Coherent's (COHR) CEO John Ambroseo on Q1 2016 Results - Earnings Call Transcript

| About: Coherent, Inc. (COHR)

Coherent Incorporated (NASDAQ:COHR)

Q1 2016 Earnings Conference Call

January 28, 2016 04:30 PM ET

Executives

Leen Simonet - EVP and CFO

John Ambroseo - President and CEO

Analysts

Larry Solow - CJS Securities

Jim Ricchiuti - Needham & Company

Mark Miller - The Benchmark Company

Joan Tong - Sidoti & Company

Patrick Newton - Stifel Nicolaus

Operator

Good day, ladies and gentlemen, and welcome to Coherent's First Fiscal Quarter 2016 Results Conference Call hosted by Coherent Inc. At this time, all participants are in a listen-only. At the conclusion of our prepared remarks, we will conduct a question-and-answer session. [Operator Instructions] As a reminder this call is being recorded.

I would now like to introduce Ms. Leen Simonet, Executive Vice President and Chief Financial Officer. You may begin your conference.

Leen Simonet

Thank you, Shannon. Good afternoon and thank you for joining us on today’s call. I will provide financial information and John Ambroseo, our President and CEO, will provide a business overview. As a reminder, any guidance and any statements in today’s conference call pertaining to future guidance, market trends, plans, events or performance, are forward-looking statements that involve risks and uncertainties, and actual results may differ significantly. We encourage you to refer to the risk disclosures and critical accounting policies described in the Company’s reports on Forms 10-K, 10-Q and 8-K, as applicable and as filed from time-to-time by the Company.

These forward looking statements are subject to the safe harbor provisions of the private securities litigation reform act. The Company undertakes no obligation to update any forward-looking statements. The full text of today’s prepared remarks and trended GAAP and non-GAAP supplemental financial information will be posted on the Coherent Investor Relations Web site. A replay of this webcast will also be made available for approximately 90 days following the call.

Let me start by giving the financial highlights of the quarter. We are delighted with our first quarter earnings report as many of our metrics turned very positive. Our first quarter bookings of $273 million is a record for the Company and was primarily driven by record flat panel display bookings. John will comment on this later during the call. Revenues for the quarter were $190.3 million with corresponding pro forma earnings of $0.99 per diluted share. Although revenues were slightly below the low-end of our guidance, earnings came in strong and are above guidance and consensus.

The first quarter earnings were positively impacted by a favorable product mix leading to a 45.1% pro forma gross profit margin. As a result, our pro forma EBITDA % for the quarter was 21.3% which is approximately the mid-point of our long-term goal of 19% to 23%. In addition, the tax rate is below guidance which is primarily the result of the permanent reinstatement of the federal R&D tax credit.

Net sales for the first quarter of $190.3 million decreased $19.3 million or 9% sequentially. In general, this decline can be attributed to our historically shorter first fiscal quarter coupled with the impact of the timing of shipping larger Linebeam systems for the flat panel display market and an overall via drilling market downturn. In addition, the economic slowdown in China impacted our materials processing and medical markets revenue. Revenues decreased $10.3 million or 5% compared to the same quarter a year ago. As a reminder, the first quarter of fiscal 2015 included our largest format Linebeam system.

Our total backlog of $403 million is also a record for the company. The shippable backlog at the end of the first fiscal quarter, defined as shippable within the next 12 months, is approximately $370 million including $169 million or approximately 46% flat panel display shippable bookings. The comparable shippable backlog at the end of fiscal 2015 was $309.5 million, of which $100 million or 32% related to flat panel display applications. Geographically, for the first quarter Asia accounted for 51% of the company’s revenues, U.S. 27%, Europe 17% and rest of the world 5%. Asia includes two territories with revenues greater than 10%, Japan and South Korea represent 25% and 15% of first fiscal quarter revenues, respectively.

Service revenues for the first quarter were approximately $57.5 million or 30% of sales and represent 4.4% growth compared to the same quarter last year and declined 10% compared to a very strong fourth quarter. The first quarter flat panel display service revenues increased approximately 20% compared to the same quarter last year and decreased approximately 9% sequentially. We had two customers, one in Japan and one in South Korea, integrators to large flat panel display manufacturers, who each contributed more than 10% of the Company’s first quarter revenues.

