II-VI's (IIVI) CEO Fran Kramer on Q4 2014 Results - Earnings Call Transcript

Aug. 5.14 | About: II-VI Incorporated (IIVI)

II-VI, Inc. (NASDAQ:IIVI)

Q4 2014 Earnings Conference Call

August 5, 2014 9:00 AM ET

Executives

Mary Jane Raymond - CFO

Fran Kramer - President and CEO

Chuck Mattera - COO

Analysts

Avinash Kant - D.A. Davidson & Company

Jim Ricchiuti - Needham & Company

Mark Douglass - Longbow Research

Dave Kang - B. Riley & Company

Operator

Good day, ladies and gentlemen, and welcome to the II-VI Incorporated Fiscal Year 2014 Fourth Quarter and Year-End Earnings Call. At this time, all participants are in a listen-only mode. Later, we will conduct the question-and-answer session with instructions following at that time. (Operator Instructions) As a reminder, this conference call is being recorded.

And now, I will turn the conference over to your host CFO of II-VI, Mary Jane Raymond, please begin.

Mary Jane Raymond

Thank you, Tyrone, and good morning. I am Mary Jane Raymond. I am the Chief Financial Officer of II-VI Incorporated. Welcome to our fourth quarter earnings call for the fiscal year 2014. With me on our call today is Fran Kramer, our Chief Executive Officer; and Dr. Chuck Mattera, our Chief Operating Officer.

As a reminder, this call is recorded today here on Tuesday, August, 5, 2014. Any forward-looking statements we may make today during this teleconference are given in the context of today only, and we do not undertake any obligation to update these statements to reflect events subsequent to today.

With that, I'll hand it over to Fran Kramer.

Fran Kramer

Well thank you, Mary Jane and thank you everyone for joining us. In our just completed quarter II-VI bookings reached a record $193 million. This strength in bookings helped us meet our fourth quarter guidance with actual revenue of $188 million on a guided range of $175 million to $190 million, and actual EPS of $0.20 on a guided range of $0.15 to $0.27 per share.

The quarter and the year overall reflect the important strategic and operational steps we took during fiscal year ’14. We have advanced our broad portfolio of products serving the high-power laser market including CO2 lasers and 1 micron lasers. We have successfully transitioned our HIGHYAG team into II-VI and we see resumption of strong customer demand. We exited the volatile tellurium market and transitioned our business to a profitable reclamation operation.

We added an advanced integration of active optical products into our portfolio for which we are seeing increases in demand and we made the decision to move to three segments in fiscal year ’15 and have begun to work to leverage this simpler structure. As we enter into fiscal year ’15, we believe the progress made and actions underway will allow us to achieve our minimum 200 BPS increase in the fourth quarter of fiscal year ’15 and gross margin, EBITDA margin and operating margin.

Now, I’ll turn it over Chuck to provide our segment level commentary.

Chuck Mattera

Thank you, Fran. In our IR segment which includes IR optics and HIGHYAG. Q4 bookings were 63.9 million, which is an all-time record and exceeded Q4 FY13 by more than 10%. For the IR optics business in the Americas on a sequential basis, orders from OEMs were up 9% and OEM shipments increased 14%. In the North American aftermarket, orders increased 4% and remained flat year-over-year indicating similar lazy utilization overall.

European bookings for Q4 were up 20% sequentially driven by a renewed demand for diamond windows and other related products for EUV photolithography systems. European aftermarket bookings were up 11%, compared to Q4 FY13 reflecting the successful results of a more focused approach to the market.

Total Asian bookings increased sequentially with Japan bookings up 13%, and in China where bookings were down 11% sequentially primarily due to the timing of a blanket order with a contract manufacturer that was already booked in Q3. We believe that the lower demand in China for higher-power CO2 laser optics is a result of slowing economic growth overall, as well as increased 1 micron high-power laser production and decreased demand for some specific applications. We believe that the production of low-power CO2 laser systems in China remains soft due to increased competition from system builders outside of China. We will continue executing our plan to expand market presence in China where aftermarket bookings increased 26% year-over-year.

