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Coherent Inc. (NASDAQ:COHR)

F1Q08 (Qtr End 12/29/07) Earnings Call

February 12, 2008 4:30 pm ET

Executives

John Ambroseo - President and CEO

Helene Simonet - CFO

Analysts

Jiwon Lee - Sidoti & Company

John Torell

Operator

Good day, ladies and gentlemen, and welcome to the Coherent first quarter 2008 financial earnings results conference call, hosted by Coherent, Incorporated. 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)

I would now like to introduce your host for today's conference call, the Chief Financial Officer of Coherent, Helene Simonet. You may begin your conference.

Helene Simonet

Good afternoon and welcome to our fiscal 2008 first quarter conference call. On today's call, I will provide financial information and John Ambroseo, our President and CEO will provide a business overview.

Let me first give you an update with respect to our SEC filings. Last week on February 6th, we filed our fiscal 2007 Form 10-K and today, we filed our first quarter fiscal 2008 Form 10-Q. We have now completed all the required SEC filings and we're pleased to announce that company will be re-listed on the NASDAQ Global Select Market effective with the opening of trading on Thursday, February 14, 2008.

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. We encourage you to refer to the risk disclosures described in the company's report on Form 10-K, 10-Q and 8K as applicable and as filed from time-to-time by the Company. The Company does not undertake any obligations to update these statements as a result of events or circumstances after the date hereof or to reflect the occurrence of unanticipated events. The full text of today's prepared remarks which will include references to historical bookings and sales by market will be made available through the Coherent investor relations website. A replay of the webcast will be made available for 90 days following the call.

We reported first quarter revenues of $144.3 million and net income of $4.7 million or $0.15 per diluted share. Excluding the charges related to the restatement of our financial statements and litigation resulting from the stock-option investigation and excluding the quarterly stock compensation charges, the pro forma net income for the first quarter of fiscal 2008 was $9.5 million or $0.30 per diluted shares, compared to a pro forma net income of $0.37 per diluted share for the first quarter of fiscal 2007.

The primary reasons for the decline in pro forma earnings related to the increase of period expenses resulting from a weakened dollar. During this period, the euro strengthened approximately 13%.

Bookings for the quarter were strong at $154.9 million, an increase by 13.7% over the corresponding prior year period. Our book-to-bill was 1.07 and the backlog at the end of Q1 '08 was $198.4 million. Net sales for the first quarter were $144.3 million and are within guidance, but as low-end primarily as the result of delivery push ups from a few customers not due to lot business.

Market perspective, when comparing to the similar quarter last year, we saw strong performance in material processing, bioinstrumentation and medical applications, resulting in a 26.5% growth for material processing and 14.5% for OEM components and instrumentations, when adjusted for the sales of optical imaging business. Microelectronics sales declined 12.7% as a result of the slow demand that we saw in the flat panel display market during the second half of fiscal 2007, coupled with normal timing of demand in other micro materials processing markets. The scientific market decline of 8.5% is primarily the results of our previously announced exit from the custom laser business.

Please note that effective Q1 '08, we are consolidating the graphic arts and display business into the OEM components and instrumentations markets. Prior period's market information has been combined to confirm to the current presentation. The Company sales by market applications for the first quarter of fiscal 2008 are as follows; Scientific 30.1; microelectronics, 48.7; material processing, 24.5; and OEM components and instrumentations, 41 for a total of 144.3 million.

First quarter gross profit was $60.5 million or 41.9% of sales. On a pro forma basis, excluding stock compensation costs, gross profit of 42.2% is similar to the first quarter of 2007. The projected accretion of having no imaging uptick revenue and lower scientific custom business was offset by the negative impact of the weak dollar and it continued unfavorable microelectronics market and product mix.

When comparing to the previous quarter pro forma gross profit increased slightly from 41.9% to 42.2%, and this sequential increase was primarily related to improve yields across several of our business units.

Total operating expenses for the quarter, excluding intangible amortization of $2.2 million, excluding the restatement of financial statements of litigation costs related to our stock-option investigation up $4.7 million, and excluding stock compensation charges of $2.3 million was $50.1 million or 34.7% of sales.

Pro forma R&D spending for the quarter was $12.5% of sales in line with guidance and pro forma as a unit spending for the quarter was $32.1 million or 22.2% of sales. This is higher than our guidance, primarily as a result of the previously mentioned customer-driven revenue push outs.