The first quarter pro forma gross profit, excluding stock compensation charges and intangibles amortization was $85.9 million, or 45.1% of sales, which compares to 44.6% last quarter. As mentioned before, the sequential increase of 50 basis points was mainly the result of a favorable product mix and lower other manufacturing charges. Period expenses excluding stock compensation charges were 27.7% compared to a guidance of 27.5% to 28.0%. Expense levels are similar to the previous quarter.

Our cash and short-term investments balance for the quarter was $336 million which represents an increase of $10.7 million compared to last quarter. During the quarter we tapped into our domestic line of credit and ended the quarter with $5 million of short-term borrowings. At the end of the first quarter our international cash was approximately $294 million or 87% of the total cash and investment balance. About 77% of the total cash and short-term investments is denominated in dollars.

Cash flow for the quarter was $14 million, working capital metrics worsened compared to the previous quarter negatively impacting the cash flow from operations. Accounts receivable DSO stood at 68 days compared to 61 days last quarter, mainly due to timing of shipping several flat panel display systems towards the end of the quarter. We will continue to see fluctuations in our DSO based on the timing of shipments of these systems during a quarter. Inventory turns declined from 3.0 last quarter to 2.7 turns this quarter as we are increasing our work in process levels to support the flat panel display demand ramp-up. Capital spending for the quarter was $4.8 million or 2.5% of sales.

We project our second fiscal 2016 quarter revenue to range from $195 to $200 million. The impact of the significant increase in the flat panel display backlog coupled with follow-on orders received in January will positively impact our fiscal 2016 second half and future revenues but not the second quarter revenues. We forecast the second quarter pro forma gross profit percentage to be in the range of 43.5% to 44.0% of sales, a considerable pick up from last year but slightly below this quarter’s results mainly due to a less favorable mix. Pro forma margins exclude intangibles amortization of $1.3 million and stock compensation costs estimated at $0.7 million.

We anticipate the second quarter pro forma period expenses to be approximately 27.5% to 28.0% of sales, a similar ratio to the quarter we just completed. The guidance excludes intangibles amortization estimated at $0.7 million and stock compensation costs of approximately $4.2 million. Other income and expense is estimated to be immaterial. We do not include transaction gains and losses related to future changes in foreign exchange rates in our guidance. We project our pro forma tax rate to be approximately 27% for the fiscal year.

We forecast our full fiscal 2015 capital spending to be approximately $45 million. This includes projects that were postponed from fiscal 2015 into fiscal 2016 as well as additional building expansion and improvement projects. In addition, based on the recent inflow and anticipated future bookings for ELA tools, we are increasing our excimer system manufacturing capacity in Germany and the optics fabrication capacity in the U.S. And, we are assuming weighted outstanding shares of 24.4 million for the second quarter.

Before turning over the call to John, I want to thank John in particular, and the entire Coherent organization for the opportunity of working for the past 16 years at Coherent, a company I consider to be remarkable with talented people and with a bright future. The best departure gift has to be the bookings record and projected new bookings record for the second quarter.

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

John Ambroseo

Thanks, Leen. Good afternoon everyone and welcome to our first fiscal quarter conference call. There were several positive takeaways from the first quarter. A favorable product mix led to higher gross margins. When combined with disciplined spending, it led to solid earnings despite revenue headwinds related to China. Our predictions about an impending OLED investment cycle panned out, leading to very strong bookings. I’ll discuss our outlook for the FPD space in a few moments.

We posted record setting bookings of $273.0 million in the first fiscal quarter, representing an increase of 32.9% sequentially and 68.0% compared to the prior year period. The book-to-bill for the first quarter was 1.43. While it’s tempting to end my prepared remarks here, let me provide some color on our end markets. Scientific orders of $33.7 million increased 0.6% sequentially and declined 3.0% compared to the prior year period.