At HIGHYAG bookings for Q4 were an all-time record, more than double Q3 FY14 and up 63% compared to the same quarter last year. Significant bookings came from Japan during the quarter. Shipments for Q4 were also a record and more than 12% higher than the previous record set in Q1 FY13. We continue to see long-term growth opportunities in 1 micron cutting, beam delivery and welding markets. We are focused on improving our service and support for the automotive market customers, as well as staying ahead of our OEM customers from a technology and production capacity standpoint.

In our near-infrared segment, Q4 bookings increased 8% sequentially while revenues increased 5% sequentially. The increase was mainly attributable to the increased demand for contract manufacturing services for optical windows and display panels, fiber laser components and optical communication and data-center components. Compared to Q4 of FY13 overall bookings were down by 11% and revenues were down by 14%, driven mainly by the softening of demand for some of our legacy optical components and the reclassification of some of the sales from external to internal, as a result of the acquisitions.

We are working to launch a new family of transceivers and an integrated coherent receiver as part of our drive to increase our 40G and 100G content, with our major customers. This segment has been the focus of increased investment over the last two years and we expect to begin to see the benefits in FY15. Our optics business remains strong in Q4 with growing demand for advanced components for fiber lasers and life science applications. We have signed several new contracts to provide the optical components and assemblies that serve customers in the fiber laser and instrumentation markets, which should support the continuous growth of our advanced optical components. We are seeing an increased interest in a family of newly designed and developed coding filters and related products for data-centers and data network applications.

In our military materials segment for Q4 bookings decreased 27% sequentially and revenues were up 14% sequentially. Lower defense spending coupled with more intense competition for the available military procurements is the main driver for the downturn in this business. Recently we were notified by a defense prime contractor of a program order that will be not be renewed in FY15. The revenue magnitude is 4 million to 5 million. Although there may be some foreign military sales that extend the life of this product line this is an example of the current market environment. Overall, we remain concerned with the uncertainty in the military market so we continue to take steps to lower operating cost, while improving our technology and product portfolios and our positioning with customers.

We are executing on our plan to consolidate our California and Florida operations in light of the lower market demand and the integration is going well. We are leveraging synergies between our advanced opto-mechanical assemblies platform in California and our laser optics capability in Florida to expand our product offerings and we’re continuing to actively pursue both military as well as commercial opportunities to diversify our customer base. We believe these actions should allow this business to maintain a solid rate of profitability in a flat market over the long haul.

In the materials business, we are making good progress refining our critical rare earth element and continue to achieve positive earnings based on improvements in our operations. This business which is located in the Philippines is performing well and has a solid order backlog for the next six to eight quarters.

In our advanced products group segment, Q4 bookings increased 56% year-over-year while revenues were flat year-over-year, with new products replacing the revenue not recurring from a large order that we received last year. Silicon carbide semiconductor wafer bookings were strong and were derived from several customers demonstrating a high level of interest in migrating to our industry-leading 150 millimeter platform. This helped offset declines caused by product launch delays at Marlow Industries in the personal comfort market and softness in M Cubed in the semiconductor market demand for new products. In the meanwhile, we have taken measures to adjust operating cost until we see improvement in these two areas.

At our advanced materials division formerly called the Wide Bandgap division market acceptance for the 150 millimeter substrates is being driven primarily by increased demand from customers with commercial applications in the wireless infrastructure and power device markets. This demand growth was forecasted for Q4 and is expected to continue to increase at least through the first half of FY15. We remain focused on utilizing our leadership position in this technology as we work to grow our overall market share.

At M Cubed Technologies we saw a healthy semiconductor component sales in the quarter of our precision products portfolio, driven by demand for products that serve the photolithography and test and measurement markets. On the display front, M Cubed saw an increase in sales in the period driven by improved demand for our advanced ceramic material platform products including from LCD OEMs and in the industrial and military components of ours.