The adjusted EBITDA percent for the quarter was 12.4% compared to 14.7% of previous quarter. We remain committed to our long-term goals ranging from 19% to 23% and we look forward to discussing our EBITDA improvement programs in the future quarters. We did, however launch the transfer of a product family to a content manufacturing partner and we anticipate completion of this transfer by the end of the fiscal year. The annual benefit commencing in fiscal 2009 are expected to be in the range of $150 million.

Our cash and cash equivalent balance for the quarter was $388.4 million representing an increase of $26.5 million compared to the last quarter. I want to remind you that the increase includes the receipt of approximately $16 million from the sale of the Auburn campus and the Imaging Optics Business located in western UK as previous reported.

Cash flow from operations was $13.1 million and capital spending for the quarter was $4.7 million or 3.2% of sales. During the quarter, we paid approximately $3.4 million for expenses arising from the restatements of our financial statements litigation related to our stock investigation. Cumulative through the first quarter of fiscal 2008, the stock investigation and related litigation have resulted in an expense of approximately $16 million.

Our cash balance of $388 million and a continuing strong free cash flow generations led to the Company's decision to launch a substantial stock repurchase program. The Board of Directors authorizes the repurchase of up to $225 million of our common stock through a modified Dutch Auction tender offer. The tender offer is expected to begin on February 15, 2008, and to expire on March 17, 2008 unless extended.

Additionally, the Board of Directors has approved a repurchase of up to an additional $25 million of its common stock following the tender offer and terminating no later than February 11, 2009. This refers to our separate press release in 8-K announcing the statistic of the Dutch tender offer.

Let me move on to the guidance for the second quarter. This guidance excludes the impact of stock compensation charges and also excludes the remaining restatement expenses resulting from the stock investigation at litigation cost.

We expect our second quarter sales to be in the range of $150 million to $153 million. We expect gross margins to be in the range of 42.5% to 43.5% of sales, R&D spending is estimated to be approximately 12.5% of sales, SG&A expenses excluding intangible amortization are anticipated to be in the range of 21.5% to 22% of sales, intangible amortization will be around $2.2 million, other income is estimated at about approximately 2% of sales. And the annual tax rate is estimated at approximately 34%. Capital spending for the full fiscal 2008 is projected to be approximately 4% of sales.

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

John Ambroseo

Thanks, Helene. Good afternoon everyone and let me add my welcome to our first fiscal quarter conference call. As you have seen in our various releases and heard Helene's commentary, we are engaged in a significant number of exciting developments. Our re-listing on NASDAQ Global Select Market this coming Thursday is occurring sooner than previously communicated. I'd like to acknowledge the NASDAQ staff for the speed with which they processed our application. The completion of all our SEC filings also enabled us to announce the Dutch tender, which will return a significant amount of cash to our shareholders.

With respect to business execution we have launched a new product platform with another post for release. Both are part of our three-year EBITDA plan. We have also extended our OPS platform to higher powers and new wave links, which opens additional market windows. I'll provide more details in my market summaries.

Orders in the first fiscal quarter totaled $154.9 million, which were down 5.4% from the prior quarter and up 13.7% versus the prior year period. The book-to-bill for the quarter was 1.07. Orders in 30.9 million in the scientific market decreased 1.4% sequentially and increased 1.1% versus the prior year period. Booking were paced by ultrafast lasers funding for a research and the life sciences led to a record number of orders for Chameleon laser. In the Physical Sciences, we experienced increased demand for our Mira and Microproducts. We also introduced a new ultrafast laser at the Photonics West show.

The Mantis is a short pulse laser well suited as a seed source for an amplifier system. It is the first product in this category to incorporate a high power OPS laser, which has a favorable cost base as compared to our traditional pump lasers. Orders of 47 million for instrumentation in OEM components were down 6.8% from a record performance in the prior quarter and increased 25.3% versus the prior year period.

As a reminder, we have incorporated the former graphic arts and display market into the OEM components and instrumentation market effective in the first quarter of fiscal 2008, and combined results for prior period as well. Bookings for instrumentation and applications remain solid for OPS, Compass and LDM products. A number of applications contributed to the strength including cytometry, microscopy and genetic sequencing.

Orders for medical OEMs were up significantly on a sequential and prior year basis. The refractive surgery market was the most active with orders from many of the key customers. Part of this trend was driven by the consolidation of our customers' product portfolio. In the non-refractive market the first full photocoagulator platform incorporating the OPSL-577 Laser is in the FDA approval process.