Demand for amplified ultrafast systems including the Astrella, Libra and Legend series remained strong across all regions. The biological imaging market is the other key contributor to scientific bookings. We saw market share growth in Japan due to the Chameleon Discovery being qualified with a major microscope vendor. We are also seeing a shift from the traditional microscope companies to smaller players that specialize in neuroscience solutions. On a geographic basis, China was a standout as institutions spent the remaining funds in the last quarter of the country’s prior five-year plan. Instrumentation and OEM components orders of $30.0 million decreased 27.4% sequentially and 4.9% versus the prior year period.

The large sequential swing is primarily a result of order timing in the instrumentation business with a smaller macro effect in the medical OEM market. Bioinstrumentation customers remain bullish on their opportunities in personalized medicine, especially for age-related, chronic diseases, and the fight against global epidemics. This is driving growth in dedicated, tabletop instruments. Our customers are racing on two fronts: expanding their bioassay or reagent portfolio and introducing dedicated tools to support testing. We are being asked to accelerate the latter through the development of multi-wavelength, plug-and-play light engines based upon our OBIS and BioRay platforms. When combined with the potential in genomics, the future of our instruments business looks solid.

The medical OEM market experienced some mild headwinds from inventory management tied to concerns about China. I don’t want to seem dismissive of the near-term trend, but the headline stories are still all about cataract treatment and dental procedures. Testing of our Monaco laser for cataracts is going well and our position for next generation tools is strengthening. Within the dental market, reviews for the CO2-based procedure are positive and, from our vantage point, widespread adoption seems increasingly likely. Microelectronics orders of $188.9 million rose 94.0% sequentially and 161.7% compared to the prior year period.

The first wave of orders for large format Linebeam systems to be used in OLED production accounted for the bookings increase. The second wave has already arrived in the current quarter with an order well in excess of $150 million. There are a significant number of orders pending for the balance of the second quarter and for the remainder of fiscal 2016. The systems are a mix of Twin Vyper Linebeam 1000’s and Triple Vyper Linebeam 1500’s. In order to meet our delivery commitments, we are expanding our footprint in Göttingen, Germany and adding optics fabrication capacity at our site in Richmond, California. Given the competitive environment amongst the end customers, we are not at liberty to disclose the order mix or delivery schedule. We can tell you that deliveries begin in the June quarter and run through calendar 2017. We have also run projections on the long-term service needs and believe we have ample space in our existing refurbishment centers to meet demand.

The correlation between semiconductor inventories and fab utilization rates was evident in the December quarter. Inventories rose and utilization dipped. We saw a predictable response in our service business skewed towards legacy nodes, but new system orders improved for a second consecutive quarter. We think these orders are linked to specific expansions rather than signaling the start of a broader cycle. The API market is mirroring the semi market and also awaits a stimulus from new device architectures. Materials processing orders of $20.4 million were down 38.6% sequentially and 15.1% versus the prior year period.

Bookings were adversely affected by the timing of certain orders, a slowdown in China and seasonality. We have been working on a number of projects for marking new materials and expected orders in the Q1 or Q2 timeframe. These orders have slid as final details of the process window and tool configuration have been finalized. As I reported last quarter, China was stable in fiscal 2015, but the market softened in the first quarter and inventories have been trimmed accordingly. Customers are citing volatility of the Chinese stock market and the ensuing hit to consumer confidence as the main culprit. There is some additional contribution from the devaluation of the yuan that have made imports more expensive. This has more of an effect upon the low end of the laser market where local alternatives are available. It is less of an issue at higher performance levels. Overall, our outlook for China in fiscal 2016 is neutral with specific projects offsetting market uncertainty. We are scheduled to begin deliveries of our second-generation fiber laser platform this quarter. This is an important step towards validating our platform and building a position in the market. Stay tuned.

We have a tremendous opportunity in front of us in the FPD business. It will lead to an inflection in revenue and healthy gross margins. Both are essential to achieving and possibly exceeding the high-end of our long-term pro forma EBITDA goals. We see the potential for this to occur in fiscal 2017.

