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Coherent Inc (NASDAQ:COHR)

F4Q07 (Qtr End 9/29/07) EarningsCall

November 7, 2007 4:30 pm ET

Executives

Helene Simonet - EVP and CFO

John Ambroseo - President and CEO

Analysts

John Harmon - Needham & Company

Jiwon Lee - Sidoti & Company

Operator

Good day, ladies and gentlemen,and welcome to the Coherent Fourth Quarter 2007 Financial Earnings ResultConference Call, hosted by Coherent Inc. At this time all participants are in alisten-only mode. At the conclusion of our prepared remarks, we will conduct aquestion-and-answer session. (Operator Instructions). As a reminder this callis being recorded.

I would now like to introduce toyour host for today's conference call, the Chief Financial Officer of Coherent,Helene Simonet. Please go ahead.

Helene Simonet

Good afternoon, and welcome toour fiscal 2007 fourth quarter conference call. On today's call, I will provideselected financial information, and John Ambroseo, our President and CEO willprovide a business overview.

Let me first address the progresswith respect to the restatement we announced in our September 27, pressrelease. As you have seen, we previously announced an estimated range of 22million to 28 million for the pretax impact of non-cash stock compensationcharges through June 2006.

We continue to work diligently toprepare our restated financial, and we expect to file our fiscal 2006 and firstquarter fiscal 2007, no later than, mid December.

We expect that second and thirdquarter and full fiscal year 2007 to be filed in the beginning of calendar year2008.

We will only provide selectedfinancial through our fourth fiscal quarter with the forward-looking guidancefor our first fiscal 2008 quarter will include additional pro forma financialinformation.

As a reminder, any guidance andany statements in today's conference call pertaining to future plans, events,or performance, are forward-looking statements that involve risks anduncertainties and actual results may differ significantly.

Please refer to our press releasefor more detailed information on specific risk factors resulting from both thespecial committees investigation and other financial and business risks. Wealso encourage you to refer to the risk disclosures described in the company'sregistration statements on Form S-3 and the reports on Forms 10-K, 10-Q and 8-Kas applicable. These forward-looking statements are subject to the Safe Harborprovisions of the Private Securities Litigation Reform Act.

The full text of today's preparedremarks, which will include references to historical bookings and sales bymarket, and a special note regarding non-GAAP measures, will be made availablethrough the Coherent, Investor Relations web site. A replay of the webcast willbe made available for 90 days following the call.

Our overall book-to-bill for thequarter was 1.03, and our backlog at the end of Q4 '07 was $188.4 million. Johnwill provide the market application updates for bookings. But, in summary,bookings of $163.8 million increased by 7.2% over the corresponding prior yearperiod and increased 17.7% sequentially. Year-to-date bookings grew 1.2%.

Net sales for the fourth quarterwere $158.9 million, a record for the company. Sales were up 0.5% from the samequarter a year ago, and up 11.4% sequentially. On a fiscal year basis, salesincreased approximately 2.8%.

From a market perspective, wecontinue to see outstanding performance in materials processing, bioinstrumentationand medical, resulting in an annual growth of 24.1% for material processing and16.9% for the OEM components market.

Compared to fiscal '06,microelectronics sales declined to 3.9%, primarily due to slow demands in theflat panel display market. The scientific market whose annual growth was 5.5%showed a strong fourth quarter partially due to the revenue recognitions of largecustom lasers.

As previously communicated, thegraphic arts and display business had a tough comparison versus the prior yearperiod, as a result of our previously announced decision not to pursue furtherthe IAB business. This decision resulted in approximately $18 million lowersales this fiscal year compared to last fiscal year.

Company sales by significantmarket applications for the fourth quarter are as follows: Scientific andgovernment programs, $31.4; microelectronics, $63.7; material processing, $25.5;OEM components and instrumentations, $43.2; graphic arts and display, $5.1 fora total of $158.9 million.