At Marlow Industries for Q4 we saw increased demand for our products from the emerging markets including our system-based products for personal comfort and for thermoelectric power generation. We are starting to see repeat orders from customers who are using waste heat to drive new sensor functions in their products. Despite delays in personal comfort shipments in FY14 we are optimistic about our growth opportunity in the personal comfort bedding market in FY15. Our major customer just recently announced the product enhancement that they expect will significantly expand the market and accelerate the market adoption. Additionally, we expect that others in the industry will come online during FY15 and that they will drive further demand.

Finally I will turn my attention to our active optical products group, which is the combination of our II-VI Laser enterprise business that we acquired on September 12, 2013 and our II-VI Network Solutions division that we acquired on November 1, 2013. Although the financial performance is not yet up to our standards, we did start to see benefits from our focus on the integration, the improvement in operations and the cost reduction actions we took earlier in the year.

During the quarter, we specifically made progress in the following integration areas; we successfully completed the cutover to our own ERP systems ending the reliance on Oclaro for their systems and certain financial and operational processes; we assumed fully control of the Shenzhen China laser module assembly and test operation that we described last quarter; we continue to rationalize the high-power semiconductor laser product portfolio by either increasing the price or by discounting the manufacturing of selected low margin and legacy products; we also continued to review the cost structure of several products and initiated new cost reduction plans to ensure that cost competiveness of the products throughout their lifecycle; and we are working to improve our wafer fab utilization by focusing on large addressable markets and leading strategic customers whose future requirements we believe will underpin increased demand stemming from developments and deployments of new datacenters, mobile handsets, cloud computing and the Internet of things.

With respect to this quarter’s top-line results, Q4 bookings increased 13% sequentially, while Q4 revenues increased 5% sequentially. During Q4, bookings increased in both the high-power laser and high volume component product lines. We saw strong demand for VCSELs and are on-track to deploy our new industry-leading high-power laser bar products for direct diode applications capable of increasing the power of today’s state-of-the-art products significantly.

During Q4, the 980 pump laser product line experienced ongoing strengthening of demand for products with new form factors including 10-pin and dual-chip products following the successful completion of our final development case. We started the formal qualification of the next generation 980 nanometer laser chip which itself is an in-feed element to a number of new products further downstream in our product roadmap. We continued to see increased customer confidence in our long-term product roadmap and global capabilities including in the high reliability submarine segment of the market which has seen a recent uptick in demand.

In our network solutions division we saw sequential revenue gains driven mainly by continued share recovery that customers that had shifted demand to other suppliers due to the uncertainties of Oclaro’s finances and growth in demand for our amplifiers targeted for 40G and 100G networks.

On the new product introduction front, we completed pilot production of our arrayed amplifier which is used in next generation multicast switching applications. We expect this product to be used in advanced networks which will start to be deployed in the next year. We see strong early stage engagements with all of our Tier 1 customers and amplifier modules, amplifiers, ROADM line cards and advanced monitoring solutions which we expect to transition to revenue beginning in late FY15. We view this significant strengthening in these engagements as a sign that customers have recommitted business to us since we acquired the business from Oclaro.

Finally, we are determined to improve the stability and profitability of the business which was for II-VI a major acquisition into semiconductor lasers. These products fill a major gap in our roadmap and technology platforms and we expect them to enhance in long-term shareholder value creation by expanding our existing businesses and customer base.

I will now turn it over to Mary Jane Raymond to walk us through the review of our overall financial performance, Mary Jane?

Mary Jane Raymond

Thanks Chuck and Fran. The overall summary for II-VI for the fiscal year of 2014 is $683 million of revenue, a 103.3 million of EBITDA, 46.5 million operating income or segment income as it’s called on Page 3 of the press release and elsewhere, and $0.60 EPS. This equates to a 24% revenue growth on a 33.2% composite gross margin, 6.8% operating margin, 15.1% in the EBITDA margin and 5.6% return on sales.

Within the segments, IR exited the fourth quarter on a strong note with 11% increase in bookings compared to last fourth quarter and 8% increase in revenue with about 1 million down on earnings as you can see from the segment table on Page 3 in the press release. That’s a nice improvement for Infrared from Q3 of this year and reflects HIGHYAG back at full strength as well as new product sales. The income being below prior year for the quarter and for the year is due to some higher selenium costs, price pressures particularly in China and of course the year HIGHYAG moved from one building to another in Berlin in the third quarter. We expect the Infrared segment to be more stable into next year.