Before we move to Q&A, I’d like to provide an update on our CFO search. We are in the final stage of the process and expect to make an announcement within 10 days. To ensure there is no gap, Leen has agreed to remain our CFO until February 15th. That’s the easy part. Describing what Leen has meant to Coherent and to me is considerably more difficult, but a baseball analogy comes to mind. She’s a five-tool player: she’s smart, exercises excellent judgment, is as ethical as they come, is very conscientious and exudes gravitas. She has made us better simply by being around. On a more personal note, I want to thank her for being an outstanding business partner for the last 16 years. And on behalf of everyone at Coherent, I want to wish her continued success and much happiness.

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

Question-and-Answer Session

Operator

[Operator Instructions] Your first question comes from the line of Larry Solow from CJS Securities. Your line is open. Please go ahead.

Larry Solow

First of all, Leen congratulations and good luck best wishes to you, we'll talk again I will get in there before the next two weeks so we will chat.

Leen Simonet

Yes, thank you, Larry.

Larry Solow

You're welcome. Just quickly on the gross margin so, nice quarter, sequential rise and I know you had expected growth to actually come in a little bit. So, was that really like a 200 bp relative to guidance, is that basically all the mix is that essentially it?

John Ambroseo

The answer is yes, there was improved mix within service and then improved mix within FPD systems.

Larry Solow

Okay.

John Ambroseo

And lower manufacturing cost as well.

Larry Solow

Right, I know you've driven warranty cost down and what not I guess that seems sustainable. So clearly John I saw within gross margins and it sounds like you're signaling as you look out flat panel display is generally better mix and I assumed service revenue will probably be at sustainable at these levels and higher as a percentage of revenue, is that fair to say or I mean does this fair to the same number in the next couple of years could that grow considerably as flat panel display really accelerates?

John Ambroseo

Well, Larry I think you have to bear in mind that we already have considerable backlog in FPD systems. We've already booked a very big order this quarter with a fair amount more to come and as the timeframe that we estimate, all of these deliveries, I've talked about being from the June quarter this year through '17. So there's going to be a lot of FPD systems higher than we've run the last few years and when you take that into account, I think the service mix as a percentage of whole probably goes down because it's going to be overwhelmed, at least on the short-term…

Larry Solow

Right, right.

John Ambroseo

…by system deliveries.

Larry Solow

Okay so from the net…

John Ambroseo

We do anticipate that those systems themselves will carry big gross margins.

Larry Solow

And then the fact that you -- because it sounds like you're committed to at least making all of the orders that you've gotten to date and maybe for even -- and it sounds like in Q2 as well delivered out by the end of '17 or calendar '17, is there potential that there is manufacturing issues or some type of inefficiencies because you have the sort of squeeze more in than you are normally used to sort of a high class problem but is that a potential issue?

John Ambroseo

So there is no doubt that this is a significant ramp and as I mentioned, we are making investment in Göttingen and in Richmond to accommodate the acceleration of the schedule and what the end customers want, and entrepreneurs want, is for a fairly tight delivery schedule and we've build a schedule or we built the capacity to handle that and we have made certain assumptions in building that capacity of what orders are coming and potentially what the mix of those orders is going to look like. Do things happen along the way sure have we built all of these systems already, meaning this type of system, yes we have shipped Linebeam 1500s and yes we have shipped Linebeam 1000s, so we know how to make them, but we have to make a lot more of them in a very compressed period of time.

Larry Solow

Right, so sounds like you're up for the challenge, in terms of other carry expenses obviously you've done a nice job, those are selling lower than expected as a percentage of revenue even though there was some I don’t know a little bit less revenue, seems like that this lower level is sustainable I guess as revenues rise maybe there is a modest amount of bearable expense or Leen could those expenses rise more as revenues rise, would they need to?

Leen Simonet

Larry it's important to remember that the first quarter was a very short quarter, we had lots of holidays and so there is a lot of capital spending, reductions that came with it, so when you move on, it will not go along with your shorter quarter so expenses will go up and I gave a guidance -- the guidance similar to 20% as a percent of revenue meaning the dollar numbers will go up?

Larry Solow

Right, okay, fair enough. John just last question and then I'll move out. On the dental opportunity you mentioned increasingly likely for a widespread adoption, can you -- I know there isn't an exact number out there but sort of ballpark what the size of that market could be or contributions for you guys?

