Q4 2019 Earnings Call
Good day, and welcome to coherent sports corridor and fiscal year 2019 financial results Conference call.
All participants will be any listen only mode. So do you mean assistance. Please secondly conference specialist bypassing the Starkey followed by zero.
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Please note this event is being recorded.
I'd now like to turn the conference over to introduce Brett Demarco Executive Vice President and General Counsel. Please go ahead.
Thank you Melissa and good afternoon, everyone. Welcome to todays conference call to discuss Coherents result from its fourth fiscal quarter at fiscal year, ending September 29 2019.
On the call with me are John Ambroseo, our President and Chief Executive Officer, and Kevin Plotnik, Our executive Vice President and Chief Financial Officer, I would like to remind everyone that some information provided during this call may include forward looking statements, including without limitation statements about coherents future events anticipated financial results business.
And the expected timing and benefits if any of such trends. These forward looking statements may contain such words as project outlook future expects will anticipates believes in tens or referred to as guidance. These forward looking statements reflect believes estimates and predictions as of today.
Expressly assumes no obligation to update any such forward looking statements. These forward looking statements are only predictions and are subject to substantial risks uncertainties and assumptions that are difficult to predict that may cause actual results performance or achievements to materially differ from those expressed or implied by these forward looking statements.
Factors that could cause or contribute to such differences include but are not limited to risks associated with global demand acceptance and adoption of our products. The worldwide demand for flat panel displays and adoption of OLED for mobile displays the pricing and availability of OLED displays the demand for the use of our products in commercial applications.
Our ability to generate sufficient cash to fund capital spending or debt repayment, our successful implementation of our customer design wins, our and our customers exposure to risks associated with worldwide economic conditions in particular in China, and the eurozone, our customers' ability to cancel long term purchase orders the ability.
Our customers to forecast, they're all going into markets, our ability to accurately forecast future periods continue timely availability of products and materials from our suppliers our ability to tighten ship our products, our customers' ability to accept such shipments our ability to have our customers qualifier products worldwide government economic policy.
He's including trade relations between the United States in China, our ability to integrate the business of real estate and other acquisitions successfully manage our expanded operations and achieve anticipated synergies our ability to successfully manage our plant site consolidation projects and other cost reduction programs and to achieve the related anticipate.
Savings and improved operational efficiencies and other risks identified in the Companys SEC filings for a detailed description of risks and uncertainties, which can impact. These forward looking statements you should review coherents periodic SEC filings, including his most recent Form 10-K Form 10-Q and forms 8-K.
Including the risks identified interface financial press release.
I will now turn the call on the job growth Jones, our president and Chief Executive Officer, Thanks spread and welcome everyone to recall the one word the best sums up our fourth fiscal quarter isn't mixed microelectronics is moving into positive territory and instrumentation remains robust on the other side of the ledger materials processing. This the set by a number of challenge.
Yes. It is attempting to project that we are at or approaching the bottom, but we are mindful that a rational behavior from foreign and domestic competitors could further up end the market. The best defense in these circumstances innovation, which has long been a hallmark for coherent.
But the trends in the various submarkets of microelectronics remain largely unchanged since last quarter's report bookings were sequentially up in the low double digits by virtue of a new fab will order in the FTD business, adding to the backlog position for fiscal 2020. While this is encouraging we expect integrators and end users to continue to reduce their.
Service spares inventory as they focus on short term cash conservation.
Several factors influenced Olin market performance in calendar 2020, the largest opportunity would be in all that I phone line up for the September 2020 release, saying Samsung has the capacity in place to address this and a standardized touch on encapsulation or why optus structure could reduce cost by 10 to 15.
Said it is widely known that LG and via we are also buying for this business one or both would have to pass engineering and production qualifications. No later than the middle of calendar 2020 data legitimate chance the stakes seem particularly high for LG and given their recent financial report, citing a loss on display.
Operations of roughly $370 million moving their mobile OLED business to profitability will provide clear benefits to their organization.
In China display manufacturers of pursuing yield gains and government funding and increasing number of skews from Chinese handset manufacturers points to higher higher OLED output, mostly for Richard displays, but there has not been a watershed moment in production.
The question. We are most frequently asked by the investment community is to outline the timing of future fab investments. The short answer is timing has been and remains fluid. We anticipate additional orders in the first half of the year that will cover our build plan for fiscal 2020, the long term view hasnt changed other than JD, which is.