At near-IR Chuck has reviewed with you all of the major factors particularly the soft demand for our legacy products, Q4 was a fairly strong revenue quarter last year though we were already seeing some of the pricing pressure coming through even then. It takes some time to refocus the product efforts, but we do feel as Chuck has already described that the work done through this year plus the addition of pumps and amps should help stabilize conditions there as well into next year.

Military and Materials orders revenue and earnings were affected by the softening military demand as Chuck has described, but the main driver really was our change in the business model that resulted in lower revenue from our exit of tellurium in particular but significantly less volatility with tellurium and frankly also in the selenium index pricing. As you will remember, we discontinued the tellurium business but we still do sell selenium at a much-much reduced level and mostly just to our self.

The Advanced Products Group saw benefit during Q4 of increased sales, demand for the 150 millimeter wafer product and a profitable government development contract that was received in the third quarter. For the full year, they also had four additional months of revenue and earnings from M Cubed, so the combination of the market demand as well as cost management in this unit produced the improvement particularly in their earnings.

Regarding AOP, we acquired these businesses to establish the semiconductor laser platform from which we could ultimately serve the large scope of our addressable markets. We added $115.2 million of revenue, on a $26.3 million reported loss, of this 26.3 million loss, about 10 million of that or roughly in the neighborhood 40% is composed of onetime charges that will not impact future periods.

For the quarter, the fourth fiscal quarter of this year delivered 22% revenue growth over the prior year’s fourth quarter on a 33.2% gross margin, which is down 240 basis points from the prior year’s gross margin of 35.6, and a 7.8 operating margin compared to 12.6 last year, 15.6 in EBITDA margin compared to 20 last year and 6.7 return on sales compared to 9.4 last year. We have though through this year a fairly significant change seen on return on sales improve throughout the year. This is primarily due to the stabilization of AOP. The tapering off of onetime charges and the success of some of our newer products, as a result, our return on sales progressed from 4.4 in Q2 of fiscal year ’14 to 4.9 in Q3 to 6.7 in Q4.

Our book-to-bill ratio for the quarter was 1.0. Our backlog is 222 million at June 30th and splits as follows; 56 million in IR, 33 in Near-IR, 42 in APG, 59 in Military & Materials, and 32 in AOP. As we move to the new three segments which will commence next year with the fiscal year ’15, the backlog will flip then being 73 for laser solutions, 49 for photonics, and 100 million for our performance products.

Moving to the income area, between the total segment income for the quarter of 14.7 and the net income of 12.7 the largest single item affecting that is tax, this is also true for the full year where the segment income was 46.5 and the net income was 38.4 million. The tax rate for the quarter was 10.7% and 16% for the year. The two primary drives affecting this year’s rate were; one, better utilization of the R&D tax credit for which the largest affect was actually seen in the third quarter, as well as a shift in where the income is earned. No one particular country swung that materially and for 2015, I am expecting the rate will be back in low 20s.

Interest expense was $4.5 million for the fiscal year ’14 and $1.4 million on the quarter. The increase in interest expense of 3.3 million compared to last year is due to the increased borrowings for acquisitions. During the quarter, we paid down about $21 million of this debt, 55 for the year and about 20% of the total. The other income of $900,000 in the quarter, 3.6 million for the year is due primarily to the interest income on the excess cash reserves worldwide, as well as earnings from our equity investment offset a little bit by foreign currency losses that goes through P&L.

The net income from continuing operations this quarter is 12.7 with EPS of $0.20 a share, $0.20 a diluted share and 7% return on sales. This compares to 14.5 million in the fourth quarter of last year or EPS of continuing operations of $0.22 per diluted share. Regarding the cash as the end of the fiscal year it was $175 million compared to 186 million at March 31, 2014, and 185 at June 30, 2013. The cash flow from operations was 95 million for the fiscal year.

