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Coherent Inc (NASDAQ:COHR)

F4Q07 (Qtr End 9/29/07) Earnings Call

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 Result Conference Call, hosted by Coherent Inc. At this time all participants are in a listen-only mode. 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 to your host for today's conference call, the Chief Financial Officer of Coherent, Helene Simonet. Please go ahead.

Helene Simonet

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

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

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

We expect that second and third quarter and full fiscal year 2007 to be filed in the beginning of calendar year 2008.

We will only provide selected financial through our fourth fiscal quarter with the forward-looking guidance for our first fiscal 2008 quarter will include additional pro forma financial information.

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

Please refer to our press release for more detailed information on specific risk factors resulting from both the special committees investigation and other financial and business risks. We also encourage you to refer to the risk disclosures described in the company's registration statements on Form S-3 and the reports on Forms 10-K, 10-Q and 8-K as applicable. These forward-looking statements are subject to the Safe Harbor provisions of the Private Securities Litigation Reform Act.

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

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

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

From a market perspective, we continue to see outstanding performance in materials processing, bioinstrumentation and medical, resulting in an annual growth of 24.1% for material processing and 16.9% for the OEM components market.

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

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

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

And we move on to the balance sheet. Our cash balance, net of debt, for the quarter was $361.8 million representing an increase of $44.4 million compared to last quarter. The increase includes approximately $24.8 million from the sale of the Condensa building which was the home of our former medical segment. This transaction resulted in a pretax gain of approximately $3.6 million.

We also completed the sale of our Auburn 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 receivables as the transfer of funds occurred on the first day of fiscal 2008.

Our first fiscal 2008 quarter cash balance will include approximately $16 million from both transactions. The sale of Auburn resulted in a pretax loss of approximately $12.6 million and the sale of imaging optics business resulted in a pretax gain of approximately $1 million.

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

The year-on-year cash balance net of debt increased $68.8 million. Stock compensation investigation cost for fiscal 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 sales outstanding at the end of the fourth quarter improved to 58 days, compared to 63 days the previous quarter, which contributed to a strong fourth quarter cash flow from operations.

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

The pro forma guidance provided for the first quarter of fiscal 2008 excludes the impact of any stock compensation charges.

We expect our first quarter sales to be in the range of $144 million to $148 million. As mentioned earlier, we no longer have the imaging optics revenue, which reduces our quarterly sales by approximately $4 million. Also remember that the first quarter is our seasonally weak quarter due to the Thanks Giving and Christmas holiday, and as you have seen in prior years, our first quarter sales typically declined approximately 2% to 7% on a sequential basis.

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

R&D spending is estimated to be approximately 12.5% of sales and SG&A expenses excluding intangible amortization and non-recurring items, such as, the stock compensation investigation 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 capital spending for the full fiscal 2008 is projected to be approximately 4% to 5% of sales.

We continue making it a priority to get our historical financials on file as quickly as possible, and we thank you for your patience.

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

John Ambroseo

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

Orders in the fourth fiscal quarter totaled $163.8 million, which were up 17.7% from the prior quarter and 7.2% versus the prior year period. The book-to-bill for the quarter was 1.03.

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

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

Orders $31.3 million in the scientific market increased 10.5% sequentially, and decreased 4.3% versus the prior year period. Bookings for the fiscal year decreased 4.4% versus fiscal 2006. The annual results were partially affected by research funding delays in United States and our decision to exit certain custom laser business earlier in fiscal 2007. The custom laser business is technically and financially challenging, the benefits of pushing the edges of the technical envelope did not offset the cost of this activity.

While US funding was delayed in March of fiscal 2007, it did improve in the fourth quarter. Domestic orders were paced by a new record for Chameleon lasers to be used in biological imaging research. International orders were mixed with Europe down slightly from Q3 and Asia up, sequentially.

Record orders are $45.9 million instrumentation and OEM components were up 39.9% sequentially and 43.7% versus the prior year period.

For the fiscal year, orders grew by 28.1%. We received several annual orders in the fourth quarter which is consistent with previous trends. Our OPS lasers continue to enjoy a leadership position in the instrumentation market. There are two developments that we believe will bolster this pattern. We are expanding our OPS product offering to provide more overlap with existing customer portfolios and this may result in further market gains.

Within the genomics market, DNA sequencers are transitioning to new architectures. As we experienced in cytometry, this transition creates an opportunity to display legacy technology from other vendors.

Bookings for medical OEMs were up significantly versus Q3. The refractive surgery market was very strong in the fourth quarter, as the affects of consolidation and customer initiatives fuel demand for our ExciStar, Excimer lasers. In the Hispanic market, orders are up, the CO2 lasers used in skin resurfacing, since they provide higher efficiency and a better 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 prior year 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 orders were up modestly on a sequential basis. The inspection market led the way with the ratio between new systems and service weighted in favor of new systems. While customer outlook remains mixed, we believe the upcoming product introductions will enable us to gain share within the semicaps space due to advantages and performance reliability and total cost of ownership.

Orders in the advanced packaging market increased for the third consecutive quarter and exhibits strong growth over the third fiscal quarter. Flip-chip packages and cell phone PCBs were the primary drivers. The growth trend could continue as Intel transitions the X66 flip-chip substrate, which may require 30% to 40% additional production capacity. According to industry reports, it is estimated that Intel currently consumes approximately 60% of flip-chips substrates.