As reporting reportedly facing funding challenges asset harvest tech deal fell through.
We've been reporting that our semi cap business has been outperforming the broader wafer fab equipment market, our semi cap bookings grew by mid single digits in fiscal 2019.
Compared to a projected decline of 10% or more for the over overall W. EFI market.
Our results reflect our market alignment investments in process control, where we have designed into multiple modes fit better the other tools in fiscal 2019.
We.
Use grew year over year.
And our resort platform is used in patterned wafer record inspection in the easy process finally, automotive and Aiotv pull remains robust leading to solve service demand across a range of legacy nodes and laser architectures.
Semi cap predict projections for calendar 2000 20.2, another decline in demand. We believe we will again outperformed the market for the same reasons that led to fiscal 2019 results.
It was a difficult year for the advanced packaging sub market. Most tool manufacturers have reported down years and end users are tightly managing utilization and investment. There are few outliers that are seeing demand growth tied to new tools and or capabilities.
Returning to growth is dependent upon fiveg, which offer something for everyone consumers benefit from faster speeds.
Wireless providers can addressable markets and mobile device manufacturers should see increased demand for fiveg enabled products. The least solution of choice is still unclear. However, with Seo to nanosecond use the UN ultrafast lasers in the mix.
Our book to Bill ratio materials processing was above one for this first time and number quarters, but customer demand is still challenged on several fronts.
Global PMI is our largely a negative territory, most notably for Europe , and specifically for Germany, which recently turned down its growth forecasts from 1.5% to 1% for 2020, several economies, including the us in China have bounced around pmnine neutrality, but recent comments from caterpillar and weak auto sales don't bode well for some.
Staying near term improvement.
Just trying to trade standoff further exacerbated the situation.
Within the materials processing Submarket automotives facing dual challenge of low growth global demand at an accelerating transition from internal combustion engines, where I see two electromobility. Unfortunately, the gains in the latter could not offset the claims declines and the former in the near term.
There have been announcements from various tier one component suppliers that theyre cutting for job production for legacy components and laying off workers part of the aforementioned GM.
You had w. dispute involves moving workers from ice CE to electric drive wise.
The slowdown in two dimensional sheet metal cutting continued in the fourth fiscal quarter, which is partly attributable to the automotive sector. While the volumes are down price continued price competition heats up this means ASP erosion in the Chinese fiber laser market is unabated, the diebold and textile market is totally different story and the management.
Parotid, we stable for a range of CEO to OEM lasers subsystems and systems.
Medical device manufacturing, our MDM was a bright spot and materials processing with all key regions moving towards historical run rates.
Like other Submarkets are MDM businesses largely comprised of then use the systems with higher levels of differentiation.
The 2020 outlook is also encouraging with projected growth in North America, Europe and China.
Total orders from OEM from materials processing customers were flat overall, thanks in large part two of biannual order for our legacy customer.
Current market dynamics painted different picture overall market softness combined with aggressive pricing from Chinese diode laser manufacturers are leading to under absorption in our semiconductor manufacturing unit.
We're taking all available steps to reduce costs, but we will not able be not be able to fully compensate for the loss of volume. The short term. However, this may reverse course over the next year or so.
Chinese fiber laser manufacturers recognize that compete at all power levels requires higher performing diodes at different wavelengths than it was what is available domestically. This opens a window for us and German semiconductor laser manufacturers.
We had a very strong finish to a record year for OEM components and instrumentation.
Orders, which set a quarterly record in the fourth fiscal quarter and revenues both enjoyed strong double digit annual growth.
Our bioinstrumentation business benefited from a number of factors, including increased clinical adoption of cell based therapies, such as immuno oncology to support this trend we've introduced the new sub system that offers enhanced capabilities of smaller footprint, while also well positions as port customers for combining cytometry and imaging the game.
Even more information about sell size sell shape and the distribution of labeled or target Biomolecules. Our recently launched axon platform looks like an ideal solution for Clinton clinical imaging applications.
Medical OEM business saw growth in dental aesthetic and surgical consumables. The death of market is driven by a lead customer that is helping transform the patient experience vanity procedures like hair removal and Fatima certification are driving growth in our static sales and a higher number of lithotripsy procedures is behind the improvement in surgical concern.
Terminals.
The defense and aerospace market.