Our total change in cash was a net reduction of 10.8 million compared to an add of 50.5 million last year. We purchased $8 million of our stock in Q4 and completed our $20 million stock program here for fiscal year ’14. We also as you can see in the cash flow statement bought $20 million of stock last year as well. We have 69 million available under the credit facility and have 242 million drawn at a rate of approximately 1.9%. Our capital spending for the fiscal year 2014 was 29.2 million.

A couple of subsequent events to point out to you, we made the decision to buy the newly constructed HIGHYAG building in Berlin which we think will be a good investment in that market so you will see some disclosure about that in the 10-K. Also our Fuzhou facility which is the headquarters of our near IR group since the Photonics in China was in the path of Typhoon Matmo. All told that it wasn’t significant damage and all of our staff are okay, but the damage there was damage to a few days -- a few of the reactors and a couple of days production. So, we don’t think there is going to be significant disruption in supply but we are really still assessing that situation. And our insurance carrier is involved at this point we’ve been a little bit cautious in the guidance for this.

Finally, the Company announced as you saw in the press release the share repurchase plan of up to $50 million which we intend to use from time-to-time. With that, that includes our prepared remarks. As we turn to the Q&A, I’ll just remind you that our answers to your questions may contain certain forward-looking statements which are based on our best knowledge to-date and the results may differ significantly from what we are saying today.

So with that, we’ll let the line open for questions.

Question-and-Answer Session

Operator

Thank you. (Operator Instructions) First question is from Avinash Kant of D.A. Davidson & Company. Your line is open.

Avinash Kant - D.A. Davidson & Company

Good morning Fran, May Jane and Chuck. So, the first question I think you mentioned pretty much just now that in the guidance you do have some impact from these disruptions. Could you give us a little bit more detail on when do you think these disruptions started happening and how long could that be? And what percentage of the quarter could be impacted in the guidance?

Mary Jane Raymond

With respect to the Typhoon?

Avinash Kant - D.A. Davidson & Company

Yes.

Mary Jane Raymond

Okay. Well, I think it’s not so continuous I mean it happened about two weeks ago. And as I say, we didn’t have significant damage to the facility obviously a lot of water affecting a couple of reactions and some few days maybe two or three days lost production. So while on the one hand it wasn’t weeks and weeks as I say we’re really still assessing the damage and it’s probably going to take a little bit of time to figure that out. I think as you know water damage is kind of notoriously difficult to estimate quickly.

Fran Kramer

So these reactors Mary Jane refers to are a really coating chambers and they’re about a $1 million each all three that are down will have to repaired by the vendor we don’t have the total bill on that and what product gets interrupted is that repair takes place is being sorted out because we’re trying to do them in other areas. So Avinash I think Mary Jane's explanation was pretty straight forward we’re assessing it. We do not believe it’s significant at this moment but the insurance will have to play out.

Avinash Kant - D.A. Davidson & Company

And in terms of tax rate, of course, it seems to be fluctuating quite a bit here. What should we think of for the coming fiscal year as the appropriate tax rate?

Mary Jane Raymond

Sure. As I said, I think probably in the low 20s call it 21, 22 something like that.

Avinash Kant - D.A. Davidson & Company

And since you paid down some of the debt, should we expect the interest expense to come down from the 1.4 million that you had in this quarter?

Mary Jane Raymond

Well, I think first of all yes I don’t know that that would be necessarily material the interest rate depends on two things one the level of income as well as the amount outstanding. So, but having said that we’re well aware of the drag of the interest on the P&L and are looking to see that come down as we retire but I have to give you a number right this second probably couldn’t quite estimate that for you.

Avinash Kant - D.A. Davidson & Company

Okay. And one question for you. Did you give out the depreciation and amortization for the quarter, Mary Jane?

Mary Jane Raymond

I can, so the depreciation for the quarter the depreciation total is 15.5 and the amortization is sorry, restart. The depreciation is 10.6 and the amortization is 3.1 for the full year the depreciation is 41.8 and the amortization is 11.3.

Avinash Kant - D.A. Davidson & Company

Now, coming back to the infrared optics business. It looks like most of the regions are doing well on a year-over-year basis except for China. Now, you gave out some reasons for the weakness in China. How is the competition? Have you seen competition from other laser types coming into China?