Bookings from microelectronics of $53.9 million decreased 0.5% sequentially and increased 13.8% versus the prior year period. Orders from semi-cap applications including inspection and metallurgy were down on a sequential basis as the industry continues to struggle with capacity requirements and capital investments. Despite the short-term results, we are receiving encouraging signals from multiple customers regarding design wins. We could see benefits from these wins in the fourth fiscal quarter of 2008.

The advanced packaging market posted double-digit growth over the previous quarter. We've received record orders from Laser Direct Imaging customers. Increased user adoption in Asia was cited as the driver for the bookings growth. More than half of these units go into production environments rather than prototyping applications. This is a positive trend for future growth. In order to fully capitalize on the opportunity, we must support higher tool throughput by increasing their Laser Optic power and reducing the dollar per watt cost. We're fully capable of doing both.

The micro review of market remains a game of throughput and feature size advancement. We have been addressing these through developments in CO2 and UV laser technologies. As an example, our newest CO2 designs deliver higher peak powers, which are important for copper direct drilling in PCBs and enhance duty cycles. Within the industry, the introduction of the X66 flip-chip substrates using a 45 nanometer design rule creates new growth opportunities, although this is dampening by its [contentment] in PC demand.

We believe this will correct itself overtime. Bookings for flat panel display manufacturers were skew towards service orders as well as non-amiling applications. We did not receive new system orders for laser new end users. However, customers are at or close to maximize yields, which is a positive indicator for future business. We have also demonstrated key results using our SLS process in AMLCD and AMOLED to achieve larger panel sizes. This is critical to gen 5.5 deployments.

I last reported that laser-based silicon singulation inscribing or gaining momentum and this continues to be the case. We've been developing a breakthrough technology for the space based upon a fiber platform. One of our lead customers achieved a 250% increase in die strength which is a tremendous result. We will be formally releasing this new platform within 90 days. It is the second installment of the platform strategy described during our Q4 conference call.

Material processing orders of $22.5 million decreased 17.3% sequentially and grew 10.8% in the prior year period. The sequential change appears to reflect the timing of orders rather than a change in market conditions. The quarter was marked by new product introductions. We released our new E-Series platform at the FABTECH show this past November.

The E-Series represents the new standard for seal CO2 lasers that has an integrated or power supplies for ease of deployment, the lowest cost of ownership in the industry, superior mode quality for processing power and a modular design that facilitates scalability. Feedback from our lead customers has been terrific and the early order book is solid. We also released a higher version of our handset platform for certain marking the applications. The mini IR needs all the performance required for CW marking and those direct modulation capabilities.

In addition to market execution, we are working on the number of initiatives to achieve our previously announced three-year EBITDA goal. As Helene mentioned, we have commenced the transfer from commercial product line to a contract manufacturing partner. The success of this transfer will serve as a parameter for future transfers. We anticipate announcing other programs over the next few months.

We move forward in fiscal 2008 with a solid backlog, a host of new product that address new market opportunities and deliver better financial returns, key design wins in several markets and plans to further fortify our financial performance. The successful execution of our objectives coupled with the benefits of the Dutch tender provides a compelling opportunity for our shareholders, customers and employees alike.

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

Question-and-Answer session

Operator

Thank you. (Operator Instructions). We'll take our first question from Mr. Jiwon Lee. Please go ahead.

Jiwon Lee - Sidoti & Company

Hi. Good afternoon, and thanks for taking my question. Just a few quick ones. First of all, John, did you mention there was no order received for laser annealing for the quarter? Did I hear correctly?

John Ambroseo

That is correct.

Jiwon Lee - Sidoti & Company

All right. There is a larger customer concentration with that particular laser in the market, isn't there?

John Ambroseo

We sell to a single customer, a single integrator. That is correct.

Jiwon Lee - Sidoti & Company

Okay.

John Ambroseo

And they serve the entire market.

Jiwon Lee - Sidoti & Company

I see. Could you give us a little more color, as this has been going on for several quarters, as to why this order push out happened?

John Ambroseo

So the question, I am not sure if we're discussing the same customer, Jiwon, but what we've been highlighting is that the LCD market for annealing has been undergoing a tremendous amount of upheaval. As capacity has been trailing off against capital investment, et cetera, what we've been working on with customers for the past three or four quarters now is really focusing on yield enhancements for the existing tools.

And the yields that I have heard quoted are in the 90s at this point. Now, I think they started out somewhere in the 60s or 70s. So there has been a fair amount of capacity that has been added simply by increasing the yields, but they are in fact running out of room, as I alluded to in my comments, and we believe that orders will have to start to flow to facilitate growth.

Jiwon Lee - Sidoti & Company

You expect that pretty much when, John?