Excellent year revenue from directed energy programs doubled year over year orders of space and ground based telescopes was very healthy we are being invited to participate in new programs that can create an attractive funnel over the next few years I'll now turn the call over to our Chief Financial Officer, Kevin Plotnik. Thanks, John .
Today, I'll first summarize fiscal fourth quarter 2019 financial results the move to the outlook for fiscal Q1 2020.
Discuss primarily non-GAAP financial results and ask that you referred to the today's press release for detailed description of our GAAP results as well as a reconciliation between GAAP and non-GAAP financial results.
non-GAAP adjustments related to stock based compensation expense amortization of intangible assets and restructuring costs the related tax adjustments and tax adjustments for stock based compensation.
A full text of today's prepared remarks, and trended GAAP and non-GAAP supplemental financial information will be posted on to the coherent Investor Relations website. A replay of this webcast will also be made available for approximately 90 days following the call.
Fiscal fourth quarter 2019 financial results for the company's key operating metrics were total revenue of $335.5 million non-GAAP gross margin of 36.4% non-GAAP operating margin of 9.6% adjusted EBITDA of 14.3% and non.
GAAP EPS of 89 cents.
Total revenue for the fiscal fourth quarter was $335.5 million and came in above the midpoint of our previously guided range due primarily to increased shipments in our OEM and the instrumentation and components business, particularly in the Aero and defense market.
Our revenue mix by market for Q4 was microelectronics, approximately 42% materials processing, 28% OEM components in instrumentation, 21% and scientific and government 9%.
Geographically Asia accounted for approximately 49% of revenues in the fiscal fourth quarter, the us, 27% Europe , 20% and rest of the world 4%.
Asia includes two territories with revenues grew 10% of sales.
We had one customer in South Korea related to flat panel display manufacturing that contributed more than 10% of our fiscal fourth quarter revenues.
Other product and service revenues for the fiscal fourth quarter were $114 million or approximately 34% of sales.
Other product revenue consist of spare parts related accessories, and other consumable products and was approximately 30% of sales revenue from services and service agreements was approximately 4% of sales.
Total service revenues decreased sequentially by approximately 4 million as their integrators and end users focus on conserving cash by keeping their service stock to minimal levels.
Fiscal fourth quarter non-GAAP gross profit exclusive excluding stock based compensation costs intangibles amortization and restructuring was approximately $122 million.
non-GAAP gross profit was impacted primarily by higher than normal inventory reserves, resulting in non-GAAP gross margin of 36.4% for Q4.
non-GAAP operating expenses increased by approximately $2 million, primarily due to a deferred compensation plan liability increases that are posted to operating expense with the approximate offset posted in other income and expense.
This resulted in a non-GAAP operating margin of 9.6% for the fiscal fourth quarter and came in slightly above the midpoint of our previously guided range.
Adjusted EBITDA was 14.3% in fiscal Q4.
Summarizing the income statement, we were above the midpoint of our previously guided range for both revenue and operating margin yielding higher than expected operating income. However, there were more than offsetting impacts below the line.
Discount rates across Europe , and in particular, Germany have decreased sequentially, adding to our pension costs recorded in other income and expense. In addition, a higher than expected non-GAAP tax rate also impacted overall net income.
Turning to the balance sheet non restricted cash cash equivalents in short term investments were approximately $306 million at the end of fiscal Q4, a decrease of approximately 13 million compared to the end of last quarter.
We did not make any voluntary payments against our term loan. However, we did repaid $30 million against our line of credit.
At the end of fiscal Q4, the outstanding amount over the term loan in Usdthree was approximately $399 million.
Accounts receivable Dsos 72 days compared to 71 days in prior quarter. The net inventory balance at the end of fiscal fourth quarter was approximately $443 million a decrease of 27 million from the prior quarter.
Now I'll turn to our outlook for our first fiscal quarter of 2020.
Revenue for fiscal Q1 is expected to be in the range of $305 million to $325 million. We expect fiscal Q1, non-GAAP gross margin to be in the range of 36.5% to 59 and 5%.
non-GAAP gross margin excludes intangibles amortization of approximately $11.6 million and stock compensation costs estimated at $1.3 million.
non-GAAP operating margin for fiscal Q1 is expected to be in the range of 7.5% to 10%.
This excludes intangibles amortization estimated at a total of $13.1 million and stock compensation expense as a total of approximately $10.2 billion.
