped to that 17 million and obviously it's subsequently rebounded? Can you remind me what happened in fiscal Q1 that caused the fiber laser revenue to decline?

Günther Braun

In Q1 we had I think Ingrid can firm that, a low number of lower power fiber lasers, we had less volume which we shipped out and I think this was the main reason why this was on the lower side.

Ingrid Mittelstädt

Within low power.

John Lopez - Vertical Group

Okay and then if I look at fiscal Q2 versus fiscal Q1 was low and mid power rebounding the explanation for the jump or did that remain at relatively low levels and most of the increases on the high power side just looking between the two periods.

Günther Braun

Low was up. The reason why it went up, too it was -- all fiber lasers had to count on this one. I mentioned this in the conference call that from China we had in the first quarter a slower order entry, in the second quarter after Chinese New Year, after Laser China towards the end of March we get new more significant orders which we have not all booked and of course also the shipments were not in the sales volume there.

John Lopez - Vertical Group

Second question, you had referenced a little earlier on the call the marking business for smartphones, consumer electronics and you suggested that that business was getting more price competitive driven especially from China and that’s something you wanted your peers to discuss also. I suppose my question how much, how big was that business for to you before the onset of the price competition.

Günther Braun

You know it I did not specifically talk about consumer electronics but of course it's also largely used in consumer electronics no doubt about it. As I said at the Laser China Show in Shanghai this was third week of March I think, we have seen many Chinese laser manufacturer especially in that range 20 watt, 30 watt pulse laser, the marking applications were incredible pricing, at least. And they settled mainly in the domestic market and it's a tough story when you want to work against those guys. So somehow I would say it's getting tougher to gain all of those 40 or less all the ordinary marking applications, let's call it that way.

John Lopez - Vertical Group

Sure. And would it be possible for you to get just a rough estimate the affected portion of your revenue from those types of applications, if that’s the right way to ask a question?

Günther Braun

May I answer easily? No. Sorry.

John Lopez - Vertical Group

Okay, I understood. My last question, we talked a bit about the cost structure for fiber laser obviously today and it's been a topic for a while, I suppose my question is are you at a point where you’re comfortable enough with the cost structure to more aggressively pursue that fiber laser business either inside of your install base or externally or are you still somewhat held back sort of given concerns about what the ultimate implications to your profitability would be. Does that question make sense?

Günther Braun

This question makes sense and what I can tell you for certain output power ranges, yes, there I think we’re -- we take a big step and so now this because of the architecture of the technical setup there, we have to improve. But it's a lot better situation than before I tell you, what we have now.

John Lopez - Vertical Group

Very good. So these are my words but it sounds as though you're a little more comfortable being aggressive in that business than has been the case for the last couple of quarters?

Günther Braun

Yes that’s what I said in the conference call that we’re targeting now of course over the next quarters, new customers and we can go because of this implementation of the cost reduction in certain power ranges. We can be really in the market also with reasonable margins on the RCI level.

Operator

There are no further questions. Now I will turn it back over to management. Thank you.

Günther Braun

So thanks to everyone for participating in the call. I think you will see somehow at least last quarter our efforts you’ve seen in our P&L and in the results. We’re working again to improving our business, our cost structure and let’s see what we can deliver to you in the third quarter. I hope we can hear you again in three months and all the best. Talk to you soon. Thank you.

Ingrid Mittelstädt

Bye.

Operator

This concludes today’s conference. All parties may disconnect. Have a great day.

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Rofin-Sinar (RSTI): FQ2 EPS of $0.16 beats by $0.05. Revenue of $128.6M (-1.9% Y/Y) beats by $1.87M.