John Ambroseo

I can't today because the lead customer here is still developing the market, but if we look at sort of the number, if you look at it sort of in terms of sockets if you will and you consider every dentist is a potential socket. I think there are 186,000 practicing dentists in the U.S. and obviously a much larger number of worldwide and as the system gets qualified, not qualified but approved for deployment in other territories, obviously the size of that addressable market just keeps going on.

Larry Solow

Got it and just November do you guys evaluate for another company like Ester with fiber lasers I know dental market is sometimes not that easy to crack right takes a little while to sort of get the ramp of this type of thing or does it sound like something could be in a couple of years versus a 10 year period in terms of adoption?

John Ambroseo

So I think you are statement is a fair one and I would broaden it to say the medical market in general the adoption can be slow, if we look at the early data here it's actually pretty encouraging and I think that really speaks to the efficacy of this device and the patient’s reaction to it. Normally for the dental market leap as I understand it, you have to get people that are in dental school accustomed to or comfortable with the technology and then when they move into practice they take it with them. I think they've seen a different trend with this product and maybe because the market has had a number of these kinds of systems in the past that really haven't delivered on the full potential of what's going out there today, so it's -- maybe it paved road a little bit and the opportunity for a superior solution is panning out.

Operator

Your next question comes from the line of Jim Ricchiuti from Needham & Company. Your line is open. Please go ahead.

Jim Ricchiuti

And just moving to the questions, John can you say whether any of these OLED-related bookings are getting end up ultimately going to customers outside of Korea?

John Ambroseo

I would have to think that, I am sorry so let me just make I understand the question. The OLED that are produced are going to customers outside of Korea that's the question?

Jim Ricchiuti

No the question maybe I wasn’t clear, I apologize, in other words the booking for the equipment orders that you have for OLED applications, from what you can see and what do you know in your backlog are any of these going to end-customers that are outside of Korea, the end-customer? I am trying to get, go ahead.

John Ambroseo

So the answer is yes. The end-customer group includes Korean panel manufacturers, Japanese panel manufacturers and Chinese panel manufacturers.

Jim Ricchiuti

Okay, is the activity more pronounced -- putting aside Korea for a second, is the activity more pronounced in Japan or you're seeing similar levels of activity in China?

John Ambroseo

I can't provide that level of granularity.

Jim Ricchiuti

Okay, is there anything -- as we think about the service business and recognize that it's going to be a while before these machines are installed and are operating, but is there -- are you anticipating any change in the pricing on the service side, because you have made some agreements on pricing with I believe you are creating customers, but do you anticipate changes going forward?

John Ambroseo

I think the most likely change going forward is we will move more towards a contract model that has benefits for the end customer and for Coherent and exactly when that co-over takes place a little bit more difficult to project, because we're going to be shipping the number of companies that have a desire to produce OLEDs is thriving and there is a lot of learning that they will do along the way which I think will influence the whole service discussion.

Jim Ricchiuti

Okay. Is there any way that you could help us to understand the opportunity you're talking about significant follow-on orders beyond what you received I believe what in January that 150 million of orders?

John Ambroseo

That's correct, that was a single order for 150 million. Well I'm sorry it is a single order for over 150 million.

Jim Ricchiuti

Okay. The follow-on potential behind that, is there any way to size that?

John Ambroseo

Do you really want to spoil the surprises, Jim? I'm sorry I am being stupid. We have a pretty good line of sight. I'd like to have the orders in place and I know the configurations and everything else before disclosing the number but it's a pretty healthy number. I'm not going to further than that at this point.

Operator

Your next question comes from the line of Mark Miller from Benchmark Company. Your line is open. Please go ahead.

Mark Miller

I also would like to extend my congratulations on your results and on your orders they are certainly impressive and also the best to Leen. Real quick as I got another call here I will jump on. In terms of the -- you'd mentioned I think at a recent conference another major opportunity for carbon monoxide lasers for via drilling when do you see that starting to ramp? Is that more of a second half?