And we move on to the balancesheet. Our cash balance, net of debt, for the quarter was $361.8 millionrepresenting an increase of $44.4 million compared to last quarter. Theincrease includes approximately $24.8 million from the sale of the Condensa buildingwhich was the home of our former medical segment. This transaction resulted ina pretax gain of approximately $3.6 million.

We also completed the sale of ourAuburn campus, as well as, the sale of our imaging optics business located in Leicester, UK.However, the cash inflow for both transaction is included in other receivablesas the transfer of funds occurred on the first day of fiscal 2008.

Our first fiscal 2008 quartercash balance will include approximately $16 million from both transactions. Thesale of Auburn resultedin a pretax loss of approximately $12.6 million and the sale of imaging opticsbusiness resulted in a pretax gain of approximately $1 million.

We have virtually no debt as ofSeptember 2007 compared to a debt balance at the end of the third quarter of $200.9million, as we previously announced the convertible debt we put in place duringthe second quarter of fiscal 2006 was accelerated and paid in full during thefourth quarter of fiscal 2007. This resulted into write-down of previouslycapitalized bond issuance, and other cost of 4.3 million.

The year-on-year cash balance netof debt increased $68.8 million. Stock compensation investigation cost forfiscal 2007 amounted to $10.1, of which $9 million was paid during fiscal 2007,and reflected as a reduction in cash.

The cash receivable day salesoutstanding at the end of the fourth quarter improved to 58 days, compared to63 days the previous quarter, which contributed to a strong fourth quarter cashflow from operations.

Capital spending for the quarteramounted to $4.2 million, or 2.6% of sales, and year-to-date capital spendingwas approximately $22 million, or 3.6% of sales.

The pro forma guidance providedfor the first quarter of fiscal 2008 excludes the impact of any stockcompensation charges.

We expect our first quarter salesto be in the range of $144 million to $148 million. As mentioned earlier, we nolonger have the imaging optics revenue, which reduces our quarterly sales byapproximately $4 million. Also remember that the first quarter is ourseasonally weak quarter due to the Thanks Giving and Christmas holiday, and as youhave seen in prior years, our first quarter sales typically declinedapproximately 2% to 7% on a sequential basis.

We expect the gross margin to bein the range of 42% to 43.5%. The gross margin percentage is lower when comparingto our last published percentage in Q3,'06, primarily due to the negativeimpact of market and product mix and a stronger Euro.

R&D spending is estimated tobe approximately 12.5% of sales and SG&A expenses excluding intangibleamortization and non-recurring items, such as, the stock compensationinvestigation cost are anticipated to be in the range of 21% to 21.5% of sales.

Intangible amortization,including the impact of Nuvonyx, our latest acquisition, will be approximately$2.1 million. Other income is estimated at about 2.5% of sales, and capitalspending for the full fiscal 2008 is projected to be approximately 4% to 5% ofsales.

We continue making it a priorityto get our historical financials on file as quickly as possible, and we thankyou for your patience.

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

John Ambroseo

Thanks Helene. Good afternoon,everyone. And welcome to our fourth fiscal quarter conference call. Beforediscussing our fourth quarter results, I'd like to provide some clarity on ourrecent announcement regarding long-term EBITDA targets. We established the goalof 19% to 23% EBITDA exiting fiscal 2010, which was well received by ourinvestor base. In our model, we assumed historical growth rates, potentialacquisitions were not factored into the equation. The achievement of the EBITDAgoal is based on a multi-step plan that will deliver benefits in phases overthe next three years, which are staged to insulate our customer supply chainsfrom any disruption. We believe the company and its shareholders will berewarded for the successful execution of this plan.

Orders in the fourth fiscalquarter totaled $163.8 million, which were up 17.7% from the prior quarter and7.2% versus the prior year period. The book-to-bill for the quarter was 1.03.

For the full fiscal year, orderswere $591 million corresponding to an increase of 1.2% and a book-to-bill ratioof 0.98.