Other income and expense its estimated to be an expense in the range of $5 million to $6 million. We do not include transaction gains and losses related to future changes in foreign exchange rates in our own outlook.
We expect our fiscal Q1 non-GAAP tax rate to be in the range of 24% to 25% and finally, we are assuming weighted average outstanding shares of approximately $24.1 million for the fiscal first quarter.
I'll now turn the call back over the operator for Q and a solution.
Thank you we will now begin the question answer session.
You asked the question you May Press Star then one on your Touchtone phone.
You are using his speakerphone, please pick up your handset before passing the keys to withdraw your question. Please press Star then too.
At this time, we will pause momentarily to assemble our roster.
And the first question today comes from General QD of Needham and company. Please go ahead.
Thank you good afternoon.
Just a point of clarification on the order Java you alluded to is this a separate order from what you talked about in the ended July or is it.
The same order.
And as a separate order.
Got it okay. Thank you and.
Kevin I know, it's it's come to be in the in the K can you give us the backlog at the end of the year and if you're able to the owe a less segment of backlog.
Yes, Jim I'm going to wait for the K to come out is a comment in a couple of weeks and you'll have a lot more detail in the K.
Okay.
And just with respect to.
The materials processing portion of the business John It sounds like things are soft is its softness that you're seeing across all geographic regions and.
I'm wondering how much is automotive weighing on you just given up the legacy.
Rofin business.
Direct sales to automotive are a relatively small percentage of total business. However, we do sell a lot of lasers that go into.
Automotive systems manufacturing systems provided by others, and it's clearly creating pressure across the supply chain.
And the weakness you're seeing in all regions, including us it sounds like.
For us is actually holding a better than than Europe , if you've been following the news, particularly out of the German automotive sector is.
It's not very encouraging.
Numbers are down pretty significantly and the tens of percentage points.
Okay. Thank you I'll jump back into queue. Thank you.
Sure.
Our next question comes from Brian Lee of Goldman Sachs.
Hey, guys. Thanks for taking the questions.
You may be for stuff on the book to Bill above one.
Materials processing I know you.
You don't want us to read too much into that and there was a legacy order in there. So maybe if we can just parse that out a little bit.
How much was the legacy order and I guess, if you took that out.
The book to Bill had been below the one and then.
You look into.
So to the near term and eat you expect that book to Bill sort of continue to stay below that one to one level. Just I guess, you don't want us to be thinking there's any sort of the trough here in the very near term and materials processing.
Yes, Brian it's Kevin So we did say materials processing at a book to bill greater than one.
In terms of the order the legacy order.
Hoping that you didnt confused that with the OLED order.
We did have a legacy large customer than in prior quarters, if that's what you're referring to.
But even netting that out for the quarter, we still were above one.
Forecasting then into the future.
Theres too much uncertainty to do that at this point.
We are happy that we were above one in the current quarter.
But too much uncertainty going forward to really forecasted out.
And Brian as John I'll, just I'll just.
To reiterate what I said in my prepared remarks is always tempting to try to call the bottom here, but as Kevin as pointed out again.
There are two moving pieces here too.
To make a definitive statement at this juncture, we'd like to have more than affords were worth of data.
So the positive overall, we feel comfortable saying that we're on the other side.
Okay fair enough makes sense.
And then maybe shifting gears, Kevin to two that OLED order.
That that you picked up this quarter.
No you're saying it's revenue in the current fiscal year I think lead times, you mentioned last quarter when you've got the first OLED order in this cycle kind of being in that six month timeframe anything changed there and.
From a revenue recognition perspective would that imply.
This is mark first half fiscal plenty that then second half just trying to get a sense for what what you walk the expectation to be for in terms of it the cadence here.
Yes, so no change primarily Brian we're still quoting lead times of six months and.
Beyond the six months, we still work with our customers to scheduled delivery dates.
That could be plus or minus to six a little bit, but I think for modeling purposes.
Whatever we book in the September quarter.
Plus or minus six months later, we will ship in revenue that.
Okay great.
And then and then just last question, maybe a bit but bigger picture.
The around this time last year you gave some.
Quantitative color around the.
The OLED business, specifically that you didn't give it for them for the entire business for the fiscal year, but.
Given where we are in the cycle it sounds like you're you're seeing some positive momentum the tone as obviously shifted to being.
More positive as well any sort of either quantitative or qualitative direction, you're willing to provide as we think about fiscal 20 with respect to the OLED business similar to what what you provided last year.