John Ambroseo

I think the CL opportunity in via drilling is probably not a second half event in terms of volume, we will probably continue to sell -- developing units for people to work on processes but the via market right now is like a selling market is experiencing some turbulence and I think there is going to be a cautious investment environment for API, probably for the rest of this fiscal year.

Mark Miller

Okay. And just finally because, I got to jump, you said China was neutralized, I assume scientific, you said was healthy and strong but it's been offset by a weakness in industrial material processing is there anything else there?

John Ambroseo

So my comment about China being neutral was more a forward-looking statement for fiscal '16 and the way to think about this Mark, is overall China for us is likely to be neutral, the core materials processing space is currently challenged because of all the uncertainty and with exchange rates and concerns about consumer confidence the things I talked about during my prepared remarks. What will offset it for us is there are some specific opportunities within the materials processing and specifically marketing opportunities that we think are interesting and we're looking at some market share capture in other areas which will make it neutral for us. So, it's really -- it's not the market is neutral and I'm sorry, I'm going along with it I am repeating myself. It's not that the market is neutral we have offsets that allow our business to be neutral.

Operator

Your next question comes from the line of Joan Tong from Sidoti & Company. Your line is open. Please go ahead.

Joan Tong

So, my question is again going back to that flat panel display business and I think John you have mentioned in the past that you've made a couple of different ways that client can go about with this OLED opportunity, they can sort of like use, if they choose to some of those like order, like lower format as smaller format line being and it seems like the order inflow is really like kind of coming in at the higher level. So can we comfortably assume that, clients are not doing that and kind of they are buying new laser for this?

John Ambroseo

I think there are two things happening here Joan. The first is I think it's difficult for them to shift capacity from LCD to OLED at this point, if all things were equal shifting that capacity, the OLED demand is going to ramp over the next few years but they still have LCD orders that they have to satisfy. The second consideration is that, while the core tool is identical to our OLED and LCD for the higher density OLEDs, and when I speak of density, I mean pixels per inch. The manufacturers seem to get a better result on the larger format systems. So the twin or triple viper systems which are typically 1 meter and above, so put it the other way using a Linebeam 750, I don't think they can actually make the product that they can make with a 1000 or a 1500, so that's what’s driving this wave. Could we foresee something well in the future where they start converting older machines to the higher density displays? The answer is yes, but from what we know today, you'd have to retire two Linebeam 750s for every OLED at least two Linebeam 750s or maybe three Linebeam 750s and harvest those lasers, but you would still need a completely new optical system. So all the orders that we're receiving now and what we anticipate receiving for the balance of ’16 will be new hardware.

Joan Tong

Okay, okay I see. And then John, you said last quarter, you won't able to provide like sort of guidance for 2016, and if I have missed that I apologize but I don't think you would actually provide guidance for 2016 and are you kind of alluded to right now that you don’t want to disclose too much for competitive purposes on your client base, so I just want to see maybe directionally obviously it looks it's going to be up like given all the puts and takes, can you just give a little bit more color how we should think about 2016 as a whole year, how we should think about like how progressing revenue progressing as well as like a full year revenue growth?

John Ambroseo

So I guess the way that I would look at it Joan is there are, for your reference you said there are puts and takes obviously FPD is a big positive things like China et cetera represent a bit of a unknown as we go forward. If I had to give you some directionality, we would view ’16 as being above the consensus numbers that are out there today. How much above it? I think we'll have a better view in the next conference call.

Joan Tong

Okay. And then again I might have missed that, I am just wondering have you talked about what is the total bookings so far for this OLED opportunity, I think it started in the December quarter, I am sorry in the September quarter, and can just disclose that or you might have done that already?

John Ambroseo

We didn’t disclose it and we can't disclose it. We can tell you what the values of orders are, but we can't do a breakdown of LCD versus OLED capacity for the reasons that I already highlighted.

Operator

Your next question comes from the line of Patrick Newton from Stifel. Your line is open. Please go ahead.

Patrick Newton

So John you've been very clear for a significant period of time that you would not make capacity additions to FPD unless you had very good view into kind of the sustainability of demand and you clearly you're talking about this wave of orders coming filling through 2017 so obviously you have that -- you've appear to have that visibility in order for you to add capacities, so my question is could you help us and the investor community understand what percentage increased in footprints or potential unit outputs or revenue growth you're putting in from capacity perspective it is just very difficult to quantify or to digest just how big this opportunity could be?