Fran Kramer

This is Fran. The two different pieces I think Chuck commented on would be the CO2 laser high-power builds in China is not strong, it’s quite weak. The lower-power business goes on well, the aftermarket very big growth. I think we had 26% quarter-over-quarter. So we’re doing well but it could be better, if those more coming down the assembling line, but we probably don’t expect that to happen. China has made a quick jump off from CO2 to fiber laser and they will continue to be strong in the fiber business. And we’ve captured some good piece of that or a nice piece of that or a nice piece of it through our HIGHYAG by some system that we’re building for there. So it will be -- I think China is the quickest to switch. They were never big in CO2, a lot of the CO2 business came to China from Europe and the U.S. and machines were shift into there. So they didn’t have the infrastructure built around CO2. But they’re certainly many deployed in China in that aftermarket as what we’re working hard to get more of.

Avinash Kant - D.A. Davidson & Company

And could you give us some color on the defense side of the business? You said that there was one order that would not show up next fiscal year. But could you give us what percentage of the business in the quarter or for the year was defense?

Fran Kramer

Well, I am not sure. You got it Mary Jane because we don’t quite roll it that way always, but it usually running 25 to 30 overall total company defense, about 20% maybe 22 I guess overall.

Avinash Kant - D.A. Davidson & Company

For the fiscal year you mean?

Fran Kramer

For the year, yes, and our comment there is -- we’ve usually been holding pretty close on defense business. Now we’re seeing the softening and Chuck really laid in there coupled of the reasons that were starting to get pullbacks on programs or at least the word that that’s not going to renew and that’s not going to renew. So we see it later in ’15 not such good shape, so we’ve kind of baked that into our guidance.

Avinash Kant - D.A. Davidson & Company

Perfect. Thank you so much. Thanks for the analysis.

Operator

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

Jim Ricchiuti - Needham & Company

Thank you. I wonder if you could talk a little bit about the seasonality you expect in the infrared optics business in the current quarter.

Fran Kramer

Yes, it’s Fran again. And we usually book about 25% of our year for IR in the first quarter and probably in the neighborhood of 22% in the second, so that add them to about 45%-47% from the first half. So our second half is just like it happened this year, up strong in third and fourth quarter and they’re both equal and about the same size. So, I’d expect it to run that way this year where we’re starting off good here so far in the first quarter and so it makes that our second quarter is the weaker quarter usually.

Jim Ricchiuti - Needham & Company

Thank you. And just with respect to the overall tone, Fran. You highlighted some of the market conditions in Europe and North America for that part of the business. Just in general, your overall view of the near-term outlook for the infrared optics business in both Europe and the U.S., if you would.

Fran Kramer

I think we’re quite pleased certainly that business goes so well when the economy goes well. When the consumer spending is strong and when the auto industry is going well and steel is reasonable around the world and so it’s so integrated now you that you have to take a worldwide, we understand the four different continents that we play in, but right now we’re getting good business in all areas. So economy is good. Consumer spending is good. So CO2 laser utilization is good which drives more means for our parts and it is at a good state right now. I wouldn’t make any comments. So, Chuck would you add to it?

Chuck Mattera

Yes, I would just say that we have a great marketing and sales team. They have a full-court press expanding their market share in Europe and in Asia, and I am looking forward to the results.

Jim Ricchiuti - Needham & Company

Okay. And just switching gears for just a second just to the Military & Materials segment. Clearly, a lot of headwinds that you've already alluded to, highlighted. How challenging is it going to be in terms of maintaining profitability levels that -- clearly this was a fairly nice quarter, and I'm just wondering how you see that going forward?

Fran Kramer

In that Military and Material segment, we have the two different pieces certainly the military piece nicely profitable doing well and now that we’ve changed our model down in the Philippines. We had a very good quarter also for the, what we call the reclamation business where we’re recovering selenium out of our zinc selenide and out of those types of materials for our own use within the IR optics business. So the selenium reclamation and other material the rare-earth that we’re doing I think those will hang in there well, very well in FY15. Military business, you think it’s okay, we caution everybody on some softness that we’re seeing on the couple of programs and we can’t go far enough ahead and tell you the exact answer because we don’t know we’re just getting from the primes that are customers the rumblings of what they are expecting that do to downsize things. So we’re getting a little bit more timid on military in the second half of the year.