Bookings from flat panel display manufacturers were down significantly from the prior quarter. The end user business continues to suffer from eroding panel prices, leading to margin compression and capital constraints. There are two potential catalysts to restart this market, with the further absorption of existing capacity in the first and the most obvious catalyst. The second is the ability to utilize new capacity in out of our LTPS or AM/OLED, display manufacturing, which speaks the process flexibility or our excimer lasers enjoy a leadership position.

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

I’m also pleased to report that we saw another bump in bookings with solar cell manufacturers resulting in record quarterly and annual orders. This is a good trend, but much work remains as the industry has to close the gap between solar and fossil fuels. As in several other markets, the laser industry must work aggressively towards improving the total cost of laser ownership.

Bookings are $5.1 million for graphic arts and display were up 8.2% sequentially and 3.3% versus the prior year period. For the full fiscal year orders were down 25% on a relatively small base.

As we mentioned during the last call, our high power OPS platform was gaining traction in the entertainment market for light-shows, the compactness and energy efficiency of the OPS lasers were the compelling factors leading to our first volume order in this application.

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

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

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

The core bookings were augmented by first time customers and new products. In particular, we received orders from an OEM integrator in India, who serves the marking and medical device markets and for our recently released metrics platform which will be used in marking applications. We view both these positive developments since India represents a potentially sizeable opportunity and the metrics were selected over other laser technologies for various laser marketing applications.

As Helene mentioned, we engaged in 3 hours transactions at the end of September 2007. We sold our thermal imaging optics business located in Leicester, England to CVI Melles Griot in all cash transaction. The Leicester operation is a standalone business within Coherent. It primarily served European military contractors and had margins and capital needs similar to the broader optics industry. This performance was not consistent with our longer term objectives, and we believe divesting it was in the best interest of the company for its shareholders. We also sold the Condesa and Auburn sites. The three transactions account for approximately 425,000 square feet of space, equivalent with 33% footprint reduction.

Our underlying story speaks of the both high growth markets and the value of diversification, while there are many global factors that could influence fiscal 2008, including NG prices, credit markets and exchange rates. We believe we are well positioned to capitalize on current market trends, and a capital investment recovery in the flat panel display market.

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

Question-and-Answer Session

Operator

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

John Harmon - Needham & Company

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

John Ambroseo

You want me to rank the sub markets within microelectronics?

John Harmon - Needham & Company

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

John Ambroseo

The market is actually reasonably balanced John, between semi-cap applications, advanced packaging applications, and historically, the flat panel market. That mix obviously shifted in the last quarter, with advanced packaging, probably making the biggest gain and flat panel giving way as new system orders were lagging, as I mentioned during the commentary. The recovery in the flat panel market, as I mentioned, is still on the 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 our future systems have to be capable of doing either LTPS or AM/OLED, as customers are seeking to balance our capacity in the future.

John Harmon - Needham & Company

Okay. Thank you. That helped. I recall that a couple of quarters ago, I think, your customer for your excimer lasers and panel manufacturing was holding-off orders in anticipation of a new product platform. Sorry if I missed it, but did that happen? Is that customer order again?

John Ambroseo

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

John Harmon - Needham & Company

Okay. Thank you.

John Ambroseo

Sure.

Operator

(Operator Instructions). And now we 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 the first quarter of '08, what type of end market, or the product assumptions, did you sort of, kind of, build in, especially, if you can sort of a focus on the materials processing, or the microelectronics?

John Ambroseo

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

Jiwon Lee - Sidoti & Company

Okay. I have heard recently from other laser vendors that they have seen some softness, especially out of Japan, and that maybe related to you, particularly to excimer lasers. Have you seen a similar landscape, or how would you characterize Japan versus China even?

John Ambroseo

The Japanese market for us, at least in the most recent quarter, was inline with expectations, with the exception of the flat panel display market, I think you are aware that we served a very large customer that's based out of Japan within FPD, and while their orders 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't think that we saw any anomalies in Japanese bookings in the fourth quarter.

Jiwon Lee - Sidoti & Company

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

John Ambroseo

Are you speaking to customers or units?

Jiwon Lee - Sidoti & Company

Customers, please.

John Ambroseo

So, it's probably somewhere between 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 think there 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 last decade.

Jiwon Lee - Sidoti & Company

Okay. Fair enough. And last quarter you guided Nuvonyx sales contribution to be about $3.5 million, do they meet that expectation?

John Ambroseo

I'm going to refer to Helene on this 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 this quarter because they have the major contracts or sometime it shift in the next quarter, they were north of $3 million, but below $3 million.

Jiwon Lee - Sidoti & Company

I see. Okay, fair enough. Thank you.

Operator

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

John Harmon - Needham & Company

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

John Ambroseo

We are changing our strategy a little bit on highly customize systems. So, we are providing configurable solutions. We are trying or attending to shy away from highly customize solutions because they are fairly time consuming to manufacturer and the ongoing support as you can imagine is also heavier than a configurable or standard 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 no further questions in the queue. I will turn the call back over to John Ambroseo for any additional or closing remarks.

John Ambroseo

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

Operator

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

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