As you'll hear on the followingcommentary, the total increase does not reflect the performance in theindividual markets. We are encouraged by the results in materials processing,instrumentation and some of the sub-markets within microelectronics.

Orders $31.3 million in thescientific market increased 10.5% sequentially, and decreased 4.3% versus theprior year period. Bookings for the fiscal year decreased 4.4% versus fiscal2006. The annual results were partially affected by research funding delays in United Statesand our decision to exit certain custom laser business earlier in fiscal 2007.The custom laser business is technically and financially challenging, thebenefits of pushing the edges of the technical envelope did not offset the costof this activity.

While US funding was delayed in Marchof fiscal 2007, it did improve in the fourth quarter. Domestic orders werepaced by a new record for Chameleon lasers to be used in biological imagingresearch. International orders were mixed with Europe down slightly from Q3 andAsia up, sequentially.

Record orders are $45.9 million instrumentationand OEM components were up 39.9% sequentially and 43.7% versus the prior yearperiod.

For the fiscal year, orders grewby 28.1%. We received several annual orders in the fourth quarter which isconsistent with previous trends. Our OPS lasers continue to enjoy a leadershipposition in the instrumentation market. There are two developments that webelieve will bolster this pattern. We are expanding our OPS product offering toprovide more overlap with existing customer portfolios and this may result infurther market gains.

Within the genomics market, DNA sequencersare transitioning to new architectures. As we experienced in cytometry, thistransition creates an opportunity to display legacy technology from othervendors.

Bookings for medical OEMs were upsignificantly versus Q3. The refractive surgery market was very strong in thefourth quarter, as the affects of consolidation and customer initiatives fuel demandfor our ExciStar, Excimer lasers. In the Hispanic market, orders are up, the CO2lasers used in skin resurfacing, since they provide higher efficiency and abetter overall patient experience compared to other lasers sources.

Bookings for microelectronics up$54.2 million increased 6.6% sequentially but declined 13.3% versus the prioryear period. This is the second consecutive quarter of increasing bookings,which is consistent with many market recovery predictions. For the fiscal year,orders declined 17.8% mostly due to weakness in the flat panel market.

Fourth quarter semicap orderswere up modestly on a sequential basis. The inspection market led the way withthe ratio between new systems and service weighted in favor of new systems.While customer outlook remains mixed, we believe the upcoming productintroductions will enable us to gain share within the semicaps space due toadvantages and performance reliability and total cost of ownership.

Orders in the advanced packagingmarket increased for the third consecutive quarter and exhibits strong growthover the third fiscal quarter. Flip-chip packages and cell phone PCBs were theprimary drivers. The growth trend could continue as Intel transitions the X66flip-chip substrate, which may require 30% to 40% additional productioncapacity. According to industry reports, it is estimated that Intel currentlyconsumes approximately 60% of flip-chips substrates.

Bookings from flat panel displaymanufacturers were down significantly from the prior quarter. The end userbusiness continues to suffer from eroding panel prices, leading to margincompression and capital constraints. There are two potential catalysts torestart this market, with the further absorption of existing capacity in thefirst and the most obvious catalyst. The second is the ability to utilize newcapacity in out of our LTPS or AM/OLED, display manufacturing, which speaks theprocess flexibility or our excimer lasers enjoy a leadership position.

Laser based in siliconsingulation and scribing continue to gain momentum in the near-term, and sometool providers are projecting gaudy growth rates of up to 50% per year over thenext few years. Our existing and future portfolios address these applications.

I’m also pleased to report thatwe saw another bump in bookings with solar cell manufacturers resulting inrecord quarterly and annual orders. This is a good trend, but much work remainsas the industry has to close the gap between solar and fossil fuels. As inseveral other markets, the laser industry must work aggressively towardsimproving the total cost of laser ownership.

Bookings are $5.1 million for graphicarts and display were up 8.2% sequentially and 3.3% versus the prior yearperiod. For the full fiscal year orders were down 25% on a relatively smallbase.