Mary Jane Raymond

I’ll just answer also a couple of questions on that for you. First of all, military sales inside the military I guess for the whole company are about 12% of the total year’s revenue in the quarter and also for the year, so that’s the first thing. And second thing is just to caution you a little bit on the military and materials earnings pickup the way the math actually works on that though everything Fran said is perfectly right. We discussed tellurium if you may remember but we did not discussed selenium because we still use it ourselves. So some of the pickup is the one time change from the index pricing we had last year. So I don’t know that we’re going to see basically $10 million pickup year-over-year but I do think and going back to what Fran said first of all the materials side of the business now as a reclamation that this is a very steady and should be a good little business for us and then as Fran said we continue to be very cautious about military.

Jim Ricchiuti - Needham & Company

Okay, thanks very much.

Operator

Thank you. (Operator Instructions) I’ve a question from Mark Douglass of Longbow Research.

Mark Douglass - Longbow Research

I missed a good part of the call, but did you discuss an AOP, when you think you might turn to profitability and what kind of actions are you taking right now to right the ship there?

Mary Jane Raymond

I think first of all with respect to the timing on the profitability, I think what we said was that we expected that to improve through this year and exit the year at a point where we are not making significant losses. So, improvement through the year not necessarily profitable right from the first quarter but improving as the year goes on. And then with respect to the action plan for AOP Chuck went over that if you’d like to just recap it.

Chuck Mattera

Mark we’re taking a number of actions in the both in the operations to improve our yields, reduce our cost, rationalize the portfolio and overall improve our operations including having taking our reliance from Oclaro down. And I articulated a number of actions I won’t repeat them here today. I won’t repeat them at this point.

Mark Douglass - Longbow Research

Okay. How are you seeing your high-powered diode pump business? Is that improving quarter over quarter? Are you seeing more opportunity than you did when you first bought the business of potential high-power fiber laser OEMs coming to market? Can you discuss that a little bit?

Chuck Mattera

Yes I would say that the business is stabilizing in that regard Mark we described last quarter and I repeated it here today that for some of the products that had lower than our target profit margins we started to take action on those early on. In addition to rationalizing those products we have also experienced an increase in demand and opportunity including in China for our products. And for the direct diode application specifically we’ve seen our share come back to the levels that we believe it was before the acquisition. We are investing in a family of higher power laser products for the direct diode market and we believe that we are well positioned there to continue to grow.

Mark Douglass - Longbow Research

Okay. So right now you're fighting a little bit of a headwind because you exited some low-margin products, at least on the sales side.

Chuck Mattera

Yes.

Mark Douglass - Longbow Research

Okay, thank you.

Operator

The next question is from Dave Kang of B. Riley. Your line is open.

Dave Kang - B. Riley & Company

Good morning. First question is regarding your revenue guide for first quarter. Just wondering if you can just go over some of the assumptions especially on AOP.

Chuck Mattera

I think Mary Jane maybe I will do that, but we are very similar in the quarter coming up to the one we just exited and that’s really the guidance we’ve given and it is just the composite of all our businesses and as usual we don’t break it down into any more than that.

Dave Kang - B. Riley & Company

Well, I'm just curious if you look at the midpoint, it's about 5% decline. So what's really driving that 5% decline, I guess?

Chuck Mattera

$0.14 to $0.20 is about the same as what we had in the guidance this time $0.15 to $0.20 and…

Dave Kang - B. Riley & Company

I am talking about the revenue top-line decline.

Chuck Mattera

Yes, okay. Maybe you have the comment there…

Mary Jane Raymond

So, first of all, I think what’s making the revenue guidance a little bit wide let’s say a little bit soft; one, I think we’re being very cautious on the military we are just trying to understand that aspect and I think the second thing is that the quarter with respect to falling in the summer particularly with respect to Europe can cause the first quarter to be a little bit lightish, sometimes it’s on par with Q4 but sometimes it’s a little light, so we tried to capture those two parts of the volatility.