I'll I'll repeat a little bit here and maybe augment to augment some.
We've we've received some orders recently, obviously, a very positive development after a stretch where they are renewing no new system orders.
The way that I would I would say you look at.
At this year is we're going to build the backlog not only to fulfill what we have in the build plan, but also to position ourselves for 21.
Okay fair enough thanks, guys.
Thanks.
The next question comes from Blayne Curtis with Barclays. Please go ahead.
Hey, guys. This is total volume for Blayne Curtis My first question is centered around the the semi cap horse of the microelectronics business clearly with sequential growth there Michael returns you're seeing some real strength. There can you talk about how big of a portion of that string sequentially is from semi cap and then can you talk about how you see your business growing next year with the expectation that the total markets down.
So, let's let's unpack that a little bit.
You know in terms of of the the breakout we've we've never drilled down into the individual pieces.
I would say that the bookings the from the dominant part of the booking strength quarter on quarter was driven by OLED. It was not driven by by semi cap.
Having said that Semicap hat has as I mentioned outperformed the broader wafer fab equipment market.
And really a part of that as alignment. If you look at the spending that took place at the high watermark of 2018, a lot of that was big process equipment.
Etch etch tools et cetera.
And it looks like the inspection equipment that would go along with that was out of phase by probably six months or so so the.
Thats part of the business benefits us because our content is an inspection and metrology and as we look after the year going forward, particularly with the strength that we're seeing around E. V. Orders. These are not large numbers of orders, but they're pretty expensive tools. So there's a benefit that comes in.
And as a consequence of that.
All right. That's really helpful. And then my second one is just going the other products and services line you guys are saying that customers are being cautious and that makes a lot of sense, but as you guys scale here, particularly with some of the orders. There PD is you get into the back inventory do you expect that to scale the nearly or do you normally see any sort of time shift there just helping me.
Get a little color around what I think that that you do.
Sure This is Kevin.
It will correlate one for one there will be some time offset whenever we deliver and installing a new machine typically.
The replaceable or the consumable parts in that has a rough life for six months or so consider that the warranty period and then it rolls into the service pool. So.
You know there is a timing elements to this but longer term over longer periods.
You can see a very strong correlation to.
From shipments into the service revenue line.
Great. Thanks, guys.
Thank you.
Next question comes from Lindy Husseini of ESI Ji. Please go ahead.
Yes. Thanks for taking my question just as a follow up to the prior question.
Is dead deadly non linearity.
Is that why your material revenue didn't really showed improvement. Despite the fact that your customers utilization rate has.
Materially improved since March quarter.
Yes, Mehdi I wouldn't say that the utilization has materially improved.
Certainly Samsung utilization has.
The been somewhat volatile, especially as they support their largest customer.
And then there is China.
China as you know they continue to progress in terms of system installations.
But to have very low yields so.
The basic premise that utilization has gone up significantly I think is erroneous.
Got it.
And then.
A question for John and over the past six nine months you have taken.
Action.
Sizing the rofin, but it seems like.
The end market.
Demand mix by geography, or who is who is being more aggressive competitive landscape is just steel pressuring the margins. There is there anything else.
You can do any any other tools in youd toolbox that you can and leverage to improve margin profile in the fiber lasers.
Steve We've previously announced around.
Fiber laser are underway and they're going to deliver the benefits that we had outlined when when we announce those actions.
It is not our practice mehdi to to make statements about things that.
We haven't internally announced yet.
Just because it's it's a bad practice that tells you guys before we tell our own people, so whether or not as anything that that is cooking, we certainly wouldn't acknowledge it during the call.
But does that mean that youre cooking something.
No it means that.
Not going to predict anything.
During the call.
And just one clarification in your prepared remarks, you said you expect semi cap to be down 18.
2020 was that in reference to fiscal year or did you really mean, a semi cap will be down in 2020.
And the comments were tied to the two our fiscal year, which is normally my my practice.
And from what we're hearing the overall market is probably going to be down again, we expect to outperform the market in 2020, just as we did in 2019.
And that nothing to do with.
The fog will be versus the rest because that's that's kind of contrary to what.
Leading OEM.
I have said they have talked about a bottom and then increase prospect of shipment picking up.
Kevin do you Tony Tony.
Well, we're looking at different data.
Okay, well could take it offline. Thank you guys.