As we mentioned during the lastcall, our high power OPS platform was gaining traction in the entertainmentmarket for light-shows, the compactness and energy efficiency of the OPS laserswere the compelling factors leading to our first volume order in thisapplication.

Materials processing orders of $27.3million increased 21.4% sequentially and 31.9% from the prior year period.

Orders for the fiscal 2007increased 32.2% over fiscal 2006. These results reinforce our prediction thatover the next five years, the materials processing market represents one of thekey growth engines for the photonics industry.

Orders in the fourth quarter offiscal 2007 from core applications and marking and non-metallic processing inAsia, especially, China and Europe, continue to exhibit strong performance.

The core bookings were augmentedby first time customers and new products. In particular, we received ordersfrom an OEM integrator in India,who serves the marking and medical device markets and for our recently releasedmetrics platform which will be used in marking applications. We view both thesepositive developments since Indiarepresents a potentially sizeable opportunity and the metrics were selectedover other laser technologies for various laser marketing applications.

As Helene mentioned, we engagedin 3 hours transactions at the end of September 2007. We sold our thermalimaging optics business located in Leicester, England to CVIMelles Griot in all cash transaction. The Leicesteroperation is a standalone business within Coherent. It primarily served Europeanmilitary contractors and had margins and capital needs similar to the broaderoptics industry. This performance was not consistent with our longer termobjectives, and we believe divesting it was in the best interest of the companyfor its shareholders. We also sold the Condesa and Auburnsites. The three transactions account for approximately 425,000 square feet of space,equivalent with 33% footprint reduction.

Our underlying story speaks of theboth high growth markets and the value of diversification, while there are manyglobal factors that could influence fiscal 2008, including NG prices, creditmarkets and exchange rates. We believe we are well positioned to capitalize oncurrent market trends, and a capital investment recovery in the flat paneldisplay market.

I'll now turn the call back overto Matt to begin the Q&A session.

Question-and-Answer Session

Operator

Thank you. (OperatorInstructions). We will take your first question from John Harmon with Needham &Company.

John Harmon - Needham& Company

Hi. Good afternoon. Couple ofquestions, please. John, I was wondering if you could just tell us about thesub components of your microelectronics business; just maybe tell us which twoor three are largest or rank some of them, if you couldplease?

John Ambroseo

You want me to rank the submarkets within microelectronics?

John Harmon - Needham& Company

Yeah, tell us what's top, two orthree are the largest, just that we can put in perspective?

John Ambroseo

The market is actually reasonablybalanced John, between semi-cap applications, advanced packaging applications,and historically, the flat panel market. That mix obviously shifted in the lastquarter, with advanced packaging, probably making the biggest gain and flatpanel giving way as new system orders were lagging, as I mentioned during thecommentary. The recovery in the flat panel market, as I mentioned, is still onthe horizon, and we expect that to occur as this capacity issued right itself.We also firmly believe – again, as I am referring to my commentary, that ourfuture systems have to be capable of doing either LTPS or AM/OLED, as customersare seeking to balance our capacity in the future.

John Harmon - Needham& Company

Okay. Thank you. That helped. Irecall that a couple of quarters ago, I think, your customer for your excimer lasersand panel manufacturing was holding-off orders in anticipation of a new productplatform. Sorry if I missed it, but did that happen? Is that customer orderagain?

John Ambroseo

Well, as I mentioned, the marketitself is pretty much on hold right now, new systems order have been laggingfor a few quarters, so even though there are new technologies available from usthat is not driving an increase in bookings within the flat panel market rightnow, it’s a very challenging space for the reasons I alluded to during mycommentary.

John Harmon - Needham& Company

Okay. Thank you.

John Ambroseo

Sure.

Operator

(Operator Instructions). And nowwe will hear from Jiwon Lee with Sidoti & Company.