I think also Dave with respect to your question about AOP and I’ll actually give a little comment on this in totality in a second but keep in mind that that the AOP segment as it stands right now is going to be subsumed into the new three segments so Laser Enterprise will be in Laser Solutions and pumps and the amps will be in photonics, so while we will lose the visibility on that the fact remains that we are still seeing the revenue exactly as Fran says very much on par with Q4 and continuing to be let’s just say very good products for us in the revenue mix. The last small topic just to mention is we are still probably a little cautious in the guidance over Matmo the hurricane, sorry the Typhoon that’s affecting photonics and we hope it’s not much. The team’s very committed to delivering their quarter but it’s a little bit tough to say.

Dave Kang - B. Riley & Company

Got it, got it, and then sticking with AOP so you talked about legacy I guess there’s pricing pressure and all that, first of all can you give us more color or quantify the pricing pressure and how much is legacy in terms of overall AOP sales?

Mary Jane Raymond

I think actually, Chuck will help a lot here I’m sure, I think really where we’re seeing the pricing pressure on legacy is in near-IR. So that’s the first thing, which also happens to be the same crew that’s in the path of the Typhoon and I think if you look at the combination of demand and pricing that’s fairly well reflected in how we save the earnings coming in for this quarter.

Dave Kang - B. Riley & Company

Got it. And then on China, I guess moving to fiber lasers. So that's not really -- can you quantify that situation about the Chinese market? And if you can just talk about other regions as far as the trend to moving to fiber lasers from CO2.

Chuck Mattera

Okay, Dave, I’ll take that. I’ll focus my comments on China, Fran mentioned that China seems to be adopting the fiber laser technology very quickly and there are a number of let us call it early adopters or fast followers rather, there’s a handful of people in this space, they’re very aggressive, they’re moving very quickly. Our judgment is that that from a unit volume point of view that’s increasing at a very significant rate and we are well positioned across the company as a critical component supplier at the near-infrared group as well as in the AOP business and our high-power laser business and also in HIGHYAG. So I think that we are really a full line supplier and a primary choice for fiber laser builders in China as a partner.

Dave Kang - B. Riley & Company

So if you can just help us understand the dynamics like your maybe like a dollar content per CO2 versus fiber lasers? What's the drop-off on a net basis?

Chuck Mattera

We do not have a statistic like that because our business runs more as a merchant supplier to each one of those industries but not that we can tell you by model, by company how much content we have in the fiber laser versus a CO2. I understand what you’d like us to be able to tell you but we cannot tell you that, but in China certainly there is six to ten major fast moving companies that are going to be fiber laser competition the likes of which, one or two fiber laser companies in the world have not seen. So our position is to be merchant suppliers to them or whether it’s a single emitter or whether it’s a bar, some way for them to energize their fiber and that’s what these accounts look to be very-very good prospects for ourselves.

Dave Kang - B. Riley & Company

Got it, alright, thank you.

Operator

Thank you. There are no further questions at this time. I’d like to turn the call over to management for any closing remarks.

Mary Jane Raymond

Well this is Mary Jane I’ll just give you a little bit of an update on the progress to the three segments so you will remember that the Company announced in the last quarter that we will move to simplify the reporting structure of the Company to three segments, Laser solutions, Photonics and Performance Products. We will -- the Company will produce towards the end of the summer a set of numbers that will give all of you the numbers recast backwards so that you can use those going forward so one just to knowledge we know that will be very helpful to you. We certainly do intend to do that, and because we will file the 10-K on this year’s existing five segments, we’ll finish that, do the numbers and then produce those for you, so just to let you know that’s coming. And we that we have Fran give the closing remarks.

Fran Kramer

Well just thank you everybody for joining us and we look forward to next quarter’s report. Thank you.

Operator

Ladies and gentlemen, thank you for your participation in today’s conference. This concludes the program. You may now disconnect. Have a wonderful day.

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