Mhm, Thanks, guys.
The next question comes from Larry Solow CJS Securities.
Good afternoon, Thanks for taking my questions.
A couple of follow ups, John can you maybe I'm just clarify on the on the flat panel and all that opportunity.
Sort of the second phases, I think you've turned it.
You had mentioned on prior calls I think you saw it would be like a four to five year sort of cycle.
And sort of a bell curve.
Getting peeking out and then Troughing for a while flattening and then coming back down do you still see those same dynamics.
It sounds like maybe things have shifted a little bit to the right on that is that fair to say.
So.
I don't think that we talked about out to four or five years.
Just technically.
We talked out to 2023 were in 2020 now sorts out to about three years.
There will be a curve to it it's going to be a different composition than the first go around which was dominated by a single large customer. This is going to the a broader set of customers.
It will it will have a.
Probably a broader plateau.
Than we've seen in the past.
And that's about as much as I can tell you at this point Larry Okay.
Visibility made with early orders.
On whether it would be more on the Gen. Five a gen six or is it too early to tell.
I think it's going to be a combination and it's really going to be customer specific as to what their confidence level is and being able to utilize those tools.
On the materials processing side, you mentioned.
You can you never know with some potentially irrational behavior from foreign competitors have you seen a lot of that outside of I know, it's been pretty highly talked about on the fiber laser side, but are you seeing that.
General and that materials processing side or is that still pretty much concern at the fiber lasers.
Well certainly the most aggressive behavior, we're seeing is in the fiber laser market, but I would say that the lower performance lower performance lasers that.
That are produced by certain foreign manufacturers. There are also being aggressive on pricing.
But not to the extent that we've seen in the fiber laser market.
Okay. A question on the dental piece I realize it's small today.
Minimal.
But perhaps in the future could it could draw some revenue growth could you speak more to that you mentioned a lead customer is sort of transforming performance.
Could you just.
It's a little more a qualification.
Well there I think my comment was transferred transforming the patient experience.
From what I have.
Red and been exposed to.
It's approaching painless dentistry, which is a pretty big deal for for lots of patients for all patients I guess.
But particularly young patients who have this this fear go into the death is.
This looks like its removing some of those barriers and and that's a good thing and as they continue to gain traction we would expect the adoption of these tools to to rise.
Okay, because I know I think other dental is a failed in the past. So I guess this is clearly must be a step up from those.
The difference by headed is still it down to one difference.
This seems to be the first dental tool that can do hard and soft tissue and it can cover probably 90.
90, maybe 95% of the procedures that a dentist will typically perform in the office.
Some of the dental tools that have come out in the past have really been pigeonholed as hard tissue or soft tissue and.
You're you're correct that they've they've disappointed.
This seems to be different.
Okay. Okay, Great and then lastly question for Kevin just on a on the operating margin.
I'm sorry, the midpoint is.
Whatever high single digits.
Real is where we're hopefully at a trough in revenue.
Can you just margins, we look out over and over three years or so obviously, we were in the mid twentys on the EBIT margin.
Just two years ago is the.
Contraction is it all negative operating leverage.
I think I'll structurally different in there.
No I think I think two attributed operating leverage makes a lot of said sorry, you know we've said for many years now that the ULAE tools for OLED right are accretive to corporate margins. They were at peak margins for for the company as well as no. None of these lower margin so with each incremental shipment.
The operator late leverage that you gain from that is very powerful and will expand operating margins going forward.
Okay, great. Thank you.
Q.
The next question comes from Mark Miller of the Benchmark Company. Please go ahead.
<unk>.
Just was wondering now Samsung's recently announced.
Beginning pulp production of this QD OLED, it's supposed to be a super process I believe any any impact on your opportunities are on the marketplace.
This announcement.
The the Q led.
Well, the Q O Q, let sorry.
Is there quantum dot overlay on an LCD panel, it's what they've been using for their high end Tvs and they recently announced a multibillion dollar investment in that space.
These.
These production.
Systems do utilize lasers, but they use.
They don't use on yield backplanes as as is true for Tvs in general so not not a needle mover for the display business. It will have pulled along for a variety of other lasers used in packaging.
Okay.
Terms.
We've been hearing about pricing pressures in China, but also I'm just wondering the impact of the trade uncertainties in the tariffs situation is that having a significant impact when your margins.
It's certainly having an impact it varies by by product line.
For certain products like the.