Jiwon Lee - Sidoti & Company

Good afternoon.

John Ambroseo

Hi, Jiwon.

Jiwon Lee - Sidoti & Company

Hi, John. When you guided thefirst quarter of '08, what type of end market, or the product assumptions, didyou sort of, kind of, build in, especially, if you can sort of a focus on thematerials processing, or the microelectronics?

John Ambroseo

Jiwon, typically, we don'tprovide the kind of granularity that I think you maybe asking for. I think thebest indicator for the market mix is reflected in what bookings have been overthe past one to two quarters. So, if you look at the fourth quarter as anindicator, it will give you some indication as to where to expect revenues tocome from in the first quarter. Historically speaking, the first quarter tendsto be a bit stronger or bit a more weighted towards scientific than tocommercial and that's largely due to the fact that many of our commercialcustomers don't want to go into the year-end holiday season with more inventorythan they need.

Jiwon Lee - Sidoti & Company

Okay. I have heard recently fromother laser vendors that they have seen some softness, especially out of Japan, and thatmaybe related to you, particularly to excimer lasers. Have you seen a similarlandscape, or how would you characterize Japanversus Chinaeven?

John Ambroseo

The Japanese market for us, atleast in the most recent quarter, was inline with expectations, with theexception of the flat panel display market, I think you are aware that weserved a very large customer that's based out of Japan within FPD, and while theirorders for service spares and services continue to move along at a pretty good rate,the orders for new systems is quite slow right now.

Jiwon Lee - Sidoti & Company

I see.

John Ambroseo

Other than that example, I don'tthink that we saw any anomalies in Japanese bookings in the fourth quarter.

Jiwon Lee - Sidoti & Company

Okay. And the solar panels, is theresome customer concentration? How many,roughly, are you selling into that market right now?

John Ambroseo

Are you speaking to customers orunits?

Jiwon Lee - Sidoti & Company

Customers, please.

John Ambroseo

So, it's probably somewherebetween 5-0 customers that are taking product right now. As you might imagine,given the historical trends, many of those customers are in Europe, I thinkthere may be a couple of win in Japan,and some emerging ones in the US.But that's consistent with where the business has developed over the lastdecade.

Jiwon Lee - Sidoti & Company

Okay. Fair enough. And lastquarter you guided Nuvonyx sales contribution to be about $3.5 million, do theymeet that expectation?

John Ambroseo

I'm going to refer to Helene onthis because she has to look at her cheat sheet here.

Jiwon Lee - Sidoti & Company

Okay.

John Ambroseo

So, if you give us a moment.

Jiwon Lee - Sidoti & Company

Okay. That's my final question.Thank you.

Helene Simonet

Nuvonyx was a little lighter thisquarter because they have the major contracts or sometime it shift in the nextquarter, they were north of $3 million, but below $3 million.

Jiwon Lee - Sidoti & Company

I see. Okay, fair enough. Thankyou.

Operator

(Operator Instructions). We do havea follow-up from John Harmon with Needham & Company.

John Harmon - Needham& Company

Hi. When you were talking aboutscientific and government, you said there was a product line or productcategory that you exited. What products, what market was that, please?

John Ambroseo

We are changing our strategy alittle bit on highly customize systems. So, we are providing configurablesolutions. We are trying or attending to shy away from highly customizesolutions because they are fairly time consuming to manufacturer and theongoing support as you can imagine is also heavier than a configurable orstandard product. For the fiscal year, it's not very much in terms of revenue.John, it's probably somewhere between $5 million and $10 million.

John Harmon - Needham& Company

Okay. Thank you.

John Ambroseo

Sure.

Operator

And at this time, we have nofurther questions in the queue. I will turn the call back over to John Ambroseofor any additional or closing remarks.

John Ambroseo

I'd like to thank everyone forparticipating in the call. And we look forward to speaking with you in January.

Operator

And once again this does concludetoday's call. Thank you for joining us and have a great day.

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