John Ambroseo

Well, I like the way that you asked the question Patrick, no, we're not going to disclose those details. Giving you an indication of how many units we are going to ship, it's very easy for anybody any manufacturer in that space to calculate how much capacity is going into place and it's not our job to do that. I know that the investment community is very interested in that from the standpoint of how it's going to affect Coherent. But we have an obligation to protect the proprietary interest of the customers here and I realize that is maybe frustrating, but it's the way it's got be. The amount of space that we're actually adding is sort of nominal of the overall footprint. Building these very larger Linebeam systems and the amount of station time that they require, we're adding some bus terminals I guess because I often describe these things as residing a city bus. And in Richmond we're not adding any physical space, we're adding additional tooling. So these are nominal investments to support the delivery commitments that we've made to the customers.

Patrick Newton

And then I guess sticking on the FPD line of sight, you made it clear that mobility is a key demand driver historically, but I am curious you had some comments to another questions that there is a rising appetite for OLED across multiple panel makers and clearly across multiple geographies, so I am curious if you have any thoughts at all on the potential for your solutions to use for TVs longer term is that still very much wish but not likely reality or has there been any change on that front?

John Ambroseo

So if I had to rank the opportunities clearly mobile solutions is the priority in the near-term, there have been a number of devices including laptops that have been released recently using OLED displays and we believe those are LTPS based displays, so they would have been made with our equipment. But if you look at some of the evolution, TV is possible, I would probably put automotive ahead of TV in terms of the opportunity timeline because there are a number of manufacturers who are demonstrating concept cars that have OLED displays in them.

And they could be used for a number of different things whether it's the instrument cluster or whether it's the information center and which is typically the center console. Even in the longer term, you can imagine having a heads up display, a transparent heads up display that's made with an OLED device. And if you really go sort of far out and think about autonomous vehicles, you could use a flexible OLED to cover the entire windscreen and turn it into information center for the passengers. Those opportunities seem to resonate more because they're based on flexible displays and have a pretty high value add.

In the TV market, I think the challenge is still going to be all the competition amongst different types of television displays whether it's LCD with quantum dot enhancement or OLEDs. The different for the average viewer versus the price points, I don't if it's -- if OLEDs are at an enabling price point yet despite how much the cost per unit has come down.

Patrick Newton

Okay, fair enough and then I guess with 1Q results and if I take the midpoint of 2Q guidance both represent year-over-year declines yet you're saying that as we sit here today and with the FPD opportunity revenue growth should exceed consensus expectations, which I am showing is 8%, 3% growth year-over-year, would it be fair to say that inflection has to occur in the 3Q timeframe in order to kind of make all those start once?

John Ambroseo

It's going to be 3Q, 4Q and that's when we start shipping these big FPD systems.

Patrick Newton

Okay, and then last one is for Leen just focusing on the gross margin side, I think that is the highest level of gross margin since December of 2010 and then guidance points to a very nice expansion year-over-year, could you discuss the sustainability of the margin at these elevated levels and you said that mix was the biggest contributor in the current quarter, but any specific products that you can or end markets that you can elaborate on that are driving what could be a sustainably elevated in gross margin?

Leen Simonet

Patrick the one that nearly contributes the most to the 45% we had was basically a favorable service mix and a favorable flat panel display mix. The reason it came down in Q2 was because we don't have that same mix, in the third and the fourth quarter as John said we're going to ship more flat panel display systems and that should help and them get back to what we had in the first quarter. And you always have to be cautious I know it was John or some else said that there maybe -- we have to deliver a lot in a short period of time and these are well knows systems to us but I would say it is sustainable in the shorter term and when I say shorter term meaning we're selling those larger systems that we have on hands right now.

Operator

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

John Ambroseo

Thank you, Shannon. Thank you everyone for participating in today's call. And again, I want to wish Leen the very best. Have a good day.

Leen Simonet

Thank you.

Operator

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

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