PV systems, no impact because the channel is from Germany to.
To China, so its circumstance the tariff issues.
Products that are produced in the U.S. face varying levels of of.
A fair if activity.
And finally, having to manufacture was a pretty good driver for a lot of laser firms as that market cool office.
And then do you expect any rebound in it.
I think the long term on additive manufacturing it remains a compelling story for for the production of of metal parts.
It has cooled off significantly part of that is driven by the change in automotive investment.
But I think the long term thesis is there and as an industry, we and the powder providers have to figure out how to make it much more cost.
Cost competitive with traditional manufacturing.
Thank you.
Yes.
Your next question comes from Nick Todorov of Longbow Research. Please go ahead.
Thanks, Hey, guys good afternoon.
And the lifecycle you guys used to quantify the size of the SPD orders I understand and assume just time, you know you're not willing to do so but can you. Please try to compare the size of the two orders did you have received so far.
Nick we stop giving out detailed booking information specific to that you delay back in 16. So we're going to we're going to stay consistent with that practice and not talk about it at that level of detail.
Okay.
Then just to clarify you I think you mentioned that you expect to receive several orders for the mix over into current in next quarter and did I hear correctly that the orders that you receive over the next two quarters you expect all of them to ship by the end of the fiscal year or is that a more of a kind of building the backlog and some of them we'll still.
And to 21.
Yes that Kevin again, we quote six month lead times. So if there's a fab in date six months out they need to put an order on books today right roughly.
That's that's a market improvement than where we were a couple of years ago.
On the Upromise, primarily shipping into Korea.
For the local.
End users there Samsung LG.
Back at that point, they were 15 to 18 months for the big systems, working with our supply chain and so forth.
We've managed to bring that down to six months and that's what we'll coating customers today.
Okay, and just another clarification, sorry, if I missed it but the order that you mentioned the last quarter is that also expect it to be delivered in fiscal year 20.
Yes, Okay, and then just quickly on materials processing, you said your attempted to call a bottom, but you know I heard more negative comments in terms of PM ice and auto weakness I guess what are the positive as it does give you that temptation.
Well certainly effect that we we have a positive book to Bill is the the largest one of that isn't that is affected by revenue was as much as it is a bookings.
I don't think that we're as I said, it's always tempting to call a bottom I didn't say were tempted to call the bottom and and that's just a small nuance.
I think we have to see sustained activity in this market before we're going to be comfortable saying that it's turned the corner.
Okay got it thanks, guys. Good luck.
Thanks.
Our next question comes from Joe When you add water research. Please go ahead.
Hey, guys.
Thanks for squeezing me in I wanted to ask on the inventory reductions in the in the LDS service tubes could can you help us square that dynamic with.
You know the rising orders on the cycle and I presume, what or at least expectations of rising utilization at the Fabs are the Kevin understand your point that utilization hasn't risen yet.
Were there, perhaps excess inventory tubes in the integrated pipeline still from the <unk> the last cycle.
When do you expect the inventory down to reverse and potentially become your friend.
So Joe it's John with respect to.
To the locally held in inventory. This is a fairly common practices as things approach the bottom of other of the cycle.
Everybody in the chain is trying to to burn off inventory.
These orders come in periodically throughout the year and the expectation from the end users and the integrators is that we'll be able to respond quickly if they need.
Service capacity.
And there's a degree of accuracy to that it it's not an infinite.
Amount of flexibility, but theres some flexibility on our end to respond.
Quickly to their needs and we would expect once it moves back into a more normalized demand cycle.
Especially as we start to see breakthroughs in yields from from some of the Chinese players and also as we move into the sort of the middle of the year, where the winners and losers and the Apple sweepstakes will be defined I think thats when you start to see a change in.
And footing.
Okay.
And then one on an M. P. You mentioned the.
One dynamic holding back more optimism was the potentially irrational behavior by by players there.
Can you help us understand what downstream competition be such a risk for your business as long as you're kind of maintaining the share or the socket and as long as the kind of power per box, it's probably a better way to put it. The Mac. It continues to rise why is competition downstream at the resonator suppliers risk for for coherent.
I think the general statement is that when when the business is is evian as it has been for a number of quarters now you're chasing there are more people chasing the same piece of business.
And even though you may be designed in customers are not stupid they understand how to play this to their advantage and I think all those things can happen.
And if you get one or more competitors, who starts to reach desperation level.