John Ambroseo

I can't tell you if it's going to be a Q2, or a Q3, or a Q4 event, but we do believe it's going to be this fiscal year.

Jiwon Lee - Sidoti & Company

Okay. Fair enough. And then I missed the commentary on your contract manufacturing as part of your EBITDA fall by above 10, could you give us a little more color on what programs or what components you're moving, and what type of contract manufacturers are you retaining on that front?

John Ambroseo

I am not going to go into the specifics of what products we're moving because we feel that some of that, at this point, is actually proprietary

Jiwon Lee - Sidoti & Company

Yeah.

John Ambroseo

We are using contract manufacturers who are skilled in Optic Mechanics, so we're now trying to develop that skill within the contract manufacturing community. There are number of notable ones that are in existence today, and we are using one of the ones that is well known. We've announced the first product family that's going, and it is one of our mid-to-higher level commercial products that will be transferred. And that process will be started relatively soon, the actual transfer will start relatively soon. The process itself has already started. And I believe it will be finished probably within a year.

Jiwon Lee - Sidoti & Company

But I think investors may appreciate, now that you have all these back historic financials filed, getting a little more inside into your operations on the last few quarters. Now, I do appreciate you have put out two additional segments, the custom lasers and special lasers. And if I look at the second half of your F'07, both products had declining profit margin. I think you alluded to some yield issue. So could you give us a little more sense as to what, in terms of your operations, might have happened in the second half of F'07?

Helene Simonet

Well, it's Helene. The gross margin in both segments actually declined, and as we had indicated, we just have a very, very negative mix throughout all the quarters, particularly in microelectronics. The other item that was negative related to the IT business that we referred to before, doesn't itself had a 0.8% decline in the gross profit. So there are multiple ups and downs, that if you [netted] out, and those two combined had an impact of more than 2% -- about 2% decline in gross profit. We had some other smaller ups and downs with some of our greening projects that, predominantly, you could almost say it's entirely due to mix.

Jiwon Lee - Sidoti & Company

Okay. And any more additional colors at this point you can provide on your EBITDA margin goal of FY'10, other than this contract manufacturing that you just announced?

John Ambroseo

So our intention, Jiwon, is to announce from time-to-time various programs that will be addressing the EBITDA goal. The other thing that I mentioned during my segment was the fact that we've brought out two new platform designs: one, the easier CO2 lasers; the other are first fiber laser offerings that would be formally released in the few months here. Both of those were part of the EBITDA plan and as our future plans roll out, we'll give some feedback as to what the impact is.

Jiwon Lee - Sidoti & Company

I think that's my last question, and I'll jump into the queue. Investors would like to see your microelectronics. That is your most profitable line of operations? And how do you see that outlook this year? I mean, other than what you highlighted in your remarks.

John Ambroseo

We have seen several quarters of strong bookings in that market. The two areas that we've seen some challenges, as I have already discussed, is in the annealing business that has been disappointing for a few quarters here, and we talked about that a couple of minutes ago. And the semi-cap market is struggling at this point in time. Our business there has been reasonably good, again given the distribution that we enjoy being more of the leading edge of that market. However, the whole market needs to cooperate in order to create lift.

Jiwon Lee - Sidoti & Company

Fair enough. I'll jump back into the queue. Thank you.

Operator

(Operator Instructions). And we do have a question. Mr. John, please go ahead.

John Torell

Hi, John. Could you talk for just a minute about any pricing pressures in the industry, and also on the other side, any cost pressures with raw materials?

John Ambroseo

I am sorry, who's on the line?

John Torell

[John Torell].

John Ambroseo

Okay. So from the standpoint of pricing, the dynamics remain pretty much as they have been for several quarters. We continue to see aggressive pricing from certain markets. The scientific market, as an example of that, has historically been one that has demonstrated or exhibited aggressive pricing. From the standpoint of the commercial markets, the trade-off between value proposition and cost has always been an important for us, and we think that we're managing that one effectively.

Clearly, the impact on revenues from the Euro was, as Helene mentioned earlier, one that we watch very closely, especially since so many of our contracts are dollar-based contracts. With respect to raw materials, I think the team has actually done a pretty good job of managing that. We haven't seen shortages of any critical components, and where we have critical items or very sensitive items, we have backup channels to deal with that, so no issues there.

Operator

And it appears there are no further questions.

John Ambroseo

We'd like to thank everyone for joining us, and we look forward to speaking to you again in three months.

Operator

That does conclude today's program. We appreciate your participation, and have a wonderful day.

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