And they just need to fill their factory.
Things can can get ugly in certain places I don't think it gets probably across the board, but if any selective selective competition and whether it's at the component level or whether it's at the laser level I think it's it's less EPA subsystem and system level, where there's a higher degree of forward integration and.
Archie Asian.
But if you are dealing with skews that they can get from a variety of different players I think that pressure can be real.
Okay that makes sense and then finally, Kevin what products or the inventory reserve sport.
[laughter], Joe I'm, not going to get that specific.
It wasn't a similar product or product line there were multiple product lines in a recognized September is our fiscal yearend and a lot of things are we looked at or Trued up and that was that was the makeup of it.
Alright.
Thanks, guys.
Thank you.
Your next question today comes from Andrew discussed area of them Baird. Please go ahead.
Thanks for taking my question I guess and on the last call. You mentioned that you weren't deemphasizing or commoditize to be cutting applications. I was just wondering timing wise I mean is if you think at 22020 event, where that will be less meaningful kind of topline.
Yeah, So Andrew it's Kevin.
Last quarter, our earnings release, we talked about getting out of this business minimizing it in the short term.
We talked about.
Homburg.
From a site location being fairly significantly reduced.
In a 24 million dollar cost expense benefit going forward.
That we would go.
That 24 million worth of benefit we would see at the end of fiscal 2020.
Recognized in Germany, It takes a while to negotiate with the workers councils and such and so that correlates to the commoditized fiber laser as well.
That will correlate with the head count reductions to site reductions and then the benefit of that by the end of fiscal 2020, Andrew It's John if I could just added piece to that in terms of forward going revenue risk.
I'd say that the the customers that were engaged win with at this point are largely outside of China.
So the greatest pressure point is probably in our rearview mirror.
Great and then one last one in terms of.
Well I guess this is probably less meaningful at this point, but are you is that you're seeing in a market a general substitution effect, where people that normally would buy a higher power laser using or buying a a lower power one because the output levels of decreased.
I don't know that that I have enough data to us to answer that.
Okay perfect. Thanks very much.
Oh I ask question today as a follow up from Jim Ricchiuti of Needham and company. Please go ahead.
Were the two orders that you received.
The OLED and.
Kneeling orders, where they received a round the the timeline that you expected things can move around a little bit, but just generally speaking our these orders coming in the way you anticipated.
If you go back a few calls Jim.
I mentioned that RFP activity was picking up and that typical conversion cycle for RF piece to orders was six to nine months.
The first order that we got that we've alluded to in the June quarter, we're probably at the shorter end of that or maybe.
Even within a six month window. This more recent one was sort of right in the middle of that have that range. So.
From our standpoint, not a lot of surprises here.
We interact with these customers on a regular basis, where we are pretty good visibility as to.
When things are likely to happen.
And when you talk about.
Yeah. It sounds like you have.
A pipeline or a funnel that gets you to the build plan to build plan for us is difficult to quantify I mean is there any way you can help us think about that build plan is it something similar to what we saw.
In fiscal 16 fiscal 15.
You know any help you can give us some along those lines.
Yes.
Certainly understand the reason for the question.
And fully aware that making a comment about a build plan doesn't help you guys very much.
The real intent behind the statement was to say, we we have visibility on on what we need what we need to make our our plan, which.
Is an obvious statement.
We're not expecting a you know a.
Spontaneous return to.
To 2017, or 2018 numbers is going be a a process because again a larger number of customers.
Building smaller fabs than what we've seen historically so this goes back to the question that are solo asked.
The shape of this thing.
It's probably us a smoother.
Right and a longer plateau, then the sharp rise that we've seen the last time around.
Jim It's Kevin one more comment and just to repeat what we've said in the past as we look forward into the.
The OLED ramp we've said that we see 2020 as a bit of river bid other recovery over 2019, but we see strength in 21 and 22.
I know that doesn't quantify things, but qualitatively that's how we look at it.
That's that's that's helpful. Thanks, guys.
Thank you.
This concludes our question and answer session I would like 10, the conference back over to John M. Brizzio for any closing remarks.
Thank you Melissa and by the way I want to congratulate you you the first person.
That has gotten Jim or Shooties name pronounced correctly.
Everyone. Thanks, so much for for joining us and we'll look forward to doing this again in a few months.
The conference has now concluded. Thank you for attending today's presentation you may now disconnect.